<PAGE>
As filed with the Securities and Exchange Commission on April 4, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
eFUNDS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7374 39-1506286
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code)
organization)
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
(414) 341-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
John A. Blanchard III
Chairman and Chief Executive Officer
eFunds Corporation
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
(414) 341-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Jonathan B. Abram, Esq. Raymond W. Wagner, Esq.
Dorsey & Whitney LLP Simpson Thacher & Bartlett
Pillsbury Center South 425 Lexington Avenue
220 South Sixth Street New York, NY 10017
Minneapolis, MN 55402 (212) 455-2000
(612) 340-2600 Facsimile: (212) 455-2502
Facsimile: (612) 340-0738
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price (1) Registration Fee
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<S> <C> <C>
Common Stock, $.01 par value(2).......................... $115,000,000.00 $30,360.00
</TABLE>
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(1) Estimated solely for the purposes of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes certain associated preferred stock purchase rights that will be
issued to each stockholder pursuant to a rights agreement.
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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 said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated April 4, 2000
PROSPECTUS
Shares
[LOGO]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
shares.We are presently a subsidiary of Deluxe Corporation. No
public market currently exists for our shares.We anticipate that the initial
public offering price will be between $ and $ per share.
We have applied to list the shares on the Nasdaq National Market under the
symbol "EFDS."
Investing in our shares involves risks. Risk Factors begin on page 6.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to eFunds.............................................. $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
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Lehman Brothers Bear, Stearns & Co. Inc.
FAC/Equities John G. Kinnard and Company,
Incorporated
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 16
Our Separation from Deluxe.......... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................ 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 53
Agreements Between eFunds and
Deluxe............................. 64
Principal Stockholder............... 70
Description of Capital Stock........ 70
Shares Eligible for Future Sale..... 75
Certain United States Federal Tax
Consequences to Non-United States
Holders............................ 76
Underwriting........................ 78
Legal Matters....................... 81
Experts............................. 81
Where You Can Find More
Information........................ 81
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
different information. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
AccountChex Plus(SM), Connex(TM), ChexSystems logo, DebitBureau(SM), eFunds,
FraudFinder(SM), Integreat!(SM), New AccountChex(SM), SCAN(SM), QualiFile(SM)
and DataNavigator(TM) are our trademarks and service marks. Other trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
Until , 2000, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
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PROSPECTUS SUMMARY
You should read the following summary with the more detailed information and
financial statements and related notes appearing elsewhere in this prospectus.
eFunds Corporation
Our Business
We are a leading provider of end-to-end electronic debit payment solutions
to financial institutions, retailers, electronic funds transfer networks and e-
commerce providers. Our primary products and services include:
. decision support and risk management tools;
. electronic funds transfer processing, monitoring and settlement
services; and
. professional services, including information technology consulting and
business process management.
We offer these products and services as comprehensive solutions or as
independent offerings. We are a single source of electronic debit payment
solutions whether payments are made using payment cards or paper checks, or
whether the transaction is accomplished at retail locations or automated teller
machines, or ATMs, through mail or telephone orders or over the Internet.
Our decision support and risk management tools combat identity fraud and
account abuse, using our leading DebitBureau database of more than 2.7 billion
records. We are a leading third party processor of electronic funds transfers
in the United States and can process electronic payments cost-effectively to
all electronic funds transfer networks on a worldwide basis. As part of our
comprehensive solutions, we offer professional services, including
implementation and integration of our software, custom software development,
creation of e-commerce applications and business process management.
Our clients include:
. 16 of the 20 largest United States financial institutions, including
Bank of America, Citibank and Bank One;
. 17 of the 20 largest United States retailers, including Wal-Mart, Home
Depot and Safeway;
. large electronic funds transfer networks, including STAR Systems and
NYCE;
. e-commerce providers, including USA Bancshares.com and X.com; and
. international financial institutions, including Bank of Montreal,
NatWest and The Royal Bank of Scotland.
Our Market Opportunity
The global payment system is undergoing rapid change as new technologies and
new business requirements, primarily in e-commerce, cause newer electronic
payment methods to supplant traditional paper methods. Debit cards are among
the fastest growing payment method in the United States. The Nilson Report
estimates that the use of debit cards in the United States will increase from
3.7%, or $168 billion, of total consumer transactions in 1998 to 10.9%, or $743
billion, in 2005. The Nilson Report also estimates that the number of debit
card transactions in the United States will increase at a compound annual
growth rate of 21.6% from 1998 to 2005 and that the number of debit card
transactions will exceed credit card transactions by 2007.
1
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At the same time as consumers and businesses are seeking new payment
methods, merchants are seeking to reduce transaction costs by increasing the
use of electronic payments, which are typically one-third the cost of paper-
based transactions. Debit cards further lower transaction costs compared to
credit cards due to higher processing costs and fees for credit card payments.
Financial service companies also face pressures to adopt new payment
technologies, such as online banking and online brokerage accounts, to better
serve their customers and reduce costs. In addition, financial institutions and
retailers are increasing their use of external information technology service
providers to implement new technologies and e-commerce applications, control
costs and address shortages of information technology resources.
Financial institutions and retailers also face significant payment costs
from debit fraud, including use of a false or stolen identity, and account
abuse, such as writing checks with insufficient funds or opening and closing
accounts to avoid payments. Debit fraud losses totaled $1.3 billion for banks
and $13 billion for merchants in the United States in 1998, according to the
Tower Group, and have increased for merchants at a rate of 5% per year since
1996.
Our Competitive Advantages
To address the rapid changes and pressures in the global payment system, we
provide comprehensive electronic debit payment solutions that offer the
following advantages for our clients:
. End-to-End Solutions. We provide end-to-end solutions that enable our
clients to manage the complete electronic debit payment cycle using our
products and services. Our solutions help clients to reduce transaction
costs, manage risks and enhance their customer relationships.
. Premier Database. Our DebitBureau database of more than 2.7 billion
records is the most comprehensive source of debit data in the industry.
DebitBureau aggregates data from over 86,000 financial service locations
and 82,000 retail locations. The breadth and depth of our DebitBureau
allow us to develop more powerful risk management and analytical tools.
Our clients can draw on DebitBureau to make better risk management
decisions, such as authorizing a new checking account or accepting a
check, and to improve customer relationship decisions, such as
identifying opportunities to cross-sell additional services to their
customers.
. Global Processing Capabilities. Our electronic debit payment services
give our clients the ability to process debit payment transactions
through all electronic funds transfer networks on a worldwide basis. We
are a leading third party processor of debit electronic funds transfers
in the United States, processing approximately five billion transactions
in 1999. Our processing services drive more than 98,000 point-of-sale
devices and more than 9,500 ATMs. We monitor over 5,200 of these ATMs
for system irregularities.
. Expertise in Electronic Commerce. We have focused on facilitating
electronic debit payments since 1976. This long history and industry
focus provides us with the experience and capabilities to facilitate
electronic debit payments through any channel, including the Internet,
point-of-sale devices or ATMs.
. Global Resources for Information Technology. Our information technology
professionals customize and implement our electronic debit payment
solutions, develop new software applications for our solutions as well
as custom applications for our clients, and produce custom e-commerce
and Internet-related software solutions. We team onsite consultants in
the United States who analyze and manage the project with software
developers in India who execute client-specific software solutions.
Our Strategy
Our objective is to be the leading provider of electronic debit payment
solutions. We intend to implement the following strategies to achieve this
objective:
. Expand e-Commerce and Internet Delivery Capabilities. We intend to
continue to adapt our core capabilities in transaction processing, fraud
prevention and client account management for Internet
2
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applications and to develop products and services that will enable new
e-commerce channels, such as business to business electronic payment
transactions.
. Extend Technology Leadership. We intend to continue to enhance our
position as a technology leader by introducing new products that provide
greater risk management and value-added functionality.
. Expand Existing Client Relationships and Attract New Clients. We intend
to expand our sales force to develop new clients, build brand awareness
and cross-sell all the components of our comprehensive suite of products
and services. We believe we can expand our relationships with existing
customers as we continue to integrate our information and processing
capabilities with our professional services into new comprehensive
information-based electronic debit payment solutions. We are
particularly focusing on Internet opportunities.
. Seek Acquisition and Strategic Alliance Opportunities. We intend to
pursue acquisitions of complementary businesses, technologies or product
lines. For example, we recently acquired an interest in a provider of
ATM management and outsourcing services to retailers and financial
institutions.
. Broaden International Sales. We intend to expand in international
markets by further penetrating our existing client base and by focusing
on emerging international markets lacking established electronic payment
systems. We currently derive approximately 10% of our revenue from
international sales in 22 countries.
Our Separation From Deluxe
On January 31, 2000, Deluxe announced a plan to combine our businesses into
a separate, publicly-traded company. We believe that our complete separation
from Deluxe will enable us to realize the following benefits:
. direct access to the capital markets that will allow us to raise capital
on a more cost effective basis to fund our growth initiatives;
. greater strategic focus on our core businesses and growth opportunities
and elimination of any competition for available capital; and
. increased ability to attract, retain and motivate employees through
incentive compensation tied to the market performance of our common
stock.
After this offering, Deluxe will own about % of the outstanding shares
of our common stock, or about % if the underwriters exercise their over-
allotment option in full. Deluxe has announced that it plans to distribute all
of its shares of our common stock to its shareholders through an offer to
exchange their Deluxe shares for our common stock owned by Deluxe. In this
prospectus we generally refer to that exchange offer as a split-off. Deluxe's
plans for a split-off are subject to receiving a private letter ruling from
the Internal Revenue Service that the split-off will be tax-free to Deluxe and
its shareholders for U.S. federal income tax purposes. Deluxe has the sole
discretion to determine whether to proceed with the distribution based on the
best interests of Deluxe's shareholders and to decide what will be the timing,
structure and terms of the split-off. Subject to these conditions, Deluxe
plans to complete the split-off within one year following the completion of
this offering. Deluxe has submitted a private letter ruling request to the
Internal Revenue Service.
Our Government Services Business
Among our businesses is our government services business. This business
provides online electronic transfer of benefits under selected entitlement
programs on behalf of state and local governments, as well as Medicaid
eligibility verification services. The electronic benefits transfer business
has a history of losses that have resulted in special charges for loss
contracts and asset impairments. As a consequence, we have decided to exit
this business as soon as we complete our current contractual obligations in
2006. Deluxe has agreed to indemnify us for future losses on currently
unprofitable government services contracts up to a specified amount.
3
<PAGE>
Information About Us
We were incorporated in Delaware in December 1984. Our principal executive
offices are located at 400 W. Deluxe Parkway, P.O. Box 12536, Milwaukee,
Wisconsin 53212 and our telephone number is 414-341-5000. Our Internet address
is www.efunds.com. The information contained on our website is not a part of
this prospectus.
The Offering
Common stock offered................ shares
Common stock to be outstanding
after the offering.................
shares
Use of proceeds..................... General corporate purposes, including
acquisitions, strategic alliances and
working capital.
Proposed Nasdaq National Market EFDS
symbol.............................
Unless we specifically state otherwise, all information in this prospectus
assumes that the underwriters do not exercise their over-allotment option. If
the underwriters exercise their over-allotment option in full, shares of
common stock will be outstanding after this offering.
The number of shares of our common stock to be outstanding immediately after
this offering does not take into account shares of our common stock
reserved for issuance under our stock plans. We expect to grant options to
purchase an aggregate of shares of our common stock upon completion of
this offering with an exercise price equal to the initial public offering
price, unless a lower price is required by foreign law or government
regulation.
At the time of the split-off, all outstanding options to purchase Deluxe
common stock will be converted into new options to purchase Deluxe common stock
and options to purchase our common stock. The actual number of options will be
determined at the time of the split-off based on the market price of our common
stock and Deluxe common stock. Based upon an assumed initial public offering
price of $ per share and assuming the market price of Deluxe's common stock
at that time is the same as the market price on , 2000, the number of our
shares for which options would be granted would be and the weighted
average exercise price would be $ per share.
4
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Summary Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(in thousands, except per
share
and operating data)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales....................................... $229,065 $267,520 $302,340
-------- -------- --------
Cost of sales, excluding loss contract and
asset impairment charges..................... 143,966 171,359 185,590
Loss contract and asset impairment charges.... -- 40,949 8,700
-------- -------- --------
Total cost of sales......................... 143,966 212,308 194,290
-------- -------- --------
Gross margin.................................... 85,099 55,212 108,050
-------- -------- --------
Selling, general and administrative........... 70,542 81,198 105,382
Research and development...................... 1,398 625 3,756
Asset impairment charges...................... 11,831 -- --
-------- -------- --------
Total operating expenses.................... 83,771 81,823 109,138
-------- -------- --------
Income (loss) from operations................... 1,328 (26,611) (1,088)
Other income (expense)
Legal proceedings............................. (40,050) 4,157 2,094
Other income (expense)........................ (918) (3,495) (4,609)
Interest income (expense)..................... (825) 2,789 963
-------- -------- --------
Loss before income taxes........................ (40,465) (23,160) (2,640)
-------- -------- --------
Benefit (provision) for income taxes............ 6,397 8,569 (5,586)
-------- -------- --------
Net loss........................................ $(34,068) $(14,591) $ (8,226)
======== ======== ========
Net loss per share--basic and diluted........... $(13,627) $ (5,836) $ (3,290)
Shares used in computing basic and diluted net
loss per share................................. 2,500 2,500 2,500
Pro forma basic and diluted net loss per
share(1).......................................
Shares used in computing pro forma basic and
diluted net loss per share(1)..................
Operating Data:
Account verifications inquiries (millions)...... 28.6 30.3 32.1
Transactions processed (millions)............... 3,313 3,944 5,019
ATMs driven at period end....................... 5,766 5,623 8,596
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------
Actual As Adjusted(2)
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(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (3)........................... $ 35,849
Working capital......................................... 25,607
Total assets............................................ 289,929
Long-term debt, excluding current portion............... 3,597
Total stockholder's equity.............................. 199,105
</TABLE>
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(1) Reflects a for stock split in connection with this offering.
(2) As adjusted to reflect the sale of shares of common stock in this
offering, assuming a public offering price of $ per share, and the
receipt of the net proceeds after deducting the underwriting discount and
estimated offering expenses.
(3) Excludes restricted cash which represents cash that we have supplied for a
client's ATMs and cash that we temporarily hold in custodial accounts on
behalf of clients.
5
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RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making a decision to buy our common
stock.
Risks Relating to Our Business and Industry
We have had net losses over the past several years, and we may not achieve
profitability.
We had net losses of $8.2 million in 1999 and $14.6 million in 1998, and we
may not achieve or maintain profitability.
Our governmental services business contributed operating losses of
approximately $6.6 million in 1999 and $47.7 million in 1998, including special
charges for loss contracts and asset impairments. We anticipate an additional
loss contract charge in early 2000 due to the execution of a definitive long-
term agreement with a prime contractor of electronic benefit transfer services
for whom we have been providing services. We intend to exit the government
services business after we complete our obligations under our long-term
contracts in 2006. Deluxe has agreed to indemnify us for any losses on
identified loss contracts in excess of the loss contract reserves up to $ .
The loss contract reserves are based on estimates of future performance of
identified contracts which may not be realized. As a result, we may incur
losses beyond our current reserves and Deluxe's indemnification. In addition,
we may be unable to manage effectively our exit from the government services
business if we are unable to retain key employees and maintain case load
volumes, which could result in further losses. Furthermore, our professional
services business is new and developing and has contributed operating losses of
$10.7 million in 1999 and $3.4 million in 1998. As a consequence, the prospects
for our professional services business must be considered in light of the risks
and uncertainties encountered by businesses in the early stage of development
in new and rapidly evolving markets.
Our ability to achieve profitability will depend on growth in electronic
debit payments, our ability to attract new clients, the market acceptance of
our new products and services and our ability to control further losses on
government services contracts.
Our inability to successfully integrate our existing businesses could limit
our growth.
In April 1999, we began the process of combining various separate businesses
into an integrated electronic debit payment business. Our range of product and
service offerings has changed since that time and our business model is still
new and developing. We may not be able to realize the anticipated strategic and
other benefits of this combination in a timely manner. Our management will
continue to be required to devote substantial attention to the process of
integrating our operations, technologies and personnel and consolidating our
infrastructure. The diversion of management's attention and any difficulties
encountered during the transition could have an adverse impact on our on-going
business activities and limit our growth.
If we fail to develop and introduce new and enhanced products and services,
we will not be able to compete effectively and our ability to generate revenues
will suffer.
Our success will depend in part on our ability to continue to develop and
introduce new and enhanced electronic debit payment solutions that keep pace
with competitive introductions, technological changes and changing customer
preferences. If we fail to anticipate or respond adequately to new
developments, we may lose opportunities for business with both current and
potential customers.
Legislation relating to consumer privacy protection could harm our ability
to collect and use data, increase our operating costs or otherwise harm our
business.
The success of our business depends in part on our ability to collect
information for DebitBureau and provide risk management services to our
clients. Exisitng and new laws and regulations relating to consumer privacy
protection, however, could harm our ability to collect and use data, increase
our operating costs or
6
<PAGE>
otherwise harm our business. Due to the increasing public concern over consumer
privacy rights, Congress and state legislatures have adopted and are
considering adopting laws and regulations restricting the purchase, sale and
sharing of personal information about consumers.
The new federal financial modernization law, known as the Gramm-Leach-Bliley
Act, imposes significant new consumer information privacy requirements on a
wide range of companies, including financial institutions from whom we obtain
information. The Act requires covered companies to develop and implement
policies to protect the security and confidentiality of consumers' nonpublic
personal information and to disclose those policies to consumers before a
customer relationship is established and annually thereafter. In addition, the
Act requires covered companies to give an opt-out notice to consumers before
sharing consumer information with third parties. The opt-out notice requirement
in the Act is subject to several exceptions, which we believe apply to our
business, thereby allowing banks to continue to provide nonpublic personal
information to us. The Act, however, also requires federal agencies, such as
the Comptroller of the Currency and the Federal Trade Commission, to issue
proposed regulations to implement these requirements. Certain provisions of the
Federal Trade Commission's proposed regulations, if enacted, would expand the
scope of the Act in ways which could adversely affect our business.
The Act does not prohibit state legislation or regulations that are more
restrictive on our collection and use of data. More restrictive legislation or
regulations have been introduced and could be introduced in the future, in
Congress and the states. We are unable to predict whether such legislation or
regulations will be adopted or their effect on our business.
We face intense competition in all areas of our business, and if we do not
compete effectively, our business will be harmed.
We face intense competition from a number of companies, including many that
have significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than we do.
In the electronic payment management market, our principal competitors
include:
. third party network and credit card processors, including First Data,
Equifax, Total System Services, Electronic Data Systems, Concord EFS and
Alliance Data Systems;
. financial institutions that have developed internal processing
capabilities or services similar to ours, including Bank of America,
Marshall and Illsley and Fifth Third National Bank;
. electronic data interchange and cash management providers, including
Fiserv, CheckFree, M&I Data, EDS and Fundtech;
. electronic bill payment providers, including CheckFree, EDS, MasterCard,
Spectrum and Visa;
. electronic funds transfer software solution providers, including
Transaction Systems Architects, SLMsoft, Oasis, Mosaic and PaySys; and
. national information database companies and other content providers,
including Equifax, Experian and Trans Union.
In the fragmented information technology professional services market, we
compete with numerous firms. We believe that our principal competition to date
has been the internal information technology departments of current and
potential clients. In addition, we compete with systems consulting and
integration firms, application software firms, Internet professional service
companies, services divisions of computer hardware and software vendors,
facilities management and outsourcing companies, "Big 5" accounting firms and
strategic consulting firms.
In addition to our current competitors, we expect substantial competition
from established and new companies as the e-commerce and Internet markets
continue to develop and expand. We cannot assure you that we will be able to
compete effectively against current and future competitors. Increased
competition could result in price reductions, reduced gross margins or loss of
market share.
7
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Our future profitability is dependent upon the continued growth in the
market for electronic debit payment services.
If the electronic debit payments market does not grow or grows more slowly
than expected, our business will suffer. Several factors could inhibit the
acceptance and growth of electronic debit payments, including:
. the unwillingness of consumers and businesses to change their
traditional payment methods; and
. adverse publicity and consumer concern about the reliability,
performance, privacy and security of electronic payment transactions.
The success of our strategy to expand our Internet delivery channels
depends on increased adoption by businesses and consumers of the Internet as a
means for commerce.
An important part of our strategy is to expand the sale of our products and
services in the Internet channel. This strategy depends heavily on the
acceptance and use of the Internet as a means of commerce. If commerce over
the Internet does not become more accepted and widespread, our business and
results of operations could suffer.
Factors that may affect Internet commerce adoption include:
. inadequate network infrastructure;
. security, privacy and authentication concerns;
. changes in, or insufficient availability of, telecommunication services
to support the Internet; and
. increased government regulations or taxation.
If we are unable to attract, integrate, motivate and retain skilled
personnel, our business will suffer.
Our future success depends on our ability to attract, integrate, motivate
and retain additional skilled personnel, particularly software development
professionals. There is currently a shortage of software developers with
advanced technological skills in the United States and this shortage is likely
to continue. Furthermore, there is significant competition for personnel with
the skills and experience required to perform the services we offer in all of
our businesses. If we are unsuccessful in attracting, integrating, motivating
or retaining qualified personnel, our business will suffer.
If we are unable to protect our name or expand our recognition in the
market place, our business may suffer.
We believe that establishing and maintaining name recognition are critical
for attracting and expanding our customer base. If our reputation is damaged
or if potential customers are not familiar with us or the products and
services we provide, we may become less competitive. Promotion and enhancement
of our name will depend largely on our success in continuing to provide new
electronic payment management solutions. If customers do not perceive our
solutions to be effective or of high quality, our brand name and reputation
will suffer.
In May 1999, we filed a trademark infringement action seeking to prevent
Citizen Advisers, Inc. from using the "E FUND" mark and efund.com Internet
domain. This action and any future litigation could be costly and time
consuming. If we are unsuccessful in preventing Citizen Advisers from using
our name, our business could be harmed.
Security and privacy breaches in electronic and Internet transactions may
deter use of our products and services.
If we are unable to protect the security and privacy of our electronic and
Internet transactions, our business could be materially adversely affected. A
security or privacy breach may:
. deter customers from using our products and services;
. harm our reputation;
8
<PAGE>
. expose us to liability;
. increase our operating expenses to remediate the problem; and
. decrease market acceptance of electronic commerce transactions in
general.
While we believe that we use proven applications designed for premium data
security and integrity to process electronic and Internet transactions, we
cannot be certain that use of these applications will be sufficient to address
technology advances, changing market conditions or other developments. Any
failures in our security and privacy measures could have a material adverse
effect on our business.
If we experience system failures, the products and services we provide to
our customers could be delayed or interrupted, which would harm our business
and reputation and result in the loss of customers.
Our ability to provide reliable service largely depends on the efficient and
uninterrupted operations of our computer network systems and data centers. Any
interruptions could severely harm our business and reputation and result in a
loss of customers. Our systems and operations could be exposed to damage or
interruption from fire, natural disaster, power loss, telecommunications
failure, unauthorized entry and computer viruses. Although we have taken steps
to prevent a system failure, we cannot be certain that our measures will be
successful and that we will not experience system failures. Further, our
property and business interruption insurance may not be adequate to compensate
us for all losses or failures that may occur.
We may experience software defects, development delays and installation
difficulties, which would harm our business and reputation and expose us to
potential liability.
Our services and products are based on sophisticated software and computing
systems which often encounter development delays, and the underlying software
may contain undetected errors or defects. In addition, we may experience
difficulties in installing or integrating our products and technologies on
platforms used by our customers or in new environments, such as the Internet.
Defects in our software products, errors or delays in the processing of
electronic transactions or other difficulties could result in:
. delay in market acceptance;
. additional development costs;
. diversion of technical and other resources;
. loss of customers;
. negative publicity; or
. exposure to liability claims.
Although we attempt to limit our potential liability for warranty claims
through disclaimers and limitation-of-liability provisions in our license and
client agreements, we cannot be certain that these measures will be successful
in limiting our liability.
Consolidation in the banking industry may adversely affect our ability to
sell our products and services.
Mergers, acquisitions and personnel changes at financial institutions may
adversely affect our business, financial condition and results of operations.
Currently, the banking industry is undergoing large-scale consolidation,
causing the number of financial institutions to decline. This consolidation
could cause us to lose:
. current and potential customers;
. market share if the combined financial institution determines that it is
more efficient to develop in-house products and services similar to ours
or use our competitors' product and services; and
9
<PAGE>
. revenue if the combined financial institution is able to negotiate a
greater volume discount for, or discontinue the use of, our products and
services.
We depend on the continued services of our key officers.
Our future success depends upon the continued services of a number of key
officers, including John Blanchard, our Chairman and Chief Executive Officer,
Debra Janssen, our President and Chief Operating Officer, and Dr. Nikhil Sinha,
our Executive Vice President for Global Corporate Development. The loss of the
technical knowledge and industry expertise of any of these officers could
seriously harm our business.
Our attempts to expand by means of acquisitions and strategic alliances may
not be successful.
We intend to expand our operations or market presence by entering into
business combinations, joint ventures or other strategic alliances in the
United States and internationally. We may not be able to identify or enter into
such combinations or alliances and tax requirements related to the split-off
may restrict our ability to complete a significant acquisition through the
issuance of our common stock. Our ability to expand in this manner involves
many risks, including:
. the operations, technology and personnel of any acquired companies may
be difficult to integrate;
. the allocation of resources to consummate these transactions may disrupt
our business;
. acquired businesses may not achieve anticipated revenues, earnings or
cash flow;
. strategic alliances may not be successful and we may not realize
anticipated benefits in a timely manner; and
. our relationships with existing customers and business partners may be
weakened or terminated as a result of these transactions.
There are a number of risks associated with our international sales and
operations that could harm our business.
Because we currently sell some of our products and services in international
markets and maintain facilities in India, our business is subject to risks
associated with doing business internationally. Also, we may not be successful
in selling our services outside of the United States. Our future results could
be harmed by a variety of factors, including:
. changes in foreign currency exchange rates;
. changes in political and economic conditions, particularly in India;
. elimination of favorable tax incentives in India;
. potentially unfavorable tax rules;
. tariffs, duties and other trade barriers;
. reduced protection for intellectual property rights;
. challenges in staffing and managing foreign operations;
. changes in foreign laws and regulatory requirements or in foreign
policy; and
. varying business practices in foreign countries.
We face collection risks on some payments.
Our debt collection services expose us to certain risks. For a limited
number of clients of our check authorization service, we purchase returned
checks at a discounted price to the stated check amount and assume the
collection risk on the checks. We base our discounted purchase price on the
collection history of each client. If we are unable to collect on returned
checks at the historical rate of our clients or the payment quality of the
portfolio of returned checks deteriorates, we may incur a loss on the portfolio
of purchased checks.
10
<PAGE>
We face termination and compliance risks with respect to our government
contracts.
Some of our government contracts, by their terms, can be terminated at any
time, without cause, for the convenience of the government. If a government
contract is so terminated, the contractor generally is entitled to receive
compensation only for the services provided or costs incurred at the time of
termination and a reasonable profit on the contract work performed prior to the
date of termination. In addition, all government contracts require compliance
with various contract provisions and procurement regulations, and in certain
cases, accounting requirements. If not cured, some violations of these
provisions could result in termination of the contract and fines.
Our business could be harmed by cost overruns on fixed-price contracts.
Our government services contracts are provided typically under fixed-price,
variable volume contracts. Under a fixed-price, variable volume contract, the
contractor agrees to perform for an agreed unit price and bears the entire risk
of cost overruns and changing volumes. In addition, we offer some of our
information technology services on a fixed-price, fixed-time basis. To avoid
losses from fixed-price contracts, we must, among other things, accurately
estimate the resources and time required to perform the project, effectively
manage our clients' expectations and complete projects within budget and to our
clients' satisfaction. If we do not successfully manage these project and
contract risks, we could suffer cost overruns and penalties and our reputation
and results of operations could be harmed.
We may be unable to protect our intellectual property rights.
We rely on a combination of trademark and copyright laws, trade secret
protection and confidentiality and license agreements to protect our
intellectual property rights. We may be required to spend significant resources
to protect our trade secrets and monitor and police our intellectual property
rights. Despite our efforts to protect our proprietary rights, parties may
infringe or misappropriate our proprietary rights, or otherwise independently
develop substantially equivalent products and services. The loss of
intellectual property protection or the inability to secure or enforce
intellectual property protection could harm our business and ability to
compete.
Although we believe our products and services do not infringe on the rights
of others, third parties may assert infringement claims against us in the
future. In particular, there has been a substantial increase in the issuance of
business process patents for Internet-related business processes, which may
have broad implications for all participants in Internet commerce. Claims for
infringement of these patents are becoming an increasing source of litigation.
If we become subject to an infringement claim, we may be required to modify our
products, services and technologies or obtain a license to permit our continued
use of those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could seriously harm our
business and operating results. In addition, future litigation relating to
infringement claims could result in substantial costs to us and a diversion of
management resources. Adverse determinations in any litigation or proceeding
could also subject us to significant liabilities and could prevent us from
using some of our products, services or technologies.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
Our quarterly operating results may fluctuate significantly for a variety of
reasons, including:
. demand for and market acceptance of our products and services;
. delays or problems in the introduction of new products and services;
. the mix of product sales;
. changes in the size and timing of orders for our products and services;
. costs associated with acquisitions or strategic alliances; and
. competitive pressures resulting in lower selling prices.
11
<PAGE>
As a result, we believe that period-to-period comparisons of our operating
results are not a good indication of our future performance. In addition, our
future quarterly operating results may fall below expectations of securities
analysts or investors. In this event, the market price of our common stock may
decrease significantly.
Our expense levels are relatively fixed in the short term and are based, in
part, on our expected future revenues. Our inability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall could
accentuate the negative effect on our quarterly results.
Risks Relating to Our Separation From Deluxe
If we are not able to obtain data from data suppliers, our business will be
seriously harmed.
Historically, we have obtained a substantial portion of our debit and other
consumer data through Deluxe under its agreements with banks and other
financial institutions. As a result of the split-off from Deluxe, we must
secure our own separate agreements with these data suppliers. We cannot be
certain that we will be successful in securing agreements or otherwise continue
to obtain sufficient amounts of data on reasonable terms and conditions, if at
all. Any failure by us to obtain data would have an adverse effect on our
ability to update information in DebitBureau, the performance of our products
and services based on DebitBureau and new product development.
We may not realize the benefits of our separation from Deluxe and our stock
price may decline if Deluxe does not complete the split-off.
If Deluxe does not complete the split-off, Deluxe will continue to control
us and we may not fully realize the benefits we expect as a result of the
split-off. Deluxe has the sole discretion to determine the timing and terms of
any split-off and is not obligated to effect the split-off. In particular,
Deluxe will not complete the split-off unless it receives a favorable tax
ruling from the Internal Revenue Service to the effect that the split-off would
be tax-free to Deluxe and its stockholders for federal income tax purposes. We
cannot assure you whether or when Deluxe will receive a favorable tax ruling
from the IRS, or that the split-off will occur. In addition, if the split-off
is not completed, the liquidity of our shares in the market will be limited
unless and until Deluxe elects to sell some of its significant ownership.
We will be controlled by Deluxe as long as it owns a majority of our common
stock, and our other stockholders will be unable to affect the outcome of
stockholder voting during this time.
After the completion of this offering, Deluxe will own approximately %
of our outstanding common stock. As long as Deluxe continues to hold a majority
of our outstanding stock, Deluxe will be able to elect all of our directors and
determine the outcome of all corporate actions requiring stockholder approval.
Because it controls us, Deluxe has the power to act without taking the best
interests of our company into consideration. For example, Deluxe will control
decisions with respect to:
. the business direction and policies of our company, including the
election and removal of directors;
. mergers or other business combinations involving us;
. the acquisition or disposition of assets by us;
. our financing; and
. amendments to our certificate of incorporation and bylaws.
12
<PAGE>
There are potential business conflicts of interest with Deluxe.
Because Deluxe controls us and our business objectives may differ,
conflicts of interest may arise between Deluxe and us regarding, among other
things:
. our past and ongoing relationships with Deluxe, including tax matters,
employee benefits, indemnification, data sharing, and other matters
arising from our separation from Deluxe;
. the nature, quality and pricing of transitional services Deluxe has
agreed to provide us;
. potential competitive business activities; and
. sales or distributions by Deluxe of all or part of its ownership
interest in us.
For example, by virtue of its controlling beneficial ownership and the
terms of the tax-sharing agreement to be entered into between us and Deluxe,
Deluxe will effectively control all of our tax decisions until the split-off
is completed. Under the tax-sharing agreement, Deluxe will have sole authority
to respond to and conduct all tax proceedings and tax audits relating to us,
to file all returns on our behalf and to determine the amount of our liability
to, or entitlement to payment from, Deluxe under the tax-sharing agreement.
This arrangement may result in conflicts of interest between us and Deluxe.
Under the tax-sharing agreement, Deluxe may choose to contest, compromise or
settle any adjustment or deficiency proposed by the relevant taxing authority
in a manner that may be beneficial to Deluxe and detrimental to us, except
that Deluxe is obligated under the tax-sharing agreement to act in good faith
with regard to all members included in the applicable returns.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated third party.
We expect that some of our directors may have conflicts of interest because
they are also directors and officers of Deluxe.
During the period that Deluxe controls us, we expect that some members of
our board of directors will continue to be directors and officers of Deluxe.
These directors will have obligations to us as well as Deluxe and may have
conflicts of interest with respect to matters potentially or actually
involving or affecting us.
The transitional services being provided to us by Deluxe may not be
sufficient to meet our needs, and we may pay increased costs to replace these
services after our agreements with Deluxe expire.
Deluxe has agreed to provide transitional services to us, including
services related to:
. accounting, financial and administrative services;
. treasury, cash management and insurance services;
. tax and legal services;
. employee benefits administration; and
. sales support.
These services may not be provided at the same level as when we were a part
of Deluxe, and we may not be able to obtain the same benefits. These
transitional service agreements generally have a term of less than one year
following the separation. After the expiration of these agreements, we may not
be able to replace the transitional services in a timely manner or on terms
and conditions, including cost, as favorable as those we would receive from
Deluxe during the transition period.
Our historical financial information may not be representative of our
results as a separate company.
We have no operating history as an independent company. The historical
financial information we have included in this prospectus has been carved out
from Deluxe's consolidated financial statements and does not reflect what our
results of operations, financial condition and cash flows would have been had
we been a
13
<PAGE>
separate, stand-alone entity during the periods presented. Following this
offering, we will be required to provide our own financial, administrative and
other resources to operate as an independent public company and to replace
other services provided by Deluxe to us. As a result, the historical financial
information is not necessarily indicative of what our results of operations,
financial condition and cash flows will be in the future. We have not made
adjustments to reflect all changes that we anticipate will occur in our cost
structure, funding and operations as a result of our separation from Deluxe.
Risks Relating to the Securities Markets and Ownership of Our Common Stock
We cannot predict the impact of the split-off on the price of our common
stock.
We cannot predict the effect that the split-off will have on the market
price of our common stock. The split-off could involve the distribution of
about shares of our common stock by Deluxe to its stockholders,
representing about % of the equity value of our company, or about % if
the underwriters exercise their over-allotment option in full. Substantially
all of these shares would be eligible for immediate resale to the public
market. Sales of substantial amounts of our common stock in the public market,
or the perception that substantial sales might occur, whether as a result of
this distribution or otherwise, could cause the market price of our stock to
decrease significantly. See "Shares Eligible For Future Sale."
Our securities have no prior market, and our stock price may decline after
the offering.
Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this offering. The market price of our
stock could be subject to significant fluctuations after this offering due to
factors such as:
. actual or anticipated fluctuations in our results of operations;
. changes in or failure by us to meet securities analysts' expectations;
. success of our operating strategies; and
. realization of any of the risks described in this section.
In addition, the stock market recently has experienced extreme price and
volume fluctuations, which have particularly affected the market prices for
securities of many technology companies. These market fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance. We cannot assure you that you will be able to
resell your shares at or above the initial public offering price.
Provisions in our charter documents and Delaware law may delay or prevent a
change in control.
Provisions of our certificate of incorporation and bylaws and Delaware law
may delay or prevent a change in control of our company that a stockholder may
consider favorable. These provisions include the following:
. no cumulative voting by stockholders for directors;
. a classified board of directors with three-year staggered terms;
. the ability of our board to set the size of the board of directors, to
create new directorships and to fill vacancies;
. the ability of our board, without stockholder approval, to issue
preferred stock, which may have rights and preferences that are superior
to our common stock;
. the ability of our board to amend the bylaws;
. prohibition of stockholder action by written consent;
. advance notice requirements for shareholder proposals and for nominating
candidates to our board;
14
<PAGE>
. a stockholder rights plan, which discourages the unauthorized
acquisition of 15% or more of our common stock or an unauthorized
exchange or tender offer;
. restrictions under Delaware law on mergers and other business
combinations between us and any holder of 15% or more of our outstanding
common stock; and
. a requirement that 66-2/3% of our stockholders and 66-2/3% of our
directors approve certain corporate transactions, including mergers and
consolidations, sales of assets or amendments of our certificate of
incorporation.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. When we use the words
"believe," "anticipate," "plan," "expect," "estimate," "will" and similar
expressions, we are identifying forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. We do not, however, represent forward-looking statements as
guarantees of future performance or results. Our actual results may vary
materially from those indicated in the forward-looking statements as a result
of a number of risks and uncertainties, including the risks described under
"Risk Factors" or elsewhere in this prospectus.
OUR SEPARATION FROM DELUXE
Our electronic payment solutions, professional services and government
services businesses were previously conducted through various operating units
of Deluxe. On January 31, 2000, Deluxe announced a plan to combine those
businesses into a separate, publicly-traded company. The separation of our
businesses from those of Deluxe has been substantially completed.
Benefits of the Separation
We believe that we will realize the following benefits from our complete
separation from Deluxe:
. Direct access to the capital markets. As a separate public company, we
will be able to directly access the capital markets to issue equity or
debt and to use stock-based acquisition currency to finance expansion
and growth opportunities.
. Greater strategic focus. We expect to have a sharper focus on our
businesses and growth opportunities as a result of our board and
management team concentrating only on our core businesses. Further, the
separation from Deluxe will eliminate any competition for capital
generated in its or our business.
. Increased ability to attract, retain and motivate employees. We believe
that incentive compensation arrangements for key employees, directly
related to the market performance of our common stock, will provide
enhanced incentives for performance. The separation will enable us to
offer our key employees compensation directly linked to the performance
of our businesses, which we expect to enhance our ability to attract and
retain qualified personnel.
Separation and Transition Agreements
We and Deluxe and, in some cases, our respective subsidiaries, have entered
into agreements providing for the separation of our businesses from Deluxe. For
additional information concerning these agreements, see "Agreements Between
eFunds and Deluxe."
The Exchange Offer
After this offering, Deluxe will own about % of our common stock, or
about % if the underwriters exercise their over-allotment option in full.
Deluxe has announced that it plans to distribute all of its shares of our
common stock to its shareholders through a split-off. Deluxe's plans for a
split-off are subject to receiving a private letter ruling from the Internal
Revenue Service that the split-off will be tax-free to Deluxe and its
shareholders for U.S. federal income tax purposes. Deluxe has the sole
discretion to determine whether to proceed with the split-off based on the best
interests of Deluxe's shareholders and to decide what will be the timing,
structure and terms of the split-off. Subject to these conditions, Deluxe plans
to complete the split-off within one year following the completion of this
offering. Deluxe has recently submitted a private letter ruling request to the
Internal Revenue Service. We cannot be certain when or whether Deluxe will
receive a favorable tax ruling from the Internal Revenue Service, or that the
distribution by Deluxe will be completed.
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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the sale of our common stock in this
offering, based on an assumed public offering price of $ per share and
after deducting the underwriting discount and estimated offering expenses
payable by us, will be approximately $ million, or $ million if
the underwriters exercise their over-allotment option in full.
We intend to use the net proceeds from this offering for working capital and
other general corporate purposes. In addition, we may use some of the net
proceeds for acquisitions of businesses, products and technologies that are
complementary to ours. We currently have no agreements with respect to any
material acquisitions as of the date of this prospectus. Pending use of the net
proceeds, we intend to invest the net proceeds from this offering in short-
term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings to fund the
development and growth of our business.
17
<PAGE>
CAPITALIZATION
The following table sets forth our actual and as adjusted capitalization at
December 31, 1999, as described below. The as adjusted column gives effect to
the sale of shares of our common stock in this offering, assuming an
initial public offering price of $ per share and after deducting the
underwriting discount and estimated offering expenses payable by us. This table
should be read in conjunction with our audited consolidated financial
statements and related notes, which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, excluding current portion............ $ 3,597 $
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding....... -- --
Common stock, $.01 par value; 250,000,000 shares
authorized; 2,500 shares issued and outstanding
actual; and shares issued and outstanding as
adjusted...........................................
Additional paid-in capital.......................... 292,598
Accumulated deficit................................. (92,946)
Accumulated other comprehensive loss................ (547)
-------- --------
Total stockholders' equity......................... 199,105
-------- --------
Total capitalization................................. $202,702
======== ========
</TABLE>
This table does not reflect shares of common stock reserved for
issuance under our stock option plans. We expect to grant options to purchase
an aggregate of shares of our common stock upon completion of this
offering with an exercise price equal to the initial public offering price,
unless a lower price is required by law or government regulation.
At the time of the split-off, all outstandings options to purchase Deluxe
common stock will be converted into new options to purchase Deluxe common stock
and options to purchase our common stock. The actual number of options will be
determined at the time of the split-off based on the market price of our common
stock and Deluxe common stock. Based upon an assumed initial public offering
price of $ per share and assuming the market price of Deluxe's common stock
at that time is the same as the market price on , 2000, then the number
of our shares for which options would be granted would be and the
weighted average exercise price would be per share.
18
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the offering price per share of our common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately after this offering. Pro forma net tangible book
value dilution per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately after completion
of this offering.
Our pro forma net tangible book value as of December 31, 1999 was $116.3
million, or $ per share of common stock. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the total number of shares of common stock outstanding for
the period immediately prior to this offering. After giving effect to the sale
of the shares of common stock offered in this prospectus at the assumed
public offering price of $ per share and after deducting the estimated
underwriting discounts and offering expenses, our adjusted pro forma net
tangible book value as of December 31, 1999 would have been $ million, or $
per share of common stock. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors purchasing shares in this offering.
The following table illustrates this per share dilution.
<TABLE>
<CAPTION>
Assumed public offering price per share...................... $
<S> <C> <C>
Net tangible book value per share before the offering........ $
Increase per share attributable to new investors............. $
------
Pro forma net tangible book value per share after this
offering.................................................... $
---
Dilution per share to new investors.......................... $
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The selected statement of operations data shown
below for the years ended December 31, 1997, 1998 and 1999 and the balance
sheet data as of December 31, 1998 and 1999 are derived from our audited
consolidated financial statements included in this prospectus which have been
audited by Deloitte & Touche LLP, independent auditors. The selected statement
of operations data shown below for the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived
from our unaudited consolidated financial statements not included in this
prospectus.
On February 19, 1999, we acquired all of the outstanding shares of an
electronic check conversion company. On April 13, 1999, we acquired the
remaining 50% ownership interest in a joint venture which comprises our
professional services business and which prior to the acquisition was recorded
in our financial statements under the equity method of accounting. The
acquisitions have been accounted for under the purchase method of accounting
and, as a result, our consolidated financial statements include the total
results of these businesses subsequent to their acquisition dates.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share data and
operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales................... $193,111 $201,681 $229,065 $267,520 $302,340
-------- -------- -------- -------- --------
Cost of sales, excluding
loss contract and asset
impairment charges....... 104,239 131,379 143,966 171,359 185,590
Loss contract and asset
impairment charges....... -- -- -- 40,949 8,700
-------- -------- -------- -------- --------
Total cost of sales..... 104,239 131,379 143,966 212,308 194,290
-------- -------- -------- -------- --------
Gross margin................ 88,872 70,302 85,099 55,212 108,050
-------- -------- -------- -------- --------
Selling, general and
administrative........... 64,330 69,544 70,542 81,198 105,382
Research and development
(1)...................... -- -- 1,398 625 3,756
Asset impairment charges.. -- -- 11,831 -- --
-------- -------- -------- -------- --------
Total operating
expenses............... 64,330 69,544 83,771 81,823 109,138
-------- -------- -------- -------- --------
Income (loss) from
operations................. 24,542 758 1,328 (26,611) (1,088)
Other income (expense)
Legal proceedings......... -- -- (40,050) 4,157 2,094
Other income (expense).... (313) 7 (918) (3,495) (4,609)
Interest income
(expense)................ (972) (1,463) (825) 2,789 963
-------- -------- -------- -------- --------
Income (loss) before income
taxes...................... 23,257 (698) (40,465) (23,160) (2,640)
Benefit (provision) for
income taxes............... (9,733) (5,203) 6,397 8,569 (5,586)
-------- -------- -------- -------- --------
Net income (loss)........... $ 13,524 $ (5,901) $(34,068) $(14,591) $ (8,226)
======== ======== ======== ======== ========
Net income (loss) per share
-- basic and diluted....... $ 5,409 $ (2,360) $(13,627) $ (5,836) $ (3,290)
Shares used in computing
basic and diluted net
income (loss) per share:... 2,500 2,500 2,500 2,500 2,500
Pro forma basic and diluted
net loss per share(2)......
Shares used in computing pro
forma basic and diluted net
loss per share:(2).........
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Account verification inquiries
(millions)...................... $ 23.7 $ 26.3 $ 28.6 $ 30.3 $ 32.1
Transactions processed
(millions)...................... 1,356 2,526 3,313 3,944 5,019
ATMs driven at period end........ N/A N/A 5,766 5,623 8,596
Balance Sheet Data:
Cash and cash equivalents(3)..... 3,967 27,226 23,843 16,055 35,849
Working capital.................. 8,735 38,666 39,686 1,869 25,607
Total assets..................... 150,614 177,230 187,810 186,335 289,929
Long-term debt, excluding current
portion......................... 3,504 2,426 4,571 4,029 3,597
Total stockholder's equity....... 101,201 131,897 87,690 89,803 199,105
</TABLE>
- --------
(1) Research and development expenses are included in, but were not separately
recorded from, cost of sales and selling, general and administrative
expenses for the years ended December 31, 1996 and 1995.
(2) Reflects a for stock split in connection with this offering.
(3) Excludes restricted cash which represents cash that we have supplied for a
client's ATMs and cash that we temporarily hold in custodial accounts on
behalf of clients.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data" and our consolidated financial statements and the notes to those
financial statements included in this prospectus. In addition to historical and
pro forma information, this discussion contains forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by us due to competitive factors, risks
associated with our expansion plans and other factors discussed under "Risk
Factors" and elsewhere in this prospectus.
Overview
We are a leading provider of end-to-end electronic debit payment solutions
to financial institutions, retailers, electronic funds transfer networks and e-
commerce providers. Our primary products and services are decision support and
risk management tools, electronic funds transfer processing, monitoring and
settlement services and professional services, including information technology
consulting and business process management. We are a single source of
electronic payment solutions whether payments are made using payment cards or
paper checks, or whether the transaction is accomplished at retail locations or
ATMs, through mail or telephone orders or over the Internet.
Our businesses have historically been operated as units of Deluxe. In April
1999, Deluxe announced that it was changing its business model to a holding
company structure with four independently operated business units: paper
payment systems, electronic payment solutions, professional services and
government services. In January 2000, Deluxe announced that its board of
directors approved a plan to combine the latter three businesses to form our
company as a separate, independent publicly traded company.
We have entered into various agreements related to transition and ongoing
relationships with Deluxe. These agreements relate to, among others,
information technology development, business process management, employee
benefits, tax sharing, real estate, data sharing, indemnification and
transition services. For transition services, we will compensate Deluxe for
providing services and negotiate third-party rates after the transition
arrangements terminate. The transition period varies depending on the agreement
but many transition services will terminate upon completion of the split-off.
See "Agreements Between eFunds and Deluxe." Some of the transition agreements
may be extended beyond the initial transition period.
Our consolidated financial statements have been prepared using the
historical results of operations and historical bases of the assets and
liabilities of the Deluxe businesses that comprise our company. The
consolidated financial statements also include allocations to us of certain
liabilities and expenses, including profit sharing, post-retirement, non-
qualified deferred compensation and other employee benefits; information
technology services; facility costs; and other Deluxe administrative services
costs. The expense allocations have been determined on bases that both Deluxe
and we considered to be a reasonable reflection of the utilization of the
services provided to us or the benefit received by us. The expense allocation
methods are based on headcount, transaction processing costs, square footage
and relative sales.
The financial information presented in this prospectus is not necessarily
indicative of what our financial position, results of operations or cash flows
would have been had we been a separate, stand-alone entity for the periods
presented nor is it indicative of our future financial position, results of
operations or cash flows. We anticipate that many changes will occur in our
funding and operations as a result of our operation as an independent entity
and through the split-off. In particular, our business was conducted as three
business segments by Deluxe. Accordingly, our financial statements reflect
those business segments: electronic payment solutions, professional services
and government services. It is our intention to integrate our operations more
fully, which may change our presentation of segment information in future
periods.
Net Sales. Our net sales are generally comprised of transaction processing
and service fees, decision support fees, software licensing, maintenance and
support fees, government service fees and information
22
<PAGE>
technology consulting and business process management services fees. Our
revenue recognition policies for these various fees are as follows:
. Transaction processing and service fees are recognized in the period
that the service is performed. These services consist of processing our
customers' electronic debit transactions through electronic funds
transfer networks and settling the funds with the financial institutions
involved in the transactions. Additionally, these services include
monitoring ATMs and point-of-sale devices to alert our customers when
potential problems occur. These fees are charged on a per transaction
basis, depending on the contractual arrangement with the customer.
Government services fees are recognized in the period services are
provided based on monthly fees per benefits recipient.
. Decision support fees are recognized as revenue in the period the
services are provided. Decision support services consist of new account
applicant and check verification screenings to manage the risk
associated with account openings and check acceptance. Decision support
fees are based on the number of inquiries against the databases used for
screening purposes or monthly fees based on the aggregate dollar value
of checks authorized by the retailer, depending on the product and
service.
. Software license fees for standard software products are recognized when
delivery has occurred, the license fee is fixed and determinable,
collectibility is probable and evidence of this arrangement exists.
License fees are charged based on modules purchased by the customer.
. Software maintenance and support revenues are recognized ratably over
the term of the contract, and/or as the services are provided. Support
services such as customization of standard software modules, are charged
on a time and materials basis and recognized as hours are completed.
. Revenues from professional services for information technology
consulting and business process management are generally recognized
under two methods, depending on contractual terms. Under the time and
materials method, revenue is based on a fee per hour basis, and is
recognized as hours are completed. Under the fixed contract method, a
pre-set fee is agreed upon for a project, and revenue is recognized
proportionately to the percentage completion of the project.
Cost of Sales. Cost of sales consists primarily of salaries and benefits,
depreciation and maintenance of equipment and facilities and amortization of
software used to operate our data centers. Expenses are recognized when
incurred, with the exception of installation costs. Installation costs are
capitalized and recognized ratably over the life of the contract, which
approximates the revenue recognition.
Expenses. Selling, general and administration expenses consist of salaries
and benefits, consulting fees, facilities and equipment costs, recruiting and
training, travel expenses, corporate administrative charges, depreciation and
amortization and all other corporate costs.
Research and development expenses, which are expensed as incurred, relate to
investigating new or improved processes and techniques and developing such
research findings into a potential new product or service. Research and
development expenses reflect the cost of salaries and benefits, travel costs
and testing- related costs incurred in the early stages of product development.
Interest expense represents the cost of funds for working capital and other
purposes and reflects Deluxe's internal cost of funds. Interest income consists
of interest credited to us for funds held in investment accounts.
Government Services
Our government services business was started in response to federal mandates
that require state and local governmental agencies to convert to electronic
payment methods for the distribution of benefits under entitlement programs,
including food stamps and other welfare programs. In 1993, we rolled out our
first state-wide system to electronically deliver these benefits using our
electronic funds transfer capabilities. From 1994 through 1996 we bid on
contracts that secured business as a prime or subcontractor with over 30
states, including three subcontracts with coalitions of states. We were
providing services in over 30 states at the end of 1999.
23
<PAGE>
All of our contracts are for service periods of five to seven years and are
based on a fixed price, variable volume model. We recognize revenue on long-
term service contracts when the service is performed. For several of the
contracts, we serve as a subcontractor in partnership with a financial
institution. An integral part of these partnerships was an exclusive switching
services agreement with that financial institution to provide merchants with
cross-border access to the benefits databases, beneficiaries and benefits among
states in a coalition.
In 1997, we recorded a $40.0 million charge to legal proceedings expense for
a judgment entered against us in an action brought by Mellon Bank in connection
with a potential bid to provide electronic benefit transfer services to a state
coalition. In 1998, $4.2 million of the reserve was reversed and credited to
legal proceedings expense due to the denial of Mellon's motion for prejudgment
interest. In 1999, after we paid the judgment of $32.2 million in the Mellon
litigation, we reversed the remaining reserve of $2.1 million through a credit
to legal proceedings expense.
In 1998, after a reorganization and management change in our government
services business and as many of the state systems were being fully
implemented, we concluded that net sales from our government services contracts
would be lower than anticipated because case volumes were lower due to welfare
reform and a strong economy. In addition, we underestimated the costs required
to support our services. The primary sources of additional costs were a need to
install a greater number of point-of-sale terminals, higher than expected
transaction volume per recipient and higher support costs. These higher costs,
which could not be recovered under our fixed-price variable volume contracts
when combined with lower sales, resulted in 1998 charges of $26.3 million and
$14.7 million to write off impaired government services assets and to accrue
for future contract losses. Subsequent to the 1998 charges, additional state
systems began operations while a continuing strong economy lead to further
reductions in the number of welfare cases and our prime contractor in state
coalition contracts notified us that it would not renew our exclusive switching
contract. As a result in 1999, we recorded additional charges totaling $8.7
million primarily for additional expected future contract losses. We anticipate
recording an additional charge in 2000 related to the execution of a definitive
contract with our coalition prime contractor for whom we have been providing
services without a finalized contract. This charge will be covered by our
indemnification agreement with Deluxe.
We have decided to exit the government services business as soon as our
current contractual commitments expire in 2006. During the wind down period, we
intend to continue to take steps to improve the profitability of the current
business. Deluxe has agreed to indemnify us for any losses on identified loss
contracts in excess of the loss contract reserves up to $ . At December 31,
1999, we had reserves of $20.6 million.
Recent Events
Acquisition of an Electronic Check Conversion Company. On February 19, 1999,
we acquired all of the outstanding shares of an electronic check conversion
company for $13 million. This company provides electronic check conversion and
electronic funds transfer solutions for financial services companies and
retailers and is included in our electronic payment solutions business. The
acquisition was accounted for under the purchase method of accounting. As a
result, our consolidated financial statements include the results of this
business subsequent to its acquisition date. Total cost in excess of net assets
acquired in the amount of $15.7 million is reflected as goodwill and is being
amortized over 10 years.
Acquisition of Remaining 50% Ownership Interest in HCL-Deluxe, N.V. On April
13, 1999, we acquired the remaining 50% ownership interest in HCL-Deluxe, N.V.
for $23.4 million. The joint venture, which Deluxe entered into with HCL
Corporation of India commenced operations in September 1997. The acquisition of
this company, which comprises our professional services business, was accounted
for under the purchase method of accounting. Total cost in excess of net assets
acquired in the amount of $24.9 million is
24
<PAGE>
reflected as goodwill and is being amortized over 15 years. Prior to the
acquisition, we recorded our 50% ownership of the joint venture's results of
operations in other expense under the equity method of accounting. Subsequent
to this acquisition, we changed the name of this entity to iDLX Technology
Partners.
Transactions With Deluxe. Deluxe has been, and is expected to continue to
be, a significant client for our professional services business. In 1999, we
provided software development and business process management services on a
project-by-project basis to Deluxe. Revenue for these professional services was
$6.3 million on a pro forma full year basis. In 1999, sales to Deluxe
represented approximately 3.0% of our total net sales and approximately 37.0%
of the net sales of our professional services business. Sales to Deluxe for our
electronic payment solutions business were less than 1.5% of net sales.
Beginning in 2000 our software services to Deluxe have been formalized into
a five year software development outsourcing agreement. During the term of the
agreement, we anticipate that Deluxe will spend approximately $43 million per
year for software development based on the actual number of hours of
information technology services that we provide to Deluxe. If Deluxe fails to
reach the $43 million spending target, it will be obligated to make payments
for a portion of our fees based on our estimates of lost profits. We also will
provide business process management services, including accounts receivable,
accounts payable and other general accounting services and mail order entry
services. Deluxe's annual minimum spending target for business process
management services will range from $8.1 million in 2000 to $4.2 million in
2004. The agreement will also provide for liquidated damages for non-
performance by us and bonuses for superior performances. The provision of
services by us under the agreement is non-exclusive, and Deluxe may contract
with any third party for the provision of professional services.
25
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the relative
composition of net sales and selected statements of operations data as a
percentage of net sales:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales:
Electronic payment solutions........................... 88.2% 83.6% 79.8%
Professional services.................................. -- -- 4.2
Government services.................................... 11.8 16.4 16.0
----- ----- -----
Total net sales...................................... 100.0 100.0 100.0
----- ----- -----
Cost of sales:
Electronic payment solutions........................... 50.1 47.5 45.6
Professional services.................................. -- -- 3.0
Government services:
Cost of sales, excluding loss contract and asset
impairment charges.................................. 12.7 16.6 12.8
Loss contract and asset impairment charges........... -- 15.3 2.9
----- ----- -----
Total cost of sales................................ 62.8 79.4 64.3
----- ----- -----
Gross margin........................................... 37.2 20.6 35.7
----- ----- -----
Operating expenses:
Selling, general and administrative.................... 30.8 30.4 34.9
Research and development............................... 0.6 0.2 1.2
Asset impairment charges............................... 5.2 -- --
----- ----- -----
Total operating expenses............................. 36.6 30.6 36.1
----- ----- -----
Income (loss) from operations.......................... 0.6 (10.0) (0.4)
Other income (expense):
Legal proceedings...................................... (17.5) 1.6 0.7
Other income (expense)................................. (0.4) (1.3) (1.5)
Interest income (expense).............................. (0.4) 1.0 0.3
----- ----- -----
Loss before income taxes............................... (17.7) (8.7) (0.9)
Benefit (provision) for income taxes................... 2.8 3.2 (1.8)
----- ----- -----
Net loss............................................... (14.9)% (5.5)% (2.7)%
===== ===== =====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. Net sales increased $34.8 million, or 13.0%, to $302.3 million in
1999 from $267.5 million in 1998. All segments experienced increases in net
sales during 1999. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, net sales increased $27.1 million, or 9.7%, to $306.7
million in 1999 from $279.6 million in 1998.
Electronic payment solutions net sales increased $17.9 million, or 8.0%, to
$241.4 million in 1999 from $223.5 million in 1998. Increased net sales due to
greater transaction processing and account verification inquiry volumes and
price increases were partially offset by decreased software sales due to
customer reluctance to make significant software changes prior to Year 2000.
Transaction volumes increased 27.3%, and inquiry volumes increased 6.1% as the
result of higher volumes from existing customers. Net sales in 1999
26
<PAGE>
included minimal contributions from several new products, such as QualiFile,
FraudFinder and Integreat!, which were launched in late 1999.
Professional services net sales were $12.7 million in 1999. We recorded no
net sales for professional services in 1998 because of equity accounting prior
to the HCL-Deluxe joint venture acquisition in April 1999. On a full year pro
forma basis taking into account the HCL-Deluxe acquisition, professional
services net sales increased $4.9 million, or 40.6%, to $17.0 million in 1999
from $12.1 million in 1998. This growth was due to new clients, increased sales
to existing clients and the initiation of business process management services
for Deluxe.
Government services net sales increased by $4.3 million, or 9.8%, to $48.3
million in 1999 from $44.0 million in 1998. This increase was due to the roll-
out of additional states during the latter half of 1998 and early 1999 and
price increases on contract extensions for online Medicaid eligibility
verification services. Government services net sales will likely decrease in
future periods as existing contracts expire because we are exiting the
government services business.
Cost of sales. Cost of sales decreased $18.0 million, or 8.5%, to $194.3
million in 1999 from $212.3 million in 1998. This decrease in 1999 is the net
result of increased cost of sales primarily due to increased volumes and the
acquisition of HCL-Deluxe, offset by a $32.2 million reduction in loss contract
and asset impairment charges related to government services. As a percentage of
net sales, cost of sales decreased to 64.3% during 1999 compared to 79.4%
during 1998, mainly due to a reduction in loss contract and asset impairment
charges. Excluding these charges, cost of sales as a percentage of net sales
would have been 61.4% in 1999 and 64.1% in 1998.
Electronic payment solutions cost of sales increased $11.0 million, or 8.6%,
to $138.0 million in 1999 from $127.0 million in 1998. As a percentage of
electronic payment solutions net sales, cost of sales increased to 57.2% during
1999 compared to 56.8% during 1998. This increase was due primarily to the
introduction of new services, primarily electronic check conversion services,
and amortization of software related to new products, primarily QualiFile,
DataNavigator and online banking in the United Kingdom.
Professional services cost of sales were $9.0 million, or 71.1% of
professional services net sales in 1999. We recorded no cost of sales for
professional services in 1998 because of equity accounting prior to the HCL-
Deluxe joint venture acquisition in April 1999. On a full year pro forma basis
taking into account the HCL-Deluxe acquisition, cost of sales for professional
services increased $2.7 million, or 29.1%, to $11.9 million in 1999 from $9.2
million in 1998. As a percentage of professional services net sales, cost of
sales decreased to 70.0% in 1999 compared to 76.2% during 1998. This decrease
was primarily due to increased sales, execution of more profitable contracts,
less reliance on subcontractors through building of our own capabilities and
increased proportion of work being done offshore where margins are higher
despite lower billing rates.
Government services cost of sales decreased $38.0 million, or 44.6%, to
$47.3 million in 1999 from $85.3 million in 1998. The decrease during 1999 was
due primarily to the $32.2 million reduction in loss contract and asset
impairment charges, as well as lower depreciation and amortization expense in
1999 due to asset impairment charges recorded in 1998. As a percentage of
government services net sales, cost of sales decreased to 97.9% during 1999
compared to 193.9% during 1998. Excluding the loss contract and asset
impairment charges, cost of sales as a percentage of government services net
sales would have decreased to 79.9% in 1999 compared to 100.8% in 1998.
Gross margin. Gross margin increased $52.8 million, or 95.7%, to $108.1
million in 1999 from $55.2 million in 1998. As a percentage of net sales, gross
margin increased to 35.7% during 1999 compared to 20.6% during 1998. Excluding
the loss contract and asset impairment charges, our gross margin was 38.6% in
1999 and 35.9% in 1998.
27
<PAGE>
Selling, general and administrative. Selling, general and administrative
expenses increased $24.2 million, or 29.8%, to $105.4 million during 1999 from
$81.2 million during 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 34.9% during 1999 compared to 30.4% during
1998. This increase was predominantly related to costs incurred in conjunction
with the development of DebitBureau, infrastructure investments and goodwill
amortization. These increases were partially offset by initiatives designed to
lower selling, general and administrative expenses, such as reductions in
hiring, travel cost and consulting fees, and lower restructuring charges. In
1999, we reversed $2.4 million of restructuring accruals from prior periods. In
1998, we recorded restructuring charges of $3.2 million for severance relating
to our initiative to reduce selling, general and administrative expenses.
During 1998, we also reversed $1.0 million of a 1996 restructuring charge.
Research and development. Research and development expenses increased by
$3.1 million to $3.8 million in 1999 from $0.7 million in 1998. As a percentage
of net sales, research and development expenses increased to 1.2% during 1999
compared to 0.2% during 1998. All research and development expenses were within
the electronic payment solutions business and primarily reflect costs incurred
in conjunction with the development of DebitBureau. In addition to these
research and development costs, we also expended $17.3 million in 1999 and $3.2
million in 1998 for product development. These expenditures were capitalized
and are reflected in our consolidated balance sheets under the categories
computer and other equipment and internal use software. We intend to continue
to invest in new product development and product enhancements to respond to new
technologies and competitive pressures.
Other income (expense). Other expense increased $1.1 million, or 31.9%, to
$4.6 million in 1999 compared to $3.5 million in 1998. The increase in expense
in 1999 was primarily due to losses on the disposal of fixed assets as a result
of a decision to replace an in-house developed system with purchased software
that has greater functionality. This increase was partially offset by the
reduced losses recorded under the equity method of accounting for HCL-Deluxe.
Prior to our acquisition of the remaining ownership interest in April 1999, we
recorded our 50% share of the joint venture's losses in other expense.
Provision for income taxes. We recognized a provision for income taxes of
$5.6 million in 1999 as compared to a benefit of $8.6 million in 1998. We did
not record a tax benefit on the operating loss of the professional services
business because of its lack of profitability through 1999. Increased non-
deductible goodwill amortization resulting from the acquisition of the
electronic check conversion company also contributed to the provision for
income taxes.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales increased $38.5 million, or 16.8%, to $267.5 million in
1998 from $229.1 million in 1997. All segments experienced increases in net
sales during 1998. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, net sales increased $47.3 million, or 20.4%, to $279.6
million in 1998 from $232.3 million in 1997.
Electronic payment solutions net sales increased $21.4 million, or 10.6%, to
$223.5 million in 1998 from $202.1 million in 1997. Increased transaction
processing volume, higher inquiry volumes, higher software licensing and
professional services contributed to this increase. Transaction volumes
increased 19.0% and inquiry volumes increased 5.9% as a result of higher
volumes from existing clients. Software licensing and related services
increased due to clients' demands for new software systems to address potential
Year 2000 impacts.
We recorded no net sales for professional services in 1998 and 1997 because
of equity accounting prior to the HCL-Deluxe joint venture acquisition in April
1999. On a full year pro-forma basis taking into account the HCL-Deluxe
acquisition, professional services net sales increased $8.9 million, or 277.5%,
to $12.1 million in 1998 from $3.2 million in 1997 when operations for this
business commenced late in the third quarter.
28
<PAGE>
Government services net sales increased by $17.0 million, or 63.1%, to $44.0
million in 1998 from $27.0 million in 1997. This increase was due to additional
state contracts and the roll-out of existing contracts.
Cost of sales. Cost of sales increased $68.3 million, or 47.5%, to $212.3
million in 1998 from $144.0 million in 1997. As a percentage of net sales, cost
of sales increased to 79.4% in 1998 compared to 62.8% in 1997. This increase
was primarily due to the $26.3 million asset impairment charges and the
$14.7 million loss contract charges recorded in the government services
business. With these charges excluded, cost of sales as a percentage of net
sales would have been 64.1% in 1998 compared to 62.8% in 1997.
Electronic payment solutions cost of sales increased $12.3 million, or
10.7%, to $127.0 million in 1998 from $114.7 million in 1997. The increase in
1998 was primarily due to higher revenue volumes. As a percentage of electronic
payment solutions net sales, cost of sales was 56.8% in both 1998 and 1997.
We recorded no cost of sales for professional services in 1998 and 1997
because of equity accounting prior to the HCL-Deluxe joint venture acquisition
in April 1999. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, professional services cost of sales increased $6.7 million,
or 267.9%, to $9.2 million in 1998 from $2.5 million in 1997. The increase was
due to a full year of operations in 1998. As a percentage of professional
services net sales, cost of sales decreased to 76.2% in 1998 compared to 78.2%
in 1997.
Government services cost of sales increased $56.0 million, or 191.7%, to
$85.3 million in 1998 from $29.2 million in 1997. This increase was primarily
due to loss contract and asset impairment charges totaling $40.9 million. As a
percentage of government services net sales, cost of sales increased to 193.9%
during 1998 compared to 108.4% during 1997.
Gross margin. Gross margin decreased $29.9 million, or 35.1%, to $55.2
million in 1998 from $85.1 million in 1997. As a percentage of net sales, gross
margin decreased to 20.6% during 1998 compared to 37.2% during 1997, primarily
due to charges of $40.9 million for loss contracts and asset impairments in the
government services business. With these charges excluded, our consolidated
gross margin would have been 35.9% for 1998 and 37.2% for 1997.
Selling, general and administrative. Selling, general and administrative
expenses increased $10.7 million, or 15.1%, to $81.2 million in 1998 from $70.5
million in 1997. This increase was predominantly related to increased selling
and marketing expenses associated with the electronic payment solutions
business and $2.7 million of costs incurred in connection with the development
of DebitBureau. These increases were partially offset by decreases within the
government services business due to lower legal costs. During 1998, we recorded
restructuring charges of $3.2 million for severance relating to our initiative
to reduce selling, general and administrative expenses, while we also reversed
$1.0 million of a 1996 restructuring charge. During 1997, we recorded
restructuring charges of $1.5 million for severance within the electronic
payment solutions business. This reduction was completed in 1998, with
severance payments of $1.4 million paid through December 31, 1999. As a
percentage of net sales, selling, general and administrative expenses were
constant at 30.4% during 1998 and 30.8% during 1997.
Research and development. Research and development expenses decreased $0.8
million, or 55.3%, to $0.6 million in 1998 from $1.4 million in 1997. As a
percentage of net sales, research and development expenses decreased to 0.2%
during 1998 compared to 0.6% during 1997. All research and development was
within the electronic payment solutions business and primarily reflects the
costs incurred in conjunction with our development of neural network and other
fraud prevention technologies. In addition to these research and development
costs, we also expended $3.2 million in 1998 and $5.0 million in 1997 for
product development. These expenditures were capitalized and are reflected in
our consolidated balance sheets under the categories of computer and other
equipment and internal use software.
29
<PAGE>
Asset impairment charges. In 1998, there was no asset impairment charges in
operating expenses compared to $11.8 million of charges recorded in 1997. In
1997, we formulated a plan to divest the international unit of our electronic
payment solutions business. Based on fair market value estimates, we recorded a
charge of $11.8 million to write down the carrying value of these operations to
their estimated fair value less costs to sell.
Other income (expense). Other expense increased $2.6 million to $3.5 million
in 1998 from $0.9 million in 1997. This increase is primarily due to the
increased losses recorded for our 50% ownership interest in the joint venture
HCL-Deluxe. In 1997, other expense does not include a full year of operations
because the joint venture began operations in September of that year.
Quarterly Results of Operations
The following tables present our unaudited quarterly data for each quarter
of 1998 and 1999. The data has been prepared on a basis consistent with our
audited consolidated financial statements included in this prospectus and
include all necessary adjustments, consisting only of normal recurring
adjustments, that our management considers necessary for a fair presentation of
such information. This data should be read in conjunction with our annual
audited consolidated financial statements and the notes to those statements
included in this prospectus. The operating results for any quarter are not
necessarily indicative of results for any future quarter or year.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Electronic payment
solutions.............. $54,086 $55,697 $ 56,775 $56,992 $56,546 $58,768 $61,510 $64,561
Professional services... -- -- -- -- -- 1,916 5,218 5,544
Government services..... 9,230 10,758 10,951 13,031 11,310 11,883 13,167 11,917
------- ------- -------- ------- ------- ------- ------- -------
Total net sales........ 63,316 66,455 67,726 70,023 67,856 72,567 79,895 82,022
------- ------- -------- ------- ------- ------- ------- -------
Cost of sales:
Electronic payment
solutions.............. 30,204 32,642 31,365 32,823 33,180 33,019 34,629 37,169
Professional services... -- -- -- -- -- 1,465 3,666 3,888
Government services:
Cost of sales,
excluding loss
contract and asset
impairment charges.... 11,065 10,478 11,915 10,867 9,880 10,579 10,361 7,754
Loss contract and asset
impairment charges.... -- -- 40,949 -- 60 57 150 8,433
------- ------- -------- ------- ------- ------- ------- -------
Total cost of sales.... 41,269 43,120 84,229 43,690 43,120 45,120 48,806 57,244
------- ------- -------- ------- ------- ------- ------- -------
Gross margin............ 22,047 23,335 (16,503) 26,333 24,736 27,447 31,089 24,778
Operating expenses:
Selling, general and
administrative......... 21,861 21,345 21,375 16,617 17,887 24,844 28,378 34,273
Research and
development............ 187 172 133 133 536 1,518 1,380 322
------- ------- -------- ------- ------- ------- ------- -------
Total operating
expenses.............. 22,048 21,517 21,508 16,750 18,423 26,362 29,758 34,595
------- ------- -------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (1) 1,818 (38,011) 9,583 6,313 1,085 1,331 (9,817)
Other income (expense):
Legal proceedings....... -- -- 4,157 -- 2,094 -- -- --
Other income (expense).. (271) (225) (1,542) (1,457) (866) (420) (2,870) (453)
Interest income
(expense).............. 877 793 369 750 803 275 (3) (112)
------- ------- -------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 605 2,386 (35,027) 8,876 8,344 940 (1,542) (10,382)
(Provision) benefit for
income taxes........... (224) (883) 12,960 (3,284) (4,530) (3,419) (7,692) 10,055
------- ------- -------- ------- ------- ------- ------- -------
Net income (loss)....... $ 381 $ 1,503 $(22,067) $ 5,592 $ 3,814 $(2,479) $(9,234) $ (327)
======= ======= ======== ======= ======= ======= ======= =======
</TABLE>
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Liquidity, Capital Resources and Financial Condition
As of December 31, 1999, cash and cash equivalents were $35.8 million. We
also had $3.4 million of restricted cash that we temporarily hold in custodial
accounts on behalf of clients and $28.9 million in restricted cash that we have
supplied to a client, who is a provider of ATM management and outsourcing
services, for use in the client's ATMs. We are obligated to provide up to $35
million of cash to this client. Funds advanced to this client earn interest at
a rate of prime plus 1% per annum.
Deluxe has agreed to provide us with a $75 million unsecured, revolving
credit facility until the earlier of the effective date of the split-off or
August 28, 2000. We currently do not have borrowings outstanding under this
facility. Borrowings under the facility will be due at the split-off or
maturity and will accrue interest at the London Interbank Offered Rate, or
LIBOR, plus a variable additional margin based on Deluxe's credit rating. At
December 31, 1999, the applicable rate would have been 6.39% per annum. The
credit facility contains financial and restrictive covenants, including
limitations on our ability to incur secured debt, to dispose of assets, to
consolidate and merge and to sell substantially all of our assets, and
financial maintenance ratios. We intend to replace this facility with a new
credit facility with one or more financial institutions prior to the split-off
or maturity. A replacement credit facility may not be available to us, or if
available, we may not be able to obtain it on a timely basis or on terms
acceptable to us.
At December 31, 1999, we also had a $5.0 million line of credit, which is
denominated in Indian rupees and guaranteed by Deluxe, available for use by our
international operations at an interest rate of 15.81%. The average amount
drawn on this line during 1999 was $2.7 million. As of December 31, 1999, $3.1
million was outstanding. In March 2000, this line of credit was increased to
$10.0 million and remains guaranteed by Deluxe until October 1, 2000.
The following table sets forth a summary of cash flow activity and should be
read in conjunction with our consolidated statements of cash flows:
<TABLE>
<CAPTION>
Summary of Cash Flows
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Cash provided by (used in) operating
activities.................................... $25,938 $ 7,821 $(12,150)
Cash used in investing activities.............. (18,519) (31,537) (73,209)
Cash (used in) provided by financing
activities.................................... (10,802) 15,928 105,153
------- ------- --------
Net (decrease) increase in cash and cash
equivalents................................... $(3,383) $(7,788) $ 19,794
</TABLE>
Cash used in operating activities was $12.2 million in 1999, primarily due
to $32.2 million to pay the judgment in legal proceedings related to our
government services business and the use of $25.0 million to supply cash to
ATMs operated by a client in our electronic payment solutions business.
Cash used in investing activities was $73.2 million in 1999, primarily due
to purchases of capital assets of $38.2 million, which included $17.3 million
for product development related expenditures. We also invested $13.0 million to
purchase an electronic check conversion company and $23.4 million to purchase
the remaining 50% ownership interest in HCL-Deluxe.
Cash provided from financing activities was $105.2 million in 1999, of which
$108.8 million was provided by Deluxe and $3.1 million from borrowings on our
line of credit. We used cash to repay debt of $6.7 million.
We had capital expenditures of $38.2 million in 1999, $30.5 million in 1998
and $18.0 million in 1997. We anticipate a substantial increase in our capital
expenditures in 2000 to complete the integration of our infrastructure and for
continued spending on product development. In particular, we intend to
consolidate our data centers and customer contact centers. We estimate our
capital expenditures to be approximately $62.5 million in 2000.
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In March 2000, we used $20 million of cash to purchase a 24% interest in a
provider of ATM management and outsourcing services to retailers and financial
institutions. We are obligated to provide up to $35 million of cash for use in
this provider's ATMs.
We believe that our cash, cash equivalents, proceeds from this offering and
borrowings under our credit facilities will provide sufficient capital to fund
our operations for the foreseeable future.
Recently Issued Accounting Standards
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-5, "Reporting the Costs of Start-up Activities," which
provides guidance on the appropriate accounting for start-up activities
beginning in 1999. Application of the SOP did not have a material impact on our
reported operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which provides guidance on accounting for derivatives
and hedge transactions. We anticipate that the effect of this pronouncement,
which is effective for us on January 1, 2001, will not have a material impact
on reported operating results.
Market Risk Disclosure
We operate internationally, and so are subject to potentially adverse
movements in foreign currency rate changes. We have not entered into foreign
exchange forward contracts to reduce our exposure to foreign currency rate
changes on intercompany foreign currency denominated balance sheet positions.
Historically, the effect of movements in the exchange rates have not been
material to our consolidated operating results.
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BUSINESS
Overview
We are a leading provider of end-to-end electronic debit payment solutions
to financial institutions, retailers, electronic funds transfer networks and e-
commerce providers. Our primary products and services include decision support
and risk management tools, electronic funds transfer processing, monitoring and
settlement services and professional services, including information technology
consulting and business process management.
Our decision support and risk management tools combat identity fraud and
account abuse, using our leading DebitBureau database of more than 2.7 billion
debit records. We are a leading third party processor of electronic funds
transfers in the United States and can process electronic payments cost-
effectively to all electronic funds transfer networks on a worldwide basis. As
part of our comprehensive solutions, we offer professional services, including
implementation and integration of our software, custom software development,
creation of e-commerce applications and business process management.
We offer our products and services as comprehensive solutions or as
independent offerings. We are a single source of electronic debit payment
solutions whether payments are made using payment cards or paper checks, or
whether the transaction is accomplished at retail locations or ATMs, through
mail or telephone orders or over the Internet.
Industry Background
Electronic Payments. The global payment system is undergoing rapid change as
new technologies and the new business requirements, primarily in e-commerce,
cause newer electronic payment methods to supplant traditional paper methods.
Although paper payments, such as personal check, cash, bank and travelers
checks and food stamps, continued to represent more than 70% by dollar volume,
or $3,255 billion, of U.S. consumer payments in 1998, the Nilson Report
estimates that paper payments will decline to 52.1%, or $3,556 billion, of U.S.
consumer payments by 2005 while the dollar volume of debt card payments will
increase from 3.7%, or $168 billion, of U.S. consumer payments in 1998 to
10.9%, $743 billion, in 2005.
The Nilson Report estimates that the number of U.S. debit cards payments
will increase from 4.9 billion transactions, or 4.9% of total consumer
transactions, in 1998 to 19.1 billion transactions, or 14.0% of total consumer
transactions, in 2005, representing a compound annual growth rate in debit
transactions of 21.6%. This compares to the number of U.S. credit card payments
which Nilson expects to increase from 17.1 billion transactions, or 17.4% of
total consumer transactions in 1998 to 21.9 billion transactions, or 16.1% of
total consumer transactions, in 2005, representing a compound annual growth
rate of only 3.1%. The Nilson Report further estimates that the number of U.S.
debit card transactions will overtake credit cards by 2007. In many
international markets, including United Kingdom and Canada, debit cards have
replaced credit cards as the leading form of consumer electronic payment. As a
result, financial institutions and retailers will require electronic payment
processes that facilitate newer electronic payment methods as well as increase
the efficiency of continued paper payment transactions.
The growth in debit cards use is increasing as a result of its convenience
and safety. Consumers use debit cards to direct a bank to pay money from a
demand deposit account, such as a checking account. Debit card use is
increasing because it is widely accepted by retailers and provides
substantially the same level of convenience in making a purchase as credit
cards. In addition, debit cards allow a consumer to avoid accumulating credit
card debt, provide a single statement of the consumer's debit card and check
transactions on the consumer's bank statements and in many cases provide a
cash-back feature at the point-of-sale. For retailers, debit cards generally
entail lower transaction costs than credit cards due to higher processing costs
and fees for credit card payments and fewer fraud losses in the cases where the
debit card transaction involves the use of a unique personal identification
number, or PIN, assigned to the cardholder.
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e-Commerce. Growth in e-commerce transactions is also expected to increase
the need for electronic payment solutions. According to Forrester Research,
online retail purchases by U.S. consumers will grow from $20 billion in 1999 to
$184 billion in 2004, reaching 7% of total retail spending that year. Payment
for Internet transactions are primarily made by payment card, with an estimated
90% made using credit cards. This dependence on credit cards presents issues
for e-commerce companies. E-commerce companies face the potential for a
substantial amount of credit card fraud due to identity manipulation. PIN-based
debit transactions could help alleviate this problem for merchants and give
consumers a higher degree of confidence in the security of PIN-based Internet
transactions. By failing to provide debit payment alternatives, e-commerce
providers exclude the estimated 32.4% of U.S. consumers, according to the
Federal Reserve Bank, who do not have a credit card. Consequently, we believe
e-commerce companies are increasingly likely to look to debit card transactions
to expand payment options for consumers, to lower transaction costs, to provide
greater transaction security and to deliver more successfully completed
transactions.
Financial Institutions and Merchants. In general, merchants and financial
institutions are seeking to increase the use of electronic payment systems to
decrease transaction costs. A study by the Bank for International Settlements
estimates that the cost of using electronic payments is one-third of the cost
of paper-based transactions. To facilitate electronic payments, merchants and
financial institutions are installing greater numbers of ATMs and point-of-sale
debit terminals. The number of these devices increased by 36.6% from 1998 to
1999 according to Bank Network News. Retailers and banks are also adopting new
technologies to reduce costs associated with paper checks. Electronic check
conversion technologies in which physical checks are scanned at the point-of-
sale and converted into an electronic transaction, are gaining acceptance.
Using electronic check conversion, retailers and banks can realize cost savings
and cash management benefits while enabling customers to continue their check
writing practices. NACHA, the electronic payments industry association,
estimates that more than one million checks per month are currently being
converted into electronic transactions at the point-of-sale. NACHA also
estimates that 25,000 merchants and 50 to 100 banks are using electronic check
conversion devices.
A significant factor in transaction costs is debit fraud, including use of a
false or stolen identity, and account abuse, such as writing checks with
insufficient funds or opening and closing accounts to avoid payments. Debit
fraud losses totaled $1.3 billion for banks and $13 billion for merchants in
the United States in 1998, according to the Tower Group, and have increased for
merchants at a rate of 5% per year since 1996. In order to combat fraud
effectively, financial services companies and retailers require payment history
data and risk management decision support tools that enable them to identify
potential risks. Debit card transactions can reduce fraud because transactions
using PINs are less likely to be fraudulent than signature based transactions.
Financial service companies also face pressures to adopt new payment
technologies to better serve their customers and reduce costs. Banks, credit
unions and savings banks are making substantial investments in on-line banking,
while brokers require efficient mechanisms for online opening and funding of
trading accounts. In each case, the financial service companies must find
online methods that reduce or eliminate the need to deliver paper checks and
manage the risk of online account funding. Financial service companies require
these services to retain highly valued customers and to position themselves for
expanded e-commerce activities. At the same time as financial services
companies and retailers are responding to these increasing demands for new
technologies and the rapid growth in e-commerce and internet delivery channels,
they also must control costs and address shortages of information technology
resources. One consequence is that financial institutions and retailers are
increasing their use of external information technology service providers. The
Tower Group estimates that spending by U.S. commercial banks on external
information technology services will increase from $26 billion in 1998 to $33
billion in 2002.
Market Opportunity. To accommodate the variety of payment methods in use
today, merchants and financial institutions need various technologies for
acquiring, authorizing and processing payment transactions. These technologies
must provide an initial means to capture transaction data. For example, a
consumer may
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wish to use a debit card, ATM card, credit card or paper check to effect a
transaction. The financial institution or retailer must collect the consumer's
account and transaction information through a point-of-sale device, ATM,
telephone order, check or Internet interface. This account and transaction
information is processed through an electronic funds transfer system for
payment authorization and settlement. The system may also provide verification
and risk analysis filters to detect potential fraud. In addition, banks and
financial institutions need technologies that facilitate opening accounts
online, manage accounts more effectively and "cross-sell" additional services
through online access to customer payment data. The following diagram
illustrates the elements of the payment cycle.
[DIAGRAM ILLUSTRATING THE FLOW OF THE PAYMENT CYCLE]
To respond to the rapid changes and pressures in the payment industry,
companies require significant transaction processing and payment management
services and support. Financial service companies and retailers are seeking
tools that provide lower payment costs, fraud prevention and risk management,
decision support and secure transactions. In the past, these organizations have
needed to work with separate service providers to obtain the necessary tools.
The electronic payments industry has been divided between delivery and
transaction processing companies and information and analysis providers. At the
same time, financial service companies and retailers need access to
professional information technology resources so that they can exploit the
promise of new technologies.
Our Solution
We offer comprehensive electronic debit payment solutions that enable our
clients to manage and combat fraud, transfer funds cost-effectively and enhance
their customer relationships. We provide a unique source of electronic debit
payment services that combines leading electronic funds transfer processing
capabilities and software with debit-based information and risk management
tools. In addition, our information technology professional services provide
clients with the resources to respond to the demands for new technology,
implement and integrate our solutions and develop new software applications.
With our products and services, our clients can enhance the value to them of
every debit transaction.
Using our premier debit data, risk management tools and processing
capabilities, we can deliver integrated end-to-end payment management
solutions. Our products and services also can be deployed as separate modules
to fit our clients' needs. We believe this mix of leading capabilities and
flexible product offerings
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address developing market opportunities and provide us with the following
competitive advantages that are key elements of our success.
End-to-End Solutions. We enable our clients to manage the complete
electronic debit payment cycle using our products and services. Our solutions
reduce transaction costs, manage risks and enhance customer relationships for
our clients by providing:
. risk management and decision support tools based on DebitBureau, our
leading debit information database;
. customer relationship tools for opening financial accounts,
electronically funding these accounts, minimizing fraud and identifying
cross-selling opportunities;
. transaction processing, monitoring and settlement on an efficient, cost-
effective and worldwide basis;
. information technology professional services to create e-commerce and
Internet solutions, integrate our solutions and new technologies and
develop custom software applications; and
. business process management services.
In the past, merchants, banks and other financial services companies needed
to integrate debit payment services from numerous providers using disparate
technologies and platforms. We believe we are the only single-source provider
of comprehensive electronic debit payment solutions on an integrated basis.
Clients, however, can use our individual services that fit their needs and we
can implement these services in any environment.
Premier Database. Our DebitBureau database is the most comprehensive source
of debit data in the industry. The database contains more than 2.7 billion
debit records, including account openings and closings, demand deposit account
activity, insufficient funds check-writing histories and check order histories.
It also includes credit information and household-specific demographic data.
Approximately 1.7 million records are added daily to DebitBureau. DebitBureau
provides a unique source of information because it aggregates data from market
leading services including SCAN, the most widely accessed check verification
database in the United States, and ChexSystems, the leading new account
applicant verification service used by more than 86,000 financial locations. We
also receive data from clients of Deluxe and over 82,000 retail locations. In
addition, we obtain data from credit bureaus and other data sources.
The breadth and depth of DebitBureau allow us to develop more powerful risk
management and analytical tools. Our clients can draw on DebitBureau to make
better risk management decisions, such as authorizing a new demand deposit
account or accepting a check, and to improve customer relationship decisions,
such as identifying opportunities to cross-sell additional services to their
customers. We offer solutions that provide our clients online access to the
database and proprietary risk assessment models. Information on a proposed
debit transaction or an account opening is entered by a client into our system
and is analyzed to determine the likelihood of identity fraud or account abuse
or to assess the overall risk of opening a new account. The system also
identifies customers of our client's who are most likely to accept client
product offers. For example, our system enables financial institutions to sell
credit cards and home equity loans more effectively to new demand deposit
account customers and to set more appropriate limits on the customer's
privileges, such as maximum withdrawals in debit card transactions.
Global Processing Capabilities. Using our electronic debit payment services,
our clients have the ability to process debit payment transactions through all
electronic fund transfer networks on a worldwide basis. Our network connects
with over 15,000 links to other networks and institutions throughout the world.
We are a leading third party processor of debit electronic fund transfers in
the United States, processing approximately five billion transactions in 1999.
Our processing services drive more than 98,000 point-of-sale devices and more
than 9,500 ATMs.
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For example, we are the single gateway for all of a major U.S. financial
institution's ATM transactions outside its internal network on a worldwide
basis, processing approximately 125 million transactions in 45 countries in
1999. Our processing services can provide a single gateway for electronic funds
transfers that can sort and execute all of a client's electronic debit payment
transactions using the appropriate networks. We also consolidate and report in
real-time a client's net cash position at a single location or across the
client's entire system. These and other features of our solutions enhance our
clients' cash management capabilities. Our processing services and software
perform high-volume online transaction processing, accommodate a wide variety
of terminal types, ranging from the Internet to ATMs, and support complex
networking relationships. We drive and manage the services for all major ATM
models through multiple telecommunication configurations.
Expertise in Electronic Commerce. We have focused on facilitating electronic
payments since 1976. This long history and industry focus provides us with the
experience and capabilities to facilitate electronic debit payments through any
channel, including the Internet, point-of-sale device or ATM. Based on these
skills, we are uniquely positioned to enable debit transactions on the
Internet. We recently introduced Integreat!, an online service for opening,
funding and managing demand deposit accounts over the Internet, which extends
our fraud management and client account management tools to the Internet. We
also offer Web EFT, a browser-based Internet application that allows clients
automatically to collect and deposit pre-authorized customer payments. We also
have developed close relationships with market-leading clients as payment
technologies, business models and global financial systems have changed
dramatically. These close relationships provide us with market insights into
our clients' needs and conditions in global markets.
Global Resources for Information Technology Solutions. Our high quality
professional services provide information technology solutions by teaming
onsite consultants in the United States who analyze and manage the project with
software developers in India who execute client-specific software solutions. We
employ over 1,300 software programmers worldwide. Our global delivery
capabilities gives us the ability to provide high quality, round-the-clock
development services at competitive prices. Our information technology
professionals customize and implement our electronic debit payment solutions
for our clients, develop new software applications for our solutions as well as
custom applications for our clients, and create custom e-commerce and Internet-
related software solutions. We are presently engaged by 20 companies for our
information technology professional services, including Bank One, the Pershing
Division of Donaldson, Lufkin & Jenrette and ReliaStar Life Insurance Company.
Our Strategy
Our objective is to be the leading provider of electronic debit payment
solutions and information technology solutions to the electronic payment
industry and financial institutions. Key elements of our business strategy are
to:
. Expand e-Commerce and Internet Delivery Capabilities. We plan to devote
significant resources to exploit e-commerce and Internet related
opportunities. Based on our processing capacities, information
capabilities and industry expertise, we believe we are uniquely
positioned to help our clients take advantage of the efficiencies and
revenue opportunities of e-commerce. We intend to continue to adapt our
core capabilities in transaction processing, fraud prevention and client
account management for Internet applications and to develop products and
services that will enable new e-commerce channels, such as business-to-
business electronic payment transactions. Our services can help make
debit payments, which are under-represented on the Internet as a payment
option, safer, easier to use, and more widespread in Internet
transactions. In our product development pipeline are:
. PIN-secured debit payment applications for purchases on the
Internet;
. ATM management applications that provide Internet access to product
advertising on the ATM screen; and
. Internet check acceptance software that can accept, authenticate,
authorize and settle a checking account-based debit transaction
initiated over the Internet.
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. Extend Technology Leadership. We intend to continue to enhance our
position as a technology leader by introducing new products that provide
greater risk management and value-added functionality. We have
introduced QualiFile, a new account opening service for banks and
brokerage firms that features improved risk scoring, enhanced financial
and demographic targeting of cross-selling opportunities and expanded
customized instructions. We have recently launched DataNavigator, a web-
based, real-time electronic funds transfer data management and customer
support platform that provides full back-office support with transaction
research, real-time settlement and reconciliation services. To extend
our technology position, we intend to leverage the development skills of
our information technology professionals and expand our research and
development role on behalf of financial institutions. We believe the
ability to combine information and transaction delivery services will be
a critical element in our success. To that end, we plan to invest in the
technology and personnel required to expand our payment information
capabilities and merge them into new, broader, faster and more versatile
delivery systems.
. Expand Existing Client Relationships and Attract New Clients. Most of
our clients currently use only a portion of our services. As we continue
to integrate our information and processing capabilities with our
professional services into new comprehensive, information-based payment
management solutions that provide greater value for our clients, we
believe we can expand our relationships with existing clients to provide
additional services. In addition, we plan to provide solutions to our
clients' e-commerce needs as they emerge. We intend to expand our sales
force to develop new clients, build brand awareness and cross-sell all
the components of our comprehensive suite of electronic payment
management services. We also are seeking new clients in rapidly growing
Internet markets such as online banking, electronic bill presentment and
payment and business-to-business e-commerce.
. Seek Acquisition and Strategic Alliance Opportunities. We intend to
pursue acquisitions of complementary businesses, technologies or product
lines. We believe there are opportunities to make accretive acquisitions
by adding services to enhance our comprehensive solutions. In addition,
we plan to seek strategic relationships with key industry participants
in order to broaden our market presence, reach new geographic and
vertical markets, and increase our sales penetration by leveraging each
partner's technology and expertise in specific markets, industry
reputation and sales and marketing resources. For example, we recently
acquired a 24% interest in a client of our transaction processing
services that is a provider of ATM management and outsourcing services
to retailers and financial institutions.
. Broaden International Sales. We currently derive approximately 10% of
our revenue from international sales in 22 countries. We intend to
expand in international markets by further penetrating our existing
client base and by focusing on emerging international markets lacking
established electronic payment systems.
Our Products and Services
We deliver electronic debit-based payment management solutions to financial
institutions, retailers, electronic funds transfer networks and gateways and e-
commerce providers. To address our clients' electronic payment management
needs, we offer a comprehensive suite of products and services. We offer the
following three broad categories of products and services:
. decision support and risk management tools;
. electronic funds transfer processing, monitoring and settlement
services; and
. professional services, including information technology consulting and
business process management.
Our products and services can be deployed on a stand-alone basis, or
combined with each other to provide an end-to-end solution. This flexibility
enables our customers to select individual services they need to meet their
current business objectives and then to add additional services as their
requirements evolve.
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Decision Support and Risk Management Tools
We offer a variety of tools to help financial institutions, retailers and
other businesses that accept debit payments to:
. determine the likelihood of account fraud and identity manipulation;
. assess the overall risks involved in opening new accounts or accepting
payment transactions; and
. make better predictions about other products their customers are likely
to purchase.
Our decision support and risk management tools are based on our DebitBureau,
the most comprehensive source of debit data, as well as credit and demographic
data. DebitBureau contains over 2.7 billion records, including account opening
and closing information, deposit account collections data, retail insufficient
funds check-writing histories and check order histories. We also record and
store third party information that our models use to screen for potentially
incorrect, inconsistent or fraudulent social security numbers, home addresses,
telephone numbers, driver license information and other indicators of possible
identity manipulation. Using the data, for example, we perform various tests to
validate the consumer's identification, and apply analytic and predictive
statistical models to assess and rank account risk and to match customers with
targeted financial products.
Check Authorization. We operate SCAN, or Shared Check Authorization Network,
the most widely accessed check verification database in the United States. SCAN
serves 17 of the top 20 retailers in the United States, including Wal-Mart,
Kmart and Home Depot. More than 82,000 retail locations report returned check
activity to the SCAN network. We verified checks with an aggregate value of
approximately $181 billion in 1998. The SCAN database helps retailers reduce
the risk of write-offs for dishonored checks due to insufficient funds and
other forms of account fraud and identity manipulation. When a check is
presented as payment at the point-of-sale, SCAN members electronically access
the database by running the check through a scanner. The information on the
check is then compared to the database and analyzed for the likelihood of
fraud. The check scanner then indicates whether the retailer should accept or
reject the check. Merchants pay a service fee for SCAN based on the aggregate
dollar value of checks authorized by the retailer using SCAN and additional
fees per inquiry for customer or retailer calls to the call centers.
As part of an integrated solution to help retailers manage their check
acceptance programs, we offer collection services to some SCAN members. We
tailor our collection strategies to specific retailer needs. The services
generally involve sending letters and follow-up telephone calls to consumers
whose checks have been returned. In addition, we extend to a limited number of
SCAN members the option of a portfolio purchase solution. Under this solution,
we purchase the returned checks from the retailer at a mutually agreed upon
total discounted purchase price and assume the collection liability.
New Account Verification. Our ChexSystems business is the leading provider
of new account applicant verifications. This service is used by more than
86,000 financial institution locations. ChexSystems provides access to more
than 22 million closed-for-cause account histories and 53 million records of
new account inquiries. ChexSystems receives on average about 2.7 million new
account inquiries per month. This service helps financial institutions assess
the risks involved in opening new customer accounts. Financial institutions may
access the service online or by telephone. We also are developing an Internet-
based new account verification service.
We also offer enhanced versions of our new account verification service. New
AccountChex performs social security number validation, and indicates whether
the applicant has made any other new account inquiries within the past 90 days
and had any accounts closed for cause within the past five years. AccountChex
Plus provides in addition to new account applicant verification, returned check
activity information and driver's license validation. Financial service
companies may access these products online or by
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telephone. We are also developing these products for use over the Internet.
Financial institutions pay a service fee for our new account verification
services based on the number of inquiries.
As a separate service, we also provide collection services to financial
institution clients of ChexSystems. We do not assume any collection liability
for these services. We contract with a third party for extended collection
activity.
FraudFinder. FraudFinder is an identity fraud-detection service for new
accounts which are opened in person or over the Internet. FraudFinder accesses
our comprehensive DebitBureau database to help financial service companies
identify potential identity manipulation and fraud. FraudFinder scores and
ranks new accounts according to their level of risk, using neural network
technology. A neural network is a complex mathematical model used to predict
the likelihood of future behavior by analyzing and learning from data supplied
about past behavioral patterns. The key to a neural network is the ability to
continuously "learn" from each new data input and thus improve its predictive
capability.
The fee structure for FraudFinder consists of a one-time set-up fee and a
charge for each customer inquiry. FraudFinder, which we introduced in 1999, is
an enhanced version of our earlier fraud detection service. Currently, over 300
clients use FraudFinder, including Bank of the West, California National Bank
and Citizens Bank.
In FraudFinder, we offer ID validation capabilities that assist businesses
in authenticating an individual and the personal information provided during an
account-opening event. These capabilities are incorporated in our on-line and
Internet-based account opening products. By validating and performing various
tests on an individual's social security number, driver's license information
and address and phone numbers, we are able to assess the likelihood of the
validity of the identity information provided.
QualiFile. QualiFile is an online, real-time account-opening service. It
combines debit data from our DebitBureau with comprehensive credit, demographic
and financial product-use data to help financial service companies make
informed decisions about opening new accounts and financial product offerings
that new customers are more likely to accept. QualifFile has the following
features:
. QualiFile validates an applicant's identity and predicts the likelihood
of account abuse by scoring the applicant's risk level.
. QualiFile creates a financial profile of the new customer and generates
a list of targeted products that matches the customer's needs with the
products offered by the financial institution.
. QualiFile simplifies and automates the account-opening process.
QualiFile guides the new account representative through the new account
process by presenting on-screen messages. These messages include whether
to accept or deny the account, or review the decision with a manager, a
customized list of products that may appeal to the new customer and
product-offer dollar limits, rates and terms.
The fee structure for QualiFile consists of a one-time set-up fee, a charge
for each customer inquiry and a monthly minimum participation fee. We
introduced QualiFile in September 1999. Clients using our QualiFile service
include BankUnited, Bank One, Union Planters and GTE Federal Credit Union.
Integreat!. In December 1999, we introduced Integreat!, our first end-to-end
solution that helps financial services companies open new accounts for
consumers over the Internet. Integreat! streamlines the online account-opening
process by verifying the applicant's risk level, targeting financial product
offerings, funding accounts electronically and delivering checks, cards and
other account-related materials to the new customer. Integreat! incorporates
our QualiFile service to provide real-time ID verification, risk assessment and
customized financial product offerings. Once the new account is approved, the
applicant authorizes the
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electronic transfer of funds to the new account from an existing outside
account, which eliminates the need to deliver paper checks and speeds up the
time to funding.
The fee structure for Integreat! consists of a one-time setup fee, a charge
for each customer inquiry and a monthly minimum participation fee. Clients
using our Integreat! service include USA Bancshares.com and Umbrellabank.com.
We believe that our Internet account opening and funding service has potential
applications in other customer markets. We are currently targeting online
brokerage firms.
Debit Report Service. In February 2000, we began to offer reports on
consumer debit transactions that can be used as part of credit reports and
scoring models that assess a consumer's payment risk. We are targeting the
service to major credit issuers and credit bureaus.
Transaction Processing
Transaction processing involves:
. capturing the information required to conduct an electronic transaction,
such as an ATM withdrawal or debit card payment through a point-of-sale
device;
. electronically locating the cardholder's bank and account;
. verifying the validity of the account;
. authorizing the financial institution or merchant to accept the
transaction;
. debiting the cardholder's account;
. crediting the merchant's or financial institution's account; and
. then electronically transferring the funds settlement.
For example, when a cardholder inserts his debit card into an ATM or point-of-
sale device and enters his PIN and the type and amount of the transaction, the
device contacts the processing company that operates that particular device and
transmits the information. The processing company identifies the institution
that issued the card and works through all the validation and authorization
routines, such as the correct PIN, limits on withdrawals, and whether there are
sufficient funds in the account. If all the routines are executed successfully,
the processing company signals the device to complete the transaction.
To carry out the tasks required in an ATM or point-of-sale device
transaction, each machine is typically connected to several computer networks.
These networks include private networks that connect the devices of a single
device owner, shared networks that serve several device owners in a region and
national shared networks that provide greater access to devices across regions.
Each shared network has numerous financial institution members. For example,
the NYCE network has over 2,300 financial institution members, including Chase
Manhattan and FleetBoston Financial, and the StarSystem Network has over 3,400
financial institution members, including Bank of America and First Union.
Gateway service providers, such as eFunds, provide access to multiple networks.
The computer driving the device will route the transaction to the lowest
network level that can complete the task.
Debit-based Transaction Processing. We are one of the largest third-party
processors for regional automated teller machine, or ATM, networks in the
United States. We also provide transaction processing for various types of
retail point-of-sale terminals that authorize payments from debit cards, checks
and electronic checks. We drive or operate more than 9,500 ATMs and more than
98,000 point-of-sale terminals. In 1999, we processed approximately five
billion debit transactions, with 99.99% availability and at speeds up to 600
transactions per second. We process virtually all types of debit-based
transactions, including cash withdrawals, cash deposits, balance inquiries,
purchases, purchases with cash back and purchase returns. In addition, we
authorize cash advances and purchases initiated with credit cards at ATM or
point-of-sale locations. We have
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the ability to process transactions to any electronic funds transfer network in
the world. This network accessibility enables a consumer to withdraw funds from
any ATM location, anywhere and at anytime.
We are also developing Internet-based transaction processing. We have
entered into an agreement with NYCE, one of the largest operators of ATM and
debit card networks, to provide transaction processing over the Internet for
its SafeDebitTM, a PIN-based Internet debit payment product. This product
allows consumers to pay for purchases on the Internet with funds withdrawn
directly from their checking accounts.
Our transaction processing services include: authorization and verification
of the payment transaction, capture and transmission of the transaction data,
settlement of the payment transaction and information reporting. We also
provide 24 hour a day, 7 days a week monitoring of 5,200 ATMs for system
irregularities, including the availability of ATM and point-of-sale terminals
and network access. Our transaction processing capabilities include:
. transaction processing from different types of ATMs and point-of-sale
terminals, which may differ according to model, protocol and software;
. authorization and verification for online and offline debit and credit
cards, including Mastercard or VISA bank cards, and paper and electronic
checks;
. access to substantially all national and regional networks, such as
MasterCard/Maestro/Cirrus, Visa/PLUS, American Express, Discover, STAR,
NYCE, Pulse and MAC;
. transaction switching, allowing transactions to be routed
internationally;
. data management through our DataNavigator, an optional product; and
. comprehensive settlement and reconciliation services.
As part of our transaction processing services, we receive fees for
installation of the software and hardware; monthly transaction processing,
which includes a base fee plus a variable fee based on the number of
transactions; and additional services related to surcharged transactions,
network access and sponsorship, ATM operation, card and authorization services,
settlement services, ATM monitoring, testing resources and professional
services.
EFT Processing Software. We license our electronic funds transfer software,
the same software that drives our electronic funds transfer processing
business, to in-house processors and regional networks in 22 foreign countries
and in the United States. In 1999, our licensees processed 10 billion
transactions around the world using our electronic funds transfer software. Our
electronic funds transfer software runs on IBM and Tandem computing platforms.
We also provide maintenance and support services.
ACH Processing. We are one of the largest private sector automated
clearinghouse service, or ACH, providers. The ACH network is an electronic
payment delivery system used primarily to process repetitive payments, such as
payroll, social security payments and utility payments. The ACH network acts as
the clearing facility for routing electronic funds transfer entries between
financial institutions on behalf of their business customers. The Federal
Reserve is the largest ACH service provider.
Our ACH services allow financial institutions to originate, receive,
balance, settle and edit their ACH transactions. We function as the financial
institution's ACH technology arm, giving the financial institution direct
control over its processing, but reducing the costs associated with operating a
processing and settlement infrastructure as an alternative to the Federal
Reserve as the exchange point. We also offer ACH switching services to members
of the American Clearing House Association which enable them to exchange and
settle ACH transactions with other member financial institutions. We also
provide calculation of daily settlement for ACH transactions, as well as
research and return capabilities.
The fee structure for our ACH services consists of installation fees,
monthly fees and transaction fees.
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DataNavigator. DataNavigator is a user-friendly software tool for financial
services companies, networks and independent service providers that enables
real-time electronic funds transfer data management and customer support.
DataNavigator uses a client server architecture that features a comprehensive
data repository supported by both a Windows-based and web browser-based user
interface. DataNavigator helps cut costs and improve customer satisfaction by
speeding up settlement and reporting, streamlining transaction research and
reconciliation services.
DataNavigator provides continuous settlement processing of electronic
transactions. Whether electronic funds transfer processing is handled in-house
or by a third party processor, DataNavigator can help users handle the
reporting, aggregation, reconciliation and settlement of transactions online,
as they arise. DataNavigator eliminates the traditional end-of-day bottleneck
for batch processing of settlement and reporting and simplifies transaction
research by providing a single point of access to all the electronic
transaction data on the user's network. Information is available to the
customer support staff immediately after a transaction occurs. DataNavigator
also provides detailed information about electronic funds transfer transactions
to help manage profitability and analyze consumer transaction behavior.
Transactions can be analyzed based on specific parameters, such as ATM location
or set dollar amounts at given locations. A bank that owns multiple ATMs, for
example, can determine its cash position at a particular ATM at any point
during the day. DataNavigator is fully operational in our transaction
processing centers and may be accessed by our transaction processing clients
for an additional fee or may be licensed by our software clients as an
additional module.
Electronic Check Conversion. Our electronic check service converts paper
checks into electronic transactions at the point-of-sale. Under the electronic
check system, the consumer continues to write a check but the retailer runs the
check through a check reader to capture account data. The check is authorized
through SCAN OnLine, our real-time check verification service. Once the
transaction is accepted, the authorized amount of funds is deposited in the
retailer's account, generally within one day, and is debited from the
consumer's account using the ACH network.
We believe that our electronic check service benefits retailers by reducing
paper check processing costs, minimizing bad-check write-offs and accelerating
funds collection. As of March 1, 2000, more than 3,000 locations use our
electronic check conversion service and seven companies remarket the service to
their merchant customers. We provide our electronic check service on a fee per
transaction basis.
OnLine Banking. We offer an online banking software solution for Internet
delivery of financial services to home users and businesses. We are initially
targeting our Internet Financial Management product line to financial
institutions in western Europe and the United Kingdom. Our Internet Financial
Management product offers banking customers the flexibility to access their
bank accounts 24 hours a day, 365 days a year, using a web browser or new
devices such as web-enabled mobile phones and personal digital assistants.
Using our product, bank customers can:
. check account balances; . check the status of previous
payment instructions;
. view transaction history;
. authorize or cancel payments
. search for a specific transaction; awaiting processing;
. transfer funds between accounts; . maintain standing order and
direct debit instructions; and
. maintain a list of payees;
. order checks and foreign
currency.
The software runs on the Windows NT operating system and employs the latest
encryption and authentication technology to enhance the security of
transactions. We introduced our Internet Financial Management product line in
June 1999. Currently, two clients are using the product on a pilot test basis.
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Electronic Bill Presentment and Payment. We plan to extend our ACH
processing services to help providers of electronic bill presentment and
payment and financial institutions manage payment origination, settlement and
collections. We are positioning our decision support and risk management tools
to address fraud and security concerns at the enrollment process. In addition,
we intend to use our information technology professional service capabilities
to help develop interoperability between developing electronic bill presentment
and payment systems and existing payment systems.
Business-to-Business e-Commerce. Currently, we are developing systems and
services to facilitate the web-based delivery of various aspects of business-
to-business e-commerce including accounts receivable and accounts payable
processing and reporting, payment acquisition and settlement and the
electronification of retail and wholesale lockbox functions.
Professional Services
We have combined the information technology professionals from the various
business units being separated from Deluxe to form a single integrated
information technology professional services group. We offer a full range of
information technology professional services to complement our electronic debit
payment business and on a stand-alone basis. We specialize in the
implementation and integration of our own and third-party software products;
the development, redevelopment and maintenance of a broad range of computer
software applications; and the development of custom e-commerce and Internet
solutions. In addition, we offer business processing management services, such
as accounting operations, transaction processing and call center operations, at
our shared services center in Delhi, India. We offer our professional services
either on a fixed-price, fixed-time basis or on a time and materials basis. In
1999, we derived approximately 80% of our information technology service
revenue from time and material contracts. Currently, we are targeting our
services to financial institutions and other businesses that accept debit
payments, such as retailers and e-commerce providers.
We provide our services through a global software development model which
combines industry, product and technical specialists based in our facilities in
the United States, United Kingdom, India and Australia. Our global delivery
capabilities give us the ability to provide high quality, round-the-clock
development services at competitive prices. Our information technology
professional services group includes over 1,300 consultants and software
developers, including approximately 900 people in the United States,
approximately 300 people in our two software development centers in India and
approximately 100 people in the United Kingdom. Our first software development
center has been assessed at Level 3 of the Software Engineering Institute's
Capability Maturity Model. The Software Engineering Institute's Capability
Maturing Model ratings are internationally recognized standard for assessing
the level of maturity and consistency of software development centers. The
Level 3 rating provides evidence of the quality and consistency of our offshore
software development capabilities, placing the center in the top 10% of all
software development facilities that have been rated. We opened our second
software development center in March 2000.
Software Development Services. We provide a variety of software development
services that cover all stages of the software development cycle. We develop
new custom applications for our clients on a variety of technology platforms,
including mainframe and client-server based, and in a variety of programming
languages. We specialize in developing financial applications, particularly
those used by large complex financial institutions in the banking, insurance
and securities industries. Our experienced professional group can install,
implement and integrate third party software applications within our client's
information technology infrastructure. We perform testing and performance
tuning of customer and third-party applications, and perform migration of
customers' legacy applications to client-server and Internet platforms. We also
provide on-going support and maintenance of customer applications. In addition,
we provide a number of specialized software application services, including
workflow management and document imaging services, SAP implementation and
support services and project management services. Examples of our software
development projects include the development of a custody application for a
major stock transfer company and documenting management systems implementation
and workflow analyses for the corporate trust division of a major bank.
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Product Based Professional Services. To complement and support our
electronic debit payment solutions, we provide our clients with consulting
services, customization and implementation services and educational and
training programs. Specifically, our services include the installation of our
electronic debit payment solutions and implementation and integration of these
solutions within the customer's existing information technology infrastructure.
We also customize our standard products and develop new applications for
clients who want additional features and functionality. We help clients test
and performance tune our products in their information technology environments.
In addition, we provide on-site user training on our products and solutions for
the information technology, operations and management staff of clients. We
build long-term continuing relationships with our clients by providing on-going
maintenance and support of our software products and solutions.
e-Commerce and Internet Services. We help clients to develop e-commerce and
Internet-related solutions. Our services enable our clients to process
business-to-customer, business-to-business and customer-initiated transactions
over the Internet. The scope of our capabilities include: multi-channel
integration for financial institutions, such as integration of call centers,
ATMs, personal computer and Internet banking, development of client extranets
and intranets and enablement of electronic bill presentment and payments. For
example, we are currently providing project management services to a major U.S.
bank to develop its Internet-based account opening process.
Business Process Management Services. In addition to our information
technology professional services, we offer business process management and
outsourcing services. We focus on both back-office and customer support
business processes, such as accounting operations, transaction processing and
call center operations. Our business process outsourcing services are provided
primarily at our shared services facility in India. This facility is staffed
with over 150 experienced business process personnel. Our offshore business
processing capabilities allow the client to focus on its core processes, reduce
the client's direct personnel costs, allow the client to avoid non-core capital
investments and improve the quality of the client's outsourced operations.
Currently, we provide process management services only to Deluxe under a
five year agreement. These services consist of accounts receivable, accounts
payable and general ledger processing services. For additional information
concerning this agreement, see "Agreements Between eFunds and Deluxe -- Master
Services Agreement" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Events." We have recently started
to market our business process management services to financial institutions
and other clients as well. We believe this line of business will tie in to our
business-to-business e-commerce and workflow management services to provide a
complete end-to-end back-office management solutions to our clients.
Government Services
We provide online electronic benefits transfer services on behalf of
governmental agencies responsible for the administration and management of
selected entitlement programs, primarily the Food Stamps and Transitional Aid
to Needy Families (formerly Aid to Families with Dependent Children) program.
Our electronic benefits transfer processing system manages, supports and
controls the electronic payment and distribution of cash benefits to program
participants through ATMs and point-of-sale networks. Our services reduce
operating costs and fraud for the government agency administering the benefits
program, eliminate the food stamp stigma for recipients through the use of a
plastic ATM-like card and make benefits more readily available to recipients at
retail point-of-sale terminals and ATMs.
We provide electronic benefits transfer services to individual state and
local governments or coalitions of state governments formed to purchase these
services jointly. We provide these services as a prime contractor or
subcontractor to nine individual state and local governments. We also are a
subcontractor for three coalitions of state governments, representing 21
states. Our services are typically provided for a fixed fee per welfare case
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plus fixed fees per transaction through the system. State and local governments
require that we enter into long-term contracts, typically five to seven years
in duration.
The principal components of this service include:
. transaction processing, including real-time transaction capture,
authorization, and settlement;
. point-of-sale terminal deployment and terminal operation for merchants;
. telecommunications network management;
. benefits card production and database management;
. financial settlement of funds with automated clearing house transfers;
. help desk support for program participants, merchants and government
personnel; and
. electronic funds transfer gateway services.
We also offer a Medicaid eligibility verification processing service that
performs online verification of a person's eligibility for Medicaid services.
Our system provides authorization services, drug utilization review and
electronic claims capture and transmissions for pharmacies and managed care
firms. Currently, we provide the service for the State of New York's Medicaid
program. This program serves over 177,800 health care providers and 4.2 million
cardholders through 19,500 point-of-sale terminals. In 1999, our Medicaid
eligibility verification processing service generated revenues of approximately
$10.1 million, or about 21% of our government services revenue.
We have had a history of operating losses and charges for asset impairment
related to our electronic benefit transfer services as described earlier in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." As a consequence, we have determined to exit this business as soon
as our current contractual commitments expire in 2006. During the wind down
period, we intend to continue to take steps to improve the profitability of the
current business. Deluxe has agreed to indemnify us for any losses on
identified loss contracts in excess of the reserves up to $ .
Clients
The following is a representative list of our corporate clients.
<TABLE>
<CAPTION>
Financial Institutions Retail Network/Gateway Internet
- ------------------------ --------------------- ------------------------- ------------------
<S> <C> <C> <C>
Bank One Food Lion Access Cash International USA Bancshares.com
Bank PEKAO Home Depot Cashcard Australia Umbrellabank.com
Bank of America J.C. Penney Citishare X.com
Bank of Montreal Kmart CU Cooperative Systems
Citibank Kroger NYCE
FleetBoston Financial Lowe's Companies Primary Payment Systems
International Nederlande National Data Funding Pulse EFT
The Royal Bank of
Scotland Safeway STAR System
Wells Fargo Bank Target
Wal-Mart
</TABLE>
In 1999, none of our clients individually accounted for 10% or more of our
total revenues. In 2000, we expect that Deluxe will account for at least 10% of
our total revenues. We intend to expand our client base in new markets,
including e-commerce providers, online brokerages, telecommunication firms,
insurance companies and utilities.
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Sales and Marketing
We market our electronic payment management services and software products
and information technology professional services through a direct sales force
and indirect sales channels, such as distributors, resellers, alliances and
partnerships. We organize our direct sales force by customer market segment,
including financial institutions, networks and gateways, retailers and e-
commerce providers. Our direct sales force focuses on our customers needs and
is capable of selling all or a portion of our products and services to offer
the most effective solution for those needs. We work collaboratively with our
customers and prospective customers to help them identify and create new
solutions. Because many of our customers use a single product or service, or a
combination of products or services, our direct sales force has begun to target
existing customers to capture cross-selling opportunities. We plan to focus our
information technology services marketing efforts on large U.S. financial
institutions and other businesses that accept debit payments.
We have full service direct sales offices in Milwaukee, Wisconsin;
Minneapolis, Minnesota; Phoenix, Arizona; Dallas, Texas; San Francisco,
California; New York, New York; and Charlotte, North Carolina. These offices
coordinate direct sales and arrange indirect sales channels in the various
regions. As of March 1, 2000, our direct sales force had 99 full-time
professionals. We intend to increase our sales force by adding new field sales
offices and by adding sales and marketing personnel to our existing
territories.
To further facilitate broad market penetration and complement our direct
sales efforts, we plan to expand our indirect sales channels, especially in
international markets. These indirect channels includes resellers, distributors
and alliances. Our indirect sales partners include VISA USA, Access Cash
International, eProfile, IBM Australia/NZ and Card Soft International a.s.
We build awareness of our products and services and the eFunds corporate
name through targeted advertising, public relations, participating in trade
shows and conferences and providing product information through our web site.
Customer Support, Technology and Infrastructure
Customer Support. We believe that providing superior quality and accessible
and reliable customer and technical support is essential to developing and
maintaining customer relationships in each business segment. We provide
customer support services through our customer contact centers located in
Bloomington, Minnesota; Bothell, Washington; and Dallas, Texas. Our contact
centers are open 24 hours a day, 7 days a week and provide access to website,
e-mail and telephone support. As of March 1, 2000, we had 1,400 employees in
customer and technical support functions. In addition to user questions and
technical issues, we respond to inquiries in accordance with the Fair Credit
Reporting Act from consumers who have been denied check authorization or
rejected for a new account. We also provide on-site customer support services
in connection with our other products and services, and charge a separate fee
for these services based on an hourly rate.
Technology. Our products are configured to run on operating systems widely
adopted by the electronic debit payment industry. These include the Tandem,
IBM, UNIX and Windows operating environments. Our software is developed using
C, C++, Cobol, HTML and other programming languages. Our software products are
modular in design and flexible in implementation, so that they can accommodate
specific customer requirements. Our software products are interoperable with a
wide range of terminal types and computer networks, and support a variety of
communications protocols, such as TCP/IP.
As of March 1, 2000, we employed over 1,300 software programmers at our
offices in Milwaukee, Wisconsin; Minneapolis, Minnesota; Phoenix, Arizona;
Seattle, Washington; Toronto, Canada; Runcorn and Watford, United Kingdom;
Sydney, Australia; and Chennai, India.
Data Centers. We operate two highly secure, fault-tolerant data centers in
New Berlin, Wisconsin and Phoenix, Arizona. Our data centers have been
engineered to ensure minimal exposure to systems failure and unauthorized
access. Our data centers contain multiple separate computer rooms to provide
containment and
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isolation. Physical security has been implemented through restricted card key
access and closed circuit T.V. cameras. We use redundant uninterruptible power
supplies with battery backup and redundant generators to ensure continuous flow
of power to the data center in the event of any component failure or power
outage. The facilities have dual-entrance, fiber optic SONET service for
telecom redundancy.
Research and Product Development
We believe that our future success will depend in large part on our ability
to develop new and enhanced electronic payment management solutions. We are
focusing our product development efforts on electronic payment software
solutions for Internet and e-commerce providers, as well as insurance
companies, utilities and telecommunication companies. For example, we are
currently working with a third party to develop the application of voice
authentication software and technology to the debit payments industry.
We have developed all of our electronic payment software solutions
independently through our software development group. Our principal research
and development sites are located in Runcorn and Watford, United Kingdom;
Sydney, Australia; and Glendale, Wisconsin. Our research and development
expenses were $3.7 million in 1999, $625,000 in 1998 and $1.4 million in 1997.
Our capitalized software development costs were $17.3 million in 1999, $3.2
million in 1998 and $5.0 million in 1997.
Competition
The market for electronic debit payment solutions is intensely competitive
and evolving. We face significant competition in all of our customer markets.
Further, we expect that competition will intensify as the e-commerce and
Internet markets continue to develop and expand. We believe that the principal
competitive factors include price, quality, features, functionality and
reliability, customer service and support, and the ability to deliver
comprehensive solutions. Our competition falls into the following categories:
. third-party network and credit card processors, such as First Data,
Equifax, Total System Services, EDS, Concord EFS and Alliance Data
Systems;
. financial institutions that have developed in-house processing
capabilities or services similar to ours, such as Bank of America,
Marshall and Illsley and Fifth Third National Bank;
. electronic data interchange and cash management providers, such as
Fiserv, CheckFree, M&I Data, EDS and Fundtech;
. electronic bill payment providers, such as CheckFree, EDS, MasterCard,
Spectrum and Visa;
. electronic funds transfer software solution providers, such as
Transaction System Architects, SLMsoft, Oasis, Mosaic and PaySys; and
. national information database companies, such as Equifax, Experian and
TransUnion, and other content providers.
The information technology services market is highly competitive and is
served by numerous firms. To date, we have faced competition and sales
resistance from internal information technology departments of current and
potential customers. In addition to in-house information technology
departments, market participants include systems consulting and integration
firms, application software firms, Internet professional service companies,
professional services divisions of computer hardware and software vendors,
facilities management and outsourcing companies, "Big 5" accounting firms and
strategy consulting firms. We also expect that competition will increase as a
result of software industry consolidation. We compete by offering financial
institution industry experience, high quality services, competitive prices,
global delivery capability and technical expertise.
In all areas of our businesses, many of our competitors have significantly
greater financial, technical, marketing and other resources, greater name
recognition and a larger installed base of customers than we do. In
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addition, current and potential competitors have established or may establish
relationships with potential clients of ours, have extensive knowledge of our
business and have developed or are capable of offering alternative solutions.
In addition, current and potential competitors have established or may
establish alliances with third parties to increase their ability to develop and
market products and services. It is possible that new competitors or alliances
among established companies may emerge and rapidly acquire significant market
share.
Data Stewardship
We collect consumer data from multiple sources, including through:
. participating members of SCAN;
. participating members of ChexSystems;
. Deluxe's check printing customers;
. credit bureaus;
. state governmental agencies (e.g., Department of Motor Vehicles); and
. federal governmental agencies (e.g., Social Security Administration).
We obtain the data under agreements or licenses with suppliers. Some of
these agreements impose restrictions on the use and resale of the data and
others are governed by the Fair Credit Reporting Act. We do not use or sell the
data for direct marketing purposes.
We have a strong commitment to the responsible use of data, including the
protection of consumer privacy rights. We have taken several measures to
fulfill this commitment, including actively participating in the development of
industry-wide privacy standards; maintaining strict information practices and
policies; and creating an internal information-practices council and systems to
oversee appropriate data usage.
Our information practices and policies include the following:
. Accuracy. We use stringent procedures to ensure that information
collected, used and exchanged will be accurate and complete.
. Security. We employ the most advanced security measures for protecting
information from unauthorized access, use and disclosure.
. Compliance. We collect, use and disclose information in accordance with
the federal Fair Credit Reporting Act, applicable state laws and
contractual obligations.
. Confidentiality. We collect, use and exchange information in accordance
with strict confidentiality standards.
. Privacy. We promote self-regulation in recognition of consumers'
expectation of privacy and adhere with industry standards, such as those
established by the Direct Marketing Association and the American Bankers
Association.
. Responsiveness. We employ extensive internal monitoring systems and
conduct ongoing customer surveys to maintain high quality and timely
response standards with respect to consumer inquiries.
. Employee education. We educate our employees regarding sound information
practices and the proper handling and use of information.
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Government Regulation
Various aspects of our businesses are subject to federal and state
regulation. Our failure to comply with any applicable laws and regulations
could result in restrictions on our ability to provide our products and
services, as well as the imposition of civil fines and criminal penalties.
As a provider of electronic data processing services to financial
institutions, we are subject to regulatory oversight and examination by the
Federal Financial Institutions Examination Council, an interagency body
comprised of the various federal bank and thrift regulators and the National
Credit Union Association. In addition, we may be subject to possible review by
state agencies that regulate banks in each state where we conduct our
electronic processing activities.
Because we collect and disclose debit data and other personal information
about consumers, we are subject to the federal Fair Credit Reporting Act and
any state laws providing greater consumer protections. The Fair Credit
Reporting Act provides that consumers have the right to know the contents of
the records pertaining to them and maintained at our consumer reporting
agencies, to challenge the accuracy of the information and to have the
information verified, updated or removed. To comply with these requirements we
maintain consumer relations call centers for each of our consumer reporting
businesses. We are also required to maintain a high level of security for the
computer systems in which consumer data files reside.
Our financial institution customers will be subject to the consumer privacy
requirements of the new federal financial modernization law, known as the
Gramm-Leach-Bliley Act. The Act imposes significant consumer information
privacy requirements on any entity engaged in the business of providing
financial services, including entities that provide services to banks. The
privacy provisions of the Act impose on each entity subject to the new consumer
privacy requirements an affirmative obligation to develop and implement
policies to protect the security and confidentiality of consumers' nonpublic
personal information and to disclose those policies to consumers before a
customer relationship is established and annually thereafter. The Act directs
each functional regulator to issue appropriate standards for carrying out this
duty. The banking regulators and the Federal Trade Commission have recently
issued proposed regulations implementing the privacy portions of the Act for
industry comment. The proposed banking regulations do not restrict the ability
of consumer reporting agencies to collect and disclose information subject to
the Fair Credit Reporting Act. The proposed FTC regulations, however, contain a
broad definition of "financial institution" which could, if enacted, subject
consumer reporting agencies, collection agencies, and data processors to the
disclosure and opt out requirements of the Act regardless of whether they have
consumers as customers.
The privacy provisions of the Act require each financial institution to
provide an "opt-out" notice to consumers and an opportunity to opt-out before
sharing nonpublic personal information with an unaffiliated third party. There
are numerous exceptions that do not require that any notice or opportunity to
opt-out be given to consumers. These include:
. transfers of consumer information made to protect the confidentiality or
security of a consumer's records; to protect against or prevent actual
or potential fraud, unauthorized transactions, claims or other
liability; for required institutional risk control; and for resolving
customer disputes or inquires;
. transfers of consumer information to a consumer reporting agency
pursuant to the Fair Credit Reporting Act; and
. transfers between affiliates of consumer reports produced by a consumer
reporting agency in compliance with the Fair Credit Reporting Act.
We believe these exceptions apply to our consumer reporting business and
will permit banks to provide debit data and other nonpublic personal
information to us without triggering the opt-out requirement. However,
50
<PAGE>
Congress and many states are considering more stringent laws or regulations
that, among other things, restrict the purchase, sale or sharing of nonpublic
personal information about consumers. Given the current public concern over
consumer privacy rights, it is possible the Congress, individual states and
governmental agencies could enact new laws or regulations governing consumer
protection in the future. If enacted, these laws or regulations could directly
affect our ability to collect and use consumer data and could have a material
adverse effect on our business, results of operations and financial condition.
Our debt collection services are subject to the Fair Debt Collection
Practices Act and state collections statutes and licensing requirements.
Laws and regulations may be adopted in the future with respect to the
Internet or e-commerce covering issues such as user privacy, pricing, content,
copyrights, consumer protections, taxation and characteristics and quality of
products and services. New laws or regulations may impeded the growth of the
Internet. This could decrease the demand for our products and services and
increase our cost of doing business. Moreover, the applicability to the
Internet of existing laws governing property ownership, taxation, libel and
personal privacy is uncertain and may remain uncertain for a considerable
length of time.
Intellectual Property Rights
We rely on a combination of trademark, copyright, trade secret law and
confidentiality or license agreements to protect our proprietary rights in
products, services, know-how and information. Intellectual property laws afford
limited protection. It may be possible for a third party to copy our products
and services or otherwise obtain and use our proprietary information without
our permission. There is no assurance that our competitors will not
independently develop services and products that are substantially equivalent
or superior to ours.
With regard to our information technology services, our business consists of
software applications development. Ownership of this software is generally
assigned to the client. We also develop software components that can be reused
in software application development and software toolsets, most of which
remains our property.
Employees
As of March 1, 2000, we had approximately 3,200 full-time employees,
including 2,500 persons employed within the United States and 700 persons
employed outside of the United States, including India. Of our total number of
employees, 1,300 persons were engaged in software development, 1,400 persons
were engaged in customer and technical support services, 140 persons were
engaged in sales and marketing and 360 persons were engaged in administrative
functions.
None of our employees are represented by a labor union, and we consider our
employee relations to be good.
Facilities
The following table sets forth a description of our principal facilities:
<TABLE>
<CAPTION>
Owned or Lease
Approximate Expiration
Location Square Feet Date Function
--------------------- ----------- -------------- ---------------------------
<S> <C> <C> <C>
Milwaukee, Wisconsin 171,250 Owned Marketing, development and
administration
New Berlin, Wisconsin 82,600 Owned Data center
Phoenix, Arizona 92,813 Owned Data center
Chennai, India 18,614 January 2008 Software development center
Delhi, India 40,950 January 2002 Shared services center
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Owned or Lease
Approximate Expiration
Location Square Feet Date Function
---------------------- ----------- -------------- ---------------------------
<S> <C> <C> <C>
Chennai, India 38,750 September 2002 Software development center
Bloomington, Minnesota 50,623 June 2002 Customer contact center
Shoreview, Minnesota 49,500 September 2001 DebitBureau and
professional services
Bothell, Washington 34,309 August 2004 Customer contact center
Bothell, Washington 24,702 September 2006 Office center
Dallas, Texas 42,052 January 2001 Customer contact center
Mesa, Arizona 3,208 August 2001 Business recovery site
New Berlin, Wisconsin 5,500 June 2000 Warehouse
</TABLE>
The leases set forth above generally have a term of 3 to 10 years, most of
which have options to extend for at least 3 years. We believe that our current
facilities are adequate to meet our space requirements and that additional
space will be available at a reasonable cost to meet our future needs.
Legal Proceedings
On May 14, 1999, we filed a trademark infringement action against Citizen
Advisers, Inc. in the United States District Court for the Central District of
California. The complaint alleges false designation of origin and trademark
infringement, trade name infringement and unfair competition under California
law regarding the use of the "E FUND" mark and efund.com internet domain by
Citizen Advisers. We are seeking injunctive relief to prevent Citizen Advisers
from using the "E FUND" mark and efund.com internet domain, cancellation of
Citizen Advisers trademark registration of the "E FUND" mark and damages and
expenses, including attorneys' fees. The case is in the discovery stage and no
trial date has been set.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John A. Blanchard III... 57 Chairman of the Board and Chief Executive Officer, Director
Debra A. Janssen........ 43 President and Chief Operating Officer
Dr. Nikhil Sinha........ 39 Executive Vice President, Global Corporate Development
Paul H. Bristow......... 57 Executive Vice President and Chief Financial Officer
Steven F. Coleman....... 41 Senior Vice President, General Counsel and Secretary
</TABLE>
John A. Blanchard III has served as Chairman of our Board of Directors and
Chief Executive Officer since March 1, 2000. Mr. Blanchard has served as
President and Chief Executive Officer of Deluxe since May 1995 and as Chairman
of the Deluxe Board of Directors since May 1996 and will continue to serve in
those capacities until the completion of the split-off from Deluxe. From
January 1994 to April 1995, Mr. Blanchard was executive vice president of
General Instrument Corporation, a supplier of systems and equipment to the
cable and satellite television industry. From 1991 to 1993, Mr. Blanchard was
chairman and chief executive officer of Harbridge Merchant Services, a national
credit card processing company. Previously, Mr. Blanchard was employed by
American Telephone & Telegraph Company for 25 years, most recently as senior
vice president responsible for national business sales. Mr. Blanchard also
serves as a director of Wells Fargo and Company and ADC Telecommunications Inc.
Debra A. Janssen has served as our President and Chief Operating Officer
since March 1, 2000. Ms. Janssen joined Deluxe's Electronic Payment Solutions
division in February 1998 as Senior Vice President and was named President and
Chief Executive Officer of that division in March 1998. Prior to joining us,
Ms. Janssen worked for 14 years for M&I Data Services in a variety of
capacities, most recently as senior vice president and chief information
officer.
Paul H. Bristow has served as Executive Vice President and Chief Financial
Officer since March 2000. From 1993 until joining our company, Mr. Bristow
served as Executive Vice President - Finance Administration and Chief Financial
Officer of Galileo International, a computer reservation system company for the
travel industry. Previously, Mr. Bristow held various finance, accounting and
auditing positions with London International Group, plc, ITT Europe, ITT
Canada, Philip Morris and Arthur Andersen.
Dr. Nikhil Sinha has served as our Executive Vice President, Global
Corporate Development since March 1, 2000. Previously, Dr. Sinha served as
President and Chief Executive Officer of iDLX Technology Partners, Deluxe's
Professional Services Division, from June 1999 to February 2000. He was a
director of the Telecommunications and Information Policy Institute at the
University of Texas at Austin from September 1997 to May 1999 and associate
professor of International Communication from 1991 to 1997. Dr. Sinha has
worked as a consultant to the Informatics and Telecommunications Division for
the World Bank and as an advisor to the Indian Telecom Commission and the
Indian Planning Commission. Dr. Sinha also serves on the advisory committee of
the Indo-US Sub-Commission on Education and Culture. He is co-founder and
director of Sinha & Lariviere, Ltd., a consulting firm providing strategic and
investment advisory services to U.S. companies doing business in South Asia.
Steven F. Coleman has served as Senior Vice President, General Counsel and
Secretary since March 2000. From 1996 until joining our company, Mr. Coleman
worked as a Senior Attorney for Deluxe. Prior to joining Deluxe, Mr. Coleman
was associated with Dorsey & Whitney, a law firm located in Minneapolis,
Minnesota, and Fried, Frank, Harris, Shriver & Jacobson, a law firm located in
New York, New York.
53
<PAGE>
Board Composition
Our board of directors is currently comprised of one director, Mr.
Blanchard. Prior to the completion of this offering, we expect that our board
will consist of seven directors. The additional directors will include three
interim directors, who will be representatives of Deluxe and will continue to
serve on our board until the completion of the split-off; two current directors
of Deluxe, who will continue to serve on Deluxe's board until completion of the
split-off; and one member of the current management team. In addition, we are
currently searching for additional independent directors. Our board of
directors will be divided into three classes for purposes of election. One
class will be elected at each annual meeting of stockholders to serve for a
three year term.
Board Committees
Our board of directors will appoint an audit committee and a compensation
committee.
Audit Committee. The functions of the audit committee, which consists of
, and include:
. reviewing the adequacy of our system of internal accounting controls;
. reviewing the results of the independent auditors' annual audit,
including any significant adjustments, management judgements and
estimates, new accounting policies and disagreements with management;
. determining the duties and responsibilities of the internal audit staff;
. reviewing the scope and results of our internal auditing procedures;
. reviewing our audited financial statements and discussing them with
management;
. reviewing the audit reports submitted by both the independent auditors
and our internal audit staff;
. reviewing disclosures by independent auditors concerning relationships
with our company and the performance of our independent auditors and
annually recommending independent auditors;
. adopting and annually assessing our charter; and
. preparing such reports or statements as may be required by Nasdaq or the
securities laws.
Compensation Committee. The compensation committee consists of , ,
and . The functions of the compensation committee currently include:
. reviewing our general compensation strategy;
. reviewing the terms of employment agreements for executives earning over
a specified amount and approving compensation for executives if their
compensation is, or may become, subject to Section 162(m) of the
Internal Revenue Code; and
. administering our compensation and benefit plans.
Director Compensation
We will compensate our non-employee directors with an annual retainer of
$15,000, meeting fees of $1,000, committee chair fees of $2,500 and annual
options under the 2000 Stock Incentive Plan valued at $50,000. We expect to
allow our directors to elect to receive stock in lieu of cash or to participate
in some form of deferred compensation plan.
Stock Ownership of Directors and Executive Officers
All of our common stock is currently owned by Deluxe, and thus none of our
directors and executive officers own any shares of our common stock. To the
extent our directors and executive officers own shares of Deluxe common stock
at the time of the split-off, they will participate in the exchange offer on
the same terms as other holders of Deluxe common stock.
The following table sets forth the number of shares of Deluxe common stock
beneficially owned on March 15, 2000 by each director, each executive officer
named in the Summary Compensation Table in the
54
<PAGE>
"-- Executive Compensation" section below, and all of our directors and
executive officers as a group. Except as otherwise noted, the individual
director or officer had sole voting and investment power with respect to such
securities. The total number of shares of Deluxe common stock outstanding as of
March 15, 2000 was 72,218,276.
<TABLE>
<CAPTION>
Shares of Deluxe
Beneficially Owned
------------------
Name of Beneficial Owner Number Percentage
- ------------------------ ------- ----------
<S> <C> <C>
John A. Blanchard III (1).................................. 478,221 *
Debra A. Janssen (2)....................................... 18,539 *
Dr. Nikhil Sinha (3)....................................... 14,480 *
Paul H. Bristow............................................ 0 *
Steven F. Coleman (4)...................................... 4,415 *
All directors and executive officers as a group (5
persons).................................................. 504,199 *
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) Includes: 39,221 shares of common stock directly owned; 25,000 restricted
shares, awarded May 1, 1995 under Deluxe's Stock Incentive Plan, which
restrictions will expire on May 1, 2000 if, subject to certain conditions,
Mr. Blanchard remains in continuous employment until such date; and options
to purchase 414,000 shares of common stock that are currently exercisable
or will be excercisable within 60 days.
(2) Includes: 1,649 shares of common stock directly owned; 1,889 restricted
shares that will convert into shares of Deluxe common stock on January 28,
2001 if, subject to certain conditions, Ms. Janssen remains in continuous
employment until such date; and options to purchase 15,001 shares of common
stock that are currently exercisable or will be exercisable within 60 days.
(3) Includes: 3,024 shares of common stock directly owned; and 11,456
restricted shares awarded January 29, 2000 under Deluxe's Stock Incentive
Plan, which restrictions will expire on the one year anniversary of this
offering if, subject to certain conditions, Dr. Sinha remains in
continuous employment until such date.
(4) Includes: 448 shares of common stock directly owned and options to
purchase 3,967 shares of common stock that are currently exercisable or
will be excercisable within 60 days.
55
<PAGE>
Executive Compensation
The following table sets forth the compensation earned by our Chief
Executive Officer and each of our other most highly compensated executive
officers who, based on the salary and bonus compensation information from
Deluxe, were the most highly compensated for the year ended December 31, 1999.
All information set forth in this table reflects compensation earned by these
individuals for services with Deluxe and its subsidiaries for each of the last
two fiscal years. Mr. Bristow was not an employee of Deluxe prior to joining us
in March 2000 and accordingly he is not shown in the table. This prospectus
refers to these individuals as the Named Executive Officers.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------- ---------------------
Restricted Securities All Other
Name and Principal Other Annual Stock Underlying Compensation
Position Year Salary Bonus(1) Compensation Awards Options (2)
- ------------------ ---- -------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Blanchard III
(3). 1999 $680,000 $ 680,000 $22,866 -- 185,000 $136,400
Chairman and Chief 1998 $600,000 $1,200,000 $13,848 -- 176,000 $ 79,051
Executive Officer
Debra A. Janssen........ 1999 $261,282 $ 168,233 $ 8,719 -- 25,000 $ 17,476
President and Chief 1998 $198,892 $ 168,300 $ 2,467 -- 10,000 --
Operating Officer
Dr. Nikhil Sinha (4).... 1999 $175,000 $ 87,500 -- -- 25,000 $ 28,846
Executive Vice
President, Global
Corporate Development
Steven F. Coleman....... 1999 $132,000 $ 26,400 -- -- 2,000 14,820
Senior Vice President, 1998 $120,000 $ 42,000 -- -- 1,500 15,237
General Counsel and
Secretary
</TABLE>
- --------
(1) Recipients of awards under Deluxe's Annual Incentive Plan are entitled to
elect to receive all or a portion of their incentive compensation in the
form of shares of restricted stock or restricted stock units (whichever
option is made available by the Compensation Committee of the Board of
Directors of Deluxe). If an election is made to receive shares of
restricted stock or restricted stock units, the amount of cash foregone is
increased by 25 percent in determining the number of shares of restricted
stock units to be awarded.
(2) All other compensation consists of (a) annual company contributions to
qualified retirement plans, (b) amounts credited to a non-qualified
supplemental retirement plan (defined contribution and profit sharing
allocations in excess of ERISA limitations) and (c) amounts credited to a
non-qualified deferred compensation plan as benefit plan equivalents.
(3) Mr. Blanchard is entitled to supplemental retirement benefits (the
"Supplemental Retirement Benefits") in addition to those ordinarily
payable under Deluxe's profit-sharing, pension and supplemental retirement
plans, and with respect to any company-paid portion of contributory
retirement plans, such as Deluxe's 401(k) plan (collectively, the "Base
Plans"). Deluxe is expected to make a lump-sum cash payment to
Mr. Blanchard on December 31, 2000 in satisfaction of its obligations in
respect of the Supplemental Retirement Benefits.
(4) Dr. Sinha began employment with Deluxe in April 1999. All other
compensation includes $28,846 paid in respect of his vacation pay following
the transfer of Deluxe employees to Deluxe Professional Services.
56
<PAGE>
The following table contains information concerning the grant of options to
purchase shares of Deluxe common stock to the Named Executive Officers during
the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (2)
----------------------------------------- ----------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price
Granted in Fiscal Per Expiration
Name (1) Year Share Date 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John A. Blanchard III... 185,000 15.04% $35.9375 1/4/09 $4,181,167 $10,595,897
Debra A. Janssen........ 15,000 1.22 $35.6250 1/29/09 $ 336,066 $ 851,656
10,000 .81 $35.8125 5/04/09 $ 225,223 $ 570,759
Dr. Nikhil Sinha........ 25,000 2.03 $37.5625 6/17/09 $ 590,571 $ 1,496,624
Steven F. Coleman....... 2,000 .16 $35.6250 1/29/09 $ 44,809 $ 113,554
</TABLE>
- --------
(1) All options were granted at an exercise price that equaled or exceeded the
fair market value of the common stock on the date of grant, as determined
by the last sale price as reported on the New York Stock Exchange. The
options are exercisable in cumulative installments of 33-1/3 percent on
each anniversary of the date of grant.
(2) The amounts represent hypothetical gains that might be achieved by the
optionees if the respective options are exercised at the end of their
terms. These gains are based on assumed rates of stock price appreciation
of 5% and 10% mandated by rules of the Securities and Exchange Commission.
These rates are shown for illustrative purposes only and do not represent
our prediction of our stock price performance.
The following table sets forth information regarding exercises of options to
purchase Deluxe common stock during the year ended December 31, 1999 and
unexercised options to purchase Deluxe common stock as of December 31, 1999, by
each of the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal Year the-Money Options at
End Fiscal Year End (1)
------------------------- -------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Blanchard III... -- -- 260,334 335,666 -- --
Debra A. Janssen........ -- -- 3,334 31,666 -- --
Dr. Nikhil Sinha........ -- -- -- 25,000 -- --
Steven F. Coleman....... -- -- 3,300 2,000 -- --
</TABLE>
- --------
(1) The value of unexercised in-the-money option is determined by multiplying
the difference between the exercise price and the closing price of Deluxe
common stock on the NYSE on December 31, 1999 ($27.4375) by the number of
shares underlying the options. If the exercise price is greater than the
December 31, 1999 closing price, the options are not in-the-money and no
value is listed.
57
<PAGE>
Treatment of Deluxe Options
As of March 31, 2000, options to purchase 4,338,385 shares of common stock
of Deluxe were outstanding. Immediately prior to the split-off of Deluxe's
remaining interest in our company following this offering, these outstanding
options will be converted into new options to purchase Deluxe common stock and
options to purchase our common stock. All persons who hold Deluxe options will
receive Deluxe options and eFunds options. The board of directors has adopted
the eFunds Corporation Stock Incentive Plan for Deluxe Conversion Awards to
provide for the eFunds options resulting from the converstion. Deluxe, as our
sole stockholder, has approved this plan, which is filed as an exhibit to our
registration statement of which this prospectus is a part.
The stock options granted under this plan generally will have the same terms
and conditions as the Deluxe options to which they relate. The eFunds options
will be granted immediately prior to our split-off from Deluxe. Both the number
of eFunds options to be granted and the exercise price of options granted under
this plan to any participant will depend on a conversion equation described
below. The vesting provisions of the eFunds options will be the same as the
Deluxe options to which they relate, assuming for vesting purposes that the
date of the grant of the eFunds options was the same as the date of the grant
for the corresponding Deluxe options. The exercisability provisions and the
term of each eFunds option will be the same as the relevant provisions of the
Deluxe options to which they relate. Any exercisability or option term
provisions that are based on past employment or contingent on continued
employment will mean and include past-employment with Deluxe and continued
employment with eFunds for those participants who are employees of eFunds as of
the split-off date.
The basic principle for the conversion of Deluxe options is to maintain the
same value of the options based on the difference between exercise price and
market price, or intrinsic value. The pre-split intrinsic value of all Deluxe
options outstanding is defined as the number of Deluxe options outstanding
multiplied by the difference (a) between the implied pre-split market value per
share of Deluxe common stock, which equals the sum of the market values of
Deluxe and eFunds divided by the number of shares of Deluxe common stock
outstanding, and (b) the weighted average exercise price. The pre-split
intrinsic value will be allocated after the split-off between the adjusted
Deluxe options and eFunds options according to the relative market valuations
of the two companies immediately prior to the split-off. The weighted average
exercise price of all eFunds options will equal the product of the market price
of eFunds common stock on the first day of trading following the split-off and
the ratio of (i) the pre-split weighted average exercise price for Deluxe
options to (ii) the implied pre-split market value per share of Deluxe common
stock. Dividing the intrinsic value allocated to eFunds options by the
difference between the market price of eFunds common stock on the first day of
trading following the split-off and the weighted average exercise price of
eFunds options results in the number of shares for which eFunds options will be
granted.
For example, assume that there are options to purchase million shares of
Deluxe common stock outstanding prior to the split and the weighted average
exercise price is $ . Deluxe has an implied pre-split value per share of
Deluxe common stock of $ . The pre-split intrinsic value of outstanding Deluxe
options is $ million (( - )* million). Assume that the pre-split market
valuation of eFunds is $ million and the pre-split market valuation of
Deluxe is $ million. eFunds percentage of the total market value is %,
which results in an intrinsic value of $ million allocated to eFunds
options. If we assume a market price for eFunds stock on the day of the split
off of $ , the weighted average exercise price will be $ ( *( / )).
The number of shares for which options will be granted would be .
This example uses hypothetical numbers that are unlikely to be accurate on
the day of the split-off. The number of eFunds options granted pursuant to the
conversion plan and the exercise price of those options is subject to a large
number of variables, particularly the relative market prices for our common
stock and Deluxe's common stock on the day before and on the day of the split-
off. At this time, we cannot provide any certainty regarding the number of
options we will grant pursuant to the conversion plan or the exercise price for
those options.
58
<PAGE>
Employment Agreements
John A. Blanchard III. We will enter into an Executive Employment Agreement
with Mr. Blanchard related to his service as our Chairman and Chief Executive
Officer. The term of the agreement begins as of the date of the split-off and
expires on December 31, 2002. Under the agreement, Mr. Blanchard will receive a
salary of $680,000, subject to increase at the discretion of our board.
Mr. Blanchard is also eligible to receive annual cash bonuses on the same basis
that we pay bonuses to our other executives, with a target bonus equal to his
base salary. Mr. Blanchard is eligible to participate in our stock incentive
plan. We anticipate that he will receive annual stock option grants having a
value equal to 200% of his base salary, as determined by the Black-Scholes
method. Mr. Blanchard will receive double-options in 2000, which are listed in
the table below under "-- 2000 Stock Incentive Plan Grants." In recognition of
the termination of Mr. Blanchard's Supplemental Retirement Benefits, Mr.
Blanchard is also entitled to receive $490,768 on or about January 2, 2003.
This amount is reflective of the present value on that date of the retirement
benefits Mr. Blanchard would have been entitled to under his supplemental
retirement benefit plan if that plan was continued throughout the term of his
Executive Employment Agreement. Mr. Blanchard has the option to receive the
economic equivalent of this benefit on an annuity basis for 15 years following
his retirement.
If we terminate Mr. Blanchard's employment other than for cause, or if Mr.
Blanchard terminates his employment for good reason, Mr. Blanchard is entitled
to a lump sum payment equal to:
. the sum of (1) his unpaid base salary due through the date of
termination, (2) the product of his most recent annual bonus and the
fraction of the year he was employed and (3) any deferred compensation
and any accrued vacation pay;
. an amount equal to the annual base salary that Mr. Blanchard would have
earned during the remaining term of the Executive Employment Agreement
had his employment not been terminated; and
. an amount equal to the annual bonus that Mr. Blanchard would have earned
had he remained continuously employed throughout the employment period
and been awarded his annual target bonus amount to the extent this bonus
amount has not theretofore been paid.
In addition, upon any such termination of Mr. Blanchard's employment, Mr.
Blanchard will be entitled to participate in all benefits plans, including
medical, disability, life and other health insurance benefits and to certain
out-placement services. All unvested options granted to Mr. Blanchard will
immediately vest and remain exercisable for a five year period (or, if less,
their remaining term) and all other restricted shares and restricted stock
units held by Mr. Blanchard under the stock incentive plan vest and are
converted into shares of common stock on the date of any termination other than
for cause or for good reason. Mr. Blanchard would also be entitled to retain
and earn any performance-based awards previously received under our stock
incentive plan as if he had continued in our employ until the expiration of the
relevant performance period. Any options granted to Mr. Blanchard will also
vest and remain exercisable for five years following any termination of
Mr. Blanchard's employment upon the expiration of his Executive Employment
Agreement.
The agreement also provides that if any payment or benefit received or to be
received by Mr. Blanchard would be subject to the federal excise tax on "excess
parachute payments," we will pay Mr. Blanchard such additional amount as may be
necessary so that he realizes, after the payment of the excise tax and any
income tax or excise tax on that additional amount, the amount of such
compensation.
Debra A. Janssen. We entered into a letter agreement with Ms. Janssen
effective as of March 1, 2000. The agreement provides for annual base salary of
$400,000 with a target bonus equal to 50% of base salary. Ms. Janssen is
eligible to receive annual stock option grants having a value equal to 225% of
her base salary, as determined by the Black-Scholes method. Ms. Janssen will
receive double-options in 2000, which are listed in the table below under "--
2000 Stock Incentive Plan Grants." Ms. Janssen's letter agreement also contains
a severance provision allowing her to receive one year's base salary plus a
second year of income continuation, if she is terminated for reasons other than
willful misconduct, gross negligence or unlawful actions toward us or toward
others involved with our business.
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Paul H. Bristow. We entered into a letter agreement with Mr. Bristow
effective as of March 1, 2000. The agreement provides for an annual base salary
of $300,000 with a bonus ranging from 0% to 100% of base salary, depending on
our performance. The target bonus is 50%, or $150,000 annually. Mr. Bristow is
eligible to receive annual stock option grants having a value equal to 150% of
his base salary, as determined by the Black-Scholes method. Mr. Bristow will
receive double-options in 2000, which are listed in the table below under "-
2000 Stock Incentive Plan Grants." Mr. Bristow's letter agreement also contains
a severance provision allowing him to receive one year's base salary plus a
second year of income continuation, if he is terminated for reasons other than
willful misconduct, gross negligence or unlawful actions toward us or toward
others involved with our business.
Dr. Nikhil Sinha. We entered into a letter agreement with Dr. Sinha
effective as of March 1, 2000. The agreement provides for an annual base salary
of $300,000 with a bonus ranging from 0% to 100% of base salary, depending on
our performance. The target bonus is 50%, or $150,000 annually. Dr. Sinha is
eligible to receive annual stock option grants having a value equal to 115% of
his base salary, as determined by the Black-Scholes method. Dr. Sinha will
receive double-options in 2000, which are listed in the table below under
"-2000 Stock Incentive Plan Grants." Dr. Sinha also will be entitled to receive
an option grant having a value between $200,000 and $600,000 upon completion of
this offering in consideration for the termination of his iDLX Technology
Partners outstanding options provided to him under our 1999 employment
agreement. Dr. Sinha's letter agreement also contains a severance provision
allowing him to receive one year's base salary plus a second year of income
continuation, if he is terminated for reasons other than willful misconduct,
gross negligence or unlawful actions toward us or toward others involved with
our business.
Steven F. Coleman. We entered into a letter agreement with Mr. Coleman
effective as of March 1, 2000. The agreement provides for an annual base salary
of $200,000 with a bonus ranging from 0% to 80% of base salary, depending on
our performance. The target bonus is 40%, or $80,000 annually. Mr. Coleman is
eligible to receive annual stock option grants having a value equal to 100% of
his base salary, as determined by the Black-Scholes method. Mr. Coleman will
receive double-options in 2000, which are listed in the table below under "-
2000 Stock Incentive Plan Grants." Mr. Coleman's letter agreement also contains
a severance provision allowing him to receive one year's base salary plus a
second year of income continuation, if he is terminated for reasons other than
willful misconduct, gross negligence or unlawful actions toward us or toward
others involved with our business.
Change in Control Arrangements
We have entered into Change in Control Agreements with each of Ms. Janssen
and Messrs. Sinha, Bristow and Coleman. These agreements are designed to
diminish the distractions that could be caused by personal uncertainties and
risks associated with changes of control and other significant business
combinations involving our company by providing these officers with assurances
regarding their compensation and benefits expectations under such
circumstances.
Under the Change in Control Agreements, each of these officers agrees to
remain in our employ, and we agreed to continue to employ each officer, until
the third anniversary following any "business combination" or "change in
control" involving our company. During that three-year period, each officer is
entitled to maintain a position, authority, duties and responsibilities at
least commensurate with the most significant of those held by such officer
during the 180 day period prior to the effective date of the business
combination or change in control and the base salary of an officer may not be
reduced below that earned by the officer during the twelve month period
preceding the effective date of the business combination or change-in-control.
In determining any increase in an officer's base salary during the three year
period, the officer is to be treated in a manner consistent with other peer
executives. The officers are also entitled to receive annual bonus payments,
stock option grants and other benefits during the three year period on the same
objective basis as other peer executives.
If, during the three year period, we terminate an officer's employment other
than for "cause" or "disability" or the officer terminates his or her
employment for "good reason," the officer is entitled to a lump
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sum payment equal to the sum of any unpaid base salary, accrued vacation pay
and a pro rated incentive award through the date of termination. In addition,
the officer is entitled to receive a lump sum payment equal to three times the
sum of the officer's annual base salary and the officer's historical incentive
award, plus the amount that we would have contributed to the retirement plans
in which the officer participated prior to his or her termination in respect of
such sum. The officers are also entitled to the continuation of their medical,
disability, life and other health insurance benefits for up to a three year
period after a qualifying termination and to certain out-placement services.
All unvested options granted to an officer vest and remain exercisable for a
five year period or their remaining term following a qualifying termination and
all other restricted shares and restricted stock units held by the officer
under our stock incentive plan vest and are converted into shares of common
stock on the date of any such termination.
The agreements also provide that if any payment or benefit received or to be
received by an officer, whether or not pursuant to his or her change in control
agreement, would be subject to the federal excise tax on "excess parachute
payments," we will pay to the officer such additional amount as may be
necessary so that the officer realizes, after the payment of such excise tax
and any income tax or excise tax on such additional amount, the amount of such
compensation.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan provides for grants of options to purchase
shares of common stock, stock appreciation rights, restricted stock and
restricted stock rights, performance awards and other stock-based awards. All
of our full-time employees are eligible for grants under this plan. Our
directors, consultants and advisors are also eligible for grants under this
plan.
The maximum aggregate number of shares of common stock that may be
distributed under this plan is 20% of the total number of shares of our common
stock outstanding at the time of the award, subject to adjustment.
Administration. This plan will be administered by our board of directors or
by a committee of directors appointed by our board of directors. The
compensation committee of the board will administer the plan.
Stock Options. Our committee may award stock options under this plan and set
their terms, including the number and kind of stock options granted, the
exercise price of the stock options, the vesting schedule applicable to such
stock options, the period during which they can be exercised and the form of
consideration, which may include, without limitation, cash, common stock, other
securities, any combination thereof or any other form of valid consideration
that is acceptable to the committee. The exercise price of incentive stock
options cannot be less than 100% of the fair market value of a share of common
stock on the date of grant, unless required by law or government regulation. No
stock option can be exercised more than ten years after the date of grant. The
committee may provide that any option granted under the plan contain a reload
feature. If an option containing this feature is exercised using shares of
common stock or if shares are withheld or tendered as payment of the amount to
be withheld under applicable income tax laws, the optionee will receive an
additional option on a number of shares equal to the number of shares tendered
or withheld. The exercise price of this reload option will be equal to the fair
market value of our stock on the date the reload option is granted.
Stock Appreciation Rights. Our committee may grant stock appreciation rights
under this plan and set their terms, including grant price, term, methods of
exercise, dates of exercise, methods of settlement and any other terms or
conditions of any stock appreciation right. Each stock appreciation right
entitles the holder to receive an amount equal to the excess of the fair market
value of a share of common stock on the date the holder exercises the stock
appreciation right over the grant price, as determined by the committee. The
grant price may not be less than 100% of the fair market value of a share of
common stock on the date of the grant, unless required by law or government
regulation.
Restricted Stock And Restricted Stock Units. Our committee may grant shares
of restricted stock and restricted stock units and set their terms, including
voting rights for restricted shares and dividend rights with
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respect to such shares and units. The committee may determine when restrictions
shall lapse. If the participant's employment or service terminates, the
participant will forfeit unvested restricted stock and restricted stock units
as of the date of such event, unless our committee determines otherwise with
respect to some or all of the unvested restricted stock and restricted stock
units.
Performance Awards. The committee may grant performance awards, which
entitle the holder to receive payments upon the achievement of specified
performance goals and set their terms, including the performance goals to be
achieved during the performance period, the length of the performance period
and the amount and form of payment of the performance award. A performance
award may be denominated or payable in cash, shares of stock or other
securities, or other awards or property.
Other Stock-Based Awards. The committee may grant other awards denominated
or payable in, valued by reference to, or otherwise based on or related to
shares of common stock as are deemed by the committee to be consistent with the
purpose of plan. The committee will determine the terms and conditions of such
other stock-based awards, including the consideration to be paid for shares of
common stock or other securities delivered pursuant to a purchase right granted
under such award. The value of such consideration shall not be less than 100%
of the fair market value of such shares or other securities as of the date such
award is granted, unless required by law or government regulation.
Transfer Restrictions. The rights of a participant with respect to the stock
options, stock appreciation rights, restricted stock and restricted stock
rights, performance awards, dividend equivalents and other stock based awards
granted under this plan generally are not transferable by the participant other
than by will or the laws of descent and distribution.
Amendment And Termination of this Plan. This plan may be terminated and may
be altered, amended, suspended or terminated at any time, in whole or in part,
by our board of directors, except that:
. no alteration or amendment will be effective without stockholder
approval if approval is required by law or under the rules of the Nasdaq
Stock Market or any stock exchange on which our common stock is listed;
and
. no such termination, suspension, alteration or amendment may adversely
alter or affect the terms of any then outstanding awards without the
consent of the affected participant.
Grants as of this Offering
Our board of directors has approved the grant of options to purchase up to
shares of our common stock under our 2000 stock incentive plan, including
the grants to individuals listed in the table below. The table has been
prepared based on an assumed initial offering price of $ per share. The
exercise price of these options will be equal to the initial public offering
price. These options granted to our employees will vest in three equal
installments, beginning on the first anniversary of the date of grant, while
options granted to our outside directors will vest in two equal installments,
beginning on the first anniversary of the date of grant.
<TABLE>
<CAPTION>
Number
of
Name Options
---- -------
<S> <C>
John A. Blanchard III..............................................
Debra A. Janssen...................................................
Paul H. Bristow....................................................
Dr. Nikhil Sinha...................................................
Steven F. Coleman..................................................
All current executive officers as a group..........................
All current members of our board of directors who are not executive
officers as a group...............................................
All employees, including current officers but excluding directors
and executive officers, as a group................................
</TABLE>
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Certain Transactions
Prior to joining iDLX Technology Partners as its President and Chief
Executive Officer, Dr. Sinha was a 50% partner in a consulting firm employed by
Deluxe. The consulting firm provided international development consulting
services to Deluxe at per diem rates subject to minimum amounts. In 1999,
Deluxe paid $28,713 to the consulting firm for services rendered. In addition,
in connection with the hiring of Dr. Sinha and the consequent termination of
the consulting agreement, Deluxe paid approximately $1.1 million to the members
of the consulting firm in lieu of an equity interest in HCL-Deluxe N.V. Dr.
Sinha received 50% of this amount.
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AGREEMENTS BETWEEN eFUNDS AND DELUXE
We have provided below a summary description of the initial public offering
and distribution agreement along with the key related agreements. This
description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of the agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
Initial Public Offering and Distribution Agreement
General. On March 31, 2000, we entered into an initial public offering and
distribution agreement with Deluxe, which governs our respective rights and
duties with respect to offerings of our common stock and other securities,
including this offering and the distribution, and sets forth certain covenants
we will agree to for various periods following this offering and the
distribution. Although Deluxe has announced that it currently plans to complete
the distribution, and we will agree to cooperate with Deluxe in all respects to
complete the distribution or a similar transaction, Deluxe is not obligated to
do so. We cannot assure you as to whether or when the distribution will occur
or as to the terms of the distribution. We refer you to "Risk Factors -- Risks
Relating to Our Separation from Deluxe."
Offerings of Securities of eFunds and the Distribution. We have agreed that
we will cooperate with Deluxe in all respects to accomplish:
. any primary offerings of our common stock and other securities,
including this offering, prior to the distribution or other similar
transaction; and
. the distribution or similar transaction.
We also agreed that, at Deluxe's direction, we will promptly take all
actions necessary or desirable to effect these transactions, including the
registration under the Securities Act of shares of our common stock owned by
Deluxe. Deluxe has the sole discretion to determine whether or when the
distribution will occur and all terms of the distribution, including the form,
structure and terms of any transactions or offerings to effect the distribution
and the timing of and conditions to the completion of the distribution.
Expenses relating to primary offerings of our securities. We will agree to
use the proceeds from this offering to pay all costs and expenses relating to
any primary offerings of our common stock and our other securities prior to the
distribution or other similar transaction, including this offering. In
particular, we will pay the underwriting discounts and commissions.
Expenses relating to the distribution. Deluxe will agree to pay all costs and
expenses relating to the distribution or other similar transaction.
Access to Information. Generally, we and Deluxe have agreed to provide each
other with access to information relating to the assets, business and
operations of the requesting party. We and Deluxe will keep our books and
records for a specified period of time. Also, we and Deluxe will cooperate with
the other party to allow access to each others' employees, to the extent they
are necessary to discuss and explain all requested information mentioned above
and with respect to any claims brought against the other relating to the
conduct of the parties prior to completion of the distribution or similar
transaction.
Covenants. We have agreed that, for so long as Deluxe is required to
consolidate our results of operations and financial position, we will:
. provide Deluxe with financial information regarding our company and our
subsidiaries;
. not select a different accounting firm than Deloitte & Touche LLP to
serve as our auditors;
. use reasonable commercial efforts to cause our auditors to complete
their audit of our financial statements such that they will date their
opinion the same date that the opinion of the audit of Deluxe's
financial statements is dated;
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. provide to Deluxe and its auditors all information required for Deluxe
to meet its schedule for the filing and distribution of its financial
statements;
. make our books and records available to Deluxe and its auditors, so that
they may conduct reasonable audits relating to our financial statements;
. consult with Deluxe and provide Deluxe and its auditors with notice of
any proposed determination of, or significant changes in, our accounting
estimates and accounting principles.
Other Covenants. The initial public offering and distribution agreement also
provides that as long as Deluxe beneficially owns 50% or more of our
outstanding shares of common stock, we may not take any action or enter into
any commitment or agreement that may reasonably be anticipated to result, with
or without notice and with or without lapse of time, or otherwise, in a
contravention or an event of default by Deluxe of:
. any provision of applicable law or regulation, including but not limited
to provisions pertaining to the Internal Revenue Code or the Employee
Retirement Income Security Act of 1974, as amended;
. any provision of Deluxe's articles of incorporation or bylaws;
. any credit agreement or other material agreement binding upon Deluxe; or
. any judgment, order or decree of any governmental body, agency or court
having jurisdiction over Deluxe or any of its assets.
Options. We have granted to Deluxe continuing options, assignable to any of
Deluxe's subsidiaries, to purchase, under specified circumstances, additional
shares of common stock. These options may be exercised immediately prior to the
issuance of any of our equity securities, other than in this offering or upon
exercise of the underwriters' over-allotment option:
. with respect to our voting stock, to the extent necessary to own at
least 80.1% of the total combined voting power of all classes of our
outstanding voting stock; and
. with respect to shares of nonvoting stock, to the extent necessary to
own at least 80.1% of each outstanding class of such stock.
The purchase price of the shares of voting stock purchased upon any exercise
will be the market price of our voting stock on the date of delivery of the
exercise notice. The purchase price of nonvoting capital stock will be the
price at which such stock may be purchased by third parties. These options will
terminate when Deluxe or its affiliates own less than 45% of the total combined
voting power of all classes of our outstanding equity of our company.
Indemnification Procedures. The initial public offering and distribution
agreement sets forth the procedures that Deluxe and we will undertake if either
of us demands to be indemnified under any indemnification right given in any of
the agreements between Deluxe and us relating to this offering or the
distribution, other than the tax sharing agreement referred to below.
Registration Rights Agreement
We and Deluxe have entered into a registration rights agreement which only
becomes effective in the event Deluxe determines not to proceed with the
distribution. The registration rights agreement will require us upon the
request of Deluxe to use our reasonable best efforts to register under the
applicable federal and state securities laws any of the shares of our common
stock owned by Deluxe for sale in accordance with Deluxe's intended method of
disposition. Deluxe will also have the right to include shares of our common
stock in other registrations of equity securities we initiate. Deluxe will pay
all costs and expenses relating to each such registration that Deluxe requests
or in which Deluxe participates except for our out-of-pocket expenses and the
fees of our attorneys, accountants and other advisors. Subject to specified
limitations, the registration rights agreement will be assignable by Deluxe and
its assigns. The registration rights agreement will contain indemnification and
contribution provisions that are customary in transactions similar to those
contemplated by this prospectus.
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Assignment and Assumption Agreement
Prior to the offering, we entered into an assignment and assumption
agreement with Deluxe, which governs the terms of the transfer to us of assets
and liabilities from Deluxe. The assignment and assumption agreement provides
that assets that cannot legally be transferred prior to March 31, 2000 will be
transferred as soon as is practical following receipt of all necessary consents
and approvals. All transfers by Deluxe to us are on an "as is, where is" basis,
and without any representations or warranties. As a result, we have agreed to
bear the economic and legal risks that any conveyances of assets are
insufficient to vest in us good and marketable title to such assets and as to
defects in the condition of the assets. We have also agreed with Deluxe that
Deluxe, on the one hand, and we, on the other hand, will transfer, without
additional consideration, to the other all assets which, subsequent to
March 31, 2000, the parties determine more properly belong in the other's
business.
The assignment and assumption agreement provides for assumptions and
indemnities designed to place, as of March 31, 2000, sole financial
responsibility on the company and its subsidiaries for all liabilities, known
or unknown, actual or contingent, associated with our current and historical
businesses and operations and all of the assets transferred to us in connection
with the assignment and assumption and to place sole financial responsibility
for Deluxe's other businesses with Deluxe and its other subsidiaries.
Tax-Sharing Agreement
We and some of our subsidiaries are, and after the offering may continue to
be, included in Deluxe's consolidated income tax group for U.S. federal income
tax purposes and our tax liability and the tax liability of some of our
subsidiaries may be included in the consolidated federal income tax liability
of Deluxe and its subsidiaries. In certain circumstances, we and some of our
subsidiaries may be included with Deluxe and some of its subsidiaries in
combined, consolidated, or unitary groups for state and local tax purposes.
Prior to this offering, we and Deluxe intend to enter into a tax-sharing
agreement. Under the tax-sharing agreement, we and Deluxe generally will make
payments to each other such that, with respect to tax returns for any taxable
period, the amount of taxes to be paid by us, subject to some adjustments, will
be determined as though we, together with our subsidiaries included in Deluxe's
consolidated group or any other applicable groups, were to file separate
federal, state and local income tax returns (including, except as provided
below, any amounts determined to be due as a result of a redetermination of the
tax liability of Deluxe arising from an audit or otherwise) as the common
parent of an affiliated group of corporations filing combined, consolidated or
unitary federal, state and local returns rather than a consolidated subsidiary
of Deluxe with respect to federal, state and local income taxes. We will be
responsible for any taxes with respect to tax returns that include us and our
subsidiaries. We will be reimbursed, however, for tax attributes that we
generate, such as net operating losses, if and when they are used on a
consolidated basis.
In determining the amount of tax-sharing payments under the tax-sharing
agreement, Deluxe will prepare for us pro forma returns with respect to federal
and applicable state and local income taxes that reflect the same positions and
elections used by Deluxe in preparing the returns for Deluxe's consolidated
group and other applicable groups. Deluxe will continue to have all the rights
of a parent of a consolidated group prior to the split-off. Deluxe will have
similar rights provided for by applicable state and local law with respect to a
parent of a combined, consolidated or unitary group. Deluxe will be the sole
and exclusive agent for us in any and all matters relating to our income,
franchise and similar tax liabilities. Deluxe will have sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined or unitary state income tax returns or amended
returns. Deluxe will have the power, in its sole discretion, to contest,
compromise or settle any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for refund on our behalf. In addition, Deluxe
has agreed to undertake to provide the aforementioned services with respect to
our separate state and local tax returns and our foreign tax returns.
In addition, the tax-sharing agreement will provide that we will indemnify
Deluxe for any taxes arising out of the failure of the split-off or some of the
transactions related to it to qualify as tax-free as a result of actions
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taken, or the failure to take required actions, by us or any of our
subsidiaries. We are required under the tax sharing agreement to comply with
the representations made to the Internal Revenue Service in connection with the
request for a private letter ruling that has been submitted to the Internal
Revenue Service regarding the tax-free nature of the split-off of our stock by
Deluxe to Deluxe's stockholders.
The-tax sharing agreement will further provide for cooperation with respect
to tax matters, the exchange of information and the retention of records which
may affect the income tax liability of either party. Disputes arising between
Deluxe and us relating to matters covered by the tax-sharing agreement are
subject to resolution through specific dispute resolution provisions.
In general, we will be included in Deluxe's consolidated group for federal
income tax purposes for so long as Deluxe beneficially owns at least 80% of the
total voting power and value of our outstanding common stock. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement will allocate tax liabilities between us and Deluxe,
during the period in which we are included in Deluxe's consolidated group, we
could be liable in the event that any federal tax liability is incurred, but
not discharged, by any other member of Deluxe's consolidated group.
Employee Benefits Agreement
We will enter into an employee matters agreement with Deluxe to allocate
assets, liabilities, and responsibilities relating to our current and former
U.S. employees and their participation in the benefit plans that Deluxe
currently sponsors and maintains.
All of our eligible employees will continue to participate in the Deluxe
benefit plans on comparable terms and conditions to those currently applicable
to them until the split-off or the time at which we establish comparable
benefit plans for our current and former employees. We intend to establish
these plans no later than the time of the split-off.
At the time of the split-off, we expect to adopt benefit plans corresponding
to the Deluxe plans, including qualified retirement plans, executive deferred
compensation and supplemental benefit plans, health and welfare plans, fringe
benefit plans, and leave of absence programs.
Once we establish our own benefit plans, we may modify or terminate any plan
in accordance with the terms of that plan and our policies. It is intended that
our benefit plans will generally provide that all service, compensation and
other benefit determinations that, as of the split-off, were recognized under
the corresponding Deluxe benefit plan will be taken into account under our
benefit plan.
It is intended that our benefit plans will generally assume any liabilities
for our employees under the corresponding Deluxe benefit plan. Assets relating
to the employee liabilities are expected to be transferred to us or our related
plans and trusts from trusts and other funding vehicles associated with
Deluxe's benefit plans.
Real Estate Agreements
We have purchased real property and a data center located in Phoenix,
Arizona and personal property from a subsidiary of Deluxe for approximately $10
million. As of the completion of this offering, we and Deluxe will enter into
several agreements pursuant to which Deluxe or its subsidiaries (other than us
and our subsidiaries), on the one hand, and we or our subsidiaries, on the
other hand, will agree to (1) lease nine different sites for use as
communication nodes, with Deluxe or one of its subsidiaries as landlord, and
eFunds as tenant, for a period of approximately 12-18 months, (2) sublease a
portion of a building in Shoreview,
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Minnesota, with a subsidiary of Deluxe, as sublandlord, and eFunds as
subtenant, for a period of approximately 12 months, (3) lease a portion of a
data center in Phoenix, Arizona, with eFunds as landlord and Deluxe as tenant,
and (4) assign the rights as tenant under various leases from Deluxe or its
subsidiaries to eFunds or one of its subsidiaries. The real estate agreements
are subject to certain early termination rights and obligations.
Transitional Services Agreement
As of the completion of this offering, we and Deluxe will enter into a
transitional services agreement pursuant to which Deluxe or its subsidiaries
(other than us and our subsidiaries), on the one hand, and we or our
subsidiaries, on the other hand, will agree to continue providing various
services to each other, including material procurement, financial and
administrative services, treasury, cash management and insurance services,
sales support, legal services, and employee benefits administration. Each
service provided under the transitional services agreements will be provided
for a specified time period beginning on completion of this offering and
continuing until the split off with respect to some services or until December
31, 2001 with respect to other services. Either party may terminate any or all
services that they receive under the transitional services agreements at any
time upon 60 days' prior written notice. Any or all services may be extended
for one additional 60 day period. During the applicable time period, the
parties are obligated to take all steps necessary to establish the processes
and systems to enable them to perform the relevant services on a stand alone
basis. The parties will be obligated to pay fees established in the
transitional services agreement based upon the type and amount of services
rendered.
Master Services Agreement
Deluxe will enter into a master agreement with us, pursuant to which we will
provide Deluxe with:
. software development, maintenance and support services for information
technology applications;
. financial shared services including accounts receivable, accounts
payable and general accounting transaction processing; and
. data entry services.
This agreement will have an initial term ending as of December 31, 2004, and
will automatically renew each year for an additional one year term unless
terminated by either party. In addition, this agreement will be terminable by
Deluxe at its option if we are acquired, whether by merger, sale, acquisition
or sale of all or substantially all its assets, by a third party. If Deluxe
exercises its termination rights, it will pay us a termination fee. During the
term of the agreement, we anticipate that Deluxe will spend approximately $43
million per year for software development, maintenance and support services for
information technology applications, which amounts will be based on the actual
number of hours of information technology services that we provide to Deluxe.
If Deluxe fails to reach the $43 million spending target per year, it will be
obligated to make liquidated damages payments for a portion of our fees based
on our estimates of lost margins. We also will provide business process
management services, including accounts receivable, accounts payable and other
general accounting services, and mail order entry services. Deluxe's annual
minimum spending target for these business process management services will
range from $8.1 million in 2000 to $4.2 million in 2004. The agreement will
also provide for liquidated damages for non-performance by us and bonuses for
superior performances as are typical for information technology professional
services. The provision of services by us under the agreement is non-exclusive,
and Deluxe may contract with any third party for the provision of information
technology and business process management services.
Third Party Indemnification Agreement
Pursuant to the Third Party Indemnification Agreement, we agree to provide
Deluxe with full indemnification in connection with any liabilities incurred by
Deluxe after the distribution as a result of Deluxe's purchase or lease of
property or services for our benefit under any master agreement or for any
guaranties under which Deluxe guaranteed our performance of agreements with
third parties. We are obligated to indemnify Deluxe for any liability to the
extent such liability primarily relates to the past, present or future
operation of our business or operations.
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ONE Channel Management Agreement
As of the completion of this offering, Deluxe will provide us a license to
use its proprietary ONE channel management systems in order to provide our
products to financial institutions. In exchange for access to the ONE channel
management systems and the services provided by Deluxe, we will pay Deluxe its
cost of providing such services during 2000 and cost plus 10% in 2001. Under
the agreement, Deluxe will maintain ownership of all rights in the ONE channel
management system, except that we will own the interface between the ONE system
security layer and our back-end systems. The agreement will have a term ending
on December 31, 2001.
Data and Related Agreements
We and Deluxe will enter into several agreements which will govern the
transfer of data between us.
Pursuant to a data contribution agreement, a subsidiary of Deluxe will
provide us with consumer account records pertaining to its direct to consumer
check printing business. We will agree to only use this information for
purposes that are consistent with applicable federal, state and local laws,
including the Fair Credit Reporting Act. Customers of Deluxe will have the
ability to request that their information not be provided to us. The agreement
has a term that will end on July 1, 2001.
Pursuant to a processing agreement, we will provide Deluxe with groups of
bank routing numbers to enable us to obtain check order history files from
Deluxe as long as we have obtained a consent from the applicable financial
institution to receive this data. Deluxe may only use the bank routing numbers
for the purpose of performing the processing requested by us. Either party may
terminate this agreement upon 30 days' prior written notice.
Pursuant to an ACH Agreement, we will agree to provide Deluxe with ACH
services for a three year term. Deluxe may terminate this agreement upon 180
days' notice after expiration of the initial three year term. Deluxe has agreed
to pay us $29,000 per month under this agreement.
We have also agreed to provide Deluxe with data relating to closed consumer
accounts pursuant to our standard agreement for the provision of this
information.
Loan Agreement
Deluxe has agreed to provide us with a revolving credit facility of up to
$75 million until the earlier of the effective date of the split-off, or August
28, 2000. Borrowings under the facility will be due at the split-off or
maturity and will accrue interest at the London Interbank Offered Rate, or
LIBOR, plus a variable additional margin based on Deluxe's credit rating. The
credit facility includes financial and restrictive covenants. We intend to
replace this facility with a new credit facility with one or more financial
institutions prior to the split-off or maturity.
Indemnification Agreement
Deluxe has agreed to indemnify us for any losses on identified government
services loss contracts in excess of the loss contract reserves. We are
required to calculate any charges for loss contracts in a manner consistent
with Deluxe's current loss accrual practices. Deluxe will also indemnify us
against any liabilities, losses or expenses arising from litigation and claims
asserted against us in connection with the operation of our government services
business prior to the completion of this offering. Deluxe's indemnification
obligations are limited to a maximum amount equal to $ .
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PRINCIPAL STOCKHOLDER
All of the shares of our common stock outstanding before this offering are
owned by Deluxe. After this offering, Deluxe will own about % of our
outstanding common stock. Except for Deluxe, we are not aware of any person or
group that will beneficially own more than 5% of the outstanding shares of our
common stock following this offering.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250 million shares of common stock,
$.01 par value per share, and 100 million shares of preferred stock, $.01 par
value per share. The following summary of certain provisions of the common
stock and preferred stock is subject to, and qualified in its entirety by, our
amended and restated certificate of incorporation and by-laws and by the
provisions of applicable law.
Common Stock
Each holder of our common stock is entitled to one vote for each share held
of record on all matters to be voted upon by the stockholders. There are no
cumulative voting rights. Subject to the preferences of preferred stock issued
after the sale of the common stock in this offering, holders of common stock
are entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, holders of common
stock would be entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking fund provisions applicable to the common stock.
All outstanding shares of common stock and the shares of common stock
offered by us in this offering, when issued and paid for, will be fully paid
and nonassessable, except for certain statutory liabilities which may be
imposed by Section 180.0622 of the Wisconsin Business Corporation Law for
unpaid employee wages. Section 180.0622 of the Wisconsin Business Corporation
Law provides that shareholders of every corporation that does business in
Wisconsin are personally liable to an amount equal to the par value of the
shares owned by them and for all debts owing to employees for services
performed for such corporation, but not exceeding six months' service in the
case of any individual employee. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we may
designate in the future.
Preferred Stock
Upon the closing of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of million shares
of preferred stock, in one or more series, with each of such series to have
such rights and preferences, including, without limitation, voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by unlimited discretion of the board of
directors.
Issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding voting stock. We currently have no plans to issue any shares of
preferred stock.
Stockholder Rights Plan
On , 2000, the board of directors declared a dividend of one
preferred share purchase right for each outstanding share of common stock
outstanding on the business day immediately preceding the date of
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<PAGE>
this prospectus to the stockholders of record on that date. Each right entitles
the registered holder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$ per one one-hundredth of a preferred share, subject to adjustment. The
description and terms of the share purchase rights are set forth in a Rights
Agreement between eFunds and , as Rights Agent, a copy of the form
of which is filed as an exhibit to the registration statement of which this
prospectus is a part.
Initially, the certificates for shares of common stock then outstanding will
evidence the rights and we will not distribute separate right certificates. The
rights will separate from the common stock on the share purchase rights
distribution date, which is the earlier of:
. the first date of public announcement that a person or group of
affiliated or associated persons has become the beneficial owner of 15%
or more of the outstanding common stock, subject to certain exceptions;
and
. the close of business on the 10th day, or such later date as may be
determined by the board of directors prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common
stock, following the commencement or public announcement of a tender
offer or exchange offer, the consummation of which would result in a
person or group of affiliated or associated persons becoming the
beneficial owner of 15% or more of the outstanding common stock.
Under the plan, Deluxe's ownership of our stock will not cause the rights to
separate from the common stock or result in a share purchase rights
distribution date.
The board of directors, after receiving such advice as it deems necessary
and giving due consideration to all relevant factors, may elect to approve a
tender offer or an exchange offer for all of our outstanding common stock if
the board determines the offer to be in our best interest and the best
interests of our stockholders. If the board does approve a tender offer or
exchange offer, the rights will expire.
Until the share purchase rights distribution date,
. the rights will be evidenced by the certificates for shares of common
stock and will be transferred with and only with the common stock;
. any common stock certificates issued after the business day immediately
preceding the date of this Prospectus upon transfer or new issuance of
the common stock will contain a notation incorporating the Rights
Agreement by reference; and
. the transfer of any common stock will also constitute the transfer of
the rights associated with the common stock.
As promptly as practicable following the share purchase rights distribution
date, we will mail separate certificates evidencing the share purchase rights
to holders of record of the common stock as of the close of business on that
date, and such separate certificates alone will evidence the share purchase
rights.
The holders of our common stock and the share purchase rights cannot
exercise the rights until the distribution date. The rights will expire on the
date that is ten years after the business day immediately preceding the date of
this prospectus, unless we extend or earlier redeem or exchange as described
below. We will not issue fractions of a preferred share, other than fractions
in integral multiples of one one-hundredth of a share, and, in lieu thereof, we
will make a cash adjustment on the closing price on the last trading date prior
to the date of exercise.
We will adjust the purchase price payable and the number of preferred shares
issuable upon exercise of the rights from time to time to prevent dilution:
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the preferred shares;
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<PAGE>
. upon the grant to holders of the preferred shares of certain rights,
options or warrants to subscribe for or purchase preferred shares or
convertible securities at less than the then current market price of the
preferred shares; or
. upon the distribution to holders of the preferred shares of any evidence
of indebtedness or assets, excluding regular periodic cash dividends or
dividends payable in preferred shares, or of subscription rights or
warrants, other than those described in clause (2) of this paragraph.
With certain exceptions, we are not required to adjust the purchase price
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. We also will adjust the number of outstanding share purchase
rights and the number of preferred shares issuable upon exercise of the rights
in the event of a stock split of the common stock or a stock dividend on the
common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
distribution date.
We cannot redeem the preferred shares purchasable upon exercise of the
rights. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $ per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $ per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of common stock. These rights are subject to adjustment in the event of a
stock dividend on the common stock or a subdivision, combination or
consolidation of the common stock.
In the event any person becomes the beneficial owner of 15% or more of the
outstanding common stock, each holder of a share purchase right shall
thereafter have a right to receive, upon exercise thereof at the then current
aggregate exercise price, in lieu of preferred shares, such number of shares of
our common stock having a current aggregate market price equal to twice the
current aggregate exercise price. In the event that at any time after there is
a beneficial owner of 15% or more of the outstanding common stock, we are
acquired in certain mergers or other business combination transactions or 50%
or more of our assets or earning power and our subsidiaries (taken as a whole)
are sold, holders of the rights will thereafter have the right to receive, upon
exercise thereof at the then current aggregate exercise price, such number of
shares of common stock of the acquiring company (or, in certain cases, one of
its affiliates) having a current aggregate market price equal to twice the
current aggregate exercise price.
At any time after a person becomes the beneficial owner of 15% or more of
the outstanding common stock, subject to certain exceptions, and prior to the
acquisition by a person of 50% or more of the outstanding common stock, the
board of directors may exchange all or part of the rights for common stock at
an exchange ratio of one share of common stock per right, subject to
adjustment.
At any time before a person has become the beneficial owner of 15% or more
of the outstanding common stock, the board of directors may redeem the rights
in whole, but not in part, at a price of $0.01 per right, subject to
adjustment. The redemption of the rights may be made effective at such time, on
such basis and with such conditions as the board of directors in its sole
discretion may establish.
Until a right is exercised, the holder of the right will have no rights as a
stockholder, including without limitation, the right to vote or to receive
dividends.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us pursuant to an offer
that is not approved by the board of directors, unless the rights have been
redeemed. However, the rights should not interfere with any tender offer or
merger approved by the board because the board of directors may redeem the
rights or approve an offer at any time prior to such time as any person has
becomes the beneficial owner of 15% or more of the outstanding common stock.
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Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation provides that we will
indemnify our directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. We believe that indemnification under our
amended and restated certificate of incorporation covers at least negligence
and gross negligence on the part of indemnified parties. Our amended and
restated certificate of incorporation also permits us to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
amended and restated certificate of incorporation would permit such
indemnifications.
At present, there is no litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
Anti-Takeover Provisions
Some provisions of our amended and restated certificate of incorporation and
bylaws could make more difficult the acquisition of control of our company, and
the removal of existing management:
. The amended and restated certificate of incorporation does not provide
for cumulative voting for directors;
. We have a classified board of directors with each class serving a
staggered three-year term;
. The board of directors fixes the size of the board of directors, may
create new directorships and may elect new directors to serve for the
full term of the class of directors in which the new directorship was
created. The board of directors (or its remaining members, even though
less than a quorum) also may fill vacancies on the board of directors
occurring for any reason for the remainder of the term of the class of
director in which the vacancy occurred.
. The board of directors may issue preferred stock without any vote or
further action by the stockholders;
. The board of directors may adopt, amend, alter or repeal the bylaws
without a vote of the stockholders;
. All stockholder actions must be taken at a regular or special meeting of
the stockholders and cannot be taken by written consent without a
meeting;
. We require advance notice procedures with respect to stockholder
proposals and the nominations of candidates for election as directors;
and
. Without the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of common stock, together with the affirmative vote
of at least 66-2/3% of the members of the board of directors,
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<PAGE>
we may not (i) consolidate or merge with any other entity, (ii) convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets, (iii) amend the certificate of incorporation to
permit the removal of directors without cause or (iv) amend, modify or
repeal the anti-takeover and indemnification provisions of the amended
and restated certificate of incorporation.
These provisions are expected to discourage coercive takeover practices and
inadequate takeover bids. They are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board. We believe that
the benefits of increased protection give us the potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us and outweigh the disadvantages of discouraging such
proposals. Negotiating with the proponent could result in an improvement of
the terms of the proposal.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years following the date
the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholders became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; and
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters' over-
allotment option. All of the shares of common stock sold in this offering will
be freely tradable without restriction under the Securities Act, unless such
shares are purchased by our "affiliates" as that term is defined in Rule 144
under the Securities Act. Persons who are affiliates may sell shares that are
issued in this offering in the public market only through registration under
the Securities Act or under an exemption from registration, such as the one
provided by Rule 144.
Deluxe has announced that, subject to specified conditions, it intends to
distribute all of its shares of our common stock in a tax-free split-off
transaction within . Any shares distributed by Deluxe will be freely
tradeable, except for shares received by our affiliates.
Rule 144
In general, under Rule 144, beginning 91 days after the date of this
prospectus, a person who beneficially owns "restricted securities" within the
meaning of Rule 144 for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this offering;
or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to that sale.
Sales under Rule 144 also are subject to manner of sale and notice requirements
and to the availability of current public information about us. Our affiliates
who purchase shares of our common stock pursuant to this offering or acquire
our shares of common stock in the tax-free distribution would be subject to the
resale restrictions of Rule 144 described above.
Lock-Up Agreements
We, our executive officers and directors have agreed not to sell or
otherwise dispose of any shares of our common stock or any securities
convertible into or exchangeable for common stock, for a period of 180 days
after the date of this prospectus, without the prior written consent of Lehman
Brothers Inc., subject to limited exceptions. See "Underwriting -- No Sales of
Similar Securities."
Stock Options
We will grant shares of our common stock pursuant to our stock plans. We
have reserved shares of our common stock for issuance under our stock
option plans. We expect to grant options to purchase an aggregate of
shares of our common stock upon the completion of this offering with an
exercise price equal to the initial public offering price, unless a lower price
is required by law or government regulation. We currently expect to file a
registration statement under the Securities Act to register shares reserved for
issuance under our stock plans. Shares issued pursuant to our stock plans after
the effective date of that registration statement, other than shares issued to
affiliates, generally will be freely tradeable without further registration
under the Securities Act. In addition, at the time of the split-off, all
outstanding options to purchase Deluxe common stock will be converted into new
options to purchase Deluxe common stock and options to purchase our common
stock. See "Management -- Treatment of Deluxe Options."
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following discussion is a summary of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by non-United States holders. This discussion does not deal with
all aspects of United States federal income and estate taxation and does not
deal with foreign, state and local tax consequences. This discussion does not
address all tax considerations that may be relevant to non-United States
holders in light of their personal circumstances, or to certain non-United
States holders that may be subject to special treatment under United States
federal income or estate tax laws. Furthermore, this discussion is based on the
Internal Revenue Code of 1986, as amended, Treasury Department regulations,
published positions of the Internal Revenue Service and court decisions now in
effect, all of which are subject to change. You are urged to consult your own
tax advisor regarding the United States federal tax consequences of owning and
disposing of our common stock, as well as the applicability and effect of any
state, local or foreign tax laws.
In this section we use the term United States holder to refer to a
beneficial owner of stock that is:
. a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision of the
United States; or
. an estate the income of which is subject to United States federal income
taxation regardless of its source;
. a trust that:
- is subject to the supervision of a court within the United States
and the control of one or more United States persons; or
- has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
We use the term non-United States holder to refer to a beneficial owner of
stock that is not a United States holder.
Dividends
Generally, any dividend paid to a non-United States holder will be subject
to United States withholding tax either at a rate of 30% of the gross amount of
the dividend or at a lesser applicable treaty rate. However, dividends that are
effectively connected with the conduct of a trade or business of the non-United
States holder within the United States and, where a tax treaty applies, that
are attributable to a United States permanent establishment of the non-United
States holder are not subject to the withholding tax but instead are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates.
In order for dividends paid to a non-United States holder to be exempt from
withholding under the effectively connected income exemption, the holder must
comply with certification and disclosure requirements. In some circumstances, a
foreign corporation that receives effectively connected dividends may be
subject to an additional branch profits tax at a 30% rate or a lesser
applicable treaty rate.
Until January 1, 2001, dividends paid to an address outside the United
States are presumed to be paid to a resident of that country, unless the payer
has knowledge to the contrary, for purposes of the withholding tax discussed
above and, under the current regulations, for purposes of determining the
applicability of a reduced rate of withholding under the terms of a tax treaty.
If you wish to claim the benefit of an applicable treaty rate and avoid backup
withholding, as discussed below, for dividends paid after December 31, 2000,
final regulations effective after that date will require you to satisfy
applicable certification and other requirements.
If you are eligible for a reduced treaty rate of United States withholding
tax pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
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Gain on Disposition of Common Stock
If you are a non-United States holder, you will generally not be subject to
United States federal income tax with respect to gain recognized on a sale or
other disposition of our common stock unless:
. the gain is effectively connected with a trade or business in the United
States and, where a tax treaty provides, the gain is attributable to a
United States permanent establishment of yours;
. you are an individual and hold our common stock as a capital asset, you
are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and certain other conditions are
met;
. you are subject to tax pursuant to the provisions of the United States
federal income tax laws applicable to certain United States expatriates;
or
. we are or have been a United States real property holding corporation
for United States federal income tax purposes.
We believe that we are not, and do not anticipate becoming, a United States
real property holding corporation for United States federal income tax
purposes. If we were to become a United States real property holding
corporation, so long as our common stock continues to be regularly traded on an
established securities market, you would be subject to federal income tax on
any gain from the sale or other disposition of the stock only if you actually
or constructively owned, during the five-year period preceding the disposition,
more than 5% of our common stock.
Special rules may apply to non-United States holders, such as controlled
foreign corporations, passive foreign investment companies, foreign personal
holding companies and corporations that accumulate earnings to avoid federal
income tax, that are subject to special treatment under the Code. These
entities should consult their own tax advisors to determine the United States
federal, state, local and other tax consequences that may be relevant to them.
Backup Withholding and Information Reporting
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to these
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to you at an address outside the United States, unless
the payer has knowledge that you are a United States person. However, under the
final regulations effective for dividends paid on or after January 1, 2001, you
will be subject to backup withholding unless applicable certification
requirements are met.
Payment of the proceeds of a sale of our common stock within the United
States or conducted through certain United States related financial
intermediaries is subject to both backup withholding and information reporting
unless you certify under penalties of perjury that you are a non-United States
holder and the payer does not have actual knowledge that you are a United
States person, or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your United States federal income tax liability
provided you furnish the required information to the Internal Revenue Service.
Estate Tax
Common stock held by an individual non-United States holder at the time of
death will be included in that holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise,
and may be subject to United States federal estate tax.
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UNDERWRITING
Under the terms of an underwriting agreement, which is filed as an exhibit
to the registration statement of which this prospectus is a part, the
underwriters of the offering named below, for whom Lehman Brothers Inc., Bear,
Stearns & Co. Inc., FAC/Equities, a division of First Albany Corporation and
John G. Kinnard & Company Incorporated are acting as representatives, have each
agreed to purchase from us the respective number of shares of common stock set
forth opposite its name below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Lehman Brothers Inc. ..............................................
Bear, Stearns & Co. Inc. ..........................................
FAC/Equities, a division of First Albany Corporation...............
John G. Kinnard and Company, Incorporated..........................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act or to contribute to payments that the
underwriters may be required to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
Fidelity Capital Markets, a division of National Financial Services
Corporation, will be facilitating electronic distribution of information
through the Internet, their Intranet and other proprietary electronic
technology.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed five percent of the total number of
shares of common stock offered by them.
Certain of the underwriters and their affiliates provide investment banking,
financial advisory and other services to us and Deluxe for which they may
receive customary fees and commissions. Specifically, Lehman Brothers Inc. has
been engaged by Deluxe to act as exchange agent and provide advisory services
in connection with the split-off. Lehman Brothers Inc. will receive customary
fees in connection with the split-off transaction.
Commissions and Discounts
The following table provides the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase addition shares described below.
<TABLE>
<CAPTION>
Paid by Us No Exercise Full Exercise
---------- ----------- -------------
<S> <C> <C>
Per share......................................
Total..........................................
</TABLE>
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The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public
offering price set forth on the cover of this prospectus and to dealers, who
may include the underwriters, at the same price less a selling concession not
in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the offering price and other selling terms may change.
Over-Allotment Option
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable to cover over-
allotments, if any, at the initial public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus. If this option is exercised, each underwriter will
be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares to the underwriters.
No Sales of Similar Securities
We, Deluxe and our executive officers and directors have agreed not to
directly or indirectly do any of the following, whether any transaction
described in clause (1) or (2) below is to be settled by delivery of common
stock or other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc. on behalf of the underwriters, for a
period of 180 days after the date of this prospectus:
(1) offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designated to, or could be expected to,
result in the disposition or purchase by any person at any time in the
future of) any shares of common stock or securities convertible into or
exchangeable for common stock or substantially similar securities,
other than any of the following:
. the common stock sold under this prospectus;
. distribution of common stock pursuant to the split-off; and
. shares of common stock we issue under employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or under currently
outstanding options, warrants or rights.
(2) sell or grant options, rights or warrants with respect to any shares
of our common stock or securities convertible into or exchangeable for
our common stock or substantially similar securities, other than the
grant of options under option plans existing on the date of this
prospectus.
Determination of Offering Price
Prior to this offering, there has been no public market for the shares of
our common stock. The initial public offering price will be negotiated between
the representatives and us. In determining the initial public offering price of
the common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our performance and capital
structure, estimates of our business potential and earnings prospects, an
overall assessment of our management and the consideration of the above factors
in relation to market valuation of companies in related businesses.
Nasdaq National Market Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "EFDS."
79
<PAGE>
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with this offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Reserved Shares
At our request, the underwriters have reserved up to % shares of the
common stock offered by this prospectus for sale to our directors and other
persons associated with us at the initial public offering price set forth on
the cover page of this prospectus. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
Canadian Offers
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
80
<PAGE>
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Certain legal matters related to the offering will be passed upon
for the underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this prospectus and elsewhere
in the registration statement, and are included in reliance upon the report of
such firm, given upon their authority, as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not include all of the information contained in the
registration statement. For further information about us and our common stock,
you should refer to the registration statement and the exhibits. Statements
contained in this prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete. In each
instance, please refer to the copy of such contract or other document filed as
an exhibit to the registration statement. Each statement about the contract or
other document contained in the prospectus is qualified in all respects to the
actual document filed with the registration statement.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934 and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Our fiscal year ends on December 31. We intend
to furnish our stockholders with annual reports containing audited financial
statements and other appropriate reports.
You may read and copy the registration statement on Form S-1 and any other
document we file with the Commission at its public reference room at 450 Fifth
Street, NW, Washington, DC 20549, as well as at its regional offices located at
7 World Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661. Please call the Commission
at 1-800-SEC-0330 for further information about its public reference facilities
and copy charges. Our filings are also available to the public from the
Commission's web site at http://www.sec.gov.
81
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1999................. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 1997, 1998 and 1999......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
eFunds Corporation
We have audited the accompanying consolidated balance sheets of eFunds
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss) and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsiblity is to express and opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of eFunds Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 3, 2000
F-2
<PAGE>
EFUNDS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(dollars in
thousands)
<S> <C> <C>
Current Assets
Cash and cash equivalents................................ $ 16,055 $ 35,849
Restricted custodial cash................................ 545 3,429
Accounts receivable--net................................. 49,620 52,834
Deferred income taxes.................................... 20,755 10,552
Income taxes receivable.................................. 2,799 7,109
Prepaid expenses and other current assets................ 3,428 3,061
-------- --------
Total current assets.................................... 93,202 112,834
Long-term Investments...................................... 1,370 3,347
Deferred Income Taxes...................................... -- 1,549
Restricted Cash............................................ 3,921 28,939
Property and Equipment
Land and land improvements............................... 5,001 4,993
Buildings and building improvements...................... 32,351 33,683
Computer and other equipment............................. 76,522 80,211
-------- --------
Total................................................... 113,874 118,887
Less accumulated depreciation............................ (55,414) (58,414)
-------- --------
Property and equipment--net............................. 58,460 60,473
Intangibles
Cost in excess of net assets acquired--net............... 9,258 46,905
Internal use software--net............................... 5,550 20,746
Other intangible assets--net............................. 14,574 15,136
-------- --------
Total intangibles....................................... 29,382 82,787
-------- --------
Total non-current assets................................ 93,133 177,095
-------- --------
Total assets.......................................... $186,335 $289,929
======== ========
Current Liabilities
Accounts payable......................................... $ 10,728 $ 19,791
Accrued liabilities:
Accrued compensation and employee benefits.............. 10,480 18,172
Accrued contract losses................................. 14,697 20,599
Reserve for legal proceedings........................... 35,754 1,554
Other................................................... 18,184 22,116
Borrowings on line of credit............................. -- 3,100
Long-term debt due within one year....................... 1,490 1,895
-------- --------
Total current liabilities............................... 91,333 87,227
Long-term Debt............................................. 4,029 3,597
Deferred Income Taxes ..................................... 1,170 --
Commitments and Contingencies (Notes 11 and 14)
Stockholder's Equity
Common shares $.01 par value (authorized: 250,000,000
shares;
issued and outstanding: 2,500 shares)................... 0 0
Additional paid-in capital............................... 14,964 292,598
Retained earnings (accumulated deficit).................. 74,967 (92,946)
Accumulated other comprehensive loss..................... (128) (547)
-------- --------
Stockholder's equity.................................... 89,803 199,105
-------- --------
Total liabilities and stockholder's equity............ $186,335 $289,929
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(dollars in thousands,
except
per share amounts)
<S> <C> <C> <C>
Net Sales........................................ $229,065 $267,520 $302,340
-------- -------- --------
Cost of sales, excluding loss contract and
asset impairment charges...................... 143,966 171,359 185,590
Loss contract and asset impairment charges..... -- 40,949 8,700
-------- -------- --------
Total cost of sales.......................... 143,966 212,308 194,290
-------- -------- --------
Gross Margin..................................... 85,099 55,212 108,050
-------- -------- --------
Selling, general and administrative............ 70,542 81,198 105,382
Research and development....................... 1,398 625 3,756
Asset impairment charges....................... 11,831 -- --
-------- -------- --------
Total operating expenses..................... 83,771 81,823 109,138
-------- -------- --------
Income (loss) from operations.................. 1,328 (26,611) (1,088)
Other Income (Expense)
Legal proceedings.............................. (40,050) 4,157 2,094
Other income (expense)......................... (918) (3,495) (4,609)
Interest income (expense)...................... (825) 2,789 963
-------- -------- --------
Loss Before Income Taxes......................... (40,465) (23,160) (2,640)
Benefit (Provision) for Income Taxes............. 6,397 8,569 (5,586)
-------- -------- --------
Net Loss......................................... $(34,068) $(14,591) $ (8,226)
======== ======== ========
Net Loss per Share--Basic and Diluted............ $(13,627) $ (5,836) $ (3,290)
======== ======== ========
Weighted Average Common Shares Outstanding--Basic
and Diluted..................................... 2,500 2,500 2,500
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Net Loss.......................................... $(34,068) $(14,591) $(8,226)
Other Comprehensive (Loss) Income, Net of Tax--
Foreign currency translation adjustments........ (972) 44 (419)
-------- -------- -------
Comprehensive Loss................................ $(35,040) $(14,547) $(8,645)
======== ======== =======
Related Tax Benefit (Expense) of Other
Comprehensive Income (Loss)--
Foreign currency translation adjustments........ $ 182 $ (26) $ (795)
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss....................................... $(34,068) $(14,591) $ (8,226)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation................................. 9,914 12,015 12,519
Amortization of intangibles.................. 12,834 9,504 9,982
Asset impairment charges..................... 11,831 26,252 492
Equity in pre-acquisition earnings of the
professional services segment............... 665 1,759 1,114
Loss on sales of capital assets.............. 449 2,635 4,973
Deferred income taxes........................ (13,521) (6,529) 8,927
Changes in assets and liabilities, net of
effects from acquisitions:
Restricted cash............................ -- (4,466) (27,902)
Accounts receivable........................ (5,256) (6,629) 393
Accounts payable........................... 1,996 (6,571) 7,963
Income taxes receivable/payable............ (119) (10,218) (4,310)
Reserve for legal proceedings.............. 41,982 (6,228) (34,200)
Accrued contract losses.................... -- 14,697 5,902
Other assets and liabilities............... (769) (3,809) 10,223
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 25,938 7,821 (12,150)
-------- -------- --------
Cash Flows from Investing Activities
Purchases of capital assets.................... (17,985) (30,468) (38,225)
Payments for acquisitions, net of cash
acquired...................................... -- -- (35,667)
Proceeds from sales of capital assets.......... 131 70 1,229
Other.......................................... (665) (1,139) (546)
-------- -------- --------
Net cash used in investing activities...... (18,519) (31,537) (73,209)
-------- -------- --------
Cash Flows from Financing Activities
Net borrowings on lines of credit.............. -- -- 3,054
Proceeds from issuance of long-term debt....... 290 61 11
Payments on long-term debt..................... (2,293) (2,125) (6,665)
(Distributions to) contributions by Deluxe..... (8,799) 17,992 268,440
Dividends paid to Deluxe....................... -- -- (159,687)
-------- -------- --------
Net cash (used in) provided by financing
activities................................ (10,802) 15,928 105,153
-------- -------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents..................................... (3,383) (7,788) 19,794
Cash and Cash Equivalents at Beginning of Year .. 27,226 23,843 16,055
-------- -------- --------
Cash and Cash Equivalents at End of Year ........ $ 23,843 $ 16,055 $ 35,849
======== ======== ========
Supplementary cash flow disclosure:
Interest paid.................................. $ 949 $ 673 $ 1,091
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
EFUNDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Split-off and basis of presentation
In January 2000, Deluxe Corporation (Deluxe) announced that its board of
directors approved a plan (the Plan) to combine its electronic payment
solutions, professional services and government services businesses into a
separate, independent publicly traded company to be called eFunds Corporation
(the Company). The Company, a Delaware corporation, changed its name from
Deluxe Electronic Payment Systems, Inc. to eFunds Corporation in September
1999. Electronic payment solutions provides comprehensive electronic payment
management solutions that combine transaction processing with decision support
and risk management tools to the financial services and retail industries.
Professional services provides information technology development, maintenance
and support and business process management to financial services companies and
to all of the Company's and Deluxe's businesses. Government services provides
electronic benefits transfer (EBT) services and online medical eligibility
verification services to state and local governments.
Deluxe has announced that it plans to issue shares of the Company's common
stock to the public through an initial public offering (IPO). After this
offering, Deluxe will own at least 80.1% of the Company's outstanding shares.
Deluxe plans to distribute all of its shares of the Company's common stock to
its shareholders who tender shares of Deluxe's common stock in an exchange
offer (the Split-off). Deluxe has requested a private letter ruling from the
Internal Revenue Service that the Split-off would be a tax-free transaction to
Deluxe and its shareholders. The Split-off is contingent upon Deluxe receiving
a favorable tax ruling from the IRS.
As part of the Split-off, the Company and Deluxe will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as software development and business process management
services, indemnification, data sharing, real estate, tax-sharing and
transitional services.
Under the Plan, Deluxe contributed the ownership of various subsidiaries and
certain assets and liabilities of business operations (the Transferred
Businesses) to the Company on March 31, 2000. As the Company and the
Transferred Businesses are under common control, the consolidated financial
statements of the Company include all of the assets, liabilities, revenues and
expenses of the businesses conducted through the electronic payment solutions,
professional services and government services segments.
All transactions between the entities included in the consolidated financial
statements have been eliminated. The consolidated financial statements are
presented as if the Company had existed as a separate and independent business
for the periods presented and have been prepared using the historical bases in
the assets, liabilities, revenues and expenses that comprise the Company and
the Transferred Businesses.
Included in the consolidated financial statements are allocated portions of
Deluxe's corporate assets, liabilities, equity and expenses relating to the
Transferred Businesses. Deluxe and the Company believe these allocations are
reasonable; however, they do not necessarily approximate the amounts or costs
that would have been or will be incurred by the Company on a stand-alone basis
(see Note 3).
The consolidated financial statements may not necessarily reflect the
financial position and results of operations of the Company had it actually
existed as a separate, stand-alone company during all the periods presented. In
addition, these financial statements may not be indicative of the future
financial position or results of operations of the Company as a separate,
stand-alone entity.
F-7
<PAGE>
Note 2: Significant accounting policies
Consolidation--The consolidated financial statements include the accounts of
the Company and the Transferred Businesses. All significant intercompany
accounts, transactions and profits have been eliminated. For purposes of
consolidating the professional services business, which is primarily based in
India, the Company has used financial statements with a November 30 fiscal
period end. In 2000, due to the implementation of a new accounting system, the
Company expects to adjust that business' fiscal-year end to conform with the
Company's December 31 year-end.
Cash and cash equivalents--The Company considers all cash on hand, money
market funds, outstanding transfers of cash for authorized settlement of
automated teller machines (ATMs) with financial institutions and other highly
liquid investments with original maturities of three months or less to be cash
and cash equivalents. The carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents approximate fair value.
Restricted cash--The Company has entered into agreements with a third party
to supply cash for ATMs maintained by the third party in various locations
throughout the United States. The agreements provide that the Company retains
control over and ownership of this cash. Subject to the approval of the
Company, the other party to the agreements determines the level of cash
required to be maintained within the ATMs up to an authorized level. The
Company currently has an aggregated outstanding authorized cash level of $35
million. The agreements are effective through August 31, 2004. The cash in the
ATMs is not available for general operating use and is reflected in the
Company's consolidated balance sheets as a non-current asset.
In connection with the Company's electronic payment transactions, the
Company also has cash belonging to customers that temporarily resides in
custodial accounts maintained by the Company. The Company records these amounts
as current restricted custodial cash with a corresponding liability within
other accrued liabilities in the consolidated balance sheets.
Accounts receivable--Accounts receivable are stated net of allowances for
uncollectible accounts of $2.0 million and $4.4 million at December 31, 1998
and 1999, respectively. As of December 31, 1998 and 1999, no one customer
accounted for 10% or more of total receivables. Bad debt expense related to
accounts deemed to be uncollectible was $1.5 million in 1997, $1.1 million in
1998 and $2.9 million in 1999.
Long-term investments--Long-term investments consist principally of cash
surrender values of insurance contracts. The carrying values approximate their
fair values.
Property and equipment--Property and equipment, including leasehold and
other improvements that extend an asset's useful life or productive
capabilities, are stated at historical cost. Buildings with 40-year lives and
computer and other equipment with lives of three to eight years are generally
depreciated using accelerated methods. Leasehold and building improvements are
depreciated on a straight-line basis over the estimated useful life of the
property or the life of the lease, whichever is shorter.
Intangibles--Intangibles are presented in the consolidated balance sheets
net of accumulated amortization. Amortization expense is determined on the
straight-line basis over periods of 10 to 30 years for cost in excess of net
assets acquired (goodwill) and one to five years for internal use software and
other intangibles. Other intangibles consist primarily of licensed software and
software held for sale. Total intangibles at December 31 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Cost in excess of net assets acquired (see Note 4)..... $21,431 $ 61,577
Internal use software.................................. 5,699 28,123
Other intangible assets................................ 61,542 62,616
------- --------
Total................................................ 88,672 152,316
Less accumulated amortization.......................... 59,290 69,529
------- --------
Intangibles--net....................................... $29,382 $ 82,787
======= ========
</TABLE>
F-8
<PAGE>
Impairment of long-lived assets--The Company evaluates the recoverability of
long-lived assets not held for sale by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. Should the sum of the expected future net cash flows be less than the
carrying value of the long-lived asset, an impairment loss would be recognized.
The impairment loss would be calculated as the amount by which the carrying
value of the asset exceeds the fair value of the asset. In evaluating whether
there is any impairment of long-lived assets associated with long-term service
contracts, the amount of any contract loss accrual is excluded from the
undiscounted future cash flows associated with the long-lived assets when
determining whether those assets are impaired.
The Company evaluates the recoverability of long-lived assets held for
disposal by comparing the asset's carrying amount with its fair value less
costs to sell. Should the fair value less costs to sell be less than the
carrying value of the long-lived asset, an impairment loss would be recognized.
The impairment loss would be calculated as the amount by which the carrying
value of the asset exceeds the fair value of the asset less costs to sell.
Income taxes--In most cases, the Company's domestic businesses are included
in the Deluxe consolidated tax return. Tax payments are made to Deluxe and tax
benefits are reimbursed by Deluxe to the extent they are used. The consolidated
financial statements include income tax provisions and liabilities calculated
as if separate tax returns were prepared for the periods covered. Deferred
income taxes result from temporary differences between the financial reporting
basis of assets and liabilities and their respective tax reporting bases.
Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not.
Translation adjustment--The financial position and results of operations of
the Company's international subsidiaries are measured using local currencies as
the functional currencies. Assets and liabilities of these operations are
translated at the exchange rate in effect at the balance sheet date. Income
statement accounts are translated at the average exchange rate during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in other comprehensive income in the
stockholder's equity section of the consolidated balance sheets. Gains and
losses that result from foreign currency transactions are included in earnings.
Revenue recognition--Revenues are recorded net of any applicable discounts.
Transaction processing and service revenues and decision support revenues are
generally recognized as the services are performed. Revenues from software
license fees for standard software products are recognized when delivery has
occurred, the license fee is fixed and determinable, collectibility is probable
and evidence of the arrangement exists. Software maintenance and support
revenues are recognized ratably over the term of the contract and/or as the
services are provided. Professional services revenues for software development,
custom applications and business process management are generally recognized as
the services are performed or proportionately based on the percentage of
completion.
Long-term service contracts--Long-term service contracts are definitive
agreements to provide services over a period of time in excess of one year and
with respect to which the Company has no contractual right to adjust the prices
or terms at or on which its services are supplied during the term of the
contract. Revenues are recognized for all long-term service contracts when the
service is performed. Total revenues for some long-term service contracts may
vary based on the demand for services. Expenses are recognized when incurred,
with the exception of installation costs. Any installation costs are
capitalized and recognized ratably over the life of the contract, which
approximates the anticipated revenue recognition. Any equipment and software
purchased to support a long-term service contract is capitalized and
depreciated or amortized over the life of the related contract or the life of
the asset, whichever is shorter.
In determining the profitability of a long-term service contract, only
direct and allocable indirect costs associated with the contract are included
in the calculation. The appropriateness of allocations of indirect costs
depends on the circumstances and involves the judgment of management, but such
costs may include the costs of indirect labor, contract supervision, tools and
equipment, supplies, quality control and inspection, insurance,
F-9
<PAGE>
repairs and maintenance, depreciation and amortization and, in some
circumstances, support costs. The method of allocating any indirect costs
included in the analysis is also dependent upon the circumstances and the
judgment of management, but the allocation method must be systematic and
rational. General and administrative costs and selling costs are not included
in the analysis. Provisions for estimated losses on long-term service
contracts, if any, are made in the period in which the loss first becomes
probable and reasonably estimable. Projected losses are based on management's
best estimates of a contract's revenue and costs. Actual losses on individual
long-term service contracts are compared to the loss projections periodically,
with any changes in the estimated total contract loss recognized as they become
probable and reasonably estimable.
Certain direct costs associated with the EBT contracts discussed in Note 5
are common to a number of contracts and are attributed to each contract based
on its use of the services associated with these common direct costs. Revenues,
case counts or other applicable statistics are used to attribute these costs to
individual contracts.
In the event an asset impairment loss is recognized on long-lived assets
used to support a long-term service contract, the original estimation of the
contract's costs is revised to reduce the depreciation and amortization
associated with the impaired assets.
Research and development expense--Research and development costs, which are
expensed as incurred, relate to investigating new or improved processes and
techniques and developing such research findings into a potential new product
or service.
Employee stock-based compensation--The Company participates in Deluxe's
stock incentive program. In connection with the IPO and the Split-off, the
Company intends to adopt new stock incentive programs. As permitted by
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," the Company continues to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." No compensation cost has
been recognized for fixed stock options issued under the Deluxe stock incentive
plan. The Company discloses pro forma net loss and net loss per share as if the
fair value method of SFAS No. 123 had been used (see Note 9).
Stockholder's equity--As of January 27, 2000, the Company increased the
number of authorized shares to 250 million. The authorized shares have been
presented as if the 250 million shares had been authorized for all years shown.
Use of estimates--The Company has prepared the accompanying consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America. In this process, it is necessary for
management to make certain assumptions and related estimates affecting the
amounts reported in the consolidated financial statements and attached notes.
These estimates and assumptions are developed based upon all information
available using management's best efforts. However, actual results can differ
from assumed and estimated amounts.
New accounting pronouncements--In April 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting the Costs of Start-up
Activities," which provides guidance on the appropriate accounting for start-up
activities beginning in 1999. Application of the SOP did not have a material
impact on the Company's reported operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which provides
guidance on accounting for derivatives and hedge transactions. This statement
is effective for the Company on January 1, 2001. The Company anticipates that
the effect of this pronouncement will not have a material impact on reported
operating results.
F-10
<PAGE>
Note 3: Transactions with Deluxe
Purchase and sale transactions between the Company and Deluxe are executed
at either current market pricing or agreed-upon transfer prices. Purchases from
Deluxe were $1.0 million, $0.2 million and $2.9 million in 1997, 1998 and 1999,
respectively. Sales to Deluxe were $2.4 million, $1.6 million and $8.8 million
in 1997, 1998 and 1999, respectively. Under Deluxe's centralized cash
management system, advances from Deluxe and excess cash sent to Deluxe are
reflected as contributions by and distributions to Deluxe and are included in
stockholder's equity in the consolidated balance sheets.
Deluxe allocated to the Company for the costs of corporate services provided
$15.5 million, $25.3 million and $25.6 million in 1997, 1998 and 1999,
respectively. These allocations, which were based on a percentage of Company
revenue to total Deluxe revenue, included expenses for various support
functions such as human resources, information services and finance. The
amounts allocated to the Company are included in selling, general and
administrative expense in the consolidated statements of operations.
Deluxe also charges the Company for interest expense or credits the Company
for interest income based on the cash the Company has borrowed from or provided
to Deluxe. The Company was charged or credited net interest (expense) income
from Deluxe of $(0.7) million, $3.0 million and $2.8 million in 1997, 1998 and
1999, respectively. These amounts are included in interest (expense) income in
the consolidated statements of operations.
Note 4: Business combinations
On February 19, 1999, Deluxe acquired all of the outstanding shares of an
electronic check conversion company for $13 million. The company provides
electronic check conversion and electronic funds transfer solutions for
financial services companies and retailers. The ownership of this company was
transferred to the Company under the Plan discussed in Note 1. The acquisition
was accounted for under the purchase method of accounting. Accordingly, the
consolidated financial statements of the Company include the results of this
business subsequent to its acquisition date. This business is included in the
electronic payment solutions segment in Note 13. The purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values on the date of purchase. Total cost in excess of net assets acquired in
the amount of $15.7 million is reflected as goodwill and is being amortized
over 10 years.
On April 13, 1999, Deluxe acquired the remaining 50% ownership interest in
HCL-Deluxe, N.V. (HCL) for $23.4 million. The joint venture, which Deluxe
entered into with HCL Corporation of India in 1996, commenced operations in
September 1997. The company provides information technology development and
support services and business process management to financial services
companies and to all of the Company's and Deluxe's businesses. The ownership of
this company was transferred to the Company under the Plan discussed in Note 1.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the consolidated financial statements of the Company include the
entire results of this business from the date the Company acquired 100%
ownership. Prior to this, the Company recorded its 50% ownership of the joint
venture's results under the equity method of accounting. As such, their results
of operations prior to the acquisition are included in other expense in the
consolidated statements of operations. This business comprises the professional
services segment in Note 13. The purchase price was allocated to the assets
acquired and liabilities assumed based on their fair values on the date of
purchase. Total cost in excess of net assets acquired in the amount of $24.9
million is reflected as goodwill and is being amortized over 15 years.
Note 5: Contract losses
During 1998, the Company recorded charges of $14.7 million to provide for
expected future losses on existing long-term contracts of the government
services segment. These charges are reflected in cost of sales in the 1998
consolidated statement of operations. Due to a continuing strong economy,
record low unemployment and welfare reform, the actual transaction volumes and
expected future revenues of this business are well below
F-11
<PAGE>
original expectations. Additionally, actual and expected future
telecommunications, installation, help desk and other costs are significantly
higher than originally anticipated. These factors resulted in expected future
losses on the existing EBT contracts of this business.
During 1999, charges of $8.2 million were recorded to provide for additional
expected future losses on the contracts of the government services segment.
These charges are reflected in cost of sales in the 1999 consolidated statement
of operations. A majority of the charges resulted from the conclusion of
settlement negotiations with a prime contractor regarding the timing and costs
of transitioning switching services from the Company to a new processor. Also,
lower than projected actual transaction volumes (primarily related to states
fully rolled-out in 1999) contributed to the changes in the estimates
underlying the 1998 charges. These increases to the reserve for accrued
contract losses were partially offset by the application of $2.3 million of
contract losses against the reserve during 1999.
Note 6: Impairment losses
During 1997, the Company determined that it would dispose of certain
international operations of its electronic payment solutions segment. Based on
fair market value estimates, the Company determined that the long-lived assets
of these operations were impaired and recorded a charge of $11.8 million to
write down the carrying value of these operations to their estimated fair value
less costs to sell. These impairment charges are reflected as operating
expenses in the 1997 consolidated statement of operations. During 1998, there
was a change in the management of the electronic payment solutions segment. As
a result, in January 1999, the Company determined that the international
operations of this segment maintained a continuing strategic importance and
were no longer considered held for sale.
During 1998, the Company recorded impairment charges of $26.3 million to
write down the carrying value of long-lived assets of the government services
segment. The assets consisted of point-of-sale equipment, internal-use software
and capitalized installation costs utilized in the EBT activities of this
segment. The Company concluded that the operating losses incurred by this
business would continue. This is primarily due to the fact that the variable
costs associated with supporting benefit recipient activity are higher than
originally anticipated and actual transaction volumes are below original
expectations. In calculating the impairment charge, the Company determined that
the assets utilized by this business have no fair market value. The point-of-
sale equipment was purchased via capital leases. The lease buy-out prices for
this equipment plus the deinstallation costs exceeded the amount equipment
resellers were willing to pay for the equipment. The utility of the internal-
use software was limited to its use in supporting the EBT business, and the
installation costs could not be resold. Thus, the long-lived assets of this
business were reduced to a carrying value of zero. These impairment charges are
reflected as cost of sales in the 1998 consolidated statement of operations.
During 1999, due to the continued operating losses of the government
services segment, additional impairment charges of $0.5 million were recorded.
These charges represent the write-down of long-lived assets purchased by this
segment during 1999. These assets consisted primarily of software and
installation costs associated with the continued roll-out of additional states.
All assets purchased were reduced to a carrying value of zero, as they were in
1998. These impairment charges are reflected in cost of sales in the 1999
consolidated statement of operations.
Note 7: Restructuring charges
During 1997, the Company recorded restructuring charges of $1.5 million for
severance relating to management changes within the electronic payment
solutions segment. This reduction of four employees was completed in 1998.
These charges are reflected in selling, general and administrative (SG&A)
expense in the 1997 consolidated statement of operations.
During 1998, the Company recorded restructuring charges of $3.2 million for
severance associated with the Company's initiative to reduce its SG&A expense.
The Company anticipated eliminating 76 positions in
F-12
<PAGE>
various support functions within sales, marketing, finance, human resources and
information services through 2000. As of December 31, 1999, 33 of the positions
have been eliminated. Also during 1998, the Company reversed $1.0 million of a
1996 restructuring charge. The 1996 charge related to planned reductions in
various support functions at the international operations of the electronic
payment solutions segment. Due to higher than anticipated attrition, it was
necessary to reduce this reserve. This accrual reversal and the new
restructuring accruals are reflected in SG&A expense in the 1998 consolidated
statement of operations.
During 1999, the Company reversed $2.4 million of restructuring accruals
relating to its 1998 initiative to reduce SG&A expense and the 1996 plan to
reduce the workforce at the international operations of the electronic payment
solutions segment. The reduction in the SG&A expense initiative accrual was due
to higher than anticipated attrition, resulting in severance payments to 37
fewer employees than originally anticipated. Also, due to the Company's
decision in 1999 to retain the international operations of its electronic
payment solutions segment (see Note 6), planned reductions within that business
were canceled. These accrual reversals are reflected in SG&A expense in the
1999 consolidated statement of operations.
The Company's consolidated balance sheets reflect restructuring accruals for
employee severance costs of $4.7 million and $1.2 million as of December 31,
1998 and 1999, respectively.
The following table summarizes the change in the Company's restructuring
accruals for 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ----------------- -----------------
Number of Number of Number of
employees employees employees
affected Amount affected Amount affected Amount
--------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance--beginning of
year................... 190 $3,500 174 $ 4,574 186 $ 4,672
Severance paid.......... (20) (442) (19) (2,053) (18) (1,031)
Adjustments to accrual.. 4 1,516 31 2,151 (162) (2,399)
--- ------ --- ------- ---- -------
Balance--end of year.... 174 $4,574 186 $ 4,672 6 $ 1,242
=== ====== === ======= ==== =======
</TABLE>
Note 8: Benefit (provision) for income taxes
(Loss) income before income taxes consists of (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Domestic..................................... $(25,620) $(24,591) $(2,163)
Foreign...................................... (14,845) 1,431 (477)
-------- -------- -------
Total...................................... $(40,465) $(23,160) $(2,640)
======== ======== =======
</TABLE>
The components of the benefit (provision) for income taxes are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ --------
<S> <C> <C> <C>
Current tax benefit (provision):
Federal..................................... $(6,866) $1,324 $ 5,527
State....................................... (1,345) 1,169 (271)
------- ------ --------
Total..................................... (8,211) 2,493 5,256
Deferred tax benefit (provision):
Federal..................................... 14,574 6,157 (10,811)
State....................................... 34 (81) (31)
------- ------ --------
Total..................................... $ 6,397 $8,569 $ (5,586)
======= ====== ========
</TABLE>
F-13
<PAGE>
The Company's effective tax rate on pretax loss differs from the U.S.
Federal statutory tax rate of 35% as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Income tax at Federal statutory rate............. $14,163 $8,106 $ 924
State income taxes net of Federal income tax
benefit......................................... (852) 707 (196)
Amortization and write-down of non-deductible
intangibles..................................... (3,132) (231) (1,074)
Change in valuation allowance.................... (1,810) 636 (4,591)
Other............................................ (1,972) (649) (649)
------- ------ -------
Benefit (provision) for income taxes............. $ 6,397 $8,569 $(5,586)
======= ====== =======
</TABLE>
Tax effected temporary differences which give rise to a significant portion
of deferred tax assets and liabilities at December 31, 1998 and 1999, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
Deferred tax Deferred tax Deferred tax Deferred tax
assets liabilities assets liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net operating loss carry
forwards............... $ 8,123 $ -- $ 13,249 $--
Reserve for legal
proceedings............ 12,669 -- 646 --
Accrued contract
losses................. 5,664 -- 8,085 --
Restructuring accruals.. 1,793 -- 476 --
Property and equipment.. -- 1,941 954 --
Intangibles............. 1,343 -- 718 --
Employee benefit plans.. 840 -- 879 --
Miscellaneous reserves
and accruals........... 854 -- 1,327 --
All other............... 175 595 131 239
------- ------ -------- ----
Subtotal................ 31,461 2,536 26,465 239
Valuation allowance..... (9,340) -- (14,125) --
------- ------ -------- ----
Total deferred taxes.... $22,121 $2,536 $ 12,340 $239
======= ====== ======== ====
</TABLE>
The valuation allowance at both dates relates to the uncertainty of
realizing foreign and state deferred tax assets.
At December 31, 1999, net operating loss carryforwards relating to both
foreign and state jurisdictions totaled $92.1 million. Of these carryforwards,
$83.0 million expire in various years between 2001 and 2014 and $9.1 million
may be carried forward indefinitely.
Note 9: Employee benefit plans
Stock purchase plan--The Company participates in Deluxe's employee stock
purchase plan that enables eligible employees to purchase Deluxe's common stock
at 75% of its fair market value on the first business day following each three-
month purchase period. Compensation expense recognized for the difference
between the employees' purchase price and the fair value of the stock was $0.6
million, $0.7 million and $0.7 million in 1997, 1998 and 1999, respectively.
Stock incentive plan--The Company participates in Deluxe's stock incentive
plan. In connection with the IPO, the Company intends to adopt a new stock
incentive program. Under these plans, stock-based awards may be issued to
employees via a broad range of methods, including non-qualified or incentive
stock options, restricted stock and restricted stock units, stock appreciation
rights and other awards based on the value of the respective Company's common
stock. Options become exercisable in varying amounts beginning generally one
year after the date of grant.
F-14
<PAGE>
The Company also participates in Deluxe's DeluxeSHARES program. In 1998,
under this program, options were awarded to substantially all employees of the
Company (excluding foreign employees), allowing them, subject to certain
conditions, to purchase 100 shares of Deluxe common stock at an exercise price
of $33 per share. The options become exercisable when the value of Deluxe's
common stock reaches $49.50 per share or January 30, 2001, whichever occurs
first.
All options under the Deluxe plans allow for the purchase of shares of
Deluxe's common stock at prices equal to their market value at the date of
grant. Options issued to Company employees under the Deluxe plans for the
purchase of 698,000 and 1.1 million were outstanding at December 31, 1998 and
1999, respectively.
Deluxe issued 1,338 restricted shares and restricted stock units to Company
employees during 1997, 979 in 1998 and 6,264 in 1999. These awards generally
vest over periods ranging from one to five years.
In connection with the Split-off (see Note 1), Deluxe and the Company have
decided that options outstanding as of the Split-off date will be converted to
options of the Company and options of Deluxe based on a formula. The formula
will be based on the market value of the Company's and Deluxe's common stock at
the Split-off date and is designed to maintain an equivalent intrinsic value
for the option holder. The Company does not expect a compensation charge to
result from this conversion process.
Pro forma information regarding net loss and net loss per share has been
determined as if the Company had accounted for its employee stock-based
compensation under the fair value method. The fair value of options was
estimated at the date of grant using a Black-Scholes option pricing model. The
following weighted-average assumptions were used in valuing options issued in
1997, 1998 and 1999, respectively: risk-free interest rate of 6.0%, 5.9% and
6.7%; dividend yield of 4.0%, 4.5% and 4.6%; and expected volatility of 23.0%,
21.8% and 24.0%. The weighted-average expected option life was 7.2 years, 5.9
years and 9.0 years for 1997, 1998 and 1999, respectively. The weighted-average
fair value of options granted in 1997, 1998 and 1999 was $6.87, $6.13 and $8.28
per share, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options was recognized as expense over the options' vesting
periods. The Company's pro forma net loss and net loss per share were as
follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(34,068) $(14,591) $ (8,226)
Pro forma................................ $(34,501) $(15,299) $(10,638)
Basic and diluted net loss per share:
As reported.............................. $(13,627) $ (5,836) $ (3,290)
Pro forma................................ $(13,800) $ (6,119) $ (4,255)
</TABLE>
These pro forma calculations only include the effects of grants made
subsequent to January 1, 1995. As such, these impacts are not necessarily
indicative of the pro forma effects on reported net income of future years.
Also, these calculations relate to options issued under the Deluxe plan, the
provisions of which may be different from the plan the Company intends to
adopt.
Profit sharing, defined contribution and 401(k) plans--The Company
participates in Deluxe's profit sharing plans, defined contribution pension
plan and plans established under section 401(k) of the Internal Revenue Code to
provide retirement benefits for certain employees. The plans cover
substantially all full-time employees with approximately 15 months of service.
Contributions to the profit sharing and defined contribution plans are made
solely by the Company. Employees may contribute up to the lesser of $10,000 or
10% of their wages to the 401(k) plan. The Company will match the first 1% of
wages contributed and 50% of the next 4% of wages contributed. All
contributions are remitted to the plans' respective trustees, and benefits
provided are paid from accumulated funds of the trusts.
F-15
<PAGE>
Contributions to the defined contribution pension plan equaled 6% of
eligible compensation in 1997 and 4% of eligible compensation in 1998 and 1999.
Related expense allocated to the Company for these years was $2.1 million, $2.5
million and $3.2 million, respectively. Contributions to the profit sharing
plans vary based on the Company's performance. Related expense allocated to the
Company for these plans was $2.2 million, $4.6 million and $4.8 million in
1997, 1998 and 1999, respectively. Company contributions to the 401(k) plan
were $1.2 million, $1.5 million and $1.5 million in 1997, 1998 and 1999,
respectively.
As part of the Split-off (see Note 1), the Company intends to establish its
own employee benefit plans. The specific provisions of such plans have not yet
been determined and may be different than the provisions of Deluxe's plans.
Note 10: Post-retirement benefits
The Company provides certain health care benefits for a portion of its
retired employees. Employees included in the plan may become eligible for such
benefits if they attain the appropriate years of service and age while working
for the Company. The Company's benefit obligation under this plan is not
funded.
The following table summarizes the change in benefit obligation during 1998
and 1999 (dollars in thousands):
<TABLE>
<S> <C>
Benefit obligation, January 1, 1998................................ $ 577
Service cost..................................................... 69
Interest cost.................................................... 41
Actuarial (gains) and losses..................................... 125
Benefits paid from general funds of the Company.................. (8)
-----
Benefit obligation, December 31, 1998.............................. 804
Service cost..................................................... 86
Interest cost.................................................... 54
Actuarial (gains) and losses..................................... (138)
Benefits paid from general funds of the Company.................. (5)
-----
Benefit obligation, December 31, 1999.............................. $ 801
=====
</TABLE>
The status of the plan was as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation................ $804 $801
Less:
Unrecognized net loss....................................... 296 141
Unrecognized transition obligation.......................... 71 66
---- ----
Accrued post-retirement liability recognized in the
consolidated balance sheets................................ $437 $594
==== ====
</TABLE>
Net post-retirement benefit cost for the years ended December 31 consisted
of the following components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the year............ $62 $ 69 $ 86
Interest cost on the accumulated post-retirement benefit
obligation.............................................. 22 41 54
Amortization of transition obligation.................... 5 6 5
Recognized net amortization of gains and losses.......... -- 6 17
--- ---- ----
Total post-retirement benefit cost....................... $89 $122 $162
=== ==== ====
</TABLE>
F-16
<PAGE>
In measuring the accumulated post-retirement benefit obligation as of
December 31, 1999, the Company's health care inflation rate for 2000 and beyond
was assumed to be 5%. A one percentage point increase in the health care
inflation rate for each year would increase the accumulated post-retirement
benefit obligation by $139,000 and the service and interest cost components of
the net post-retirement benefit cost by $29,000. A one percentage point
decrease in the health care inflation rate for each year would decrease the
accumulated post-retirement benefit obligation by $119,000 and the service and
interest cost components of the net post-retirement benefit cost by $24,000.
The discount rate used in determining the accumulated post-retirement benefit
obligation as of December 31, 1998 and 1999 was 6.75% and 7.50%, respectively.
Note 11: Lease and debt commitments
Long-term debt was as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Capital leases and other................................ $ 5,519 $ 5,492
Less amount due within one year......................... (1,490) (1,895)
------- -------
Total................................................. $ 4,029 $ 3,597
======= =======
</TABLE>
Long-term debt consists principally of equipment capital leases on
equipment. The capital lease obligations bear interest rates of 6.7% to 15.7%
and are due through the year 2004. Carrying value materially approximates fair
value for these obligations. Maturities of long-term debt for the five years
ending December 31, 2004, are $1.9 million, $2.1 million, $1.3 million, $0.1
million and $0.1 million.
The Company has entered into operating leases on certain facilities and
equipment. Future minimum lease payments for all noncancelable operating leases
for the five years ending December 31, 2004, are $17.0 million, $10.1 million,
$4.3 million, $2.2 million and $1.6 million and $2.9 million thereafter. Rental
expense was $14.7 million, $18.8 million and $20.7 million in 1997, 1998 and
1999, respectively.
As of December 31, 1999, the Company had a $5.0 million line of credit,
which is denominated in Indian rupees and guaranteed by Deluxe, available to
its international operations at an interest rate of 15.81%. The average amount
drawn on this line during 1999 was $2.7 million. The line of credit was
increased on March 9, 2000 to $10.0 million and remains guaranteed by Deluxe
until October 1, 2000.
Note 12: Stockholder's equity
<TABLE>
<CAPTION>
Retained Accumulated
Common stock Additional earnings other Total
------------- paid-in (accumulated comprehensive stockholder's
Shares Amount capital deficit) income (loss) equity
------ ------ ---------- ------------ ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 2,500 $ 0 $ 7,471 $ 123,626 $ 800 $ 131,897
Net loss ............... -- -- -- (34,068) -- (34,068)
Distributions to Deluxe,
net.................... -- -- (9,167) -- -- (9,167)
Translation adjustment.. -- -- -- -- (972) (972)
----- --- -------- --------- ----- ---------
Balance, December 31,
1997................... 2,500 $ 0 (1,696) 89,558 (172) 87,690
Net loss ............... -- -- -- (14,591) -- (14,591)
Contributions by Deluxe,
net.................... -- -- 16,660 -- -- 16,660
Translation adjustment.. -- -- -- -- 44 44
----- --- -------- --------- ----- ---------
Balance, December 31,
1998................... 2,500 $ 0 14,964 74,967 (128) 89,803
Net loss ............... -- -- -- (8,226) -- (8,226)
Contributions by Deluxe,
net.................... -- -- 277,634 -- -- 277,634
Dividends paid to
Deluxe................. -- -- -- (159,687) -- (159,687)
Translation adjustment.. -- -- -- -- (419) (419)
----- --- -------- --------- ----- ---------
Balance, December 31,
1999................... 2,500 $ 0 $292,598 $ (92,946) $(547) $ 199,105
===== === ======== ========= ===== =========
</TABLE>
F-17
<PAGE>
Note 13: Business segment information
The Company has organized its business units into three operating segments
based on the nature of the products and services offered by each: electronic
payment solutions, professional services and government services. Electronic
payment solutions provides comprehensive electronic payment management
solutions that combine transaction processing with decision support and risk
management tools to the financial services and retail industries. Professional
services provides information technology development, maintenance and support
and business process management to financial services companies and to all of
the Company's and Deluxe's businesses. Government services provides EBT
services and online medical eligibility verification services to state and
local governments. The Company's segments operate primarily in the United
States. The electronic payment solutions and professional services segments
also have international operations. No single customer of the Company accounted
for more than 10% of net sales in 1997, 1998 or 1999.
The accounting policies of the segments are the same as those described in
Note 2. In evaluating segment performance, management focuses on income from
operations. The income from operations measurement utilized by management
excludes special charges (e.g., restructuring charges, asset impairment
charges, certain one-time charges that management believes are not reflective
of on-going operations, etc.).
Prior to the acquisition of the remaining 50% interest in HCL-Deluxe, N.V.
in 1999 (see Note 4), the results of this business were recorded under the
equity method of accounting. As such, the Company recorded its 50% ownership of
the joint venture's results of operations prior to the acquisition in other
expense in the consolidated statements of operations. To be consistent with
management reporting, the entire results of the joint venture for the pre-
acquisition periods are reflected in the business segment information as if the
business had been a consolidated entity.
<TABLE>
<CAPTION>
Electronic
Payment Professional Government Total
1997 Solutions Services Services Segments
- ---- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $199,662 $ 1,589 $ 26,965 $228,216
Net sales to external
affiliates...................... 2,438 1,615 -- 4,053
Total net sales to external
customers....................... 202,100 3,204 26,965 232,269
Intersegment sales............... -- 76 -- 76
Operating income (loss) excluding
special charges................. 27,744 (1,590) (12,269) 13,885
Asset impairment charges......... 11,831 -- -- 11,831
Other special charges............ 2,316 -- -- 2,316
Operating income (loss) including
special charges................. 13,597 (1,590) (12,269) (262)
Depreciation and amortization
expense......................... 19,168 12 3,580 22,760
Segment assets................... 141,360 3,704 46,115 191,179
Capital purchases................ 17,295 151 690 18,136
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Electronic
Payment Professional Government Total
1998 Solutions Services Services Segments
- ---- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $221,964 $7,994 $ 43,970 $273,928
Net sales to external
affiliates...................... 1,586 4,100 -- 5,686
Total net sales to external
customers....................... 223,550 12,094 43,970 279,614
Intersegment sales............... -- 1,134 -- 1,134
Operating income (loss) excluding
special charges................. 23,459 (3,406) (6,496) 13,557
Asset impairment charges......... -- -- 26,252 26,252
Other special charges............ 2,375 -- 14,928 17,303
Operating income (loss) including
special charges................. 21,084 (3,406) (47,676) (29,998)
Depreciation and amortization
expense......................... 17,294 260 4,225 21,779
Segment assets................... 145,572 5,410 37,286 188,268
Capital purchases................ 30,148 1,934 320 32,402
</TABLE>
<TABLE>
<CAPTION>
Electronic
Payment Professional Government Total
1999 Solutions Services Services Segments
- ---- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $237,885 $ 10,745 $48,277 $296,907
Net sales to external
affiliates...................... 3,500 6,258 -- 9,758
Total net sales to external
customers....................... 241,385 17,003 48,277 306,665
Intersegment sales............... -- 2,372 -- 2,372
Operating income (loss) excluding
special charges................. 14,842 (7,809) 3,454 10,487
Special charges (recoveries)..... (225) 2,938 10,096 12,809
Operating income (loss) including
special charges................. 15,067 (10,747) (6,642) (2,322)
Depreciation and amortization
expense......................... 20,681 1,963 -- 22,644
Segment assets................... 210,661 36,200 34,410 281,271
Capital purchases................ 34,068 3,373 929 38,370
</TABLE>
F-19
<PAGE>
Segment information reconciles to consolidated amounts as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total net sales to external customers
Total segment net sales to external customers... $232,269 $279,614 $306,665
Professional services pre-acquisition
elimination.................................... (3,204) (12,094) (4,325)
-------- -------- --------
Total consolidated net sales to external
customers.................................... $229,065 $267,520 $302,340
======== ======== ========
Operating income (loss) including special charges
Total segment operating loss.................... $ (262) $(29,998) $ (2,322)
Professional services pre-acquisition
elimination.................................... 1,590 3,387 1,234
-------- -------- --------
Total consolidated operating income (loss).... $ 1,328 $(26,611) $ (1,088)
======== ======== ========
Depreciation and amortization expense
Total segment depreciation and amortization
expense........................................ $ 22,760 $ 21,779 $ 22,644
Professional services pre-acquisition
elimination.................................... (12) (260) (143)
-------- -------- --------
Total consolidated depreciation and
amortization expense......................... $ 22,748 $ 21,519 $ 22,501
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total assets
Total segment assets.................... $191,179 $188,268 $281,271
Professional services pre-acquisition
elimination............................ (3,369) (4,732) --
Income tax receivable and long-term
deferred tax asset not allocated to
segments............................... -- 2,799 8,658
-------- -------- --------
Total consolidated assets............. $187,810 $186,335 $289,929
======== ======== ========
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Capital purchases
Total segment capital purchases......... $ 18,136 $ 32,402 $ 38,370
Professional services pre-acquisition
elimination............................ (151) (1,934) (145)
-------- -------- --------
Total consolidated capital purchases.. $ 17,985 $ 30,468 $ 38,225
======== ======== ========
</TABLE>
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. The Company's operations by geographic area are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Long-Lived
Assets
Total External Net Sales December 31,
-------------------------- ---------------
1997 1998 1999 1998 1999
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
United States..................... $214,741 $245,682 $281,933 $55,763 $55,587
United Kingdom.................... 12,801 21,555 17,468 2,647 1,948
India............................. -- -- 2,939 -- 2,904
Other foreign countries........... 1,523 283 -- 50 34
-------- -------- -------- ------- -------
Total consolidated.............. $229,065 $267,520 $302,340 $58,460 $60,473
======== ======== ======== ======= =======
</TABLE>
F-20
<PAGE>
Note 14: Legal proceedings
During 1997, a judgment was entered against the Company in the U.S. District
Court for the Western District of Pennsylvania. The case was brought against
the Company by Mellon Bank (Mellon) in connection with a potential bid to
provide electronic benefit transfer services for the Southern Alliance of
States. In September 1997, the Company recorded a charge of $40 million to
reserve for this judgment and other related costs. This charge is reflected in
legal proceedings in the 1997 consolidated statement of operations.
In 1998, Mellon's motion for prejudgment interest was denied by the district
court. The Company reversed $4.2 million of the $40 million liability. This
reversal is reflected in legal proceedings in the 1998 consolidated statement
of operations. At December 31, 1998, the remaining liability of $34.4 million
was included in the reserve for legal proceedings in the consolidated balance
sheet.
In January 1999, the United States Court of Appeals for the Third Circuit
affirmed the judgment of the district court and the Company paid $32.2 million
to Mellon in February 1999. The portion of the reserve remaining after the
payment of this judgment ($2.1 million) was reversed and is reflected in legal
proceedings in the 1999 consolidated statement of operations. The United States
Supreme Court denied the Company's petition for a further review of this
judgment in June 1999.
Note 15: Subsequent events
In March 2000, the Company paid $20 million for a 24% interest in a limited
liability company that provides ATM management and outsourcing services to
retailers and financial institutions. This investment will be accounted for
under the equity method of accounting. Accordingly, the Company's consolidated
statements of operations will reflect the results of this business in other
income (expense) within the Company's electronic payment solutions segment. The
Company has also entered into vault cash agreements with the limited liability
company to supply cash for ATMs in various locations throughout the United
States (see Note 2).
Deluxe has agreed to provide the Company with a revolving credit facility of
up to $75 million until the earlier of the effective date of the Split-off or
August 28, 2000. Borrowings under the facility will be due at the Split-off or
maturity and will accrue interest at the London Interbank Offered Rate, or
LIBOR, plus a variable additional margin based on Deluxe's credit rating. The
credit facility includes financial and restrictive covenants.
Beginning in 2000 the Company's software services to Deluxe have been
formalized into a five year software development outsourcing agreement. During
the term of the agreement, the Company anticipates Deluxe will spend
approximately $43 million per year for software development, maintenance and
support services for information technology applications. Amounts will be based
on the actual number of hours of information technology services that the
Company provides to Deluxe. If Deluxe fails to reach the $43 million spending
target per year, it will be obligated to make liquidated damages payments for a
portion of the Company's fees based on its estimates of lost margins. The
Company also will provide business process management services to Deluxe.
Deluxe's annual minimum spending target for business process management
services will range from $8.1 million in 2000 to $4.2 million in 2004. The
agreement will also provide for liquidated damages for non-performance by the
Company and bonuses for superior performances. The provision of services by the
Company under the agreement is non-exclusive, and Deluxe may contract with any
third party for the provision of professional services.
After its current contractual commitments expire in 2006, the Company
intends to exit the government services business. Deluxe has agreed to
indemnify the Company for any losses on identified government services loss
contracts. The Company is required to calculate any charges for loss contracts
in a manner consistent with Deluxe's current loss accrual practices. Deluxe
will also indemnify the Company against any liabilities, losses or expenses
arising from litigation and claims asserted against the Company in connection
with the operation of the government services business prior to the completion
of this offering.
F-21
<PAGE>
On March 31, 2000, the Company purchased real property and a data center
located in Phoenix, Arizona and personal property from a subsidiary of Deluxe.
The Company previously rented portions of this facility.
On April 4, 2000, the Company authorized 100 million shares of preferred
stock with a par value of $.01 per share. No shares are issued or outstanding.
EFUNDS CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales.......................... $63,316 $66,455 $ 67,726 $70,023
Cost of sales...................... 41,269 43,120 84,229 43,690
Net income (loss).................. 381 1,503 (22,067)(1) 5,592
Per share of common stock
Net income (loss)--basic and
diluted......................... $ 152 $ 601 $ (8,826) $ 2,237
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
1999 Quarter Ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales......................... $67,856 $72,567 $79,895 $82,022
Cost of sales..................... 43,120 45,120 48,806 57,244
Net income (loss)................. 3,814 (2,479) (9,234) (327)(2)
Per share of common stock
Net income (loss)--basic and
diluted........................ $ 1,526 $ (992) $(3,694) $ (130)
======= ======= ======= =======
</TABLE>
- --------
(1) 1998 third quarter results include charges of $14.7 million for losses
on existing contracts of the government services segment, asset
impairment charges of $26.3 million on the long-lived assets of the
Government services segment and restructuring charges of $2.2 million.
(2) 1999 fourth quarter results include charges of $8.2 million to reserve
for additional expected future losses on existing contracts of the
government services segment.
F-22
<PAGE>
[LOGO]
Shares
[LOGO]
Common Stock
-----------------
PROSPECTUS
, 2000
-----------------
Lehman Brothers
Bear, Stearns & Co. Inc.
FAC/Equities
John G. Kinnard and Company,
Incorporated
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee................................................ $
NASD Filing Fee.....................................................
Nasdaq Filing Fee...................................................
Blue Sky fees and expenses..........................................
Accountants' fees and expenses......................................
Legal fees and expenses.............................................
Printing and engraving expenses.....................................
Transfer agent and registrar fees...................................
Miscellaneous expenses..............................................
----
Total............................................................. $
====
</TABLE>
Item 14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law (DGCL) authorizes a
corporation's board of directors to grant indemnity to directors and officers
in terms sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act.
As permitted by the DGCL, the Registrant's certificate of incorporation
provides that the Registrant shall indemnify its directors, officers, employees
and agents to the fullest extent permitted by the DGCL. As permitted by the
DGCL, the Registrant's certificate of incorporation also includes a provision
that eliminates the personal liability of its directors for monetary damages
for breach of the director's fiduciary duty, except for liability (1) for any
breach of the director's duty of loyalty to the Registrant or its stockholders;
(2) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (3) under Section 174 of the DGCL
regarding payments of dividends, stock purchases or redemptions which are
unlawful; or (4) for any transaction from which the director derived an
improper personal benefit.
The Registrant also intends to maintain director and officer liability
insurance.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement contains provisions indemnifying officers and directors of the
Registrant against liabilities arising under the Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
None.
II-1
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Initial Public Offering and Distribution Agreement, dated as of March
31, 2000, by and between Deluxe and eFunds
3.1 Amended and Restated Certificate of Incorporation of eFunds
Corporation
3.2 Bylaws of eFunds Corporation
4.1* Form of eFunds common stock certificate
4.2* Rights Agreement, by and between eFunds and as Rights agent
5.1* Opinion of Dorsey & Whitney LLP
10.1 Assignment and Assumption Agreement, dated as of March 31, 2000, by
and between eFunds and Deluxe
10.2* Third Party Indemnification Agreement, dated as of March 31, 2000, by
and between eFunds and Deluxe
10.3 Registration Rights Agreement, dated as of March 31, 2000, by and
between Deluxe and eFunds
10.4* Tax Sharing Agreement, by and between eFunds and Deluxe
10.5* Employee Benefits Agreement, by and between eFunds and Deluxe
10.6* Real Estate Agreements, by and between eFunds and Deluxe including:
10.7* Purchase Agreement, by and between eFunds and Deluxe
10.8* Transition Services Agreement, by and between eFunds and Deluxe
10.9* Master Services Agreement, by and between eFunds and Deluxe
10.10* ONE Channel Management Agreement, by and between eFunds and Deluxe
10.11* Data Sharing Agreements, by and between eFunds and Deluxe
10.12* Data Contribution Agreement, by and between eFunds and
10.13* Processor Agreement, by and between eFunds and Deluxe
10.14* Data License Agreement, by and between eFunds and Deluxe
10.15* ACH Agreement, by and between eFunds and Deluxe
10.16* Loan Agreement, by and between eFunds and Deluxe
10.17* Government Services Indemnity Agreement, by and between eFunds and
Deluxe
10.18* eFunds Corporation 2000 Stock Incentive Plan
10.19* eFunds Corporation Stock Incentive Plan for Deluxe Conversion Awards
10.20* Form of Award Agreement
10.21* Executive Employment Agreement, by and between eFunds and John. A.
Blanchard III.
10.22* Letter Agreement, dated as of February 28, 2000, by and between eFunds
and Debra A. Janssen
10.23* Letter Agreement, dated as of February 29, 2000, by and between eFunds
and Dr. Nikhil Sinha
10.24* Letter Agreement, dated as of , 2000, by and between eFunds and
Paul Bristow
10.25* Letter Agreement, dated as of , 2000, by and between eFunds and
Steven F. Coleman
10.26* Form of Executive Retention Agreements for eFunds executives
21.1* Subsidiaries of eFunds
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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 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 our 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 Act and will be governed by the final
adjudication of such issue.
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; and (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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Shoreview, State of
Minnesota, on April 4, 2000.
eFunds Corporation
By: /s/ John A. Blanchard III
-------------------------------
John A. Blanchard III
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul H. Bristow and Steven F. Coleman, and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or any other registration statement for the same offering that is effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933) and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on April 4, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
By: /s/ John A. Blanchard III Chairman of the Board and Chief
---------------------------------- Executive Officer (Principal
John A. Blanchard III Executive Officer)
By: /s/ Paul H. Bristow Executive Vice President and
---------------------------------- Chief Financial Officer
Paul H. Bristow (Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Initial Public Offering and Distribution Agreement, dated as of March
31, 2000, by and between Deluxe and eFunds
3.1 Amended and Restated Certificate of Incorporation of eFunds
Corporation
3.2 Bylaws of eFunds Corporation
4.1* Form of eFunds common stock certificate
4.2* Rights Agreement, by and between eFunds and as Rights agent
5.1* Opinion of Dorsey & Whitney LLP
10.1 Assignment and Assumption Agreement, dated as of March 31, 2000, by
and between eFunds and Deluxe
10.2* Third Party Indemnification Agreement, dated as of March 31, 2000, by
and between eFunds and Deluxe
10.3 Registration Rights Agreement, dated as of March 31, 2000, by and
between Deluxe and eFunds
10.4* Tax Sharing Agreement, by and between eFunds and Deluxe
10.5* Employee Benefits Agreement, by and between eFunds and Deluxe
10.6* Real Estate Agreements, by and between eFunds and Deluxe including:
10.7* Purchase Agreement, by and between eFunds and Deluxe
10.8* Transition Services Agreement, by and between eFunds and Deluxe
10.9* Master Services Agreement, by and between eFunds and Deluxe
10.10* ONE Channel Management Agreement, by and between eFunds and Deluxe
10.11* Data Sharing Agreements, by and between eFunds and Deluxe
10.12* Data Contribution Agreement, by and between eFunds and
10.13* Processor Agreement, by and between eFunds and Deluxe
10.14* Data License Agreement, by and between eFunds and Deluxe
10.15* ACH Agreement, by and between eFunds and Deluxe
10.16* Loan Agreement, by and between eFunds and Deluxe
10.17* Government Services Indemnity Agreement, by and between eFunds and
Deluxe
10.18* eFunds Corporation 2000 Stock Incentive Plan
10.19* eFunds Corporation Stock Incentive Plan for Deluxe Conversion Awards
10.20* Form of Award Agreement
10.21* Executive Employment Agreement, by and between eFunds and John. A.
Blanchard III.
10.22* Letter Agreement, dated as of February 28, 2000, by and between eFunds
and Debra A. Janssen
10.23* Letter Agreement, dated as of February 29, 2000, by and between eFunds
and Dr. Nikhil Sinha
10.24* Letter Agreement, dated as of , 2000, by and between eFunds and
Paul Bristow
10.25* Letter Agreement, dated as of , 2000, by and between eFunds and
Steven F. Coleman
10.26* Form of Executive Retention Agreements for eFunds executives
21.1* Subsidiaries of eFunds
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
<PAGE>
EXHIBIT 2.1
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
DATED AS OF MARCH 31, 2000
BY AND BETWEEN
DELUXE CORPORATION
AND
EFUNDS CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS.......................................................2
Section 1.01 Definitions............................................2
ARTICLE II THE IPO AND THE DISTRIBUTION.....................................6
Section 2.01 The IPO and Other Primary Offerings....................6
Section 2.02 Transactions Prior to the IPO..........................6
Section 2.03 Conditions Precedent to Consummation of the IPO........7
Section 2.04 The Distribution.......................................8
Section 2.05 Certain Stockholder Matters............................8
Section 2.07 Further Assurances Regarding the Distribution..........9
Section 2.08 Abandonment of the Distribution........................9
ARTICLE III EXPENSES.......................................................10
Section 3.01 General...............................................10
Section 3.02 Certain Expenses Relating to the IPO and any
Other Primary Offerings by eFunds.....................10
Section 3.03 Certain Expenses Relating to the Distribution.........11
ARTICLE IV ACCESS TO INFORMATION...........................................11
Section 4.01 Restrictions on Disclosure of Information.............11
Section 4.02 Legally Required Disclosure of Confidential
Information...........................................11
Section 4.03 Access to Information.................................12
Section 4.04 Record Retention......................................12
ARTICLE V COVENANTS........................................................13
Section 5.01 Auditors and Audits; Annual and Quarterly Statements
and Accounting........................................13
Section 5.02 No Violations.........................................15
Section 5.03 Other Agreements......................................15
ARTICLE VI OPTIONS.........................................................15
Section 6.01 Options...............................................15
Section 6.02 Notice................................................16
Section 6.03 Option Exercise and Payment...........................16
Section 6.04 Effect of Failure to Exercise.........................17
Section 6.05 Termination of Options................................17
ARTICLE VII INDEMNIFICATION................................................17
Section 7.01 Indemnification Procedures............................17
ARTICLE VIII CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION........20
Section 8.01 Condition.............................................20
Section 8.02 Termination...........................................20
ARTICLE IX MISCELLANEOUS...................................................20
Section 9.01 Limitation of Liability...............................20
Section 9.03 Waiver................................................20
Section 9.04 Remedies..............................................21
Section 9.05 Performance...........................................21
Section 9.06 References; Construction..............................21
Section 9.07 Amendments............................................21
Section 9.08 Successors and Assignment.............................21
i
<PAGE>
Section 9.09 Severability..........................................21
Section 9.10 Entire Agreement......................................22
Section 9.11 Notices...............................................22
Section 9.12 Governing Law.........................................23
Section 9.13 Counterparts..........................................23
ii
<PAGE>
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT (this "AGREEMENT") dated
as of March 31, 2000, by and between Deluxe Corporation, a Minnesota Corporation
("Deluxe"), and eFunds Corporation, a Delaware corporation and a wholly owned
subsidiary of Deluxe ("eFunds"). Certain capitalized terms used herein are
defined in Article I of this Agreement.
RECITALS
WHEREAS, the Board of Directors of Deluxe has determined that it would be
appropriate and desirable to completely separate the eFunds Business from
Deluxe;
WHEREAS, Deluxe and eFunds have previously entered into the Assignment and
Assumption Agreement, dated as of March 31, 2000 (the "Separation Date"),
pursuant to which Deluxe has contributed and assigned to eFunds and eFunds has
received and assumed, the assets and liabilities then associated with the eFunds
Business as described therein (the "Assignment and Assumption Agreement");
WHEREAS, Deluxe currently owns all of the issued and outstanding capital
stock of eFunds;
WHEREAS, Deluxe and eFunds currently contemplate that, following the
contribution and assumption of assets and liabilities, eFunds proposes to make
an initial public offering ("IPO") of an amount of its common stock pursuant to
a registration statement on form S-1 pursuant to the Securities Act of 1933, as
amended, that, together with all derivative shares, will reduce Deluxe's
ownership of eFunds to not less than 80.1%;
WHEREAS, Deluxe currently contemplates that, several months following such
IPO, Deluxe will distribute to the holders of its common stock by means of an
exchange offer and/or a pro rata distribution all of the shares of eFunds Stock
owned by Deluxe (the "Distribution");
WHEREAS, Deluxe and eFunds intend that the contribution and assumption of
assets and liabilities and the Distribution will qualify as a tax-free
reorganization under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code
of 1986, as amended (the "Code"), and that this Agreement is intended to be, and
is hereby adopted as, a plan of reorganization under Section 368 of the Code;
and
WHEREAS, the parties intend in this Agreement, including the Exhibits
attached hereto, to set forth the principal arrangements between them regarding
such Initial Public Offering and Distribution.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. As used in this Agreement, the following terms
will have the following meanings, applicable both to the singular and the plural
forms of the terms described:
"Affiliates" means, with respect to any specified Person, any Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with such specified Person; provided,
however, that for purposes of this Agreement, (i) Deluxe and its Subsidiaries
(other than eFunds and its Subsidiaries) shall not be considered Affiliates of
eFunds and (ii) eFunds and its Subsidiaries shall not be considered Affiliates
of Deluxe.
"Agreement" has the meaning ascribed thereto in the Preamble.
"Ancillary Agreements" means the Registration Rights Agreement,
Transitional Services Agreement, Employee Benefits Agreement, Real Estate
Agreements, Master Agreement, ONE Channel Management Agreement, Data Sharing
Agreements, Loan Agreement, Third Party Indemnification Agreement, Government
Services Indemnity Agreement and the Tax-Sharing Agreement.
"Confidential Information" means, with respect to any party hereto, (i) any
Information concerning such party, its business or any of its Affiliates that
such party or its Affiliates treat as confidential or proprietary or is a trade
secret of any of them that was obtained by another party hereto, (ii) any
Information concerning such party that is obtained by another party under
Section 4.03, or (iii) any other Information obtained by, or furnished to,
another party hereto; provided, that, such Information shall no longer be deemed
Confidential Information, to the extent that it is or was (i) in the public
domain other than by the breach of this Agreement or by breach of any other
agreement between or among the parties hereto and/or any of their respective
Affiliates, (ii) available to such party outside the context of the Prior
Relationship on a nonconfidential basis prior to its disclosure by the other
party, (iii) lawfully acquired outside the context of the Prior Relationship on
a nonconfidential basis or independently developed by, or on behalf of, such
party by Persons who do not have access to such Confidential Information, (iv)
required to be disclosed by law, governmental order or the rules and regulations
of the SEC, or (v) mutually agreed to by the parties.
"Data Sharing Agreements" means the agreements to be entered into on or
before the IPO Effective Date between Deluxe and eFunds concerning (a) the
provision of consumer account information of Checks Unlimited to eFunds, (b) the
ability of eFunds to submit groups of bank routing numbers to Deluxe to obtain
check order history files from Deluxe for use in eFunds' Debit Bureau
operations, (c) the provision of eFunds data regarding closed consumer accounts
to Deluxe and (d) the provision of ACH services to Deluxe by eFunds.
"Deluxe" has the meaning ascribed thereto in the Preamble.
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"Deluxe Business" means any assets, business or operations of Deluxe or any
of its Affiliates other than the eFunds Business.
"Deluxe Common Stock" means the common stock, par value $1.00 per share, of
Deluxe.
"Deluxe Group" includes for federal income tax purposes, Deluxe, its
Affiliates, eFunds and its Affiliates.
"Deluxe's Auditors" has the meaning ascribed thereto in Section 5.01(b).
"Deluxe Transfer Agent" means the company designated by Deluxe as the
transfer agent and registrar for the Deluxe Common Stock.
"Distribution" has the meaning ascribed thereto in the Preamble.
"Distribution Date" is the date upon which the Distribution is consummated.
"eFunds" has the meaning ascribed thereto in the Preamble.
"eFunds Business" has the meaning ascribed thereto in Section 1.1 of the
Assignment and Assumption Agreement.
"eFunds Nonvoting Stock" means any class of eFunds' capital stock not
representing the right to vote generally for the election of directors.
"eFunds Nonvoting Stock Option" has the meaning ascribed thereto in Section
6.01(c).
"eFunds Nonvoting Stock Option Notice" has the meaning ascribed thereto in
Section 6.02.
"eFunds Stock" means any class of eFunds capital stock, including any class
of eFunds Voting Stock and any class of eFunds Nonvoting Stock.
"eFunds Voting Stock" means the common stock, par value $0.01 per share of
eFunds, and any other class of eFund's capital stock representing the right to
vote generally for the election of directors.
"eFunds Voting Stock Option" has the meaning ascribed thereto in Section
6.01(a).
"eFunds Voting Stock Option Notice" has the meaning ascribed thereto in
Section 6.02.
"Employee Benefits Agreement" means the agreement to be entered into on or
before the IPO Effective Date between Deluxe and eFunds concerning the provision
of employee benefits to employees of eFunds and the separation of employee
benefit plans and agreements in connection with the Distribution.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, together with the rules and regulations promulgated thereunder.
"Government Services Indemnity Agreement" means the agreement to be entered
into on or before the IPO Effective Date between Deluxe and eFunds whereby
Deluxe will agree to indemnify eFunds with respect to certain losses that may be
sustained in connection with the government services business.
"Information" means all records, books, contracts, instruments, computer
data and other data.
"IPO Effective Date" means the date on which the IPO Registration Statement
is declared effective by the SEC.
"IPO Registration Statement" means the Registration Statement on Form S-1,
of eFunds, including all exhibits thereto and as supplemented and amended from
time to time.
"Issuance Event" has the meaning ascribed thereto in Section 6.02.
"Issuance Event Date" has the meaning ascribed thereto in Section 6.02.
"Loan Agreement" means the agreement to be entered into between Deluxe and
eFunds on or before the IPO Effective Date whereby Deluxe will provide eFunds
with a $75,000,000 revolving credit facility.
"Losses" means all losses, liabilities, deficiencies, damages, expenses or
costs (including reasonable legal and other external advisors fees and
expenses).
"Market Price" of any shares of eFunds Voting Stock on any date means (i)
the average of the last sale price of such shares on each of the five trading
days immediately preceding such date on the New York Stock Exchange or Nasdaq
Stock Market's National Market ("Nasdaq") or, if such shares are not listed
thereon, on the principal national securities exchange or automated interdealer
quotation system on which such shares are traded or (ii) if such sale prices are
unavailable or such shares are not so traded, the value of such shares on such
date determined in accordance with agreed-upon procedures reasonably
satisfactory to eFunds and Deluxe.
"Master Agreement" means the agreement to be entered into on or before the
IPO Effective Date between Deluxe and iDLX Corporation, a wholly owned
subsidiary of eFunds, pursuant to which iDLX Corporation will provide Deluxe
with information technology development services, maintenance and support,
financial shared services and order entry services.
"ONE Channel Management Agreement" means the agreement to be entered into
on or before the IPO Effective Date between Deluxe and eFunds that will govern
Deluxe's provision
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and support of its proprietary ONE system for eFunds, such that eFunds products
are available to financial institutions through any ONE product configuration.
"Owning Party" has the meaning ascribed thereto in Section 4.02.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture association, joint stock company, trust
unincorporated organization or government or any agency or political subdivision
thereof.
"Prior Relationship" means the ownership relationship between Deluxe and
eFunds at any time prior to the Distribution Date.
"Real Estate Agreements" means the leases and subleases to be entered into
on or before the IPO Effective Date between Deluxe or its Subsidiaries, as
lessor or sublessor, and eFunds or its Subsidiaries as lessee or sublessee with
respect to the FSG space or space for equipment and the lease to be entered into
between eFunds or its Subsidiaries as lessor and Deluxe or its Subsidiaries as
lessee with respect to the building located in Phoenix, Arizona.
"Registration Rights Agreement" means the Registration Rights Agreement to
be entered into on or before the IPO Effective Date between Deluxe and eFunds.
"Regulation S-K" means Regulation S-K of the General Rules and Regulations
promulgated by the SEC.
"Regulation S-X" means Regulation S-X of the General Rules and Regulations
promulgated by the SEC.
"Related Parties" has the meaning ascribed thereto in Section 4.03.
"Representatives" means directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"Requestor" has the meaning ascribed thereto in Section 4.03.
"Retention Period" has the meaning ascribed thereto in Section 4.04.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, together with the rules and regulations promulgated thereunder.
"Subsidiary" means, with respect to any Person, any other Person a majority
of the equity ownership or voting stock of which is at the time owned, directly
or indirectly, by such Person and/or one or more other Subsidiaries of such
Person; provided, however, that unless the context otherwise requires prior to
the Distribution, a Subsidiary of Deluxe shall only include Persons
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who would be a Subsidiary of Deluxe assuming the Distribution has occurred
immediately prior to the determination as to whether such Person were a
Subsidiary of Deluxe.
"Tax-Sharing Agreement" means the tax-sharing agreement to be entered into
on or before the IPO Effective Date between Deluxe and eFunds.
"Third Party Claim" has the meaning ascribed thereto in Section 7.01(b).
"Third Party Indemnification Agreement" means the third party
indemnification agreement to be entered into on or before the IPO Effective Date
between Deluxe and eFunds whereby eFunds will agree to indemnify Deluxe with
respect to any payments made under guarantees that Deluxe provided to third
parties or pursuant to master agreements that Deluxe has entered into with
respect to equipment provided to eFunds or performance of eFunds.
"Transitional Services Agreement" means the transitional services agreement
to be entered into on or before the IPO Effective Date between Deluxe and eFunds
covering the provision of certain transitional services to each other.
ARTICLE II
THE IPO AND THE DISTRIBUTION
Section 2.01 The IPO and Other Primary Offerings . Until the Distribution
Date, eFunds shall consult with, and cooperate in all respects with, Deluxe in
connection with any primary offering of the eFunds Voting Stock or any other
securities of eFunds and shall, at Deluxe's direction, promptly take any and all
actions necessary or desirable to consummate the IPO and the Distribution.
Section 2.02 Transactions Prior to the IPO. Subject to the conditions
specified in Section 2.03, Deluxe and eFunds shall use their reasonable
commercial efforts to consummate the IPO. Such efforts shall include, but not
necessarily be limited to, those specified in this Section 2.02.
(a) Registration Statement. eFunds shall file the IPO Registration
Statement, and such amendments or supplements thereto, as may be necessary in
order to cause the same to become and remain effective as required by law or by
the managing underwriters for the IPO (the "Underwriters"), including, but not
limited to, filing such amendments to the IPO Registration Statement as may be
required by the underwriting agreement to be entered into among eFunds and the
Underwriters (the "Underwriting Agreement"), the SEC or federal, state or
foreign securities laws. Deluxe and eFunds shall also cooperate in preparing,
filing with the SEC and causing to become effective a registration statement
registering the common stock of eFunds under the Exchange Act, and any
registration statements or amendments thereof which are required to reflect the
establishment of, or amendments to, any employee benefit and other plans
necessary or appropriate in connection with the IPO, the Distribution or the
other transactions contemplated by this Agreement.
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(b) Underwriting Agreement. eFunds shall enter into the Underwriting
Agreement, in form and substance reasonably satisfactory to eFunds, and shall
comply with its obligations thereunder.
(c) Other Matters. Deluxe and eFunds shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.
(d) Blue Sky. eFunds shall use its reasonable commercial efforts to take
all such action as may be necessary or appropriate under state securities and
blue sky laws of the United States (and any comparable laws under any foreign
jurisdictions) in connection with the IPO.
(e) NYSE or Nasdaq Listing. eFunds shall prepare, file and use reasonable
commercial efforts to seek to make effective, an application for listing of the
common stock of eFunds issued in the IPO on the New York Stock Exchange (the
"NYSE") or Nasdaq, subject to official notice of issuance.
Section 2.03 Conditions Precedent to Consummation of the IPO. As soon as
practicable after the date hereof, the parties hereto shall use their reasonable
commercial efforts to satisfy the conditions listed below to the consummation of
the IPO. The obligations of the parties to use their reasonable commercial
efforts to consummate the IPO shall be conditioned on the satisfaction, or
waiver by Deluxe, of the following conditions:
(a) Registration Statement. The IPO Registration Statement shall have been
filed and declared effective by the SEC, and there shall be no stop-order in
effect with respect thereto.
(b) Blue Sky. The actions and filings with regard to state securities and
blue sky laws of the United States (and any comparable laws under any foreign
jurisdictions) described in Section 2.02 shall have been taken and, where
applicable, have become effective or been accepted.
(c) NYSE or Nasdaq Listing. The common stock of eFunds to be issued in
the IPO shall have been accepted for listing on the NYSE or Nasdaq, subject to
official notice of issuance.
(d) Underwriting Agreement. eFunds shall have entered into the Underwriting
Agreement and all conditions to the obligations of eFunds and the Underwriters
shall have been satisfied or waived.
(e) eFunds Stock Ownership. Using whatever method that it determines
appropriate in its sole discretion, Deluxe shall be satisfied in its sole
discretion that at all times prior to the Distribution it will own at least
80.1% of (i) the total combined voting power of all classes of eFunds Voting
Stock and (ii) each class of eFunds Nonvoting Stock. All other conditions to
permit the Distribution to qualify as a tax-free distribution under Section 355
of the Code shall, to the extent applicable as of the time of the IPO, be
satisfied. There shall be no event or
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condition that is likely to cause any of such conditions not to be satisfied as
of the time of the Distribution or thereafter.
(f) No Legal Restraints. No order, injunction or decree issued by any court
or agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Assignment and Assumption Agreement or the
IPO or any of the other transactions contemplated by this Agreement shall be in
effect.
(g) Other Actions. Such other actions as the parties hereto may, based upon
the advice of counsel, reasonably request to be taken prior to the IPO in order
to assure the successful completion of the IPO shall have been taken.
(h) No Termination. This Agreement shall not have been terminated.
Section 2.04 The Distribution. Deluxe currently intends, following the
consummation of the IPO, to complete the Distribution during 2000. Deluxe shall,
in its sole and absolute discretion, determine whether to proceed with all or
part of the Distribution and all terms of the Distribution, including, without
limitation, the form, structure and terms of any transaction(s) and/or
offering(s) to effect the Distribution and the timing of and conditions to the
consummation of the Distribution. In addition, Deluxe may at any time and from
time to time until the completion of the Distribution abandon, modify or change
any or all of the terms of the Distribution, including, without limitation, by
accelerating or delaying the timing of the consummation of all or part of the
Distribution. eFunds shall cooperate with Deluxe in all commercially reasonable
respects to accomplish the Distribution and shall, at Deluxe's direction,
promptly take any and all actions necessary or desirable to effect the
Distribution, including, without limitation, the registration under the
Securities Act of eFunds Voting Stock on an appropriate registration form or
forms to be designated by Deluxe. Deluxe shall select any investment banker(s)
and manager(s) in connection with the Distribution, as well as any other
institutions providing services in connection with the Distribution.
Section 2.05 Certain Stockholder Matters. From and after the distribution
of eFunds Stock in connection with any transaction(s) included as part of the
Distribution and until such eFunds Stock is duly transferred in accordance with
applicable law, eFunds shall regard the Persons receiving eFunds Stock in such
transaction(s) as record holders of eFunds Stock in accordance with the terms of
such transaction(s) without requiring any action on the part of such Persons.
eFunds agrees that, subject to any transfers of such stock, (a) each such holder
shall be entitled to receive all dividends payable on, and exercise voting
rights and all other rights and privileges with respect to, the shares of eFunds
Stock then held by such holder and (b) each such holder shall be entitled,
without any action on the part of such holder, to receive one or more
certificates representing, or other evidence of ownership of, the shares of
eFunds Stock then held by such holder. Deluxe shall cooperate, and shall
instruct the Deluxe Transfer Agent to cooperate, with eFunds and the eFunds
Transfer Agent, and eFunds shall cooperate, and shall instruct the eFunds
Transfer Agent to cooperate, with Deluxe and the Deluxe Transfer Agent, in
connection with all aspects of the Distribution and all other matters relating
to the issuance and delivery of certificates representing, or other evidence of
ownership of, the shares of eFunds
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Stock distributed to the holders of Deluxe Common Stock in connection with any
transaction(s) included as part of the Distribution. Following the Distribution,
Deluxe shall promptly, but in no event no later than two business days
thereafter, instruct the Deluxe Transfer Agent to deliver to the eFunds Transfer
Agent true, correct and complete copies of the stock and transfer records
reflecting the holders of Deluxe Common Stock receiving shares of eFunds Stock
in connection with any transaction(s) included as part of the Distribution.
Section 2.06 Prior Relationship. eFunds, with respect to eFunds and its
Affiliates, and Deluxe, with respect to Deluxe and its Affiliates, agree to take
all commercially reasonable action to discontinue their respective uses as
promptly as is commercially reasonable of any printed material that indicates an
ownership or other relationship between or among Deluxe and eFunds or any of
their respective Affiliates that has changed as a result of the IPO, the
Distribution or any other transactions contemplated hereby; provided, that, this
Section 2.06 shall not prohibit the use of printed material containing
appropriate and accurate references to such relationship.
Section 2.07 Further Assurances Regarding the Distribution. In addition to
the actions specifically provided for elsewhere in this Agreement, eFunds shall,
at Deluxe's direction, use all commercially reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things
commercially reasonably necessary, proper or expeditious under applicable laws,
regulations and agreements in order to consummate and make effective the
Distribution as promptly as reasonably practicable. Without limiting the
generality of the foregoing, eFunds shall, at Deluxe's direction, cooperate with
Deluxe, and execute and deliver, or use all commercially reasonable efforts to
cause to have executed and delivered, all instruments, including instruments of
conveyance, assignment and transfer, and to make all filings with, and to obtain
all consents, approvals or authorizations of, any domestic or foreign
governmental or regulatory authority requested by Deluxe in order to consummate
and make effective the Distribution.
Section 2.08 Abandonment of the Distribution. The parties expressly
acknowledge and agree that Deluxe is not obligated in any respect to proceed
with or complete the Distribution and that Deluxe may, in its sole and absolute
discretion, at any time abandon its plans to proceed with or complete the
Distribution. In the event that Deluxe so determines that it no longer intends
to proceed with or complete the Distribution, Deluxe shall provide to eFunds a
written notification of such determination (an "Abandonment Notice"). Effective
as of the date of the Abandonment Notice, (a) this Agreement shall terminate,
become null and void and have no further force and effect and (b) Deluxe's
rights, and eFunds' obligations, set forth in the Registration Rights Agreement
shall immediately become effective.
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ARTICLE III
EXPENSES
Section 3.01 General. Except as otherwise provided in this Agreement, the
Ancillary Agreements or any other agreement between the parties relating to the
IPO or the Distribution, all costs and expenses of either party hereto in
connection with the IPO and the Distribution shall be paid by the party that
incurs such costs and expenses.
Section 3.02 Certain Expenses Relating to the IPO and any Other Primary
Offerings by eFunds. eFunds shall cause to be paid from the proceeds of the IPO
all out-of-pocket expenses (including, without limitation, fees and expenses of
eFunds and Deluxe's counsel and accountants or other third parties) relating to
the IPO or any other primary offering by eFunds prior to the Distribution Date,
including, without limitation, (i) the preparation, printing and filing of the
IPO Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto or any other registration
statements, (ii) the preparation, printing and delivery to any underwriters of
any underwriting agreement, any agreement among underwriters and any other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the eFunds Voting Stock or any other securities of
eFunds, (iii) the preparation, issuance and delivery of the certificates for the
eFunds Voting Stock or any other securities of eFunds to any underwriters or any
other purchasers, including any stock or other transfer taxes and any stamp or
other duties payable upon the sale, issuance or delivery of the eFunds Voting
Stock or any other securities of eFunds to any underwriters or any other
securities, (iv) the qualification of the eFunds Voting Stock or any other
securities of eFunds under the securities laws in accordance with any state
(Blue Sky laws), including filing fees and the reasonable fees and disbursements
of counsel for any underwriters in connection therewith and in connection with
the preparation of any Blue Sky survey and any supplement thereto, (v) the
printing and delivery to any underwriters of copies of each preliminary
prospectus, any term sheets and of the final prospectus and any amendments or
supplements thereto, (vi) the preparation, printing and delivery to any
underwriters of copies of any Blue Sky survey and any supplement thereto, (vii)
the fees and expenses of any transfer agent or registrar for the eFunds Voting
Stock or any other securities of eFunds, (viii) the filing fees incident to, the
review by the National Association of Securities Dealers, Inc. (the "NASD") of
the terms of the sale of the eFunds Voting Stock or any other securities of
eFunds and (ix) the fees and expenses incurred in connection with the listing of
the eFunds Voting Stock or any other securities of eFunds on the NYSE, Nasdaq,
any other national securities exchange or any national over the counter
quotation system, (x) any other fees and disbursements payable to the
underwriters in connection with the IPO, whether in the form of an underwriting
discount or otherwise, (xi) the preparation and implementation of the Assignment
and Assumption Agreement, and (xii) any miscellaneous expenses incurred in
connection with the IPO such as travel expenses.
Section 3.03 Certain Expenses Relating to the Distribution. Deluxe shall
pay all out-of-pocket expenses relating to the Distribution, including (i) the
fees and expenses of the underwriter or dealer-manager, (ii) the fees and
expenses of eFunds and Deluxe's attorneys, accountants and other advisors, (iii)
the preparation, printing, filing (including under federal and
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state securities laws), mailing and publishing of the offering materials
relating to the eFunds Stock, (iv) the preparation, printing and delivery of any
certificates or documents entered into in connection with the Distribution, (v)
the fees and Stock, (v) the fees and expenses incurred in connection with the
listing of the eFunds Stock with the NYSE or Nasdaq, any other national
securities exchange or any national over the counter quotation system, if
applicable and (vi) any other fees incurred in connection with the Distribution.
ARTICLE IV
ACCESS TO INFORMATION
Section 4.01 Restrictions on Disclosure of Information.
(a) Without limiting any rights or obligations under any other agreement
between or among the parties hereto and/or any of their respective Affiliates
relating to confidentiality, with respect to Confidential Information that is
not a trade secret of the disclosing party or its Affiliates for a period of
three years following the date hereof, otherwise for a perpetual period, each of
the parties hereto agrees that it shall not, and shall not permit any of its
Affiliates or Representatives to, disclose any Confidential Information to any
Person, other than to such Affiliates or Representatives on a need-to-know basis
in connection with the purpose for which the Confidential Information was
originally disclosed.
(b) Each of the parties hereto shall maintain, and shall cause its
respective Affiliates to maintain, policies and procedures, and develop such
further policies and procedures as shall from time to time become necessary or
appropriate, to ensure compliance with this Section 4.01.
Section 4.02 Legally Required Disclosure of Confidential Information. If
any of the parties to this Agreement or any of their respective Affiliates or
Representatives become legally required to disclose any Confidential
Information, such disclosing party shall promptly notify the party owning the
Confidential Information (the "Owning Party") and shall use all commercially
reasonable efforts to cooperate with the Owning Party so that the Owning Party
may seek a protective order or other appropriate remedy and/or waive compliance
with this Section 4.02. All expenses reasonably incurred in seeking a protective
order or other remedy shall be borne by the Owning Party. If such protective
order or other remedy is not obtained, or if the Owning Party waives compliance
with this Section 4.02, the disclosing party or its Affiliate or Representative,
as applicable, shall (a) disclose only that portion of the Confidential
Information it is compelled by law to disclose, (b) use all commercially
reasonable efforts to obtain reliable assurance requested by the Owning Party
that confidential treatment will be accorded such Confidential Information, and
(c) promptly provide the Owning Party with a copy of the Confidential
Information so disclosed, in the same form and format so disclosed, together
with a description of all Persons to whom such Confidential Information was
disclosed.
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Section 4.03 Access to Information.
(a) During the Retention Period, each of the parties hereto shall cooperate
with and afford, and shall cause their respective Affiliates, Representatives,
Subsidiaries, successors and/or assignees, and shall use reasonable efforts to
cause joint ventures that are not Affiliates (collectively, "Related Parties")
to cooperate with, and afford to the other party, reasonable access upon
reasonable advance written request to all information (other than information
created after the Distribution Date (i) the disclosure of which would have the
effect of waiving a legal privilege, (ii) which is the subject of a
confidentiality agreement between such party and a third party which prohibits
disclosure to the other party, or (iii) which is necessary or desirable to
fulfill any obligations of Requestor under contracts existing as of the
Distribution Date, provided, that, such party shall use all commercially
reasonable efforts to obtain such third party's consent to disclosure of such
information) within such party's or any Related Party's possession. Access to
the requested information shall be provided so long as it relates to the
requesting party's (the "Requestor") assets, business and operations, and access
is reasonably required by the Requestor as a result of the parties' Prior
Relationship for purposes of auditing, accounting, claims or litigation (except
for claims or litigation between the parties hereto), employee benefits,
regulatory or tax purposes or fulfilling disclosure or reporting obligations
including, without limitation, information reasonably necessary for the
preparation of reports required by or filed under the Securities Act or the
Exchange Act with respect to any period entirely or partially prior to the
Distribution Date or any other reasonable purpose.
(b) Each party agrees to cooperate fully to allow access to each other's
employees (i) to the extent that they are reasonably necessary to discuss and
explain all requested Information with and to the requesting party and (ii) with
respect to any claims brought against the other involving the conduct of the
eFunds Business prior to the Distribution Date.
Section 4.04 Record Retention. Deluxe and eFunds shall preserve and keep
all of their respective books and records in the possession of such party or its
Related Parties, whether in electronic form or otherwise, for no less than the
later of (i) the record retention policy of Deluxe and eFunds as in effect as of
the Distribution Date or (ii) any period as may be required by any laws,
regulations or rulings promulgated thereunder of any jurisdiction (or of any
political subdivision or taxing authority thereof) (the "Retention Period"), at
such party's sole cost and expense. Deluxe shall deliver to eFunds on the
Distribution Date any and all original corporate organization books that Deluxe
has in its possession relating solely to the eFunds Business, copies of which
Deluxe may retain at its own expense. Upon reasonable prior written request,
Deluxe and eFunds shall deliver to the other copies of any and all books and
records that Deluxe or eFunds, as the case may be, has in its possession
relating to the eFunds Business or the Deluxe Business, respectively.
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ARTICLE V
COVENANTS
Section 5.01 Auditors and Audits; Annual and Quarterly Statements and
Accounting. Each party agrees that, for so long as Deluxe is required in
accordance with United States generally accepted accounting principles and rules
and regulations established by the SEC to consolidate eFunds's results of
operations and financial position:
(a) Selection of Auditors. eFunds shall not select a different accounting
firm than Deloitte & Touche LLP to serve as its (and its Subsidiaries')
independent certified public accountants ("eFunds's Auditors") for purposes of
providing a report on its consolidated financial statements without Deluxe's
prior written consent (which shall not be unreasonably withheld).
(b) Date of Auditors' Report and Quarterly Reviews. eFunds shall use its
reasonable commercial efforts to enable the eFunds Auditors to complete their
audit such that they will date their report on eFunds's audited annual financial
statements on the same date that Deluxe's independent certified public
accountants ("Deluxe's Auditors") date their report on Deluxe's audited annual
financial statements, and to enable Deluxe to meet its timetable for the
printing, filing and public dissemination of Deluxe's annual financial
statements. eFunds shall use its reasonable commercial efforts to enable the
eFunds Auditors to complete their quarterly review procedures such that they
will provide a review report on eFunds's quarterly financial statements on the
same date that Deluxe's Auditors provide a review report on Deluxe's quarterly
financial statements.
(c) Annual and Quarterly Financial Statements. eFunds shall provide to
Deluxe on a timely basis all Information that Deluxe reasonably requires to meet
its schedule for the preparation, printing, filing, and public dissemination of
Deluxe's annual and quarterly financial statements. Without limiting the
generality of the foregoing, eFunds will provide all required financial
Information with respect to eFunds and its Subsidiaries to eFunds's Auditors in
a sufficient and reasonable time and in sufficient detail to permit eFunds's
Auditors to take all steps and perform all reviews necessary to provide
sufficient assistance to Deluxe's Auditors with respect to Information to be
included or contained in Deluxe's annual and quarterly financial statements.
Similarly, Deluxe shall provide to eFunds on a timely basis all Information that
eFunds reasonably requires to meet its schedule for the preparation, printing,
filing, and public dissemination of eFunds's annual and quarterly financial
statements. Without limiting the generality of the foregoing, Deluxe will
provide all required financial Information with respect to Deluxe and its
Subsidiaries to Deluxe's Auditors in a sufficient and reasonable time and in
sufficient detail to permit Deluxe's Auditors to take all steps and perform all
reviews necessary to provide sufficient assistance to eFunds's Auditors with
respect to Information to be included or contained in eFunds's annual and
quarterly financial statements.
(d) Identity of Personnel Performing the Annual Audit and Quarterly
Reviews. eFunds shall authorize eFunds's Auditors to make available to Deluxe's
Auditors both the personnel who performed or are performing the annual audits
and quarterly reviews of eFunds
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and work papers related to the annual audits and quarterly reviews of eFunds, in
all cases within a reasonable time prior to eFunds's Auditors' report date, so
that Deluxe's Auditors are able to perform the procedures they consider
necessary to take responsibility for the work of eFunds's Auditors as it relates
to Deluxe's Auditors' report on Deluxe's financial statements, all within
sufficient time to enable Deluxe to meet its timetable for the printing, filing
and public dissemination of Deluxe's annual and quarterly statements. Similarly,
Deluxe shall authorize Deluxe's Auditors to make available to eFunds's Auditors
both the personnel who performed or are performing the annual audits and
quarterly reviews of Deluxe and work papers related to the annual audits and
quarterly reviews of Deluxe, in all cases within a reasonable time prior to
Deluxe's Auditors' report date, so that eFunds's Auditors are able to perform
the procedures they consider necessary to take responsibility for the work of
Deluxe's Auditors as it relates to eFunds's Auditors' report on eFunds's
statements, all within sufficient time to enable eFunds to meet its timetable
for the printing, filing and public dissemination of eFunds's annual and
quarterly financial statements.
(e) Access to Books and Records. eFunds shall provide Deluxe's internal
auditors and their designees access to eFunds's and its Subsidiaries' books and
records so that Deluxe may conduct reasonable audits relating to the financial
statements provided by eFunds pursuant hereto as well as to the internal
accounting controls and operations of eFunds and its Subsidiaries. Similarly,
Deluxe shall provide eFunds's internal auditors and their designees access to
Deluxe's and its Subsidiaries' books and records so that eFunds may conduct
reasonable audits relating to the financial statements provided by Deluxe
pursuant hereto as well as to the internal accounting controls and operations of
Deluxe and its Subsidiaries.
(f) Notice of Change in Accounting Principles. eFunds shall give Deluxe as
much prior notice as reasonably practical of any proposed determination of, or
any significant changes in, its accounting estimates or accounting principles
from those in effect on the Separation Date. eFunds will consult with Deluxe
and, if requested by Deluxe, eFunds will consult with Deluxe's Auditors with
respect thereto. Deluxe shall give eFunds as much prior notice as reasonably
practical of any proposed determination of, or any significant changes in, its
accounting estimates or accounting principles from those in effect on the
Separation Date.
(g) Conflict with Third-Party Agreements. Nothing in Sections 4.03 and 5.01
shall require either Deluxe or eFunds to violate any agreement with any third
parties regarding the confidentiality of confidential and proprietary
information relating to that third party or its business; provided, however,
that in the event that either Deluxe or eFunds is required under Sections 4.03
and 5.01 to disclose any such information, such party shall use all commercially
reasonable efforts to seek to obtain such customer's consent to the disclosure
of such information.
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Section 5.02 No Violations.
(a) For so long as Deluxe owns, in the aggregate, greater than or equal to
50% of the total combined voting power of all classes of eFunds Voting Stock,
eFunds covenants and agrees that it will not take any action or enter into any
commitment or agreement which may reasonably be anticipated to result, with or
without notice and with or without lapse of time or otherwise, in a
contravention or event of default by any of its Affiliates of (i) any provisions
of applicable law or regulation, including but not limited to provisions
pertaining to the Code or the Employee Retirement Income Security Act of 1974,
as amended, (ii) any provision of Deluxe's Articles of Incorporation or Bylaws,
(iii) any credit agreement or other material agreements (including agreements
relating to covenants not to compete) binding upon Deluxe or (iv) any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over Deluxe or any of its respective assets.
(b) eFunds and Deluxe agree to provide to the other any information and
documentation necessary or requested by the other for the purpose of evaluating
and ensuring compliance with Section 5.02(a) hereof.
(c) Notwithstanding the foregoing Section 5.01, nothing in this Agreement
is intended to limit or restrict in any way Deluxe's rights as a stockholder of
eFunds.
Section 5.03 Other Agreements. On or prior to the consummation of the IPO,
Deluxe and eFunds shall have executed and delivered to each other each of the
Ancillary Agreements.
ARTICLE VI
OPTIONS
Section 6.01 Options.
(a) eFunds hereby grants to Deluxe, on the terms and conditions set forth
herein, a continuing right (the "eFunds Voting Stock Option") to purchase from
eFunds, at the times set forth herein, such number of shares of eFunds Voting
Stock as is necessary to allow Deluxe to maintain ownership of at least 80.1% of
the total combined voting power of all classes of eFunds Voting Stock. The
exercise price for the shares of eFunds Voting Stock purchased pursuant to the
eFunds Voting Stock Option shall be the Market Price of the eFunds Voting Stock
as of the date of first delivery of notice of exercise of the eFunds Voting
Stock Option by Deluxe to eFunds.
(b) The provisions of Section 6.01(a) hereof notwithstanding, the eFunds
Voting Stock Option granted pursuant to Section 6.01(a) shall not apply and
shall not be exercisable in connection with the issuance by eFunds of any shares
of eFunds Voting Stock pursuant to any stock option or other executive or
employee benefit or compensation plan maintained by eFunds, so long as, from and
after the date hereof and prior to the issuance of such shares, eFunds has
repurchased from shareholders and not subsequently reissued a number of shares
equal or greater to the number of shares to be issued in any such issuance.
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(c) eFunds hereby grants to Deluxe, on the terms and conditions set forth
herein, a continuing right (the "eFunds Nonvoting Stock Option" and, together
with the eFunds Voting Stock Option, the "Options") to purchase from eFunds, at
the times set forth herein, such number of shares of eFunds Nonvoting Stock as
is necessary to allow the Deluxe to own at least 80.1% of each class of
outstanding eFunds Nonvoting Stock. The exercise price for the shares of eFunds
Nonvoting Stock purchased pursuant to the eFunds Nonvoting Stock option shall be
the price at which such eFunds Nonvoting Stock is then being sold to third
parties, or, if no eFunds Nonvoting Stock is being sold, the fair market value
thereof as determined in good faith by an independent investment advisor.
Section 6.02 Notice.
(a) At least fifteen business days prior to (i) the issuance of any shares
of eFunds Voting Stock (other than in connection with the IPO, including the
full exercise of all underwriters' over-allotment options granted in connection
therewith) or (ii) the first date on which any event could occur that, in the
absence of a full or partial exercise of the eFunds Voting Stock Option, would
result in Deluxe not owning at least 80.1% of the total combined voting power of
all classes of eFunds Voting Stock, eFunds will notify Deluxe in writing (a
"eFunds Voting Stock Option Notice") of any plans it has to issue such shares or
the date on which such event could first occur.
(b) At least fifteen business days prior to (i) the issuance of any shares
of eFunds Nonvoting Stock (other than issuances of eFunds Nonvoting Stock to
Deluxe) or (ii) the first date on which any event could occur that, in the
absence of a full or partial exercise of the eFunds Nonvoting Stock Option,
would result in the Deluxe not owning at least 80.1% of any class of outstanding
eFunds Nonvoting Stock, eFunds will notify Deluxe in writing (a "eFunds
Nonvoting Stock Option Notice" and, together with a eFunds Voting Stock Option
Notice, an "Option Notice") of any plans it has to issue such shares or the date
on which such event could first occur. Each Option Notice must specify the date
on which eFunds intends to issue such additional shares or on which such event
could first occur (such issuance or event being referred to herein as an
"Issuance Event" and the date of such issuance or event as an "Issuance Event
Date"), the number of shares eFunds intends to issue or may issue and the other
terms and conditions of such Issuance Event.
Section 6.03 Option Exercise and Payment. The eFunds Voting Stock Option
may be exercised by Deluxe for a number of shares equal to or less than the
number of shares that are necessary for the Deluxe to maintain, in the
aggregate, ownership of at least 80.1% of the total combined voting power of all
classes of eFund Voting Stock. The eFunds Nonvoting Stock Option may be
exercised by Deluxe for a number of shares equal to or less than the number of
shares that are necessary for the Deluxe to own, in the aggregate, at least
80.1% of each class of outstanding eFunds Nonvoting Stock. Each option may be
exercised at any time after receipt of an applicable Option Notice and prior to
the applicable Issuance Event Date by the delivery to eFunds of a written notice
to such effect specifying (i) the number of shares of eFunds Voting Stock or
eFunds Nonvoting Stock, as the case may be, to be purchased by Deluxe and (ii) a
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calculation of the exercise price for such shares. Upon any such exercise of
either Option, eFunds will, prior to the applicable issuance Event Date, deliver
to Deluxe, against payment therefore, certificates (issued in the name of
Deluxe) representing the shares of eFunds Voting Stock or eFunds Nonvoting
Stock, as the case may be, being purchased upon such exercise. Payment for such
shares shall be made by wire transfer or intrabank transfer of
immediately-available funds to such account as shall be specified by eFunds, for
the full purchase price for such shares.
Section 6.04 Effect of Failure to Exercise. Except as provided in Section
6.06, any failure by Deluxe to exercise either Option, or any exercise for less
than all shares purchasable under either Option, in connection with any
particular Issuance Event shall not affect Deluxe's right to exercise the
relevant Option in connection with any subsequent Issuance Event.
Section 6.05 Termination of Options. The Options shall terminate upon the
occurrence of any Issuance Event that, after considering Deluxe's response
thereto and to any other Issuance Events, results in Deluxe owning, in the
aggregate, less than 45% of the total combined voting power of all classes of
eFunds Voting Stock, other than any Issuance Event in violation of this
Agreement.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification Procedures.
(a) Deluxe shall indemnify eFunds and each of its Subsidiaries and their
respective officers, directors, employees, agents and representatives (each, an
"eFunds Indemnified Party") and hold them harmless against any and all Losses
resulting from, relating to or arising out of (i) any breach of, or failure to
perform, any agreement of Deluxe contained in this Agreement or (ii) any third
party claims arising in connection with the performance by Deluxe of its
agreements contained in this Agreement.
(b) eFunds shall indemnify Deluxe and each of its Subsidiaries and their
respective officers, directors, employees, agents and representatives (each, a
"Deluxe Indemnified Party") and hold them harmless against any and all Losses
resulting from, relating to or arising out of (i) any breach of or failure to
perform any agreement of eFunds contained in this Agreement or (ii) any third
party claims arising in connection with the performance by eFunds of its
agreements contained in this Agreement.
(c) The indemnification procedures set forth in Section 7.01(d) herein are
applicable to any indemnity granted pursuant to the Ancillary Agreements (other
than the Tax-Sharing Agreement).
(d) If a claim or demand is made against an Indemnified Party by any Person
who is not a party to the Ancillary Agreements (a "Third Party Claim") as to
which such Indemnified Party is entitled to indemnification pursuant to the
Ancillary Agreements, such Indemnified Party
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shall give the Indemnifying Party notice of such Third Party Claim, as promptly
as practicable, but in any event no later than 15 days of the receipt by the
Indemnified Party of such notice; provided, however, that the failure to provide
such notice shall not release the Indemnifying Party from any of its obligations
under the Ancillary Agreements except to the extent the Indemnifying Party is
materially prejudiced by such failure and shall not relieve the Indemnifying
Party from any other obligation or liability that it may have to any Indemnified
Party otherwise than under the Ancillary Agreements. If the Indemnifying Party
acknowledges in writing its obligations to indemnify the Indemnified Party
hereunder against any Losses that may result from such Third Party Claim, then
such Indemnifying Party shall be entitled to assume and control the defense of
such Third Party Claim at its expense and through counsel of its choice, subject
to the approval of the Indemnified Party (which approval shall not be
unreasonably withheld or delayed), if it gives notice of its intention to do so
to the Indemnified Party within 15 business days of the receipt of such notice
from the Indemnified Party; provided, however, that if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the Indemnified Party for the same
counsel to represent both the Indemnified Party and the Indemnifying Party, then
the Indemnified Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is required to
participate in such defense, at the expense of the Indemnifying Party. In the
event the Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified Party
shall cooperate with the Indemnifying Party in such defense and make available
to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by the Indemnifying Party, subject to reimbursement of
reasonable out-of-pocket expenses. Similarly, in the event the Indemnified Party
is, directly or indirectly, conducting the defense against any such Third Party
Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such
defense and make available to the Indemnified Party all such witnesses, records,
materials and information in the Indemnifying Party's possession or under the
Indemnifying Party's control relating thereto as is reasonably required by the
Indemnified Party, subject to reimbursement of reasonable out-of-pocket
expenses. No such Third Party Claim may be settled by the Indemnifying Party
without the prior written consent of the Indemnified Party (which shall not be
unreasonably withheld or delayed) unless such settlement is solely for money and
includes an unconditional release of each Indemnified Party from any and all
Losses arising out of such action, claim, suit or proceeding and would not
otherwise adversely affect the Indemnified Party. No such Third Party Claim may
be settled by the Indemnified Party without the prior written consent of the
Indemnifying Party which shall not be unreasonably withheld or delayed.
(e) All Persons who by their relationship to a party to this agreement
(including, without limitation all Affiliates of such party and all officers,
directors, employees and agents of such party and its Affiliates) are, or may
become, entitled to indemnification hereunder or under the Ancillary Agreements
(other than the Tax-Sharing Agreement) shall, as a condition of their rights to
indemnification hereunder or thereunder, be deemed to have granted such party an
irrevocable power of attorney, coupled with an interest, with respect to all
matters for which any determination may be made, action may be taken or consent
may be given or withheld under this section 7.01, including, without limitation,
any determination regarding selection of counsel and
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any consent regarding settlement, and any such determination, action or consent
made, taken, given or withheld by such party shall be binding up such Person as
if made, taken, given or withheld by such Person personally.
(f) Notwithstanding the foregoing, the Indemnifying Party shall not be
entitled to assume the defense of any Third Party Claim and shall be liable for
the fees and expenses of counsel incurred by the Indemnified Party in defending
such Third Party Claim if the Third Party Claim seeks an order, injunction or
other equitable relief or relief for other than money damages against the
Indemnified Party which the Indemnified Party reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
(g) In the event any Indemnified Party should have a claim against the
Indemnifying Party that does not involve a Third Party Claim, the Indemnified
Party shall deliver a notice of such claim with reasonable promptness to the
Indemnifying Party. If the Indemnifying Party notifies the Indemnified Party
that it does not dispute the claim described in such notice or fails to notify
the Indemnified Party within 20 business days after delivery of such notice by
the Indemnified Party whether the Indemnifying Party disputes the claim
described in such notice, the Loss in the amount specified in the Indemnified
Party's notice will be conclusively deemed a liability of the Indemnifying Party
and the Indemnifying Party shall pay the amount of such Loss to the Indemnified
Party on demand. If the Indemnifying Party has timely disputed the liability
with respect to such claim, the Chief Financial Officer of eFunds and the Chief
Financial Officer of Deluxe will proceed in good faith to negotiate a resolution
of such dispute, and if not resolved through the negotiations of such
individuals within 20 days after the delivery of the Indemnified Party's notice
of such claim, such dispute shall be resolved fully and finally in Minneapolis,
Minnesota, by an arbitrator selected pursuant to and an arbitration governed by
Commercial Arbitration Rules of the American Arbitration Association, as
modified herein. The parties will jointly appoint a mutually acceptable
independent arbitrator, seeking assistance in such regard from the American
Arbitration Association. The arbitrator shall resolve the dispute within 30 days
after selection and judgment upon the award rendered by such arbitrator may be
entered in any court of competent jurisdiction. Each of Deluxe, on the one hand,
and eFunds, on the other, shall bear its own fees and expenses in connection
with such arbitration and shall bear 50% of the fees and expenses of the
arbitrator.
ARTICLE VIII
CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION
Section 8.01 Condition. Consummation of the transactions provided for in
this Agreement and the Ancillary Agreements is conditioned upon, and shall only
be effected upon or after (i) the final approval of the IPO by the Board of
Directors of eFunds and Deluxe, and (ii) the closing of the IPO.
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Section 8.02 Termination. This Agreement may be terminated and the IPO and
Distribution abandoned by the Board of Directors of Deluxe in its sole
discretion, without the approval of eFunds at any time prior to the IPO
Effective Date or Distribution Date, as applicable. In the event of any such
termination, no party shall have any liability of any kind to the other party.
ARTICLE IX
MISCELLANEOUS
Section 9.01 Limitation of Liability. Neither Deluxe nor eFunds shall be
liable to the other for any special, indirect, incidental or consequential
damages of the other arising in connection with this Agreement.
Section 9.02 Further Assurances. Each party agrees to execute, acknowledge,
deliver, file, record and publish such further certificates, amendments to
certificates, instruments and documents, and do all such other acts and things
as may be required by law, or as may be required to carry out the intent and
purposes of this Agreement and the Ancillary Agreements and the translations
contemplated thereby.
Section 9.03 Waiver. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if it is in writing signed by a duly authorized officer of the
party against which such waiver is to be asserted. Unless other expressly
provided in this Agreement, no delay or omission on the part of any party in
exercising any right or privilege under this Agreement shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any right or privilege
under this Agreement operates as a waiver of any other right or privilege under
this Agreement nor shall any single or partial exercise of any right or
privilege preclude any other or future exercise thereof or the exercise of any
other right or privilege under this Agreement. No failure by either party to
take any action or assert any right or privilege hereunder shall be deemed to be
a waiver of such right or privilege in the event of the continuation or
repetition of the circumstances giving rise to such right unless expressly
waived in writing by the party against whom the existence of such waiver is
asserted.
Section 9.04 Remedies. Each of Deluxe and eFunds acknowledges and agrees
that under certain circumstances the breach by Deluxe or any of its Affiliates
or eFunds or any of its Affiliates of a term or provision of this Agreement will
materially and irreparably harm the other party, that money damages will
accordingly not be an adequate remedy for such breach and that the
non-defaulting party, in its sole discretion and in addition to its rights under
this Agreement and any other remedies it may have at law or in equity, may apply
to any court of law or equity of competent jurisdiction for specific performance
and/or other injunctive relief in order to enforce or prevent any breach of the
provisions of this Agreement.
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Section 9.05 Performance. Each of the parties hereto shall use all
commercially reasonable efforts to cause to be performed all actions, agreements
and obligations set forth herein to be performed by any Affiliate of such party.
Section 9.06 References; Construction. The table of contents and the
section and other headings and subheadings contained in this Agreement and the
exhibits hereto are solely for the purpose of reference, are not part of the
agreement of the parties hereto, and shall not in any way affect the meaning or
interpretation of this Agreement or any exhibit hereto. All references to days
or months shall be deemed references to calendar days or months. Unless the
context otherwise requires, any reference to a "Section" or an "Exhibit" shall
be deemed to refer to a section of this Agreement or an exhibit to this
Agreement, as applicable. The words "hereof," "herein" and "hereunder" and words
of similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. This Agreement shall be
construed without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing the document to be drafted.
Section 9.07 Amendments. This Agreement shall not be supplemented, amended
or modified in any manner whatsoever (including without limitation by course of
dealing or of performance or usage of trade) except in writing signed by the
parties.
Section 9.08 Successors and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
permitted assigns. Except as set forth below, this Agreement may not be assigned
by any party by operation of law or otherwise without the express written
consent of the other party (which consent may be granted or withheld). The
option granted to Deluxe pursuant to Article VII hereof may be assigned to any
Subsidiary of Deluxe.
Section 9.09 Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. If any portion of this Agreement is declared invalid for
any reason in any jurisdiction, such declaration shall have no effect upon the
remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; provided, that, the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
Section 9.10 Entire Agreement. Other than the Assignment and Assumption
Agreement and the Ancillary Agreements, this Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersedes all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof and thereof.
Section 9.11 Notices. All notices, consents, requests, approvals, and other
communications provided for or required herein, and all legal process in regard
thereto, must be in writing and shall be deemed validly given, made or served,
(a) when delivered personally or sent by telecopy to the facsimile number
indicated below with a required confirmation copy sent
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in accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally-recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:
If to Deluxe:
Deluxe Corporation
3680 Victoria Street North
Shoreview, Minnesota 55126
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile:
If to eFunds:
eFunds Corporation
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile:
Section 9.12 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of Minnesota sitting in the County of Hennepin or the United
States District Court for the District of Minnesota and the appellate court
having jurisdiction of appeals in such courts. In that context, and without
limiting the generality of the foregoing, each of the parties hereby irrevocably
and unconditionally:
(a) submits for itself and its property in any legal suit, action or
proceeding relating to this Agreement or any transaction contemplated hereby, or
for recognition and enforcement of any judgment in respect thereof, to the
exclusive jurisdiction of the courts of the State of Minnesota sitting in the
County of Hennepin or the United States District Court for the District of
Minnesota and appellate court having jurisdiction of appeals in such courts, and
each of the parties hereto irrevocably and unconditionally agrees that all
claims in respect of any such suit, action, or proceeding shall be heard and
determined in such Minnesota State court or, to the extent permitted by law, in
such federal court;
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(b) consents that any such suit, action or proceeding may and shall be
brought in such courts and waives any objection that it may now or hereafter
have to the venue or jurisdiction or any such action or proceeding in such court
or that such action or proceeding was brought in an inconvenient forum and
agrees not to plead or claim the same;
(c) agrees that service of process in any such action or proceeding may be
effected by mailing a copy thereof by registered or certified mail (or any
substantially similar form of mail), postage prepaid, to such party in its
address as provided in Section 9.11 hereof;
(d) agrees that nothing herein shall affect the right to effect service of
process in any other manner permitted by Minnesota law; and
(e) agrees that this Agreement has been entered into in the State of
Minnesota and performed in part in the State of Minnesota.
Section 9.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first written above.
DELUXE CORPORATION
By:
----------------------------------
Name:
Title:
EFUNDS CORPORATION
By:
----------------------------------
Name:
Title:
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EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EFUNDS CORPORATION
To form a corporation pursuant to the Delaware General Corporation Law,
the undersigned hereby certifies:
ARTICLE I
The name of the corporation is eFunds Corporation.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
Delaware General Corporation Law, as amended from time to time ("Delaware Law").
ARTICLE IV
The total number of shares which the corporation is authorized to issue
is 350,000,000 shares as follows: 250,000,000 shares of common stock, par value
$.01 per share (the "Common Stock"), and 100,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock").
The Preferred Stock may be issued from time to time by the board of
directors as shares of one or more class or series. Subject to the provisions
hereof and the limitations prescribed by law, the board of directors is
expressly authorized, by adopting resolutions providing for the issuance of
shares of any particular class or series and, if and to the extent from time to
time required by law, by filing with the Delaware Secretary of State a
certificate setting forth the resolutions so adopted pursuant to the Delaware
Law, to establish the number of shares to be included in each such class or
series and to fix the designation and relative powers, including voting powers,
preferences, rights, qualifications, limitations and restrictions thereof
relating to the shares of each such class or series. The authority of the board
of directors with respect to each class or series shall include, but not be
limited to, determination of the following:
(i) the distinctive serial designation of such series and the number of
shares constituting such class or series;
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(ii) the annual dividend rate on shares of such class or series, if
any, whether dividends shall be cumulative and, if so, from which date
or dates;
(iii) whether the shares of such class or series shall be redeemable
and, if so, the terms and conditions of such redemption, including the
date or dates upon and after which such shares shall be redeemable, and
the amount per share payable in case of redemption, which amount may
vary under different conditions and at different redemption dates;
(iv) the obligation, if any, of the corporation to retire shares of
such class or series pursuant to a sinking fund;
(v) whether shares of such class or series shall be convertible into,
or exchangeable for, shares of stock of any other class or classes and,
if so, the terms and conditions of such conversion or exchange,
including the price or prices or the rate or rates of conversion or
exchange and the terms of adjustment, if any;
(vi) whether the shares of such class or series shall have voting
rights, in addition to any voting rights provided by law, and, if so,
the terms of such voting rights;
(vii) the rights of the shares of such class or series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
corporation; and
(viii) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such class or series.
The shares of Preferred Stock of any one series shall be identical with each
other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative.
All shares of Common Stock shall be identical and shall entitle the
holders thereof to the same rights and privileges. When and as dividends are
declared on the Common Stock, whether payable in cash, in property or in
securities of the corporation, the holders of the Common Stock shall be entitled
to share equally, share for share, in such dividends. Upon any liquidation,
dissolution or winding-up of the corporation, whether voluntary or involuntary,
after the payment in full of all amounts to which the holders of the Preferred
Stock shall be entitled, the remaining assets of the corporation to be
distributed to the holders of the stock of the corporation shall be distributed
ratably among the holders of the shares of Common Stock. The holders of shares
of the Common Stock shall be entitled to vote on all matters to be voted on by
the stockholders of the corporation. On all matters to be voted on by the
holders of Common Stock, the holders shall be entitled to one vote for each
share thereof held of record.
ARTICLE V
Without the affirmative vote of the holders of record of 66-2/3% of all
of the shares outstanding and entitled to vote on the following matters and the
approval of 66-2/3% of all of the directors of the corporation (with any
fractional number of directors resulting from application of such percentage
rounded up to the nearest whole number):
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(a) The corporation shall not, directly or indirectly, consolidate with
or merge into or with any other person or entity except that any
subsidiary may consolidate with or merge into or with the corporation
under the provisions of Section 253 of Delaware Law or into or with any
wholly owned subsidiary of the corporation.
(b) The corporation shall not, directly or indirectly, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets to any person, entity or group that agrees to act
together for the purpose of acquiring such properties and assets
whether in a single transaction or a series or related transactions,
except that the corporation or any subsidiary of the corporation may at
any time or from time to time convey, transfer, lease or otherwise
dispose of all or any of its properties and assets to the corporation
or any wholly owned subsidiary of the corporation.
(c) The corporation shall not amend this Certificate of Incorporation
or the by-laws of the corporation in any manner that would permit a
director to be removed from office other than for cause.
(d) The corporation shall not amend or otherwise modify or repeal
Articles V, VI, VII, VIII, IX, X, or XI of the Certificate of
Incorporation.
ARTICLE VI
The number of directors to constitute the whole board of directors
shall be such number (not less than one nor more than twelve) as shall be fixed
from time to time by resolution of the board of directors adopted by such vote
as may be required in the by-laws. The board of directors shall be divided into
three classes as nearly equal in number as may be, with the term of office of
one class expiring each year. The directors of the first class shall be elected
to hold office for a term expiring at the annual meeting of stockholders in
2001, directors of the second class shall be elected to hold office for a term
expiring at the next succeeding annual meeting in 2002, and directors of the
third class shall be elected to hold office for a term expiring at the second
succeeding annual meeting in 2003. Commencing in 2001, at each annual meeting of
stockholders, successors to the directors whose terms shall then expire shall be
elected to hold office for terms expiring at the third succeeding annual meeting
of stockholders. In case of any vacancies, by reason of an increase in the
number of directors or otherwise, each additional director may be elected by a
majority of the directors then in office, even though less than a quorum of the
board of directors, to serve until the end of the remainder of the term of the
class to which such director is assigned and until his or her successor shall
have been elected and qualified. Directors shall continue in office until others
are chosen and qualified in their stead. When the number of directors is
changed, any newly created directorships or any decrease in directorships shall
be so assigned among the classes by a majority of the directors then in office,
though less than a quorum, as to make all classes as nearly equal in number as
may be feasible. No decrease in the number of directors shall shorten the term
of any incumbent director.
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ARTICLE VII
All actions required or permitted to be taken by the stockholders of
the corporation must be effected at a duly called annual or special meeting of
stockholders of the corporation and may not be effected by any consent in
writing of such stockholders.
ARTICLE VIII
In furtherance and not in limitation of the power conferred upon the
board of directors by law, the board of directors shall have power to adopt,
amend, alter and repeal from time to time the by-laws of the corporation by
majority vote of all directors except that any provision of the by-laws
requiring, for board action, a vote of greater than a majority of the board
shall not be amended, altered or repealed except by such super-majority vote.
ARTICLE IX
Subject to Article V of this Certificate of Incorporation, the
corporation reserves the right to amend this Certificate of Incorporation in any
manner provided herein or permitted by Delaware Law and all rights and powers
conferred herein on stockholders, directors and officers, if any, are subject to
this reserved power.
ARTICLE X
A director of the corporation shall not be liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
the law, (iii) under Section 174 of Delaware Law or (iv) for any transaction
from which the director derived an improper personal benefit.
If the Delaware Law is hereafter amended to further eliminate or limit
the liability of a director of a corporation, then a director of the
corporation, in addition to the circumstances set forth herein, shall have no
liability as a director (or such liability shall be limited) to the fullest
extent permitted by the Delaware Law as so amended. No repeal or modification of
the foregoing provisions of this Article X nor, to the fullest extent permitted
by law, any modification of law, shall adversely affect any right or protection
of a director of the corporation existing at the time of such repeal or
modification.
ARTICLE XI
The corporation shall, to the full extent permitted by Delaware Law,
indemnify each officer and director of the corporation and may, but shall not be
obligated to, indemnify any employee or agent of the corporation who is not an
officer or director of the corporation as follows:
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(a) Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that
he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or
agent, shall or may, as applicable, be indemnified and held harmless by
the corporation to the fullest extent authorized by Delaware Law, as
the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than permitted
prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's
heirs, executors and administrators; provided, however, that, except as
provided in Paragraph (c) hereof with respect to proceedings to enforce
rights to indemnification, the corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated
by such indemnitee only if such proceeding (or part thereof) was
authorized by the board of directors of the corporation.
(b) Right to Advancement of Expenses. The right to indemnification
conferred in Paragraph (a) of this Article XI shall include the right
to be paid by the corporation the expenses incurred in defending any
proceeding for which such right to indemnification is applicable in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, if Delaware Law so requires, an
advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only
upon delivery to the corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Article XI or
otherwise.
(c) Right of Indemnitee to Bring Suit. The rights to indemnification
and to the advancement of expenses conferred in Paragraphs (a) and (b)
of this Article XI shall be contract rights. If a claim under Paragraph
(a) or (b) of this Article XI is not paid in full by the corporation
within sixty days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the
corporation to recover an
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advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting
or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought
by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense for the corporation that, and (ii) in any suit by
the corporation to recover an advancement of expenses pursuant to the
terms of an undertaking the corporation shall be entitled to recover
such expenses upon a final adjudication that, the indemnitee has not
met any applicable standard for indemnification set forth in Delaware
Law. Neither the failure of the corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such suit that the
indemnitee has met the applicable standard of conduct set forth in
Delaware Law and that indemnification of the indemnitee is therefore
proper in the circumstances, nor an actual determination by the
corporation (including its board of directors, independent legal
counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the
case of such a suit brought by the indemnitee, be a defense of the
corporation to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses
hereunder, or by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article XI or otherwise shall be on the
corporation.
(d) Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article XI shall not be
exclusive of any other right which any person may have or hereafter
acquire under any statute, this Amended and Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or of
disinterested directors or otherwise.
(e) Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of status
as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of
Delaware Law.
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IN WITNESS WHEREOF, the undersigned executes and acknowledges this
Certificate and certifies that the same has been duly authorized by all
requisite corporate action under Delaware General Corporate Law Sections 103,
242 and 245.
EFUNDS CORPORATION
By
-----------------------------
Steven F. Coleman
Its Senior Vice President,
General Counsel and Secretary
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EXHIBIT 3.2
BY-LAWS
OF
EFUNDS CORPORATION
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of eFunds
Corporation, in the State of Delaware shall be at 1209 Orange Street,
Wilmington, Delaware 19801. The name of the registered agent in charge thereof
shall be The Corporation Trust Company.
Section 1.02. Other Offices. The corporation may also have an office or
offices at such other place or places either within or without the State of
Delaware as the board of directors may from time to time determine or the
business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Place of Meetings. Each meeting of the stockholders of
the corporation shall be held at such place either within or without the State
of Delaware as shall be fixed by the board of directors and specified in the
notice of said meeting.
Section 2.02. Annual Meetings. The annual meeting of the stockholders
for the transaction of such business as may properly come before the meeting
shall be held at such place, date and hour as shall be determined by the board
of directors.
Section 2.03. Special Meetings. A special meeting of the stockholders
for any purposes may be called at any time by the board of directors.
Section 2.04. Notice of Annual and Special Meetings. Written notice of
the annual and any special meetings of the stockholders, stating the place, date
and hour of the meeting, and for special meetings the purpose or purposes for
which the meeting is called, shall be given to each stockholder entitled to vote
at such meeting, either personally or by mail, not less than ten, nor more than
sixty, days before the date of the meeting.
Section 2.05. Business at Annual and Special Meetings. The business to
be transacted at any annual or special meeting of stockholders shall be limited
to business which is properly brought before the meeting. For the purposes of
these by-laws, "properly brought before the meeting" shall mean (i) the business
which is specified in the notice of the meeting given by the board of directors,
(ii) otherwise brought before the meeting by order of the board of directors or
(iii) otherwise properly brought before an annual meeting by a stockholder. In
order for business to be properly brought before an annual meeting by a
stockholder, the stockholder must give written notice of such stockholder's
intent to bring a matter before the annual meeting, either by
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personal delivery or by United States mail, postage pre-paid, to the chief
executive officer or secretary of the corporation no later than the date
specified by Rule 14a-8 promulgated under the Securities Act of 1934, as the
same may be amended from time to time and any successor rule or regulation, as
the last date for receipt of shareholder proposals to be submitted under such
rule (such date, the "Notice Date"). Each such notice shall set forth: (a) the
name and address of the stockholder who intends to bring such matter before a
meeting; (b) the number of shares of the corporation entitled to vote at such
meeting held by the stockholder; (c) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person at the meeting to bring such matter before the
meeting; (d) a description of the business desired to be brought before the
meeting and the reasons of such stockholder in requesting that such matter be
included in proxy statement pertaining to the matter; (e) such other information
regarding the business proposed by such stockholder as would be required to be
included in the proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (f) a representation as to the
stockholder's material interest in the business being proposed. The presiding
officer of the meeting shall refuse to acknowledge any business proposed to be
brought before an annual meeting not made in compliance with the foregoing
procedure.
Section 2.06. Quorum and Adjourned Meetings. The holders of a majority
of the stock issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting, at which the quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.07. Required Vote. When a quorum is present at any meeting,
the vote of the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of statute
or by the Certificate of Incorporation, a different vote is required, in which
case such express provisions shall govern and control the decision of such
question.
Section 2.08. Proxies. Every stockholder entitled to vote at a meeting
may authorize another person or persons to act for such stockholder by proxy
duly appointed by an instrument in writing, subscribed by such stockholder, or
by transmitting or authorizing the transmission of a facsimile, telegram,
cablegram or other means of electronic transmission as permitted by Section 212
of the Delaware General Corporation Law or any successor provision thereof. The
appointment of a proxy shall be made not more than three (3) years prior to the
meeting, unless the appointment provides for a longer period. To be valid, all
proxies must meet the requirements of, and shall be governed by, Section 212 of
the Delaware General Corporation Law or any successor provision thereof. The
attendance at any meeting of stockholders of a stockholder who theretofore may
have given a proxy shall not have the effect of revoking such proxy unless such
stockholder shall in writing or by electronic transmission in accordance with
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Section 212 of the Delaware General Corporation Law or any successor provision
thereof so notify the secretary of the meeting prior to the voting of the proxy.
Section 2.09. Conduct of Meetings of Stockholders. The chairman of the
board of directors, or if there shall be none or in his or her absence, the
highest ranking officer of the corporation, among a group consisting of the
chief executive officer, president and the vice presidents, who is present at
the meeting, shall call to order and act as the chair of any meeting of the
stockholders of the corporation. The secretary of the corporation shall serve as
the secretary of the meeting or, if there shall be none or in his or her
absence, the secretary of the meeting shall be such person as the chair of the
meeting appoints. The chair of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to take or refrain from
taking such actions as, in the judgment of the chair of the meeting, are
appropriate for the conduct of the meeting. To the extent not prohibited by
applicable law, such rules, regulations and procedures may include, without
limitation, establishment of (i) an agenda or order of business for the meeting,
(ii) the method by which business may be proposed and procedures for determining
whether business has been properly (or not properly) introduced before the
meeting, (iii) procedures for casting and the form of ballots to be used by
shareholders in attendance at the meeting and the procedures to be followed for
counting shareholder votes, (iv) rules, regulations and procedures for
maintaining order at the meeting and the safety of those present, (v)
limitations on attendance at or participation in the meeting to shareholders of
record of the corporation, their duly authorized proxies or such other persons
as the chair of the meeting shall determine, (vi) restrictions on entry to the
meeting after the time fixed for commencement thereof and (vii) limitations on
the time allotted to questions or comments by participants. Unless and to the
extent otherwise determined by the chair of the meeting, it shall not be
necessary to follow Roberts' Rules of Order or any other rules of parliamentary
procedure at the meeting of shareholders. Following completion of the business
of the meeting as determined by the chair of the meeting, the chair of the
meeting shall have the exclusive authority to adjourn the meeting.
Section 2.10. Conduct of Business. No business shall be conducted at an
annual meeting of stockholders of the corporation except business brought before
the meeting in accordance with the procedures set forth in these by-laws;
provided, however, that once business has been properly brought before the
meeting in accordance with such procedures, nothing in this Section shall be
deemed to preclude discussion by any shareholder of any such business. If the
introduction of any business at a annual meeting of stockholders does not comply
with the procedures specified in this Section, the chair of the meeting shall
declare that such business is not properly before the meeting and shall not be
considered at the meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The business, property and affairs of the
corporation shall be managed under the direction of the board of directors.
Section 3.02. Nomination of Directors. Nominations for the election of
directors may be made by the board of directors or a committee appointed by the
board of directors or by any stockholder entitled to
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vote in the election of directors generally. Any stockholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors at a meeting only if written notice of such stockholder's
intent to make such nomination or nominations has been given, either by personal
delivery or by United States mail, postage prepaid, to the chief executive
officer or secretary of the corporation not later than (i), with respect to an
election to be held at an annual meeting of stockholders, the Notice Date, and
(ii), with respect to the election to be held at a special meeting of
stockholders for the election of directors, the close of business on the tenth
day following the date on which notice of such meeting is first given to
stockholders. Each such notice shall set forth (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) the number of shares of the corporation entitled to vote at
such meeting held by the stockholder and by each nominee; (c) a representation
that the stockholder is a holder of record of stock of the corporation entitled
to vote at such meeting and that such stockholder and the nominee or nominees
proposed by such stockholder intend to appear in person at the meeting to
nominate the person or persons specified in the notice; (d) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (e) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission; and (f) the consent of each nominee
to serve as a director of the corporation if so elected. In order to be properly
before the meeting at which such nominations are to be considered, the
stockholder proposing the nomination or nominations and the person or persons so
nominated shall be present at the meeting. The chair of the meeting shall refuse
to acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
Section 3.03 Quorum and Manner of Acting. One-half in number of the
directors in office at the time shall constitute a quorum for the transaction of
business at any meeting. If the number of directors in office at the time is not
evenly divisible by two, any resulting fraction shall be rounded upwards to the
next whole number in calculation of the quorum number. Except as otherwise
required by the Certificate of Incorporation or these by-laws, the affirmative
vote of a majority of the directors present at any meeting at which a quorum is
present shall be required for the taking of any action by the board of
directors. In the absence of a quorum at any meeting of the Board, such meeting,
need not be held, or a majority of the directors present thereat or, if no
director is present, the chief executive officer or secretary, may adjourn such
meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting need not be given.
Section 3.04. Offices; Place of Meetings. The board of directors may
hold meetings and have an office or offices at such place or places within or
without the State of Delaware, as the board of directors may from time to time
determine.
Section 3.05. Annual Meeting. The board of directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable following each annual meeting of stockholders.
Such meeting shall be called and held at the place and time specified in the
notice or waiver of notice thereof as in the case of a special meeting of the
board of directors.
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Section 3.06. Regular Meeting. Regular meetings of the board of
directors shall be held at such places and at such times as the board of
directors shall from time to time determine. Notice of regular meetings of the
board of directors need not be given.
Section 3.07. Special Meetings. Special meetings of the board of
directors shall be held whenever called by the chairman of the board, the chief
executive officer or any two of the directors. Notice of each such meeting shall
be mailed by the chief executive officer, secretary or chairman of the board to
each director, addressed to him or her at his or her residence, usual place of
business or other location designated by such director as the address for
receipt of such notices, at least two days before the day on which the meeting
is to beheld, or shall be sent to him or her at his or her residence or at such
place of business or other address by facsimile, electronic transmission or
similar means, or be delivered personally or by telephone, not later than two
days before the day on which the meeting is to be held. Each such notice shall
state the time and place of the meeting but need not state the purposes thereof
except as otherwise herein expressly provided. Notice of any such meeting need
not be given to any director, however, if waived by him or her in writing or by
facsimile, electronic or similar means, or by mail, whether before or after such
meeting shall be held, or if he or she shall be present at such meeting; and any
meeting of the board shall be a legal meeting without any notice thereof having
been given if all of the directors shall be present thereat.
Section 3.08. Organization. At each meeting of the board of directors,
the chairman of the board, or in the absence of the chairman of the board, or if
they be directors, the chief executive officer, or in the absence of the chief
executive officer, the president, or in the absence of the president, any
director chosen by a majority of the directors present thereat, shall preside.
The secretary, or in his or her absence an assistant secretary of the
corporation, or in the absence of the secretary and all assistant secretaries or
subject to other direction of the board of directors, a person whom the chairman
of such meeting shall appoint, shall act as secretary of such meeting and keep
the minutes thereof.
Section 3.09. Order of Business. At all meetings of the board of
directors business shall be transacted in the order determined by the board of
directors.
Section 3.10. Action by Consent. Any action required or permitted to be
taken at any meeting of the board of directors or of any committee thereof may
be taken without a meeting if a written consent thereto is signed by all members
of the board or of such committee, as the case may be, and such written consent
is filed with the minutes of the proceedings of the board of directors or such
committee.
Section 3.11. Telephone, etc. Meetings. Members of the board of
directors, or any committee designated by the board of directors, may
participate in a meeting of the board of directors, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute the presence of such person at such meeting.
Section 3.12. Resignation. Any director of the corporation may resign
at any time by giving written notice of his or her resignation to the chairman
of the board, the chief executive officer or the secretary of the corporation.
Such resignation shall take effect at the time specified therein, or, if the
time when it shall become effective shall not be specified therein, then it
shall
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take effect when received. Except as aforesaid, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.13. Compensation. Each director, in consideration of his or
her serving as such, shall be entitled to receive from the corporation such
amount per annum or such fees for attendance at directors' and committee
meetings, or both, as the board of directors shall from time to time determine.
The board of directors may likewise provide that the corporation shall reimburse
each director or member of a committee for any expenses incurred by him or her
on account to his or her attendance at any such meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving proper compensation therefor.
Section 3.14. Indemnification of Directors and Officers. The
corporation shall indemnify its directors and officers in the manner and to the
extent provided in the Certificate of Incorporation.
Section 3.15. Removal. Any director or the entire board of directors
may be removed at any time but only for cause.
Section 3.16. Super-Majority. Subject to Article V of the Certificate
of Incorporation, without the approval of 66-2/3% of all directors (to the
extent that the application of such percentage results in a fractional number,
rounded up to the nearest whole number of directors) the corporation shall not
and it shall not permit any subsidiary of the corporation to:
(a) Acquire, consolidate with or merge into another person or
entity, if the aggregate consideration for such transaction exceeds
[$50 million], except that any subsidiary may consolidate with or merge
into the corporation or any wholly owned subsidiary of the corporation
under the provisions of Section 253 of Delaware Law.
(b) In one or a series of related transactions and other than
in the ordinary course of business, convey, transfer, lease or
otherwise dispose of assets or properties of the corporation, or any of
its subsidiaries, if the aggregate consideration exceeds [$50 million],
except that any subsidiary of the corporation may at any time, or from
time to time, convey, transfer, lease or otherwise dispose of all or
any of its properties and assets to the corporation or any wholly owned
subsidiary of the corporation and except that the corporation may at
any time, or from time to time, convey, transfer, lease or otherwise
dispose of all or any of its properties and assets to any wholly owned
subsidiary of the corporation.
(c) Make any recommendation to the stockholders with respect
to a pending tender offer.
(d) Issue, sell, assign, pledge or otherwise dispose of any
shares of, or any securities convertible into, Common Stock of the
corporation or any subsidiaries of the corporation except that:
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(i) the corporation may issue up to [500,000] shares of
Common Stock in any one transaction or series of
related transactions, for any purpose authorized by
the board including acquisitions;
(ii) the corporation may sell or assign to any wholly
owned subsidiary of the corporation, and any
subsidiary of the corporation may issue, sell,
assign, pledge or otherwise dispose of to the
corporation or any wholly owned subsidiary of the
corporation, shares of or any warrants, rights or
options to acquire any securities convertible into,
stock of any subsidiary; and
(iii) the corporation may issue shares in connection with
stock option plans and other stock-based plans
approved by the stockholders and administered by the
board of directors or a committee thereof.
(e) Increase the size of the board of directors.
(f) Agree to do any of the foregoing.
(g) Amend this Section 3.16.
ARTICLE IV
COMMITTEES
The board of directors may, by resolution or resolutions passed by a
majority of the full board of directors, designate one or more committees, each
such committee to consist of one or more directors of the corporation, which to
the extent provided in said resolution or resolutions shall have and may
exercise the powers of the board of directors in the management of the business
and affairs of the corporation, except that any such committee or committees
shall not be authorized to exercise the powers of the board with respect to any
actions set forth in Section 3.16 hereof. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the board of directors. A majority of all the members of any such
committee may determine its actions and fix the time and place of its meetings,
unless the board of directors shall otherwise provide. The board of directors
shall have power to change the members of any such committee at any time, to
fill vacancies and to discharge any such committee, either with or without
cause, at any time.
ARTICLE V
OFFICERS
Section 5.01. Number. The principal officers of the corporation shall
be chosen by the board of directors and shall be a chief executive officer and
chief financial officer and, if elected by the board of directors, a president,
one or more vice presidents (the number thereof to be determined by the board of
directors and one or more of whom may be designated as executive or senior vice
presidents), a secretary, a treasurer and one or more assistant secretaries and
assistant treasurers. The board of directors may also elect a chairman and a
vice chairman or vice chairmen of the board whom the board may designate to be
an officer or officers of the
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corporation. In addition, there may be such subordinate officers, agents and
employees as may be appointed in accordance with the provisions of Section 5.03.
Any two or more offices may be held by the same person. The offices of the
corporation for which officers may be elected shall be set forth, from time to
time, by resolution of the board of directors.
Section 5.02. Election, Qualifications and Term of Office. Each officer
of the corporation, except such officers as may be appointed in accordance with
the provisions of Section 5.03, shall be elected by the board of directors from
time to time, and shall hold office until his or her successor shall have been
duly elected and qualified, or until his or her death, or until he or she shall
have resigned or shall have been removed in the manner herein provided.
Section 5.03. Other Officers. The corporation may have such other
subordinate officers, agents and employees as the chief executive officer may
deem necessary, including one or more vice presidents, assistant secretaries, or
assistant treasurers, a controller and one or more assistant controllers, each
of whom shall hold office for such period, have such authority, and perform such
duties as the chief executive officer may from time to time determine.
Section 5.04. Removal. Any officer may be removed, either with or
without cause, by the vote of a majority of the full board of directors or,
except in case the chief executive officer or chief financial officer, by the
chief executive officer and any other officer upon whom the power of removal may
be conferred by the board of directors. Such removal from office shall not
affect any rights which such removed officer may have under any employment or
stockholder agreement.
Section 5.05. Resignation. Any officer may resign at any time by giving
written notice to the board of directors or to the chief executive officer. Any
such resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, then it shall
take effect when accepted by action of the board of directors. Except as
aforesaid, the acceptance of such resignation shall not be necessary to make it
effective.
Section 5.06. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these by-laws for
regular election or appointment to such office. If there shall occur a vacancy
in the office of chief executive officer or chief financial officer, such
vacancy shall be filled by the board of directors as expeditiously as
practicable. If there shall occur a vacancy in the position of chairman of the
board of directors or in any other office of the corporation, such vacancy may,
but need not, be filled by the board of directors.
Section 5.07. Chairman of the Board. The chairman of the board, if one
is elected, shall preside at all meetings of the stockholders and of the board
of directors and shall perform such other duties and have such responsibilities
as the board of directors may from time to time determine.
Section 5.08. Chief Executive Officer. The chief executive officer of
the corporation shall have general active management of the business and affairs
of the corporation. In the absence of the chairman of the board of directors, or
if one is not elected or refuses to act, the chief executive
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officer shall preside at all meetings of the shareholders and directors. In the
absence of the secretary and assistant secretary, or if none shall be elected,
the chief executive officer shall maintain records of and, whenever necessary,
certify all proceedings of the board of directors and the shareholders. The
chief executive officer shall have such other duties as may, from time to time,
be prescribed by the board of directors. The powers and duties specified herein
may be modified or limited at any time by the board of directors.
Section 5.09. President. The president, if one is elected, shall have
such power and duties regarding the management and daily conduct of the business
of the corporation as shall be determined by the board of directors, and, unless
otherwise provided by the board of directors, such power and duties of the chief
executive officer as may be delegated to the president by the chief executive
officer. Unless otherwise provided by the board of directors, in the absence of
the chairman of the board of directors (or if one is not elected) and the chief
executive officer, the president shall preside at all meetings of the
shareholders and directors. In the absence of the chief executive officer, the
president shall succeed to the chief executive officer's powers and duties
unless otherwise directed by the chief executive officer or the board of
directors.
Section 5.10. Chief Financial Officer. The chief financial officer
shall (i) keep accurate financial records for the corporation; (ii) deposit all
moneys, drafts and checks in the name of, and to the credit of, the corporation
in such banks and depositories as the board of directors shall, from time to
time, designate or otherwise authorize; (iii) have the power to endorse, for
deposit, all notes, checks and drafts received by the corporation; (iv) disburse
the funds of the corporation, making or causing to be made proper vouchers
therefor; (v) render to the chief executive officer and the board of directors,
whenever requested, an account of all of his or her transactions as chief
financial officer and of the financial condition of the corporation, and (vi)
perform such other duties as may, from time to time, be prescribed by the board
of directors or by the chief executive officer. The powers and duties specified
herein may be modified or limited at any time by the board of directors.
Section 5.11. Vice President. Each vice president shall have such
powers and duties as may be prescribed by the board of directors and, unless
otherwise provided by the board of directors, such power and duties of the chief
executive officer or president as may be delegated from time to time to each
vice president by the chief executive officer or president, as the case may be.
In the event of the absence of the president, the vice presidents shall succeed
to the duties and powers of such office in the order of their election, as
appears from the minutes of the meeting or meetings at which such elections
shall have taken place, unless otherwise provided by the board of directors,
chief executive officer or president.
Section 5.12. Secretary. The secretary, if one shall be elected by the
board of directors, shall be secretary of and shall attend all meetings of the
shareholders and board of directors. The secretary shall act as clerk thereof
and shall record all proceedings of such meetings in the minute book of the
corporation and, whenever necessary, certify all proceedings of the board of
directors and the shareholders. The secretary shall give proper notices of
meetings of shareholders and directors as provided in these by-laws. The
secretary shall, with the chairman of the board of directors, president or any
vice president, sign or cause to be signed by facsimile signature all
certificates for shares of the corporation and shall have such other powers and
shall perform such other duties as may be prescribed from time to time by the
board of directors
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Section 5.14. Treasurer. The treasurer, if one shall be elected by the
board of directors, shall have such powers and duties as may be prescribed by
the board of directors and, unless otherwise provided by the board of directors,
such power and duties of the chief financial officer as may be delegated from
time to time to the treasurer by the chief financial officer. In the absence of
the chief financial officer, the treasurer shall succeed to the duties and
powers of the chief financial officer unless otherwise directed by the board of
directors, chief executive officer or chief financial officer. The treasurer
shall have charge and custody of, and be responsible for, all funds and
securities of the corporation, and shall deposit all such funds to the credit of
the corporation in such banks, trust companies or other depositories as shall
selected in accordance with the provisions of these by-laws; shall disburse the
funds of the corporation as may be ordered by the board of directors, making
proper vouchers for such disbursements, and shall render to the board of
directors, whenever the board may require him or her so to do, and shall present
at the annual meeting of the stockholders a statement of all his or her
transactions as treasurer; and, in general, shall perform all the duties
incident to the office of treasurer and such other duties as from time to time
may be assigned to him or her by the board of directors, chief executive officer
or the chief financial officer.
Section 5.13. Assistant Secretary, Assistant Secretary and Assistant
Treasurer. Any assistant secretary or assistant treasurer, who may from time to
time be elected by the board of directors, may perform the duties of the
secretary or of the treasurer, as the case may be, under the supervision and
subject to the control of the secretary or of the treasurer, respectively.
Unless otherwise provided by the board of directors, the chief executive officer
or the secretary, in the event of the absence of the secretary, an assistant
secretary shall have the powers and perform the duties of the office of
secretary. If there shall be more than one assistant secretary, the assistant
secretary appearing as first elected in the minutes of the meeting at which such
elections shall have taken place shall exercise such powers and have such
duties. Unless otherwise provided by the board of directors, the chief executive
officer, the chief financial officer or the treasurer, in the event of the
absence of the treasurer, an assistant treasurer shall have the powers and
perform the duties of the office of treasurer. If there shall be more than one
assistant treasurer, the assistant treasurer appearing as first elected in the
minutes of the meeting or meetings at which such elections shall have taken
place, shall exercise such powers and have such duties. Each assistant secretary
and each assistant treasurer shall also have such powers and duties of the
secretary or the treasurer as the secretary or the treasurer respectively may
delegate to such assistant and shall also have such other powers and perform
such other duties as may be prescribed from time to time by the board of
directors. Any assistant secretary shall have authority to attest by his or her
signature to the same extent as the secretary.
Section 5.15 Compensation. The compensation of the officers shall be
fixed from time to time by or in the manner prescribed by the board of
directors, and none of such officers shall be prevented from receiving
compensation by reason of the fact that he or she is also a director of the
corporation. The application of this Section 5.15 shall not affect the right any
officer may have regarding compensation under an employment agreement.
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ARTICLE VI
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, these
by-laws may be altered, amended or repealed at any regular meeting of the
stockholders (or at any special meeting thereof duly called for that purpose)
(i) except for Section 3.16, by a majority vote of the shares represented and
entitled to vote at such meeting and (iii) in the case of Section 3.16 by the
affirmative vote of 66-2/3% of all the outstanding share entitled to vote.
Subject to the laws of the Delaware Law (as defined in the Certificate of
Incorporation), the Certificate of Incorporation and the provisions of Section
3.16 hereof, the board of directors may, by the approval of a majority of all
directors, amend these by-laws, or enact such other by-laws as in their judgment
may be advisable for the regulation of the conduct of the affairs of the
corporation.
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Exhibit 10.1
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (this "Agreement") is entered
into on March 31, 2000 between Deluxe Corporation, a Minnesota corporation
("Deluxe"), and eFunds Corporation, a Delaware corporation ("eFunds").
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to such terms in Article I hereof.
RECITALS
WHEREAS, the Board of Directors of Deluxe has determined that it would
be appropriate and desirable to completely separate the eFunds Business from
Deluxe;
WHEREAS, the Boards of Directors of Deluxe and eFunds have each
determined that it would be appropriate and desirable for Deluxe to contribute
and transfer to eFunds, and for eFunds to receive and assume, directly or
indirectly substantially all of the assets and liabilities currently associated
with the eFunds Business, including those assets and liabilities currently held
directly by Deluxe and the stock or similar interests currently held by Deluxe
in subsidiaries and other entities that conduct such business;
WHEREAS, Deluxe and eFunds intend that the contribution of assets by
Deluxe and the assumption of liabilities by eFunds will qualify as a tax-free
reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986,
as amended (the "Code");
WHEREAS, Deluxe and eFunds currently contemplate that, following the
contribution of assets and assumption of liabilities, eFunds will make an
initial public offering of an amount of its voting stock that will reduce
Deluxe's ownership of eFunds single class of voting stock to not less than
80.1%;
WHEREAS, Deluxe and eFunds currently contemplate that, several months
following such initial public offering, Deluxe will distribute to the holders of
its common stock, by means of an exchange offer and/or a pro rata distribution
of all of the shares of eFunds common stock owned by Deluxe (the
"Distribution");
WHEREAS, Deluxe and eFunds intend that the Distribution will be
tax-free to eFunds, Deluxe and Deluxe's shareholders under Section 355 of the
Code;
WHEREAS, Deluxe and eFunds intend in this Agreement, including the
Exhibits and Schedules attached hereto, to set forth the principal arrangements
between them regarding the transfer of assets and liabilities in connection with
the separation of the eFunds Business from Deluxe; and
WHEREAS, Deluxe and eFunds intend that entering into this Agreement
will constitute the adoption of a plan of reorganization under Section
368(a)(1)(D) of the Code.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Defined Terms. The following terms, as used herein, shall
have the following meanings:
"Affiliates" means, with respect to any specified Person, any Person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with such specified Person; provided,
however, that for purposes of this Agreement, (i) Deluxe and its Subsidiaries
(other than eFunds and its Subsidiaries) shall not be considered Affiliates of
eFunds and (ii) eFunds and its Subsidiaries shall not be considered Affiliates
of Deluxe;
"Assets" means, except for cash and cash equivalents, any and all
assets, properties and rights (including goodwill), wherever located (including
in the possession of vendors or other third parties or elsewhere), whether real,
personal or mixed, tangible, intangible or contingent, in each case whether or
not recorded or reflected or required to be recorded or reflected on the books
and records or financial statements of any Person, including the following:
(i) all accounting and other books, records and files whether
in paper, microfilm, microfiche, computer tape or disc, magnetic tape
or any other form;
(ii) all apparatus, computers and other electronic data
processing equipment, fixtures, machinery, equipment, furniture, office
equipment, automobiles, trucks, aircraft, rolling stock, vessels, motor
vehicles and other transportation equipment, special and general tools,
test devices, prototypes and models and other tangible personal
property;
(iii) all inventories of materials, parts, raw materials,
supplies, work-in-process and finished goods and products;
(iv) all interests in real property of whatever nature,
including easements, whether as owner, mortgagee or holder of a
security interest, lessor, sublessor, lessee, sublessee or otherwise;
(v) all interests in any capital stock or other equity
interests of any Subsidiary or any other Person; all bonds, notes,
debentures or other securities issued by any Subsidiary or any other
Person; all loans, advances or other extensions of credit or capital
contributions to any Subsidiary or any other Person; and all other
investments in securities of any Person;
(vi) all license agreements, leases of personal property, open
purchase orders for raw materials, supplies, parts or services,
unfilled orders for the manufacture and sale of products and other
contracts, agreements or commitments;
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(vii) all notes, loans, accounts receivable and interests as a
beneficiary under letters of credit, advances and performance and
surety bonds;
(viii) all written technical information, data,
specifications, research and development information, engineering
drawings, operating and maintenance manuals, and materials and analyses
prepared by consultants and other third parties;
(ix) all Intellectual Property and licenses from third Persons
granting the right to use any Intellectual Property;
(x) all computer applications, programs and other software,
including operating software, network software, firmware, middleware,
design software, design tools, systems documentation and instructions;
(xi) all cost information, sales and pricing data, customer
prospect lists, supplier records, customer and supplier lists, customer
and vendor data, correspondence and lists, product literature, artwork,
design, development and manufacturing files, vendor and customer
drawings, formulations and specifications, quality records and reports
and other books, records, studies, surveys, reports, plans and
documents;
(xii) all rights under contracts or agreements, all claims or
rights against any Person arising from the ownership of any Asset, all
rights in connection with any bids or offers and all claims, choses in
action or similar rights, whether accrued or contingent;
(xiii) all rights under insurance policies and all rights in
the nature of insurance, indemnification or contribution;
(xiv) all licenses (including radio and similar licenses),
permits, approvals and authorizations which have been issued by any
Governmental Authority;
(xv) interest rate, currency, commodity or other swap, collar,
cap or other hedging or similar agreements or arrangements.
"Contracts" means any contract, agreement, lease, license, sales order,
purchase order, instrument or other commitment that is binding on any Person or
any part of its property under applicable law.
"Contribution Date" means March 31, 2000.
"Deluxe Group" means Deluxe, each Subsidiary and Affiliate of Deluxe
and each Person that becomes a Subsidiary or Affiliate of Deluxe after the
Contribution Date.
"eFunds Assets" means all of Deluxe's right, title and interest in and
to all Assets that (i) are, except as set forth on Schedule 2.1(c) or as
otherwise provided herein, reflected in the
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eFunds Financial Statements and not disposed of by Deluxe after the date thereof
and before the Contribution Date (including assets written off or expensed but
still used by eFunds) or (ii) are acquired by the eFunds Businesses after the
date of the eFunds Financial Statements and would be reflected in the financial
statements of eFunds as of the Contribution Date if such financial statements
were prepared using the same accounting principles under which the eFunds
Financial Statements were prepared, or (iii) are expressly provided by this
Agreement to be transferred to eFunds, or (iv) except as otherwise provided by
express agreement of the parties, are used exclusively by the eFunds Businesses
as of the Contribution Date.
"eFunds Business" means the business and operations of eFunds as
currently conducted by eFunds, iDLX Corporation, eFunds Holding Ltd., Connex
Europe SRL, eFunds Overseas, Inc. (f/k/a Deluxe Overseas, Inc.), eFunds
Corporation, Deluxe Payment Protection Systems,Inc., Chex Systems, Inc. and
Analytic Research Technologies, Inc. (f/k/a Deluxe Analytic Research
Technologies, Inc.), and as such business and operations will continue following
the Contribution Date.
"eFunds Financial Statements" means the audited financial statements
(including the notes thereto) of eFunds for the year ended December 31, 1999, a
copy of which is set forth as Exhibit A hereto.
eFunds Group. "eFunds Group" means eFunds, each Subsidiary and
Affiliate of eFunds immediately after the Contribution Date and each Person that
becomes a Subsidiary or Affiliate of eFunds after the Contribution Date.
"eFunds Liabilities" means all of the Liabilities of eFunds or Deluxe
that (i) are, except as otherwise set forth on Schedule 2.2(c) or as otherwise
provided herein, reflected in the eFunds Financial Statements and remain
outstanding at the Contribution Date, or (ii) arise in connection with the
eFunds Businesses after the date of the eFunds Financial Statements and would be
reflected in financial statements of eFunds as of the Contribution Date if such
financial statements were prepared using the same accounting principles under
which the eFunds Financial Statements were prepared, or (iii) are expressly
contemplated by this Agreement, the IPO and Distribution Agreement or any
Ancillary Agreement (as defined in Section 1.01 of the IPO and Distribution
Agreement) and the Exhibits and Schedules referenced or attached hereto and
thereto as Liabilities to be transferred to and assumed by eFunds, or (iv)
except as otherwise provided in an express agreement of the parties, are related
to or arise out of or in connection with the eFunds Assets, or (v) except as
otherwise provided in an express agreement of the parties, are related to or
arise out of or in connection with the eFunds Businesses.
"Governmental Authority" means any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
"Intellectual Property" means all domestic and foreign patents and
patent applications, together with any continuations, continuations-in-part or
divisional applications thereof, and all patents issuing thereon (including
reissues, renewals and re-examinations of the foregoing);
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design patents, invention disclosures; mask works; copyrights, and copyright
applications and registrations; Web addresses, trademarks, service marks, trade
names, and trade dress, in each case together with any applications and
registrations therefor and all appurtenant goodwill relating thereto; trade
secrets, commercial and technical information, know-how, proprietary or
confidential information, including engineering, production and other designs,
notebooks, processes, drawings, specifications, formulae, and technology;
computer and electronic data processing programs and software (object and source
code), data bases and documentation thereof; inventions (whether patented or
not); utility models; registered designs, certificates of invention and all
other intellectual property under the laws of any country throughout the world.
"IPO and Distribution Agreement" means the Initial Public Offering and
Distribution Agreement entered into between Deluxe and eFunds on the date
hereof.
"IPO Effective Date" means the date on which the IPO Registration
Statement is declared effective by the Securities and Exchange Commission.
"IPO Registration Statement" means the registration statement on Form
S-1 pursuant to the Securities Act of 1933, as amended, to be filed with the
Securities and Exchange Commission registering the shares of common stock of
eFunds to be issued in the initial public offering, together with all amendments
thereto.
"Liabilities" means any and all debts, liabilities, guarantees,
assurances, commitments and obligations, whether fixed, contingent or absolute,
asserted or unasserted, matured or unmatured, liquidated or unliquidated,
accrued or not accrued, known or unknown, due or to become due, whenever or
however arising (including, without limitation, whether arising out of any
Contract or tort based on negligence or strict liability) and whether or not the
same would be required by generally accepted principles and accounting policies
to be reflected in financial statements or disclosed in the notes thereto.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Separation" means the transfer and contribution from Deluxe to eFunds,
and eFunds's receipt and assumption of, directly or indirectly, substantially
all of the Assets and Liabilities currently associated with the eFunds Business.
"Subsidiary" means, with respect to any Person, any corporation, any
limited liability company, any partnership or other legal entity of which such
Person or its Subsidiaries owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote on the election of members of
the board of directors or similar governing body. Unless the context otherwise
requires, with reference to Deluxe and its Subsidiaries, the term "Subsidiary"
shall not include eFunds or any Subsidiary of Deluxe that will be transferred to
eFunds after giving effect to the Separation.
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ARTICLE II
CONTRIBUTION AND ASSUMPTION
Section 2.1 Contribution of Assets.
(a) On the Contribution Date, Deluxe hereby transfers to eFunds all of
its right, title and interest in and to the eFunds Assets in the following
order:
(i) all of the issued and outstanding capital stock of iDLX
Corporation, a Delaware corporation;
(ii) all of the issued and outstanding capital stock of eFunds
Holdings Ltd., a United Kingdom corporation;
(iii) the one percent (1%) ownership interest in Connex Europe
SRL, a corporation organized under the laws of Italy, held by Deluxe;
(iv) all of the issued and outstanding capital stock of eFunds
Overseas, Inc., a Minnesota corporation;
(v) all of the issued and outstanding capital stock of eFunds
Corporation , a California corporation;
(vi) all of the issued and outstanding capital stock of Deluxe
Payment Protection Systems, Inc., a Delaware corporation;
(vii) all of the issued and outstanding capital stock of Chex
Systems, Inc., a Minnesota corporation;
(viii) all of the issued and outstanding capital stock of
Analytic Research Technologies, Inc., a Minnesota corporation; and
(ix) all other eFunds Assets, including without limitation,
the Assets listed on Schedule 2.1 hereto.
(b) On the Contribution Date, Deluxe shall contribute to eFunds cash
and/or cash equivalents in the aggregate amount of $-0-.
(c) Notwithstanding anything to the contrary contained herein, the
eFunds Assets shall not include any of the Assets set forth on Schedule 2.1(c)
hereto (the "Excluded Assets") .
(d) In the event that at any time or from time to time (whether prior
to, on or after the Contribution Date), any party hereto (or any member of such
party's respective Group), shall receive or otherwise possess any Asset that is
allocated to any other person pursuant to this Agreement, such party shall
promptly transfer, or cause to be transferred, such Asset to the
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Person so entitled thereto. Prior to any such transfer, the Person receiving or
possessing such Asset shall hold such Asset in trust for any such other Person.
Section 2.2 Assumption of Liabilities.
(a) Effective as of the Contribution Date, eFunds hereby assumes and
agrees on a timely basis to pay, perform, satisfy and discharge, or will cause
the eFunds Subsidiaries to pay, perform, satisfy and discharge all the eFunds
Liabilities, in accordance with their respective terms, including, without
limitation, the liabilities set forth on Schedule 2.2(a) hereto.
(b) eFunds and Deluxe agree that to the extent that Deluxe entered into
a lease with a third party dated prior to the Contribution Date pursuant to
which Deluxe agreed to lease machinery and/or equipment for use by the eFunds
Businesses, upon identification of any such lease, eFunds will be deemed to have
entered into a sublease with Deluxe with terms identical or as similar as
possible to such original lease pursuant to which eFunds will sublease from
Deluxe that portion of the machinery and/or equipment used by the eFunds
Businesses covered under such original lease.
(c) Notwithstanding anything to the contrary contained herein, eFunds
shall not assume any of the Liabilities set forth on Schedule 2.2(c) hereto.
(d) Notwithstanding anything herein to the contrary, any nonrecurring
costs and expenses incurred by the parties hereto to effect the transactions
contemplated hereby which are not allocated pursuant to the terms of this
Agreement or the IPO and Distribution Agreement shall be the responsibility of
the party which incurs such costs and expenses.
Section 2.3 Methods of Transfer and Assumption.
(a) eFunds and Deluxe agree that transfers of Assets set forth in
Section 2.1 hereof shall be effected by delivery by Deluxe or one of its
Subsidiaries to eFunds or one of its Subsidiaries, as the case may be of (a)
with respect to those eFunds Assets which are evidenced by capital stock
certificates or similar instruments, certificates duly endorsed in blank or
accompanied by stock powers or other instruments of assignment executed in blank
or (b) with respect to all other eFunds Assets owned by Deluxe (or its
Subsidiaries), such good and sufficient instruments of contribution, conveyance,
assignment and transfer, in form and substance reasonably satisfactory to Deluxe
and eFunds, as shall be necessary to vest in eFunds or its Subsidiaries, as the
case may be, all of Deluxe's title and ownership interest in and to any such
eFunds Asset
(b) To the extent necessary, the assumption of the Assumed Liabilities
contemplated pursuant to Section 2.2 hereof shall be effected by delivery by
eFunds to Deluxe of such good and sufficient instruments of assumption, in form
and substance reasonably satisfactory to Deluxe and eFunds as shall be necessary
for the assumption by eFunds of the Assumed Liabilities.
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(c) Each of the parties hereto also agrees to deliver to any other
party hereto such other documents, instruments and writings as may be reasonably
requested by such other party hereto in connection with the transactions
contemplated hereby.
(d) NOTWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT TO THE
CONTRARY, THE TRANSFERS AND ASSUMPTIONS REFERRED TO IN THIS ARTICLE II AND THE
SEPARATION OF THE EFUNDS BUSINESS FROM DELUXE ARE BEING MADE WITHOUT ANY
REPRESENTATION OR WARRANTY OF ANY NATURE (I) AS TO THE VALUE OR FREEDOM FROM
ENCUMBRANCE OF ANY ASSETS, (II) AS TO ANY WARRANTY OF MERCHANTABILITY OR
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER MATTER CONCERNING
ANY ASSETS, OR (III) AS TO THE LEGAL SUFFICIENCY TO CONVEY TITLE TO ANY ASSETS.
The instruments of transfer or assumption referred to in this Section 2.3 shall
not include any separate representations and warranties. Deluxe and eFunds
hereby acknowledge and agree that all eFunds Assets are being transferred "AS
IS, WHERE IS." eFunds shall bear the economic and legal risks that any
conveyances of the eFunds Assets to eFunds shall prove to be insufficient or
that eFunds's or any of its Subsidiary's title to any of the eFunds Assets which
they currently own (or, after giving effect to the transfers contemplated by
this Agreement, will own) shall be other than good and marketable and free from
encumbrances, and Deluxe shall bear the economic and legal risk that any
conveyances of Excluded Assets to Deluxe shall be other than good and marketable
and free from encumbrances.
(e) Deluxe and eFunds hereby further acknowledge and agree that in the
event and to the extent that there is any conflict between the provisions of
this Agreement and the provisions of any of the instruments of transfer or
assumption referred to in this Section 2.3, the provisions of this Agreement
shall control except where a specific conveyancing instrument specifically
provides that such instrument shall control over this Section 2.3 and refers to
this specific Section 2.3 by number.
(f) The parties intend to complete the transfer of all eFunds Assets
and the assumption of all eFunds Liabilities effective on or prior to the
Contribution Date but, to the extent that any such transfers and assumptions are
not completed prior to the Contribution Date, the parties shall take all actions
reasonably necessary or appropriate to complete such transactions as promptly
thereafter as possible. In addition to those transfers and assumptions
accurately identified and designated by the parties to take place but which the
parties are not able to effect prior to the Contribution Date, there may exist
(i) Assets that the parties discover were, contrary to the agreements between
the parties, by mistake or omission, transferred to eFunds or retained by Deluxe
or (ii) liabilities that the parties discover were, contrary to the agreements
between the parties, by mistake or omission, assumed by eFunds or not assumed by
eFunds. The parties shall, between the Contribution Date and the date the
Distribution occurs, cooperate in good faith to effect the transfer or
re-transfer of such Assets, and/or the assumption or re-assumption of such
liabilities, to or by the appropriate party and shall not use the determination
of remedial actions contemplated herein to alter the original intent of the
parties hereto with respect to Assets to be transferred to or the liabilities to
be assumed by eFunds. Each party shall reimburse the other or make other
financial adjustments (e.g., without limitation, cash reserves)
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or other adjustments to remedy any mistakes or omissions relating to any of the
Assets transferred hereby or liabilities assumed hereby.
Section 2.4 Nonassignable Contracts. Notwithstanding anything contained
herein to the contrary, this Agreement shall not constitute an agreement to
assign any Asset or assume any Liability if an assignment or assumption or
attempted assignment or assumption of the same without the consent of another
Person would constitute a breach thereof or in any way impair the rights of a
party thereunder (including a party hereunder) or give to any third party any
rights with respect thereto. If any such consent is not obtained or if any
attempted assignment or assumption would be ineffective or would so impair a
party's rights with respect to any such Asset or Liability so that the party
entitled to the benefits (including relief from Liability) associated with such
purported transfer (the "Intended Transferee") would not receive all of such
benefits, then, as appropriate, (w) the party purporting to make such transfer
(the "Intended Transferor") shall use commercially reasonable efforts to provide
or cause to be provided to the Intended Transferee, to the extent permitted by
law, the benefits of any such Asset or Liability (x) the Intended Transferee, to
the extent permitted by law, shall use commercially reasonable efforts to assume
such Liability so that the Intended Transferor is relieved therefrom, (y) the
Intended Transferor shall promptly pay or cause to be paid to the Intended
Transferee when received all moneys received by the Intended Transferor with
respect to any such Asset and (y) the Intended Transferee shall pay, perform and
discharge on behalf of the Intended Transferor all of the Intended Transferor's
Liabilities thereunder in a timely manner and accordance with the terms thereof
which it may do without breach. In addition, the Intended Transferor and
Intended Transferee, as the case may be, shall take such other actions as may be
reasonably be requested by the other party in order to place the (i) Intended
Transferee, insofar as reasonably possible, in the same position as if such
Asset had been transferred as contemplated hereby and so all the benefits and
burdens relating thereto, including possession, use, risk of loss, potential for
gain and dominion, control and command, shall inure to the Intended Transferee
and (ii) Intended Transferor, insofar as reasonably possible, in the same
position as if such Liability had been transferred as contemplated hereby so
that the Intended Transferor shall be relieved therefrom. If and when such
consents and approvals are obtained, the transfer of the applicable Asset shall
be effected in accordance with the terms of this Agreement.
Section 2.5 Novation of Assumed eFunds Liabilities.
(a) Each of Deluxe and eFunds, at the request of the other, shall use
their reasonable commercial efforts to obtain, or to cause to be obtained, any
consent, substitution, approval or amendment required to novate (including with
respect to any federal government contract) or assign all rights and obligations
under agreements, leases, licenses and other obligations or Liabilities of any
nature whatsoever that constitute eFunds Liabilities or to obtain in writing the
unconditional release of all parties to such arrangements other than any member
of the eFunds Group, so that, in any such case, eFunds and its Subsidiaries will
be solely responsible for such Liabilities; provided, however, that neither
Deluxe, eFunds nor their Subsidiaries shall be obligated to pay any
consideration therefor to any third party from whom such consents, approvals,
substitutions and amendments are requested.
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(b) If Deluxe or eFunds is unable to obtain, or to cause to be
obtained, any such required consent, approval, release, substitution or
amendment, the applicable member of the Deluxe Group shall continue to be bound
by such agreements, leases, licenses and other obligations and, unless not
permitted by law or the terms thereof, eFunds shall, as agent or subcontractor
for Deluxe or such other Person, as the case may be, pay, perform and discharge
fully, or cause to be paid, transferred or discharged all the obligations or
other Liabilities of Deluxe or such other Person, as the case may be, thereunder
from and after the date hereof. Deluxe shall, without further consideration, pay
and remit, or cause to be paid or remitted, to eFunds or its appropriate
Subsidiary promptly all money, rights and other consideration received by it or
any member of its respective Group in respect of such performance (unless any
such consideration is an Excluded Asset). If and when any such consent,
approval, release, substitution or amendment shall be obtained or such
agreement, lease, license or other rights or obligations shall otherwise become
assignable or able to be novated, Deluxe shall thereafter assign, or cause to be
assigned, all its rights, obligations and other Liabilities thereunder or any
rights or obligations of any member of its respective Group to eFunds without
payment of further consideration and eFunds shall, without the payment of any
further consideration, assume such rights and obligations.
(c) In the event that Deluxe and eFunds are not able to obtain a
novation or other unconditional release of Deluxe's obligations with respect to
the eFunds Liabilities prior to the IPO Effective Date, Deluxe and eFunds shall
enter into an Indemnification Agreement in substantially the form attached
hereto as Exhibit A on or prior to the IPO Effective Date.
Section 2.6 Use of "Deluxe" Name. eFunds covenants and agrees that it
will use all commercially reasonable efforts to take any and all actions
necessary or appropriate to remove the word "Deluxe" or any variation thereof
from the name of any Subsidiary of eFunds as soon as practicable. In
furtherance, and not in limitation of the foregoing, eFunds shall use
commercially reasonable efforts to obtain any approval or consent from all
Governmental Authorities necessary or appropriate to remove the name "Deluxe"
from each Subsidiary of eFunds. Notwithstanding the foregoing, no later than six
months after the date the Distribution occurs, no Subsidiary of eFunds shall use
the word "Deluxe" or any variation thereof in its name or business.
ARTICLE III
INDEMNIFICATION
Section 3.1. Indemnification by eFunds. eFunds shall jointly and
severally indemnify in full Deluxe and each of its Subsidiaries and their
respective officers, directors, employees, agents and representatives (the
"Deluxe Indemnitees") and hold them harmless against any and all losses,
liabilities, deficiencies, damages, expenses or costs (including reasonable
legal and other external advisors fees and expenses) (each an "Indemnifiable
Loss"), resulting from, relating to or arising, whether prior to or following
the Contribution Date, out of or in connection with (a) the eFunds Assets and
the eFunds Liabilities and/or (b) eFunds's conduct of its business and affairs
after the Contribution Date. Any indemnification payment made under this
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Agreement shall be characterized for tax purposes as if such payment were made
immediately prior to the Contribution Date.
Section 3.2. Indemnification Procedures.
(a) If a claim or demand for an Indemnifiable Loss is made against a
Deluxe Indemnitee by any Person who is not a party to the this Agreement (a
"Third Party Claim") as to which such Deluxe Indemnitee is entitled to
indemnification pursuant Section 1 hereof, such Deluxe Indemnitee shall give
eFunds notice of such Third Party Claim, as promptly as practicable, but in any
event no later than 15 days of the receipt by the Deluxe Indemnitee of such
notice; provided, however, that the failure to provide such notice shall not
release eFunds from any of its obligations under this Agreement except to the
extent eFunds is materially prejudiced by such failure and shall not relieve
eFunds from any other obligation or liability that it may have to any Deluxe
Indemnitee otherwise than under this Agreement. If eFunds acknowledges in
writing its obligations to indemnify the Deluxe Indemnitee hereunder against any
Indemnifiable Losses that may result from such Third Party Claim, then eFunds
shall be entitled to assume and control the defense of such Third Party Claim at
its expense and through counsel of its choice, subject to the approval of the
Deluxe Indemnitee (which approval shall not be unreasonably withheld or
delayed), if it gives notice of its intention to do so to the Deluxe Indemnitee
within 15 days of the receipt of such notice from the Deluxe Indemnitee (or such
shorter period as may be required to avoid a default in responding to the
assertion of the Third Party Claim in any tribunal before which such claim has
been brought); provided, however, that if there exists or is reasonably likely
to exist a conflict of interest that would make it inappropriate in the
reasonable judgment of the Deluxe Indemnitee for the same counsel to represent
both the Deluxe Indemnitee and eFunds, then the Deluxe Indemnitee shall be
entitled to retain its own counsel, in each jurisdiction for which the Deluxe
Indemnitee determines counsel is required to participate in such defense, at the
expense of eFunds. In the event eFunds exercises the right to undertake any such
defense against any such Third Party Claim as provided above, the Deluxe
Indemnitee shall cooperate with eFunds in such defense and make available to
eFunds, at the eFunds's expense, all witnesses, pertinent records, materials and
information in the Deluxe Indemnitee's possession or under the Deluxe
Indemnitee`s control relating thereto as is reasonably required by eFunds,
subject to reimbursement of reasonable out-of-pocket expenses. Similarly, in the
event the Deluxe Indemnitee is, directly or indirectly, conducting the defense
against any such Third Party Claim, eFunds shall cooperate with the Deluxe
Indemnitee in such defense and make available to the Deluxe Indemnitee all such
witnesses, records, materials and information in eFunds's possession or under
eFunds's control relating thereto as is reasonably required by the Deluxe
Indemnitee, subject to reimbursement of reasonable out-of-pocket expenses. No
such Third Party Claim may be settled by eFunds without the prior written
consent of the Deluxe Indemnitee (which shall not be unreasonably withheld or
delayed) unless such settlement is solely for money and includes an
unconditional release of each Deluxe Indemnitee from any and all Indemnifiable
Losses arising out of such action, claim, suit or proceeding and would not
otherwise adversely affect the Deluxe Indemnitee. No such Third Party Claim may
be settled by the Deluxe Indemnitee without the prior written consent of eFunds
which shall not be unreasonably withheld or delayed.
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(b) All Deluxe Indemnitees (other than Deluxe) shall, as a condition of
their rights to indemnification hereunder, be deemed to have granted Deluxe an
irrevocable power of attorney, coupled with an interest, with respect to all
matters for which any determination may be made, action may be taken or consent
may be given or withheld under this Section 2, including, without limitation,
any determination regarding selection of counsel and any consent regarding
settlement, and any such determination, action or consent made, taken, given or
withheld by such party shall be binding up such Deluxe Indemnitee as if made,
taken, given or withheld by such Deluxe Indemnitee personally.
(c) Notwithstanding the foregoing, eFunds shall not be entitled to
assume the defense of any Third Party Claim and shall be liable for the fees and
expenses of counsel incurred by the Deluxe Indemnitee in defending such Third
Party Claim if the Third Party Claim seeks an order, injunction or other
equitable relief or relief for other than money damages against the Deluxe
Indemnitee which the Deluxe Indemnitee reasonably determines, after conferring
with its counsel, cannot be separated from any related claim for money damages.
If such equitable relief or other relief portion of the Third Party Claim can be
so separated from that for money damages, eFunds shall be entitled to assume the
defense of the portion relating to money damages.
(d) In the event any Deluxe Indemnitee should have a claim against
eFunds that does not involve a Third Party Claim, the Deluxe Indemnitee shall
deliver a notice of such claim with reasonable promptness to eFunds. If eFunds
notifies the Deluxe Indemnitee that it does not dispute the claim described in
such notice or fails to notify the Deluxe Indemnitee within 20 business days
after delivery of such notice by the Deluxe Indemnitee whether eFunds disputes
the claim described in such notice, the Indemnifiable Loss in the amount
specified in the Deluxe Indemnitee's notice will be conclusively deemed a
liability of eFunds and eFunds shall pay the amount of such Indemnifiable Loss
to the Deluxe Indemnitee on demand. If eFunds has timely disputed the liability
with respect to such claim, the Chief Financial Officer of eFunds and the Chief
Financial Officer of Deluxe will proceed in good faith to negotiate a resolution
of such dispute, and if not resolved through the negotiations of such
individuals within 20 days after the delivery of the Deluxe Indemnitee's notice
of such claim, such dispute shall be resolved fully and finally in Minneapolis,
Minnesota, by an arbitrator selected pursuant to and an arbitration governed by
Commercial Arbitration Rules of the American Arbitration Association, as
modified herein. The parties will jointly appoint a mutually acceptable
independent arbitrator, seeking assistance in such regard from the American
Arbitration Association. The arbitrator shall resolve the dispute within 30 days
after selection and judgment upon the award rendered by such arbitrator may be
entered in any court of competent jurisdiction. Each of Deluxe, on the one hand,
and eFunds, on the other, shall bear its own fees and expenses in connection
with such arbitration and shall bear 50% of the fees and expenses of the
arbitrator.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Entire Agreement. This Agreement, the IPO and Distribution
Agreement, and the Exhibits and Schedules referenced or attached hereto and
thereto, constitutes the entire agreement between the parties with respect to
the subject matter hereof and shall supersede all
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prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof.
Section 4.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota without regard
to its conflicts of laws principles.
Section 4.3 Notices. All notices, consents, requests, approvals, and
other communications provided for or required herein, and all legal process in
regard thereto, must be in writing and shall be deemed validly given, made or
served, (a) when delivered personally or sent by telecopy to the facsimile
number indicated below with a required confirmation copy sent in accordance with
subsection (c) below; or (b) on the next business day after delivery to a
nationally recognized express delivery service with instructions and payment for
overnight delivery; or (c) on the fifth (5th) day after deposited in any
depository regularly maintained by the United States postal service, postage
prepaid, certified or registered mail, return receipt requested, addressed to
the following addresses or to such other address as the party to be notified
shall have specified to the other party in accordance with this section:
If to Deluxe:
Deluxe Corporation
3680 Victoria Street North
Shoreview, Minnesota 55126
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile:
If to eFunds:
eFunds Corporation
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile:
Section 4.4 Parties in Interest. This Agreement, including the
Schedules and Exhibits hereto, and the other documents referred to herein, shall
be binding upon and inure solely to the benefit of each party hereto and their
legal representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
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Section 4.5 Counterparts. This Agreement, including the Schedules and
Exhibits hereto, and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
Section 4.6 Assignment. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto.
Section 4.7 Severability. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the fullest extent
possible.
Section 4.8 No Waiver; Remedies Cumulative. No failure or delay on the
part of any party hereto in the exercise of any right hereunder shall impair
such right or be construed to be a waiver of, or acquiescence in, any breach of
any representation, warranty or agreement herein, nor shall any single or
partial exercise of any such right preclude other or further exercise thereof or
of any other right. All rights and remedies existing under this Agreement or the
Schedules or Exhibits attached hereto are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
Section 4.9 Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to such agreement.
Section 4.10 Authority. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors, rights generally and general equity principles.
Section 4.11 Interpretation. The headings contained in this Agreement,
in any Exhibit or Schedule hereto and in the table of contents to this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
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Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, each of the parties has caused the Assignment and
Assumption Agreement to be executed on its behalf by its officers thereunto duly
authorized on the day and year first above written.
DELUXE CORPORATION
By: /s/ John LeFevre
-------------------------
Name: John LeFevre
Title: Senior Vice President
EFUNDS CORPORATION
By: /s/ John A. Blanchard III
-------------------------
Name: John A. Blanchard III
Title:Chief Executive Officer
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Exhibit 10.3
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of March 31,
2000 by and between Deluxe Corporation, a Minnesota corporation ("Deluxe"), and
eFunds Corporation, a Delaware corporation and wholly owned subsidiary of Deluxe
("eFunds").
RECITALS
WHEREAS, Deluxe has owned and operated the businesses and operations
related to eFunds;
WHEREAS, Deluxe beneficially owns all of the shares of the issued and
outstanding common stock, par value $0.01 per share, of eFunds (the "eFunds
Common Stock");
WHEREAS, eFunds proposes to issue shares of its Common Stock in an
initial public offering registered under the Securities Act of 1933, as amended;
WHEREAS, Deluxe and eFunds currently contemplate that, several months
following such initial public offering, Deluxe will distribute to the holders of
its common stock, by means of an exchange offer and/or a pro rata distribution,
all of the shares of eFunds common stock owned by Deluxe (the "Distribution");
WHEREAS, the parties desire to enter into this Agreement to set forth
their agreement regarding certain registration rights with respect to eFunds
Common Stock (and any other securities issued in respect thereof or in exchange
therefor).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Deluxe and eFunds, for themselves,
their successors, and assigns, hereby agree as follows:
Capitalized terms not otherwise defined herein have the meaning given
to them in the IPO and Distribution Agreement dated March 31, 2000 between
Deluxe and eFunds.
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used in this Agreement, the following
terms will have the following meanings, applicable both to the singular and the
plural forms of the terms described:
"Affiliates" means, with respect to any specified Person, any Person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with such specified Person; provided,
however, that for purposes of this Agreement, (i) Deluxe and its Subsidiaries
(other than eFunds and its Subsidiaries) shall not be considered Affiliates of
eFunds and (ii) eFunds and its Subsidiaries shall not be considered Affiliates
of Deluxe.
<PAGE>
"Agreement" has the meaning ascribed thereto in the Preamble.
"Applicable Stock" means at any time the (i) shares of eFunds Common
Stock owned by Deluxe and its Affiliates that were owned on the date hereof,
PLUS (ii) shares of eFunds Voting Stock purchased by Deluxe and its Affiliates
pursuant to Article VI of the Initial Public Offering and Distribution
Agreement, PLUS (iii) shares of eFunds Voting Stock that were issued to Deluxe
and its Affiliates in respect of shares described in either clause (i) or clause
(ii) in any reclassification, share combination, share subdivision, share
dividend, share exchange, merger, consolidation or similar transaction or event.
"Company Securities" has the meaning ascribed thereto in Section
2.02(b).
"Deluxe" has the meaning ascribed thereto in the Preamble.
"Deluxe Group" means Deluxe and its Affiliates and eFunds and its
Affiliates.
"Deluxe Transferee" means a Transferee of Registrable Securities from
Deluxe or any of its Affiliates.
"Disadvantageous Condition" has the meaning ascribed thereto in Section
2.01(a).
"eFunds" has the meaning ascribed thereto in the Preamble.
"eFunds Voting Stock" means the common stock, par value $0.01 per share
of eFunds and any other class of eFunds's capital stock representing the right
to vote generally for the election of directors.
"Holder" means Deluxe, its Affiliates and any Transferee.
"Holder Securities" has the meaning ascribed thereto in Section
2.02(b).
"IPO" means the initial public offering by eFunds of shares of eFunds
Common Stock as contemplated by the IPO Registration Statement.
"IPO and Distribution Agreement" means the Initial Public Offering and
Distribution Agreement dated as of the date hereof between Deluxe and eFunds.
"IPO Date" means the date of completion of the initial sale of eFunds
Common Stock in the IPO.
"Other Holders" has the meaning ascribed thereto in Section 2.02(c).
"Other Securities" has the meaning ascribed thereto in Section 2.02.
<PAGE>
"Person" means any individual, corporation, limited or general
partnership, limited liability company, joint venture association, joint stock
company, trust unincorporated organization or government or any agency or
political subdivision thereof.
"Registrable Securities" means shares of eFunds Voting Stock and any
stock or other securities into which or for which such eFunds Voting Stock may
hereafter be changed, converted or exchanged and any other shares or securities
issued to Holders of such eFunds Voting Stock (or such shares or other
securities into which or for which such shares are so changed, converted or
exchanged) upon any reclassification, share combination, share subdivision,
share dividend, share exchange, merger, consolidation or similar transaction or
event or pursuant to the eFunds Nonvoting Stock Option. As to any particular
Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale by the Holder thereof shall have been declared effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (ii) they shall have been distributed to the
public in accordance with Rule 144, (iii) they shall have been otherwise
transferred, new certificates for them not bearing a legend restricting further
transfer shall have been delivered by eFunds and subsequent disposition of them
shall not require registration or qualification of them under the Securities Act
or any state securities or blue sky law then in effect or (iv) they shall have
ceased to be outstanding.
"Registration Expenses" means any and all reasonable expenses incident
to performance of or compliance with any registration of securities pursuant to
Article II, including, without limitation, (i) all expenses, including filing
fees, in connection with the preparation, printing and filing of the
registration statement, any preliminary prospectus or final prospectus, any
other offering document and amendments and supplements thereto and the mailing
and delivering of copies thereof to any underwriters and dealers; (ii) the cost
of printing or producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda, any selling agreements
and any other documents in connection with the offering, sale or delivery of the
securities to be disposed of; (iii) all expenses in connection with the
qualification of the securities to be disposed of for offering and sale under
state securities laws, including the fees and disbursements of counsel for the
underwriters of securities in connection with such qualification and in
connection with any blue sky and legal investment surveys; (iv) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (v) transfer agents' and registrars' fees and expenses and the fees
and expenses of any other agent or trustee appointed in connection with such
offering; (vi) all security engraving and security printing expenses; (vii) all
fees and expenses payable in connection with the listing of the securities on
any securities exchange or automated interdealer quotation system or the rating
of such securities and (ix) any other fees and disbursements of underwriters
customarily paid by issuers of securities.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
<PAGE>
"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from time
to time, together with the rules and regulations promulgated thereunder.
"Selling Holder" has the meaning ascribed thereto in Section 2.04(e).
"Subsidiary" means with respect to any Person, any other Person a
majority of the equity ownership or voting stock of which is at the time owned,
directly or indirectly, by such Person and/or one or more other Subsidiaries of
such Person; provided, however, that unless the context otherwise requires,
prior to the Distribution, a Subsidiary of Deluxe shall only include Persons who
would be a Subsidiary of Deluxe assuming the Distribution has occurred
immediately prior to the determination as to whether such Person were a
Subsidiary of Deluxe.
"Transferee" has the meaning ascribed thereto in Section 2.09.
Section 1.02. Internal References. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement and references
to the parties shall mean the parties to this Agreement.
ARTICLE II
REGISTRATION RIGHTS
Section 2.01. Effective Date. Neither Deluxe nor any Holder shall have
any right to exercise its rights under Section 2.02 or 2.03 hereof unless and
until such time as Deluxe shall have delivered to eFunds an Abandonment Notice
pursuant to Section 2.08 of the IPO and Distribution Agreement.
Section 2.02. Demand Registration - Registrable Securities.
(a) Upon written notice provided at any time after the IPO
Date from any Holder of Registrable Securities requesting that eFunds
effect the registration under the Securities Act of any or all of the
Registrable Securities held by such Holder, which notice shall specify
the intended method or methods of disposition of such Registrable
Securities, eFunds shall use its reasonable best efforts to effect the
registration under the Securities Act and applicable state securities
laws of such Registrable Securities for disposition in accordance with
the intended method or methods of disposition stated in such request
(including in a Rule 415 offering, if eFunds is then eligible to
register such Registrable Securities on Form S-3 (or a successor form)
for such offering); provided, that:
<PAGE>
(i) with respect to any registration statement filed,
or to be filed, pursuant to this Section 2.02, if eFunds shall
furnish to the Holders of Registrable Securities that have
made such request a certified resolution of the Board of
Directors of eFunds (adopted by the affirmative vote of a
majority of the directors not designated by Deluxe or its
Affiliates) stating that in the Board of Directors' good faith
judgment it would (because of the existence of, or in
anticipation of, any acquisition or financing activity, or the
unavailability for reasons beyond eFunds' reasonable control
of any required financial statements, or any other event or
condition of similar significance to eFunds) be significantly
disadvantageous (a "Disadvantageous Condition") to eFunds for
such a registration statement to be maintained effective, or
to be filed and become effective, and setting forth the
general reasons for such judgment, eFunds shall be entitled to
cause such registration statement to be withdrawn and the
effectiveness of such registration statement terminated, or,
in the event no registration statement has yet been filed,
shall be entitled not to file any such registration statement,
until such Disadvantageous Condition no longer exists (notice
of which eFunds shall promptly deliver to such Holders). Upon
receipt of any such notice of a Disadvantageous Condition,
such Holders shall forthwith discontinue use of the prospectus
contained in such registration statement and, if so directed
by eFunds, each such Holder will deliver to eFunds all copies,
other than permanent file copies then in such Holder's
possession, of the prospectus then covering such Registrable
Securities current at the time of receipt of such notice;
provided, that the filing of any such registration statement
may not be delayed for a period in excess of 90 days due to
the occurrence of any particular Disadvantageous Condition;
(ii) after any event which results in Deluxe and its
Subsidiaries owning, in the aggregate, less than 45% of the
total combined voting power of all classes of eFunds Voting
Stock, the Holders of Registrable Securities may collectively
exercise their rights under this Section 2.02 on not more than
three occasions (it being acknowledged that prior to any such
event, there shall be no limit to the number of occasions on
which such Holders may exercise such rights; and
(iii) The Holders of Registrable Securities shall not
have the right to exercise registration rights pursuant to
this Section 2.02 within the 180-day period following the
registration and sale of Registrable Securities effected
pursuant to a prior exercise of the registration rights
provided in this Section 2.02.
(b) Notwithstanding any other provision of this Agreement to
the contrary, a registration requested by a Holder of Registrable
Securities pursuant to this Section 2.02 shall not be deemed to have
been effected (and, therefore, not requested for purposes of paragraph
(a) above), (i) unless it has become effective, (ii) if after it has
become effective such registration is interfered with by any stop
order, injunction or other order or requirement of the SEC or other
governmental agency or court for any reason other than a
<PAGE>
misrepresentation or an omission by such Holder and, as a result
thereof, the Registrable Securities requested to be registered cannot
be completely distributed in accordance with the plan of distribution
set forth in the related registration statement or (iii) if the
conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such
registration are not satisfied or waived other than by reason of some
act or omission by such Holder of Registrable Securities.
(c) In the event that any registration pursuant to this
Section 2.02 shall involve, in whole or in part, an underwritten
offering, the Holders of a majority of the Registrable Securities to be
registered shall have the right to designate an underwriter or
underwriters as the lead or managing underwriters of such underwritten
offering reasonably acceptable to eFunds and, in connection with each
registration pursuant to this Section 2.02, such Holders may select one
counsel to represent all such Holders.
(d) eFunds shall have the right to cause the registration of
additional equity securities for sale for the account of any Person
(including, without limitation, eFunds, and any existing or former
directors, officers or employees of eFunds and its Affiliates) in any
registration of Registrable Securities requested by the Holders
pursuant to paragraph (a) above; provided, however, that if such
Holders are advised in writing (with a copy to eFunds) by a nationally
recognized investment banking firm selected by such Holders reasonably
acceptable to eFunds (which shall be the lead underwriter or a managing
underwriter in the case of an underwritten offering) that, in such
firm's good faith view, all or a part of such additional equity
securities cannot be sold or the inclusion of such additional equity
securities in such registration would be likely to have an adverse
effect on the price, timing or distribution of the offering and sale of
the Registrable Securities then contemplated by any Holder, the
registration of such additional equity securities or part thereof shall
not be permitted. The Holders of the Registrable Securities to be
offered may require that any such additional equity securities be
included in the offering proposed by such Holders on the same
conditions as the Registrable Securities that are included therein. In
the event that the number of Registrable Securities requested to be
included in a registration statement by the Holders thereof exceeds the
number which, in the good faith view of such investment banking firm,
can be sold without adversely affecting the price, timing, distribution
or sale of securities in the offering, the number shall be allocated
pro rata among the requesting Holders on the basis of the relative
number of Registrable Securities then held by each such Holder
(provided that any number in excess of a Holder's request may be
reallocated among the remaining requesting Holders in a like manner).
Section 2.03. Piggyback Registration. In the event that eFunds at any
time after the IPO Date proposes to register any of its eFunds Common Stock, any
other of its equity securities or securities convertible into or exchangeable
for its equity securities (collectively, including eFunds Common Stock, "Other
Securities") under the Securities Act, whether or not for sale for its own
account, in a manner that would permit registration of Registrable Securities
for sale for cash to the public under the Securities Act, it shall at each such
time give prompt written notice to each Holder of Registrable Securities of its
intention to do so and of the rights of such Holder
<PAGE>
under this Section 2.03. Subject to the terms and conditions hereof, such notice
shall offer each such Holder the opportunity to include in such registration
statement such number of Registrable Securities as such Holder may request. Upon
the written request of any such Holder made within 15 days after the receipt of
eFunds notice (which request shall specify the number of Registrable Securities
intended to be disposed of and the intended method of disposition thereof),
eFunds shall use its reasonable best efforts to effect, in connection with the
registration of the Other Securities, the registration under the Securities Act
of all Registrable Securities which eFunds has been so requested to register, to
the extent required to permit the disposition (in accordance with such intended
method of disposition thereof) of the Registrable Securities so requested to be
registered; provided, that:
(a) if, at any time after giving such written notice of its
intention to register any Other Securities and prior to the effective
date of the registration statement filed in connection with such
registration, eFunds shall determine for any reason not to register the
Other Securities, eFunds may, at its election, give written notice of
such determination to such Holders and thereupon eFunds shall be
relieved of its obligation to register such Registrable Securities in
connection with the registration of such Other Securities, without
prejudice, however, to the rights of the Holders of Registrable
Securities immediately to request that such registration be effected as
a registration under Section 2.02 to the extent permitted thereunder;
(b) if the registration referred to in the first sentence of
this Section 2.03 is to be an underwritten registration on behalf of
eFunds, and a nationally recognized investment banking firm selected by
eFunds advises eFunds in writing that, in such firm's good faith view,
the inclusion of all or a part of such Registrable Securities in such
registration would be likely to have an adverse effect upon the price,
timing or distribution of the offering and sale of the Other Securities
then contemplated, eFunds shall include in such registration: (i)
first, all Other Securities eFunds proposes to sell for its own account
("Company Securities"); (ii) second, up to the full number of
Registrable Securities held by Holders constituting Deluxe and its
Affiliates that are requested to be included in such registration
(Registrable Securities that are so held being sometimes referred to
herein as "Holder Securities") in excess of the number of Company
Securities to be sold in such offering which, in the good faith view of
such investment banking firm, can be sold without adversely affecting
such offering and the sale of the other Securities then contemplated
(and (x) if such number is less than the full number of such Holder
Securities, such number shall be allocated by Deluxe among Deluxe and
its Affiliates and (y) in the event that such investment banking firm
advises that less than all of such Holder Securities may be included in
such offering, Deluxe and its Affiliates may withdraw their request for
registration of their Registrable Securities under this Section 2.03
and 90 days subsequent to the effective date of the registration
statement for the registration of such Other Securities request that
such registration be effected as a registration under Section 2.02 to
the extent permitted thereunder); (iii) third, up to the full number of
Registrable Securities held by Holders (other than Deluxe and its
Affiliates) of Registrable Securities that are requested to be included
in such registration in excess of the number of Company Securities and
Holder Securities to be sold in such
<PAGE>
offering which, in the good faith view of such investment banking firm,
can be so sold without so adversely affecting such offering (and if
such number is less than the full number of such Registrable
Securities, such number shall be allocated pro rata among such Holders
on the basis of the number of Registrable Securities requested to be
included therein by each such Holder and (y) in the event that such
investment banking firm advises that less than all of such Registrable
Securities may be included in such offering, such Holders may withdraw
their request for registration of their Registrable Securities under
this Section 2.03 and 90 days subsequent to the effective date of the
registration statement for the registration of such other Securities
request that such registration be effected as a registration under
Section 2.02 to the extent permitted thereunder); and (iv) fourth, up
to the full number of the Other Securities (other than Company
Securities), if any, in excess of the number of Company Securities and
Registrable Securities to be sold in such offering which, in the good
faith view of such investment banking firm, can be so sold without so
adversely affecting such offering (and, if such number is less than the
full number of such Other Securities, such number shall be allocated
pro rata among the holders of such Other Securities (other than Company
Securities) on the basis of the number of securities requested to be
included therein by each such holder);
(c) if the registration referred to in the first sentence of
this Section 2.03 is to be an underwritten secondary registration on
behalf of holders of Other Securities (the "Other Holders"), and the
lead underwriter or managing underwriter advises eFunds in writing that
in their good faith view, all or a part of such additional securities
cannot be sold and the inclusion of such additional securities in such
registration would be likely to have an adverse effect on the price,
timing or distribution of the offering and sale of the Other Securities
then contemplated, eFunds shall include in such registration the number
of securities (including Registrable Securities) that such underwriters
advise can be so sold without adversely affecting such offering,
allocated pro rata among the Other Holders and the Holders of
Registrable Securities on the basis of the number of securities
(including Registrable Securities) requested to be included therein by
each Other Holder and each Holder of Registrable Securities; provided
that if such registration statement is to be filed at any time after an
event which results in Deluxe and its Subsidiaries owning, in the
aggregate, less than 45% of the total combined voting power of all
classes of eFunds Voting Stock, if any, and if such Other Holders have
requested that such registration statement be filed pursuant to demand
registration rights granted to them by eFunds, eFunds shall include in
such registration: (i) Other Securities sought to be included therein
by the Other Holders pursuant to the exercise of such demand
registration rights; (ii) the number of Holder Securities sought to be
included in such registration in excess of the number of other
Securities sought to be included in such registration by the Other
Holders which in the good faith view of such investment banking firm,
can be so sold without so adversely affecting such offering (and (x) if
such number is less than the full number of such Holder Securities,
such number shall be allocated by Deluxe among Deluxe and its
Affiliates and (y) in the event that such investment banking firm
advises that less than all of such Holder Securities may be included in
such offering, Deluxe and its Affiliates may withdraw their request for
<PAGE>
registration of their Registrable Securities under this Section 2.03
and 90 days subsequent to the effective date of the registration
statement for the registration of such Other Securities request that
such registration be effected as a registration under Section 2.02 to
the extent permitted thereunder); and (iii) the number of Registrable
Securities sought to be included in such registration by Holders (other
than Deluxe and its Affiliates) of Registrable securities in excess of
the number of Other Securities and the number of Holder Securities
sought to be included in such registration which, in the good faith
view of such investment banking firm, can be so sold without so
adversely affecting such offering (and (x) if such number is less than
the full number of such Registrable Securities, such number shall be
allocated pro rata among such Holders on the basis of the number of
Registrable Securities requested to be included therein by each such
Holder and (y) in the event that such investment banking firm advises
that less than all of such Registrable Securities may be included in
such offering, such Holders may withdraw their request for registration
of their Registrable Securities under this Section 2.03 and 90 days
subsequent to the effective date of the registration statement for the
registration of such Other Securities request that such registration be
effected as a registration under Section 2.02 to the extent permitted
thereunder);
(d) eFunds shall not be required to effect any registration of
Registrable Securities under this Section 2.03 incidental to the
registration of any of its securities in connection with mergers,
acquisitions, exchange offers, subscription offers, dividend
reinvestment plans or stock option or other executive or employee
benefit or compensation plans; and
(e) no registration of Registrable Securities effected under
this Section 2.03 shall relieve eFunds of its obligation to effect a
registration of Registrable Securities pursuant to Section 2.02.
Section 2.04. Expenses. Deluxe shall pay or cause to be paid all
Registration Expenses with respect to a particular offering (or proposed
offering), as the case may be, except for fees, disbursements and expenses
related to eFunds' counsel, accountants and other advisors. Notwithstanding the
foregoing, Deluxe, any other Holder and eFunds shall each be responsible for its
own internal administrative and similar costs, which shall not constitute
Registration Expenses.
Section 2.05. Registration and Qualification. If and whenever eFunds is
required to effect the registration of any Registrable Securities under the
Securities Act as provided in Sections 2.02 or 2.03, eFunds shall as promptly as
practicable:
(a) prepare, file and use its reasonable best efforts to cause
to become effective a registration statement under the Securities Act
relating to the Registrable Securities to be offered;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be
<PAGE>
necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities until the earlier of (A) such
time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition set forth in such
registration statement and (B) the expiration of (i) twelve months
after such registration statement becomes effective or (ii) twenty four
months after a registration statement filed in a Rule 415 offering
becomes effective; provided, that such respective periods shall be
extended for such number of days that equals the number of days
elapsing from (x) the date the written notice contemplated by paragraph
(f) below is given by eFunds to (y) the date on which eFunds delivers
to the Holders of Registrable Securities the supplement or amendment
contemplated by paragraph (f) below;
(c) furnish to the Holders of Registrable Securities and to
any underwriter of such Registrable Securities such number of conformed
copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number
of copies of the prospectus included in such registration statement
(including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, such documents
incorporated by reference in such registration statement or prospectus,
and such other documents, as the Holders of Registrable Securities or
such underwriter may reasonably request, and a copy of any and all
transmittal letters or other correspondence to or received from, the
SEC or any other governmental agency or self-regulatory body or other
body having jurisdiction (including any domestic or foreign securities
exchange) relating to such offering;
(d) use its reasonable best efforts to register or qualify all
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the Holders of
such Registrable Securities or any underwriter to such Registrable
Securities shall request, and use its reasonable best efforts to obtain
all appropriate registrations, permits and consents in connection
therewith, and do any and all other acts and things which may be
necessary or advisable to enable the Holders of Registrable Securities
or any such underwriter to consummate the disposition in such
jurisdictions of its Registrable Securities covered by such
registration statement; provided, that, eFunds shall not for any such
purpose be required to qualify generally to do business as a foreign
corporation in any such jurisdiction wherein it is not so qualified or
to consent to general service of process in any such jurisdiction;
(e) (i) use its reasonable best efforts to furnish to each
Holder of Registrable Securities included in such registration (each, a
"Selling Holder") and to any underwriter of such Registrable Securities
an opinion of counsel for eFunds addressed to each Selling Holder and
dated the date of the closing under the underwriting agreement (if any)
(or if such offering is not underwritten, dated the effective date of
the registration statement) and (ii) use its reasonable best efforts to
furnish to each Selling Holder a "Cold Comfort" letter addressed to
each Selling Holder and signed by the independent public accountants
who have audited the financial statements of eFunds included in such
registration statement, in each such case covering substantially the
same matters with respect to such
<PAGE>
registration statement (and the prospectus included therein) as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities and such other matters as the Selling Holders may reasonably
request and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements;
(f) as promptly as practicable, notify the Selling Holders in
writing (i) at any time when a prospectus relating to a registration
pursuant to Sections 2.02 or 2.03 is required to be delivered under the
Securities Act of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading and (ii) of any request by the SEC or any other
regulatory body or other body having jurisdiction for any amendment of
or supplement to any registration statement or other document relating
to such offering, and in either such case, at the request of the
Selling Holders prepare and furnish to the Selling Holders a reasonable
number of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(g) if reasonably requested by the lead or managing
underwriters, use its reasonable best efforts to list all such
Registrable Securities covered by such registration on each securities
exchange and automated inter-dealer quotation system on which a class
of common equity securities of eFunds is then listed;
(h) to the extent reasonably requested by the lead or managing
underwriters, send appropriate officers of eFunds to attend any "Road
Shows" scheduled in connection with any such registration, with all
out-of-pocket costs and expense incurred by eFunds or such officers in
connection with such attendance to be paid by eFunds; and
(i) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected
pursuant to Sections 2.02 or 2.03 unlegended certificates representing
ownership of the Registrable Securities being sold in such
denominations as shall be requested by the Selling Holders or the
underwriters.
Section 2.06. Conversion of Other Securities, Etc. In the event that
any Holder offers any options, rights, warrants or other securities issued by it
or any other Person that are offered with, convertible into or exercisable or
exchangeable for any Registrable Securities, the Registrable Securities
underlying such options, rights, warrants or other securities shall continue to
be eligible for registration pursuant to Sections 2.02 and 2.03.
<PAGE>
Section 2.07. Underwriting; Due Diligence.
(a) If requested by the underwriters for any underwritten
offering of Registrable Securities pursuant to a registration requested
under this Article II, eFunds shall enter into an underwriting
agreement with such underwriters for such offering, which agreement
will contain such representations and warranties by eFunds and such
other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially
to the effect and to the extent provided in Section 2.08 (or such other
indemnification and contribution provisions as may be customary that
are requested by such underwriter or underwriters), and agreements as
to the provision of opinions of counsel and accountants' letters to the
effect and to the extent provided in Section 2.05(e). The Selling
Holders on whose behalf the Registrable Securities are to be
distributed by such underwriters shall be parties to any such
underwriting agreement and the representations and warranties by, and
the other agreements on the part of, eFunds to and for the benefit of
such underwriters, shall also be made to and for the benefit of such
Selling Holders. Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other
terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially
to the effect and to the extent provided in Section 2.08.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the
Securities Act pursuant to this Article II, eFunds shall give the
Holders of such Registrable Securities and the underwriters, if any,
and their respective counsel and accountants, such reasonable and
customary access to its books and records and such opportunities to
discuss the business of eFunds with its officers, employees, agents,
representatives, customers, suppliers and others having business
relationships with eFunds and the independent public accountants who
have certified the financial statements of eFunds as shall be
necessary, in the opinion of such Holders and such underwriters or
their respective counsel, to conduct a reasonable investigation within
the meaning of the Securities Act.
Section 2.08. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities
made pursuant to this Article II, eFunds agrees to indemnify and hold
harmless, to the extent permitted by law, each Selling Holder, each
underwriter of Registrable Securities so offered and each Person, if
any, who controls any of the foregoing Persons within the meaning of
the Securities Act and the officers, directors, Affiliates, employees
and agents of each of the foregoing, against any and all losses,
liabilities, deficiencies, damages, expenses or costs (including,
without limitation, any legal or other expenses incurred in connection
with defending or investigating any such action or claim)
(collectively, "Losses"), as incurred, arising out of or relating to
any untrue statement or alleged untrue statement of a material fact
contained in, or incorporated by reference into, in the registration
statement (or in any
<PAGE>
preliminary or final prospectus included therein) or in any offering
memorandum or other offering document relating to the offering and sale
of such Registrable Securities prepared by eFunds or at its direction,
or any amendment thereof or supplement thereto, or any omission by
eFunds or alleged omission by eFunds to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading; except that eFunds shall not be liable to any
Person in any such case to the extent that any such Loss arising out of
or relating to any untrue statement or alleged untrue statement, or any
omission or alleged omission, if such statement or omission shall have
been made in reliance upon and in conformity with information relating
to a Selling Holder, another holder of securities included in such
registration statement or underwriter furnished in writing to eFunds by
or on behalf of such Selling Holder, other holder or underwriter, as
the case may be, specifically for use in the registration statement (or
in any preliminary or final prospectus included therein), offering
memorandum or other offering document, or any amendment thereof or
supplement thereto. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of any
Selling Holder, any other holder or any underwriter and shall survive
the transfer of such securities. In the case of an offering with
respect to which a Selling Holder has designated the lead or managing
underwriters (or a Selling Holder is offering Registrable Securities
directly, without an underwriter), this indemnity does not apply to any
Loss arising out of or relating to any untrue statement or alleged
untrue statement or omission or alleged omission in any preliminary
prospectus or offering memorandum if a copy of a final prospectus or
offering memorandum was not sent or given by or on behalf of any
underwriter (or such Selling Holder or other holder, as the case may
be) to such Person asserting such Loss at or prior to the written
confirmation of the sale of the Registrable Securities as required by
the Securities Act and such untrue statement or omission had been
corrected in such final prospectus or offering memorandum.
(b) In the case of each offering made pursuant to this
Agreement, each Selling Holder, by exercising its registration rights
hereunder, agrees to indemnify and hold harmless, and to cause each
underwriter of Registrable Securities included in such offering (in the
same manner and to the same extent as set forth in Section 2.08(a)) to
agree to indemnify and hold harmless, eFunds, each other underwriter
who participates in such offering, each other Selling Holder or other
holder with securities included in such offering and in the case of an
underwriter, such Selling Holder or other holder, and each Person, if
any, who controls any of the foregoing within the meaning of the
Securities Act and the Affiliates and Representatives of each of the
foregoing, against any and all Losses (including, without limitation,
any legal or other expenses incurred in connection with defending or
investigating any such action or claim), as incurred, arising out of or
relating to any untrue statement or alleged untrue statement of a
material fact contained in, or incorporated by reference into, the
registration statement (or in any preliminary or final prospectus
included therein) or in any offering memorandum or other offering
document relating to the offering and sale of such Registrable
Securities prepared by eFunds or at its direction, or any amendment
thereof or supplement thereto, or any omission by such Selling Holder
or underwriter, as the case may be, or alleged omission by such Selling
Holder or underwriter, as the case may be, of a material fact required
to be stated therein
<PAGE>
or necessary to make the statements therein not misleading, but in each
case only to the extent that such untrue statement of a material fact
is contained in, or such material fact is omitted from information
relating to such Selling Holder or underwriter, as the case may be,
furnished in writing to eFunds by or on behalf of such Selling Holder
or underwriter, as the case may be, specifically for use in such
registration statement (or in any preliminary or final prospectus
included therein), offering memorandum or other offering document, or
any amendment thereof or supplement thereto. In the case of an offering
made pursuant to this Agreement with respect to which eFunds has
designated the lead or managing underwriters (or eFunds is offering
securities directly, without an underwriter), this indemnity does not
apply to any Loss arising out of or related to any untrue statement or
alleged untrue statement or omission or alleged omission in any
preliminary prospectus or offering memorandum if a copy of a final
prospectus or offering memorandum was not sent or given by or on behalf
of any underwriter (or eFunds as the case may be) to such Person
asserting such loss, liability, cost, claim or damage at or prior to
the written confirmation of the sale of the Registrable Securities as
required by the Securities Act and such untrue statement or omission
had been corrected in such final prospectus or offering memorandum.
(c) The indemnification procedures set forth in Sections
7.01(d) through (g) of the IPO and Distribution Agreement are
incorporated herein and made a part hereof for all purposes as if fully
set forth herein and shall govern the parties' rights and obligations
with respect thereto.
(d) If the indemnification provided for in this Section 2.08
shall for any reason be unavailable (other than in accordance with its
terms) to an Indemnified Party in respect of any Loss referred to
therein, then each Indemnifying Party shall, in lieu of indemnifying
such Indemnified Party, contribute to the amount paid or payable by
such Indemnified Party as a result of such Loss (i) as between eFunds
and the Selling Holders on the one hand and the underwriters on the
other, in such proportion as shall be appropriate to reflect the
relative benefits received by eFunds and the Selling Holders on the one
hand and the underwriters on the other hand or, if such allocation is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits but also the relative fault
of eFunds and the Selling Holders on the one hand and the underwriters
on the other with respect to the statements or omissions which resulted
in such Loss as well as any other relevant equitable considerations and
(ii) as between eFunds on the one hand and each Selling Holder on the
other, in such proportion as is appropriate to reflect the relative
fault of eFunds and of each Selling Holder in connection with such
statements or omissions as well as any other relevant equitable
considerations. The relative benefits received by eFunds and the
Selling Holders on the one hand and the underwriters on the other shall
be deemed to be in the same proportion as the total proceeds from the
offering (net of underwriting discounts and commissions but before
deducting expenses) received by eFunds and the Selling Holders bear to
the total underwriting discounts and commissions received by the
underwriters, in each case as set forth in the table on the cover page
of this prospectus. The relative fault of eFunds and the Selling
Holders on the one hand and of the underwriters on the other shall be
<PAGE>
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 eFunds and the Selling
Holders or by the underwriters. The relative fault of eFunds on the one
hand and of each Selling Holder on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, but not
by reference to any Indemnified Party's stock ownership in eFunds. The
amount paid or payable by an Indemnified Party as a result of the Loss
in respect thereof, referred to above in this paragraph (d) shall be
deemed to include, for purposes of this paragraph (d), any legal or
other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
eFunds and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 2.08 were determined
by pro rata allocation (even if the underwriters were treated as one
entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in
this paragraph. Notwithstanding any other provisions of this Section
2.08, no Selling Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Registrable
Securities of such Selling Holder were offered to the public exceeds
the amount of any damages which such Selling Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. Each Selling Holder's obligations to
contribute pursuant to this Section 2.08 are several in proportion to
the proceeds of the offering received by such Selling Holder bears to
the total proceeds of the offering received by all the Selling Holders
and not joint. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) Indemnification and contribution similar to that specified
in the preceding paragraphs of this Section 2.08 (with appropriate
modifications) shall be given by eFunds, the Selling Holders and
underwriters with respect to any required registration or other
qualification of securities under any state law or regulation or
governmental authority.
(f) The obligations of the parties under this Section 2.08
shall be in addition to any liability which any party may otherwise
have to any other party.
Section 2.09. Rule 144 and Form S-3. Commencing 90 days after the IPO
Date, eFunds shall use its reasonable best efforts to ensure that the conditions
to the availability of Rule 144 set forth in paragraph (c) thereof shall be
satisfied. Upon the request of any Holder of Registrable Securities, eFunds will
deliver to such Holder a written statement as to whether it has complied with
such requirements. eFunds further agrees to use its reasonable efforts to cause
all conditions to the availability of Form S-3 (or any successor form) under the
Securities Act of the filing of registration statements under this Agreement to
be met as soon as practicable after the
<PAGE>
IPO Date. Notwithstanding anything contained in this Section 2.09, eFunds may
deregister under Section 12 of the Securities Exchange Act of 1934, as amended,
if it then is permitted to do so pursuant to said Act and the rules and
regulations thereunder.
Section 2.10. Transfer of Registration Rights.
(a) Any Holder may transfer all or any portion of its rights
under Article II to (i) any other transferee in respect of a number of
Registrable Securities owned by such Holder equal to or exceeding 3% of
the outstanding eFunds Common Stock at the time of the transfer (each
transferee that receives such minimum number of Registrable Securities
shall be referred to herein as a "Transferee"). Any transfer of
registration rights pursuant to this Section 2.09(a) shall be effective
upon receipt by eFunds of written notice from such Holder stating the
name and address of any Transferee and identifying the number of
Registrable Securities with respect to which the rights under this
Agreement are being transferred and the nature of the rights so
transferred and (ii) a written agreement from such Transferee to be
bound by the terms of this Article II and Sections 3.03, 3.06, 3.07,
3.09, and 3.11 of this Agreement. The Holders may exercise their rights
hereunder in such priority as they shall agree upon among themselves.
(b) Notwithstanding the foregoing, in the event that any
stockholder of Deluxe receives restricted Registrable Securities in the
Distribution and as a result of the Distribution, such stockholder is
"affiliated" with eFunds for purposes of the Securities Act, such
stockholder shall be entitled to the rights hereunder; provided,
however, that it shall only be entitled to request registration of
Registrable Securities pursuant to Section 2.01 twice and provided such
stockholder signs a written agreement to be bound by the terms of this
Agreement. Any such stockholder for purposes of this Agreement shall be
considered a "Holder".
Section 2.11. Holdback Agreement. If any registration pursuant to this
Article II shall be in connection with an underwritten public offering of
Registrable Securities, each Selling Holder agrees not to effect any public sale
or distribution, including any sale under Rule 144, of any equity security of
eFunds (otherwise than through the registered public offering then being made),
within 7 days prior to or 90 days (or such lesser period as the lead or managing
underwriters may permit) after the effective date of the registration statement
(or the commencement of the offering to the public of such Registrable
Securities in the case of Rule 415 offerings). Upon the reasonable request of
the underwriters, eFunds hereby also so agrees and agrees to use its reasonable
best efforts to cause each other holder of equity securities or securities
convertible into or exchangeable or exercisable for such securities (other than
in the case of equity securities, under dividend reinvestment plans or employee
stock plans, including, without limitation eFund's Stock Incentive Plan for
Deluxe Conversion Awards) purchased from eFunds otherwise than in a public
offering to so agree.
<PAGE>
ARTICLE III
MISCELLANEOUS
Section 3.01. Limitation of Liability. Neither Deluxe nor eFunds shall
be liable to the other for any special, indirect, incidental or consequential
damages of the other arising in connection with this Agreement.
Section 3.02. Subsidiaries. Deluxe agrees and acknowledges that Deluxe
shall be responsible for the performance by each of its Affiliates of the
obligations hereunder applicable to such Affiliate.
Section 3.03. Term. This Agreement shall remain in effect until all
Registrable Securities held by Holders have been transferred by them to Persons
other than Transferees; provided, that the provisions of Section 2.07 shall
survive any such expiration.
Section 3.04. Further Assurances. Deluxe and eFunds shall execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such instruments and take such other action as may be necessary or advisable to
carry out their obligations under this Agreement and under any exhibit, document
or other instrument delivered pursuant hereto.
Section 3.05. Specific Performance. The parties hereto acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in addition to any other remedy to which they may be entitled
at law or equity.
Section 3.06. Amendments. This Agreement shall not be supplemented,
amended or modified in any manner whatsoever (including without limitation by
course of dealing or of performance or usage of trade) except in writing signed
by the parties.
Section 3.07. Successors and Assigns. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and assigns. Nothing contained in this Agreement, express or implied,
is intended to confer upon any other person or entity any benefits, rights or
remedies.
Section 3.08. Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. If any portion of this Agreement is declared invalid for
any reason in any jurisdiction, such declaration shall have no effect upon the
remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; provided, that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
<PAGE>
Section 3.09. Entire Agreement. Other than the IPO and Distribution
Agreement, this Agreement constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof and thereof and supersedes all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof.
Section 3.10. Notices. All notices, consents, requests, approvals, and
other communications provided for or required herein, and all legal process in
regard thereto, must be in writing and shall be deemed validly given, made or
served, (a) when delivered personally or sent by telecopy to the facsimile
number indicated below with a required confirmation copy sent in accordance with
subsection (c) below; or (b) on the next business day after delivery to a
nationally-recognized express delivery service with instructions and payment for
overnight delivery; or (c) on the fifth (5th) day after deposited in any
depository regularly maintained by the United States postal service, postage
prepaid, certified or registered mail, return receipt requested, addressed to
the following addresses or to such other address as the party to be notified
shall have specified to the other party in accordance with this section:
If to Deluxe:
Deluxe Corporation
3680 Victoria Street North
Shoreview, Minnesota 55126
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile: 651-787-2749
If to eFunds:
eFunds Corporation
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
Attn: Chief Financial Officer
Facsimile:
Copy to: General Counsel
Facsimile: 651-787-2749
Section 3.11. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of Minnesota sitting in the County of Hennepin or the United
States District Court for the District of Minnesota and the appellate courts
having jurisdiction of appeals in such courts. In that context, and without
limiting the generality of the foregoing, each of the parties hereby irrevocably
and unconditionally:
<PAGE>
(a) submits for itself and its property in any legal suit,
action or proceeding relating to this Agreement or any transaction
contemplated hereby, or for recognition and enforcement of any judgment
in respect thereof, to the exclusive jurisdiction of the courts of the
State of Minnesota sitting in the County of Hennepin or the United
States District Court for the District of Minnesota and appellate
courts having jurisdiction of appeals in such courts, and each of the
parties hereto irrevocably and unconditionally agrees that all claims
in respect of any such suit, action, or proceeding shall be heard and
determined in such Minnesota State court or, to the extent permitted by
law, in such federal court;
(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may
now or hereafter have to the venue or jurisdiction or any such action
or proceeding in such court or that such action or proceeding was
brought in an inconvenient forum and agrees not to plead or claim the
same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such party in its address as provided in Section 3.06
hereof; and
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by Delaware
law.
Section 3.12. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DELUXE CORPORATION
By: /s/ John LeFevre
------------------------
Name: John LeFevre
Title: Senior Vice President
EFUNDS CORPORATION
By: /s/ John A Blanchard III
------------------------
Name: John A. Blanchard III
Title: Chief Executive Officer
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of eFunds Corporation
on Form S-1 of our report dated April 3, 2000, appearing in the Prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the headings "Selected Financial Data" and "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Minneapolis, MN
April 3, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 23,843 16,055 35,849
<SECURITIES> 0 0 0
<RECEIVABLES> 45,508 51,663 57,228
<ALLOWANCES> 2,517 2,043 4,394
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 92,031 93,202 112,834
<PP&E> 109,423 113,874 118,887
<DEPRECIATION> 57,342 55,414 58,414
<TOTAL-ASSETS> 187,810 186,335 289,929
<CURRENT-LIABILITIES> 52,345 91,333 87,227
<BONDS> 4,571 4,029 3,597
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 87,690 89,803 199,105
<TOTAL-LIABILITY-AND-EQUITY> 187,810 186,335 289,929
<SALES> 229,065 267,520 302,340
<TOTAL-REVENUES> 229,065 267,520 302,340
<CGS> 143,966 212,308 194,290
<TOTAL-COSTS> 227,737 294,131 303,428
<OTHER-EXPENSES> 40,968 (662) 2,515
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 825 (2,789) (963)
<INCOME-PRETAX> (40,465) (23,160) (2,640)
<INCOME-TAX> (6,397) (8,569) 5,586
<INCOME-CONTINUING> (34,068) (14,591) (8,226)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (34,068) (14,591) (8,226)
<EPS-BASIC> (13,627) (5,836) (3,290)
<EPS-DILUTED> (13,627) (5,836) (3,290)
</TABLE>
