<PAGE> 1
As filed with the Securities and Exchange Commission on October 31, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHECKFREE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7374 31-1013521
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
4411 East Jones Bridge Rd.
Norcross, Georgia 30092
(770) 840-1217
(Address, including zip code,
and telephone number,
including area code, of
Registrant's principal
executive offices)
Peter J. Kight
Chairman, President and Chief Executive Officer
Checkfree Corporation
4411 East Jones Bridge Rd.
Norcross, Georgia 30092
(770) 840-1217
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Correspondence to:
Curtis A. Loveland, Esq. Kenneth A. Linhares, Esq.
Porter, Wright, Morris & Arthur Fenwick & West LLP
41 South High Street Two Palo Alto Square, Suite 800
Columbus, Ohio 43215 Palo Alto, California 94306
(614) 227-2004 (415) 858-7235
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this Registration
Statement becomes effective and all other conditions to the proposed merger (the
"Merger") of a wholly owned subsidiary of the Registrant with and into Intuit
Services Corporation ("ISC") pursuant to the Agreement and Plan of Merger, dated
as of September 15, 1996, attached as Appendix A to the enclosed
Prospectus/Proxy Statement/Information Statement have been satisfied or waived.
If any 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. / X /
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration
Securities to be Registered Registered Per Share* Price* Fee*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $.01 par value.......... 12,600,000 $ 0.33 $ 33.33 $100.00
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Estimated solely for the purpose of calculating the registration fee based
on one-third of the aggregate par and stated values on July 31, 1996, of
the 100 shares of common stock, $1.00 par value of Intuit Services
Corporation to be canceled in the Merger, in accordance with Section 6(b)
and Rule 457(f)(2). At July 31, 1996, Intuit Services Corporation had an
accumulated capital deficit.
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.
<PAGE> 2
INTUIT SERVICES CORPORATION
2001 Butterfield Road, Suite 800
Downers Grove, Illinois 60515-1050
____________ __, 1996
Dear Stockholder:
On September 15, 1996, Intuit Inc. ("Intuit") and Intuit Services
Corporation ("ISC") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Checkfree Corporation (the "Company") and Checkfree Acquisition
Corporation II ("Acquisition"), a wholly owned subsidiary of the Company,
pursuant to which Acquisition will merge (the "Merger") with and into ISC and
ISC will become a wholly owned subsidiary of the Company. As a result of the
Merger, ISC's sole stockholder will be entitled to receive 12,600,000 shares of
Checkfree common stock, as such number of shares may be adjusted in accordance
with the terms of the Merger Agreement, in exchange for all of the issued and
outstanding shares of capital stock of ISC.
THE ISC BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF ISC'S SOLE
STOCKHOLDER AND THEREFORE RECOMMENDS THAT YOU VOTE IN FAVOR OF THE APPROVAL OF
THE MERGER AND THE MERGER AGREEMENT.
In accordance with the Certificate of Incorporation of ISC and the
General Corporation Law of the State of Delaware, the Merger and the Merger
Agreement may be approved and adopted without a stockholders meeting by written
consent of the stockholders without a meeting. Subject to the satisfaction of
the other conditions to the Merger, it is expected that the Merger will be
completed on or about ____________ __, 1996.
The accompanying Prospectus/Proxy Statement/Information Statement
explains in detail the terms of the Merger and the Company's common stock to be
issued in the Merger. It also contains pro forma financial information and other
information concerning the Company, ISC and the Merger. Please read the
Prospectus/Proxy Statement/Information Statement carefully and consider the
information contained therein.
Very truly yours,
David Kinser
President
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CHECKFREE CORPORATION
4411 East Jones Bridge Rd.
Norcross, Georgia 30092
__________ __, 1996
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of
Stockholders (the "Checkfree Special Meeting") of Checkfree Corporation (the
"Company"), which will be held on _________, __________ __, 1996, at _____ _.m.
local time. The Checkfree Special Meeting will be held at
_________________________________________, __________, _____.
On September 15, 1996, the Company and Checkfree Acquisition
Corporation II ("Acquisition"), a wholly owned subsidiary of the Company,
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Intuit Inc. ("Intuit") and Intuit Services Corporation ("ISC"), pursuant to
which Acquisition will merge (the "Merger") with and into ISC and ISC will
become a wholly owned subsidiary of the Company. As a result of the Merger,
ISC's sole stockholder will be entitled to receive 12,600,000 shares of
Checkfree common stock, as such number of shares may be adjusted in accordance
with the terms of the Merger Agreement, in exchange for all of the issued and
outstanding shares of capital stock of ISC (the "Merger Consideration"). At the
Checkfree Special Meeting, stockholders of the Company will be asked to consider
and approve the issuance of Checkfree common stock to ISC pursuant to the Merger
Agreement. A copy of the Merger Agreement is attached as Appendix A to the
Prospectus/Proxy Statement/Information Statement enclosed herewith.
ISC is a wholly owned subsidiary of Intuit that provides electronic
home banking, bill payment and other on-line services to financial institutions
and their consumer customers. ISC operates a network of servers that perform the
"back-end" computer processing and data storage functions that enable these
on-line financial transactions. To date, ISC's services have been marketed to,
and designed primarily for, users of Intuit's Quicken personal finance software
program.
Additionally, you are being asked to consider and approve an
amendment to the Company's 1995 Stock Option Plan and to adopt the Company's
Associate Stock Purchase Plan. If approved, the amendment to the Company's 1995
Stock Option Plan would increase the number of shares of common stock of the
Company issuable upon the exercise of stock options under the Company's 1995
Stock Option Plan from 2,630,700 shares to 5,000,000 shares. If adopted, the
Company's Associate Stock Purchase Plan would authorize the sale of up to
1,000,000 shares of Checkfree Common Stock to eligible employees.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE
ISSUANCE OF THE MERGER CONSIDERATION, THE AMENDMENT TO THE COMPANY'S 1995 STOCK
OPTION PLAN, AND THE ADOPTION OF THE COMPANY'S ASSOCIATE STOCK PURCHASE PLAN
AND RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH OF THE PROPOSALS.
Please read carefully the accompanying Transition Report on Form
10-K, Notice of Special Meeting of Stockholders and the Prospectus/Proxy
Statement/Information Statement and appendices thereto and consider the
information contained in them.
The affirmative vote of the holders of a majority of the outstanding
shares of Checkfree common stock present at the Checkfree Special meeting is
required to approve the issuance of Checkfree common stock pursuant to the
Merger and the other actions. Accordingly, your vote is important no matter how
large or how small your holdings may be. Whether or not you plan to attend the
Checkfree Special Meeting, you are urged to complete, sign, and promptly return
the enclosed proxy card to assure that your shares will be voted at the
Checkfree Special Meeting. If you attend the Checkfree Special Meeting, you may
vote in person if you wish and your proxy will not be used.
Very truly yours,
Peter J. Kight
Chairman of the Board
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CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
-------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
, 1996
-------------------------------------
Notice is hereby given that a Special Meeting of Stockholders (the
"Checkfree Special Meeting") of Checkfree Corporation (the "Company") has been
called by the Board of Directors and will be held at
____________________________________________________________________, ________,
____, on _________, __________ __, 1996, at _____ _.m. local time, for the
following purposes:
1. To consider and approve the issuance of common stock, $.01 par value, of
the Company (the "Checkfree Common Stock") pursuant to the Agreement and
Plan of Merger, dated as of September 15, 1996 (the "Merger Agreement").
Pursuant to the Merger Agreement, Checkfree Acquisition Corporation II, a
Delaware corporation ("Acquisition") and a wholly owned subsidiary of the
Company, would be merged with and into Intuit Services Corporation, a
Delaware corporation ("ISC"), and the sole stockholder of ISC would
receive up to 12,600,000 shares of Checkfree Common Stock, as such number
of shares may be adjusted in accordance with the terms of the Merger
Agreement, in exchange for its shares of common stock of ISC, as more
fully described in the accompanying Prospectus/Proxy Statement/Information
Statement;
2. To consider and act upon a proposed amendment to the Company's 1995 Stock
Option Plan to increase the number of shares of Checkfree Common Stock
issuable upon exercise of stock options under the Company's 1995 Stock
Option Plan from 2,630,700 shares to 5,000,000 shares;
3. To consider and adopt the Company's Associate Stock Purchase Plan which
authorizes the sale of up to 1,000,000 shares of Checkfree Common Stock to
eligible employees; and
4. To transact any other business which may properly come before the meeting
or any adjournment or adjournments thereof. (The Board of Directors is not
currently aware of any other business to come before the Checkfree Special
Meeting.)
Only holders of Checkfree Common Stock of record at the close of
business on _________, 1996, the record date for the Checkfree Special Meeting,
are entitled to notice of and to vote at the Checkfree Special Meeting and any
adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE ISSUANCE OF CHECKFREE COMMON STOCK
PURSUANT TO THE MERGER AGREEMENT, "FOR" APPROVAL OF THE AMENDMENT TO THE
COMPANY'S 1995 STOCK OPTION PLAN AND "FOR" APPROVAL OF THE COMPANY'S ASSOCIATE
STOCK PURCHASE PLAN.
We urge you to execute and return the enclosed proxy as soon as
possible in order to ensure that your shares will be represented at the
Checkfree Special Meeting. Your proxy may be revoked in the manner described in
the accompanying Prospectus/Proxy Statement/Information Statement at any time
before it has been voted at the Checkfree Special Meeting. If you attend the
Checkfree Special Meeting, you may vote in person, and your proxy will not be
used.
Dated: __________ __, 1996 By Order of the Board of Directors
Peter J. Kight
Chairman of the Board
WHETHER OR NOT YOU PLAN TO ATTEND THE CHECKFREE SPECIAL
MEETING, PLEASE SIGN AND MAIL THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED
IN THE UNITED STATES.
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<PAGE> 8
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1996
PROSPECTUS
CHECKFREE CORPORATION
COMMON STOCK
($.01 PAR VALUE)
------------
This Prospectus/Proxy Statement/Information Statement is being
furnished to the sole stockholder of Intuit Services Corporation, a Delaware
corporation ("ISC"), and to the stockholders of Checkfree Corporation, a
Delaware corporation (the "Company"), in connection with the merger (the
"Merger") of Checkfree Acquisition Corporation II ("Acquisition"), a wholly
owned subsidiary of the Company, with and into ISC, a wholly owned subsidiary of
Intuit Inc., a Delaware corporation ("Intuit"), pursuant to the Agreement and
Plan of Merger, dated as of September 15, 1996, among the Company, Acquisition,
Intuit, and ISC (the "Merger Agreement"). This Prospectus also serves as an
Information Statement to the sole stockholder of ISC and as a Proxy Statement
for the Special Meeting of Stockholders of the Company to be held on
_____________ __, 1996 (the "Checkfree Special Meeting").
Upon consummation of the Merger (the "Effective Time"), all
outstanding shares of common stock, $1.00 par value, of ISC ("ISC Common Stock")
shall be converted, in accordance with the Merger Agreement, into the right to
receive 12,600,000 shares of Common Stock, $.01 par value, of the Company (the
"Checkfree Common Stock"), as such number of shares may be adjusted in
accordance with the terms of the Merger Agreement (the "Merger Consideration").
A copy of the Merger Agreement is attached to this Prospectus/Proxy
Statement/Information Statement as Appendix A and is incorporated herein by
reference. See "THE MERGER."
The closing price per share of Checkfree Common Stock on the Nasdaq
National Market on October 23, 1996 was $20.875. THE CHECKFREE COMMON STOCK
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 14.
------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS/PROXY STATEMENT/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS PROSPECTUS/PROXY STATEMENT/ INFORMATION STATEMENT AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS/PROXY STATEMENT/ INFORMATION
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT/
INFORMATION STATEMENT IN ANY JURISDICTION OR TO ANY PERSON TO WHOM IT WOULD BE
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT/ INFORMATION STATEMENT AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------------------------------
The date of this Prospectus/Proxy Statement/Information Statement is
________________ __, 1996.
<PAGE> 9
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and in accordance therewith files reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "Commission"). Copies of such reports, proxy statements, and
other information filed by the Company can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 or at the public reference facilities of the regional offices of the
Commission at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material also can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the fees prescribed by the rules and regulations of the Commission. Such
materials may also be accessed electronically by means of the Commission's home
page on the Internet at http:\\www.sec.gov.
Checkfree Common Stock is listed on the Nasdaq National Market, and
accordingly such reports and other information concerning the Company also
should be available for inspection and copying at the offices of the Nasdaq
Stock Market, 1735 K. Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission under the Securities Act
of 1933, as amended, and the rules and regulations thereunder (the "Securities
Act"), a Registration Statement on Form S-4, as it may be amended (the
"Registration Statement"), with respect to the shares of Checkfree Common Stock
issuable in connection with the Merger. This Prospectus/Proxy
Statement/Information Statement does not contain all of the information
contained in the Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission and to which
reference is hereby made. Any statements contained herein or in any document
incorporated by reference herein concerning the provisions of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or other document, each such statement being qualified in
its entirety by such reference. The Registration Statement (and exhibits
thereto) should be available for inspection at the offices of the Commission at
450 Fifth Street, N.W., Washington D.C. 20549, and copies thereof may be
obtained from the Commission at prescribed rates. Such materials may also be
accessed electronically by means of the Commission's home page on the Internet
at http:\\www.sec.gov.
All information contained herein or incorporated herein by reference
with respect to the Company and Acquisition, was supplied by the Company and all
information contained herein with respect to ISC and Intuit was supplied by
Intuit. Neither the Company nor Intuit can warrant the accuracy or completeness
of information relating to the other party.
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed with the Commission by the
Company pursuant to Sections 13(a), 14 or 15(d) of the Exchange Act are hereby
incorporated herein by reference:
1. Transition Report on Form 10-K for the six months ended June 30,
1996;
2. Current Report on Form 8-K, dated October 1, 1996; and
3. Current Report on Form 8-K/A No. 2, dated May 9, 1996.
In addition, the description of Checkfree Common Stock which is
contained in the Company's Form 8-A (Registration No. 0-26802) filed with the
Commission pursuant to Section 12 of the Exchange Act, as the same may be
updated in any amendment or report filed for the purpose of updating such
description, is hereby incorporated by reference.
All documents filed by the Company, pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus/Proxy
Statement/Information Statement and prior to the Checkfree Special Meeting shall
be deemed to be incorporated by reference in this Prospectus/Information
Statement/Proxy Statement and to be a part hereof from the date of filing of
such documents. Any statement incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus/Proxy
Statement/Information Statement to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus/Proxy
Statement/Information Statement.
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<PAGE> 10
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION........................................... 2
INFORMATION INCORPORATED BY REFERENCE........................... 2
TABLE OF CONTENTS............................................... 3
INTRODUCTION.................................................... 4
The Company.................................................. 4
Record Date; Shares Entitled to Vote......................... 5
ISC.......................................................... 5
SUMMARY......................................................... 6
The Company and Acquisition.................................. 6
ISC.......................................................... 7
The Checkfree Special Meeting, Record Date
and Vote Required............................................ 8
The Merger; General Terms.................................... 8
Recommendation of the Company's Board of Directors
and the ISC Board of Directors..............................10
Restrictions on Transfer of Checkfree Common Stock...........10
Certain Related Transactions.................................10
Regulatory Requirements......................................11
Comparative Per Share Information............................12
Market Price Data; Dividend Policy...........................13
RISK FACTORS....................................................14
RECENT DEVELOPMENTS.............................................23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA OF CHECKFREE.............................................24
SELECTED HISTORICAL FINANCIAL
DATA OF ISC...................................................25
UNAUDITED PRO FORMA
COMBINING SELECTED FINANCIAL DATA
OF THE COMPANY AND ISC........................................26
THE MERGER......................................................27
Background of the Merger.....................................27
The Company's Reasons for the Merger; Recommendation ........
of the Company's Board of Directors........................28
Opinion of Checkfree Financial Advisor.......................29
ISC's Reasons for the Merger; Recommendation of the
ISC Board of Directors.....................................33
Required Vote................................................33
The Merger Agreement.........................................34
Exchange of Certificates.....................................40
Stock Exchange Listing.......................................40
Regulatory Approvals.........................................40
Anticipated Accounting Treatment.............................41
Certain Federal Income Tax Consequences......................41
Resales by Affiliates; Registration Rights...................42
CERTAIN RELATED TRANSACTIONS....................................43
UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL INFORMATION...............................45
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL INFORMATION...............................49
CHECKFREE CORPORATION...........................................51
General......................................................51
The Servantis Acquisition and Servantis......................51
The Security APL Acquisition and Security APL................51
Acquisition..................................................52
Other Information............................................52
INTUIT SERVICES CORPORATION.....................................52
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................53
COMPARISON OF CERTAIN RIGHTS OF
STOCKHOLDERS OF THE COMPANY AND ISC...........................58
Capital Stock................................................58
Voting Power.................................................59
Payment of Dividends and Other Distributions.................59
Meetings of Stockholders.....................................59
Stockholder Nominations and Proposals........................59
Amendment of Certificate of Incorporation and By-Laws........60
Appraisal Rights.............................................60
Action by Written Consent....................................60
Size and Classification of Board of Directors; Removal
of Directors; Filling Vacancies............................61
Limitations on Director Liability............................61
Indemnification of Officers and Directors....................62
Interested Stockholder Transactions..........................62
Preemptive Rights............................................62
Repurchase and Redemption of Stock...........................62
AMENDMENT TO THE COMPANY'S 1995 STOCK
OPTION PLAN...................................................62
The 1995 Stock Option Plan...................................62
Federal Income Tax Consequences..............................64
ADOPTION OF THE CHECKFREE CORPORATION
ASSOCIATE STOCK PURCHASE PLAN.................................66
The Stock Purchase Plan......................................66
Federal Income Tax Consequences..............................67
EXPERTS.........................................................68
LEGAL OPINION...................................................68
INDEX TO FINANCIAL STATEMENTS..................................F-1
FINANCIAL STATEMENTS OF ISC....................................F-2
APPENDICES
Appendix A - Agreement and Plan of Merger
Appendix B - Opinion of Alex. Brown & Sons, Incorporated
Appendix C - Amended and Restated Checkfree Corporation 1995 Stock Option Plan
Appendix D - Checkfree Corporation Associate Stock Purchase Plan
THIS PROSPECTUS/PROXY STATEMENT/INFORMATION STATEMENT INCORPORATES BY REFERENCE
PORTIONS OF THE COMPANY'S TRANSITION REPORT ON FORM 10-K FOR THE SIX MONTHS
ENDED JUNE 30, 1996, A COPY OF WHICH WAS FURNISHED TO CHECKFREE'S STOCKHOLDERS
AND ISC'S SOLE STOCKHOLDER PRIOR TO OR CONCURRENTLY WITH THIS PROSPECTUS.
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<PAGE> 11
CHECKFREE CORPORATION
AND
INTUIT SERVICES CORPORATION
PROSPECTUS/PROXY STATEMENT/INFORMATION STATEMENT
INTRODUCTION
THE COMPANY
This Prospectus/Proxy Statement/Information Statement and the
accompanying proxy card will be furnished to the stockholders of the Company in
connection with the solicitation of proxies by the Board of Directors of the
Company for the Checkfree Special Meeting to be held at _____ _.m., local time,
on ________, _____________ __, 1996, at _______________________, ________, ____,
and any adjournments or postponements thereof, to consider and approve: (i) the
issuance of 12,600,000 shares of Checkfree Common Stock pursuant to the Merger
Agreement, as such number of shares may be adjusted in accordance with the terms
of the Merger Agreement, pursuant to which Acquisition will be merged with and
into ISC and the sole stockholder of ISC will become a stockholder of the
Company; (ii) a proposed amendment to the Checkfree Corporation 1995 Stock
Option Plan (the "1995 Stock Option Plan") to increase the number of shares of
Checkfree Common Stock issuable upon the exercise of stock options under the
1995 Stock Option Plan from 2,630,700 shares to 5,000,000 shares; and (iii) the
adoption of the Checkfree Corporation Associate Stock Purchase Plan (the
"Associate Stock Purchase Plan") which authorizes the sale of up to 1,000,000
shares of Checkfree Common Stock to eligible employees. This Prospectus/Proxy
Statement/Information Statement and accompanying proxy card will be first sent
or given to the stockholders of the Company on or about ________ __, 1996.
This Prospectus/Proxy Statement/Information Statement also
constitutes a prospectus of the Company with respect to the issuance of
12,600,000 shares of Checkfree Common Stock pursuant to the Merger Agreement (as
such number of shares may be adjusted in accordance with the terms of the Merger
Agreement) in order to effect the proposed acquisition of ISC by the Company.
The shares represented by the accompanying proxy card will be voted
as directed if the proxy is properly signed and received by the Company prior to
the Checkfree Special Meeting. If no directions are made to the contrary on a
duly executed and returned proxy, then the proxy will be voted FOR the approval
of: (i) the issuance of 12,600,000 shares of Checkfree Common Stock pursuant to
the Merger Agreement, as such number of shares may be adjusted in accordance
with the terms of the Merger Agreement; (ii) a proposed amendment to the 1995
Stock Option Plan to increase the number of shares of Checkfree Common Stock
issuable upon the exercise of stock options under the 1995 Stock Option Plan
from 2,630,700 shares to 5,000,000 shares; and (iii) the Associate Stock
Purchase Plan which authorizes the sale of up to 1,000,000 shares of Checkfree
Common Stock to eligible employees. The proxy may also be used to grant
discretionary authority to vote on other matters which may arise at the
Checkfree Special Meeting. While management is presently unaware of any such
matters, the person or persons designated to vote the shares will cast votes
according to their best judgment if any such matters properly come before the
Checkfree Special Meeting. Any stockholder giving the enclosed proxy has the
power to revoke it at any time prior to the Checkfree Special Meeting by filing
with the Secretary of the Company a written notice of revocation or a subsequent
proxy relating to the same shares, or by attending the Checkfree Special Meeting
and voting in person. Stockholders who attend the meeting may vote in person and
their proxies will not then be used.
A majority of the outstanding shares of Checkfree Common Stock,
represented in person or by proxy, will constitute a quorum at the meeting.
Abstentions and broker non-votes will be counted for purposes of determining the
presence of a quorum at the Checkfree Special Meeting. The affirmative vote of
the holders of a majority of the
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<PAGE> 12
outstanding shares of Checkfree Common Stock present in person or by proxy and
entitled to vote (assuming the presence of a quorum) at the Checkfree Special
Meeting is required to approve (i) the issuance of shares of Checkfree Common
Stock pursuant to the Merger Agreement; (ii) the amendment to the 1995 Stock
Option Plan; and (iii) the adoption of the Associate Stock Purchase Plan.
Because the matters to be voted on require the affirmative vote of a particular
percentage of the outstanding shares of Checkfree Common Stock voting on a
matter, an abstention or a broker non-vote with respect to such matter will have
the same effect as a vote against the matter.
RECORD DATE; SHARES ENTITLED TO VOTE
Only the Company's stockholders of record at the close of business
on __________, 1996 (the "Checkfree Record Date"), will be entitled to vote at
the Checkfree Special Meeting. At that date, the Company had __________ shares
of Checkfree Common Stock outstanding and entitled to vote on all matters
requiring a vote of the stockholders. These shares were held by approximately
___ holders of record. Each share of Checkfree Common Stock entitles the holder
to one vote, exercisable in person or by properly executed proxy, on each matter
that comes before the stockholders at the Checkfree Special Meeting.
The Company will bear the cost of the solicitation of proxies,
including the charges and expenses of brokerage firms and others, if any, for
forwarding solicitation material to beneficial owners of stock. Representatives
of the Company may solicit proxies by mail, telegram, telephone, or personal
interview.
ISC
This Prospectus/Proxy Statement/Information Statement is being
furnished to the sole stockholder of ISC in connection with the solicitation of
an Action by Written Consent of Sole Stockholder to consider and vote upon the
approval and adoption of the Merger Agreement pursuant to which Acquisition will
be merged into ISC and the sole stockholder of ISC will become a stockholder of
the Company. This Prospectus/Proxy Statement/Information Statement will be first
sent or given to the sole stockholder of ISC on or about [ ________ __, 1996.]
In accordance with the Certificate of Incorporation of ISC and the
General Corporation Law of the State of Delaware (the "Delaware GCL"), the
Merger and the Merger Agreement may be approved and adopted without a
stockholder's meeting by the written consent of the sole stockholder of all of
the issued and outstanding shares of capital stock of ISC. Upon approval of the
sole stockholder, no further action is required by such stockholder under the
Delaware GCL to approve the transactions contemplated by the Merger Agreement.
Subject to the satisfaction of the other conditions to the Merger, it is
expected that the Merger will be completed on or about [____________ __, 1996.]
- 5 -
<PAGE> 13
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus/Proxy Statement/Information Statement. This summary
is not intended to be complete and is qualified in its entirety by reference to,
and should be read in conjunction with, the detailed information and financial
statements contained herein and in the exhibits hereto.
THE COMPANY AND ACQUISITION
As used in this Prospectus/Proxy Statement/Information Statement, "Checkfree" is
generally used to indicate Checkfree Corporation prior to its acquisition of
Servantis Systems Holdings, Inc. on February 21, 1996 (the "Servantis
Acquisition") and prior to its acquisition of Security APL, Inc. on May 9, 1996
(the "Security APL Acquisition") (the Servantis Acquisition and the Security APL
Acquisition are collectively referred to as the "Acquisitions"). "Servantis" is
generally used to indicate Servantis Systems Holdings, Inc. prior to its
acquisition by Checkfree, "Security APL" is generally used to indicate Security
APL, Inc. prior to its acquisition by Checkfree, and the term the "Company" is
used to indicate the combined company following the Acquisitions. This
Prospectus/Proxy Statement/Information Statement contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANY
Checkfree Corporation (the "Company") is a leading provider of
electronic commerce services, financial application software and related
products for financial institutions and businesses and their customers. The
Company services over 700,000 consumers, 1,000 businesses and approximately 850
financial institutions (including the 500 largest banks in the United States).
The Company has also signed agreements with over 140 banks to provide electronic
home banking services for the customers of those banks. To maximize the
efficiency and effectiveness of its product development and distribution
strategies, the Company has established several strategic alliances with
companies such as AT&T Corporation ("AT&T"), Automatic Data Processing, Inc.
("ADP"), Block Financial Corporation ("Block Financial"), CyberCash, Inc.
("CyberCash"), Electronic Data Systems Corporation ("EDS"), Fiserv, Inc.
("Fiserv"), FiTech, Inc. ("FiTech"), Premiere Communications, Inc. ("Premiere"),
Spyglass, Inc. ("Spyglass"), and SPRY, Inc. ("Spry"), an affiliate of CompuServe
Corporation ("CompuServe").
The Acquisitions further Checkfree's strategy of providing an
expanding range of convenient, secure and cost-effective electronic commerce
services and related products to financial institutions and businesses and their
customers. Servantis' experience as a provider of electronic commerce and
financial application software and services to financial institutions
substantially enhances the Company's presence in the financial institutions
market of the electronic commerce segment. Security APL's experience as a vendor
of portfolio management and software services to institutional investment
managers and investment services to consumers enhances the Company's presence in
the consumer and financial institutions market of the electronic commerce
industry. The integration of Checkfree's electronic transaction processing and
remote delivery technology with Servantis' software products and market presence
and Security APL's portfolio management and software services has created a
single vendor of electronic commerce services and related products to an
expanded customer base of financial institutions and businesses and their
customers.
Prior to the Servantis Acquisition, the Company operated its
business in one business segment, the electronic commerce segment. With the
Servantis Acquisition, the Company added financial application software as a
second business segment. The electronic commerce segment includes electronic
home banking, electronic bill payment, automatic accounts receivable collection,
electronic accounts payable processing, investment portfolio management services
and investment trading and reporting services. These services are primarily
directed to financial institutions and businesses and their customers. The
financial application software segment includes end-to-end software products for
Automated Clearing House ("ACH") processing, account reconciliation, wire
transfer, mortgage loan origination and servicing, lease accounting and debt
recovery. These products and services are primarily directed to financial
institutions and large corporations.
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has ten direct and indirect wholly owned
subsidiaries: Servantis Systems Holdings, Inc., a Delaware corporation;
Servantis
- 6 -
<PAGE> 14
Systems, Inc., a Georgia corporation (" Servantis Systems"); Servantis Services,
Inc., a Georgia corporation ("Servantis Services"); Checkfree Software
Solutions, Inc., a Delaware corporation; Security APL, Inc., an Illinois
corporation; Bow Tie Systems, Inc., an Illinois corporation; Checkfree
Acquisition Corporation II, a Delaware corporation; Interactive Solutions
Corporation, an Oregon corporation; Checkfree Investment Corporation, a Delaware
corporation; and RCM Systems, Inc., a Wisconsin corporation. The Company's
principal executive offices are located at 4411 East Jones Bridge Road,
Norcross, Georgia 30092 and its telephone number is (770) 840-1217. The
Company's Internet address is http://www.checkfree.com.
THE SERVANTIS ACQUISITION AND SERVANTIS
On February 21, 1996, Checkfree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of Checkfree
Common Stock valued at $20.00 per share and $42.5 million in cash to repay
Servantis' long-term debt, in addition to the assumption of $38.3 million of
liabilities. Founded in 1971, Servantis is a leading provider of electronic
commerce and financial application software and services for businesses and
financial institutions (including the 500 largest banks and over 350 mortgage
institutions in the United States). Servantis designs, markets, licenses and
supports software products for electronic corporate banking, home banking,
financial lending, regulatory compliance and document imaging. In addition,
Servantis offers software consulting and remote processing services. The Company
accounted for the Servantis Acquisition using the purchase method of accounting.
THE SECURITY APL ACQUISITION AND SECURITY APL
On May 9, 1996, Checkfree acquired Security APL for approximately
$53.3 million, consisting of the issuance of 2.8 million shares of Checkfree
Common Stock valued at $18.50 per share, and the assumption of $5.5 million of
liabilities. Security APL is a leading vendor of portfolio management and
software services for institutional investment managers. Security APL has been
developing and providing advanced investment analysis systems since it was
founded in 1978. Security APL believes that it is the only full-service provider
of fully-integrated portfolio management, performance measurement, trading and
reporting systems for the investment manager. Security APL's clients include
money management firms, bank trust departments, insurance companies and
brokerage houses. Security APL added an additional investment information
service by establishing its Portfolio Accounting World Wide ("PAWWS") division
in August 1994. The PAWWS world-wide web site offers individuals some of the
same tools professional money managers have to gather the information they need
to make their investment decisions to enter trades and to monitor the status of
their investments. Some of the services available through PAWWS include
portfolio accounting and allocation, research information provided by various
data suppliers, free stock quotes, stock host lists and brokerage services.
Currently, Security APL monitors more than 300,000 portfolios for approximately
1,500 portfolio managers at over 150 firms. The Company accounted for the
Security APL Acquistion using the purchase method of accounting.
ACQUISITION
Acquisition was incorporated in Delaware in September 1996 and is a
wholly owned subsidiary of Checkfree formed for the purpose of facilitating the
Merger. The principal executive offices of Acquisition are located at 8275 North
High Street, Columbus, Ohio 43235 and its telephone number is (614) 825-3000.
ISC
ISC was incorporated in Delaware on December 2, 1989, under the name
"National Payment Clearinghouse, Inc." ISC was acquired by Intuit in July 1994
and later renamed Intuit Services Corporation. Today, ISC is an operations
processing facility for Intuit and the online products of other companies. ISC's
principal business is to provide online electronic banking and bill payment
processing services (including Intuit's online banking and online bill payment
services) to approximately 40 financial institutions (including six of the ten
largest domestic banks and American Express), their customers, and a variety of
merchants. ISC also supports BankNow, an Intuit home banking service that is
available on America Online, and banking, bill payment and stock quote services
accessible through Microsoft Money. ISC's current operations include data
processing and storage, maintenance and development of multiple online
connections to other entities (including companies other than Intuit), and
telephone support for both customer service and technical support. However, to
date ISC's services have been marketed to and designed primarily for users of
Intuit's Quicken personal finance software program. ISC has 190 employees and
conducts its operations from two facilities located in Downers' Grove and
Aurora, Illinois.
- 7 -
<PAGE> 15
ISC is a Delaware corporation with executive offices located at 2001
Butterfield Road, Suite 800, Downers Grove, Illinois 60515-1050 and its
telephone number is (708) 852-4700.
THE CHECKFREE SPECIAL MEETING; RECORD DATE AND VOTE REQUIRED
The Checkfree Special Meeting will be held at ________ _.m., local
time, on ________, ________ __, 1996, at _____________________, _______, _____.
The close of business on __________, has been set as the record date for
determining the stockholders of record of the Company entitled to notice of and
to vote at the Checkfree Special Meeting and any adjournments or postponements
thereof (the "Checkfree Record Date"). At the Checkfree Special Meeting, the
stockholders of the Company will be asked to approve proposals which authorize:
(i) the issuance of 12,600,000 shares of Checkfree Common Stock, as such
number of shares may be adjusted in accordance with the terms of the Merger
Agreement; (ii) an amendment to the 1995 Stock Option Plan to increase the
number of shares subject to such from 2,630,700 shares to 5,000,000 shares; and
(iii) to adopt the Associate Stock Purchase Plan. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares entitled to vote
at the Checkfree Special Meeting is necessary to constitute a quorum at the
Checkfree Special Meeting. Abstentions and broker non-votes will be counted for
purposes of determining the presence of a quorum at the Checkfree Special
Meeting. The affirmative vote of the holders of a majority of the shares of
Checkfree Common Stock present in person or by proxy and entitled to vote at the
Checkfree Special Meeting is required to approve each matter to be voted upon at
the Checkfree Special Meeting. Because the matters to be voted on require the
affirmative vote of a particular percentage of the outstanding shares of
Checkfree Common Stock voting on a matter, an abstention or a broker non-vote
with respect to such matter will have the same effect as a vote against the
matter.
THE MERGER; GENERAL TERMS
At the Effective Time of the Merger, Acquisition will, pursuant to
the Merger Agreement, be merged with and into ISC, with ISC being the surviving
corporation of the Merger and becoming a wholly-owned subsidiary of the Company
operating under the corporate name of Checkfree Services Corporation
("Services"). It is currently anticipated that, assuming all conditions to the
Merger have been satisfied or waived, the Effective Time will occur on or about
____________ __, 1996. At the Effective Time, by virtue of the Merger and
without further action by the stockholders of the Company or ISC, the
Certificate of Incorporation and By-laws of Services will be amended as provided
in the Merger Agreement will read the same as the Certificate of Incorporation
and By-Laws of Acquisition immediately prior to the Effective Time, except for
the above-mentioned change of Services' name to "Checkfree Services
Corporation." See "THE MERGER".
MERGER CONSIDERATION. In the Merger, all of the outstanding shares
of ISC Common Stock shall be converted into the right to receive 12,600,000
fully paid and nonassessable shares of Checkfree Common Stock, as such number of
shares may be adjusted in accordance with the terms of the Merger Agreement (the
"Merger Consideration"), of which 1,260,000 shares shall be held in escrow. See
"THE MERGER -- The Merger Agreement (Merger Consideration Generally)." The
closing price per share of Checkfree Common Stock on the Nasdaq National Market
on October 23, 1996 was $20.875.
VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding shares of Checkfree Common Stock present in person or by proxy
and entitled to vote at the Checkfree Special Meeting is necessary to approve
the issuance of 12,600,000 shares of Checkfree Common Stock pursuant to the
Merger Agreement, as such number of shares may be adjusted in accordance with
the terms of the Merger Agreement. As of the Checkfree Record Date, the
directors and executive officers of the Company and their affiliates
beneficially owned __________ shares of Checkfree Common Stock (excluding shares
subject to stock options), which represent _____% of the total issued and
outstanding shares of such stock entitled to vote at the Checkfree Special
Meeting. See "THE MERGER -- Required Vote."
Approval of the Merger and the Merger Agreement and the transactions
contemplated thereby requires the affirmative vote of a majority of the
outstanding shares of ISC. In accordance with the Bylaws of ISC and the Delaware
GCL, the Merger and the Merger Agreement may be approved and adopted without a
stockholder's meeting by the written consent of ISC's sole stockholder. Upon
approval of the sole stockholder, no further action is required by such
stockholder under the Delaware GCL to approve the Merger and the other
transactions contemplated by the Merger Agreement.
- 8 -
<PAGE> 16
In connection with the Merger Agreement, Peter J. Kight, the
Company's Chairman of the Board, President and Chief Executive Officer and Mark
A. Johnson, the Company's President of Business Services, who beneficially own
14.9% and 3.6%, respectively, of the outstanding shares of the Company's Common
Stock, have executed Stockholder Agreements pursuant to which they have agreed
to vote their shares of Checkfree Common Stock in favor of the Merger and the
issuance of the Merger Consideration and against any proposal that is in
opposition to or in competition with the Merger.
CONDITIONS TO THE MERGER. The respective obligations of the Company
and ISC to consummate the Merger are subject to the satisfaction of certain
conditions, including among others the approval of the Merger and the Merger
Agreement by the sole stockholder of ISC; the approval the issuance of
12,600,000 shares of Checkfree Common Stock pursuant to the Merger Agreement, as
such number of shares may be adjusted in accordance with the terms of the Merger
Agreement, by the holders of the requisite number of shares of Checkfree Common
Stock; the compliance by each of the parties to the Merger Agreement with its
obligations thereunder in all material respects and the truth of the
representations and warranties made by each of the parties as of the date of the
Merger Agreement; the expiration or earlier termination of any waiting period
under the HSR Act (as defined below); the effectiveness of the Registration
Statement of which this Prospectus/Proxy Statement/Information Statement forms a
part and the absence of any stop order with respect thereto at the Effective
Time; the absence of any injunction, order, statute or rule preventing the
consummation of the Merger as contemplated by the Merger Agreement; the
Checkfree Common Stock to be issued in the Merger having been approved for
listing on the Nasdaq National Market, subject to notice of issuance; each of
the Company and ISC having received an opinion from each other's respective
legal counsel; and the Company and Intuit having executed and delivered an
Escrow Agreement (as defined below) and a Registration Rights Agreement
(as defined below). See "THE MERGER -- The Merger Agreement (Conditions to
Consummation of the Merger)."
TERMINATION. The Merger Agreement may be terminated by the mutual
written consent of the Boards of Directors of the Company, Intuit and ISC; by
Intuit or ISC if the Board of Directors of the Company fails to recommend the
approval of the Merger Agreement and the Merger to the Company's stockholders or
recommends against the approval of the Merger Agreement or the Merger to the
Company's stockholders; by either the Company, on the one hand, or Intuit or
ISC, on the other hand, if the conditions to such parties' obligation to
consummate the Merger are not satisfied or complied with or waived by March 31,
1997; or by either the Company, on the one hand, or Intuit or ISC, on the other
hand, if there has been a material breach of a representation or warranty or of
a covenant (which cannot be cured or eliminated) by the other party. See "THE
MERGER -- The Merger Agreement (Termination)."
STOCK EXCHANGE LISTING. The shares of Checkfree Common Stock to be
issued in the Merger are expected to be listed on the Nasdaq National Market.
See "THE MERGER -- Stock Exchange Listing."
ACCOUNTING TREATMENT. The Company intends to account for the Merger
using the purchase method of accounting under generally accepted accounting
principles and the rules and regulations of the Commission. Under the purchase
method of accounting, the Company will be treated as the acquiror of ISC and, as
a result, the purchase price will be allocated based on the fair value of the
assets of ISC acquired and the liabilities assumed. See "THE MERGER --
Anticipated Accounting Treatment."
FEDERAL INCOME TAX CONSEQUENCES. The parties intend that the Merger
qualify as a tax-free plan of reorganization in accordance with the provisions
of Section 368(a)(1)(A) of the Internal Revenue Code (the "Code") by virtue of
the provisions of Section 368(a)(2)(E) of the Code. The parties believe that the
value of the Checkfree Common Stock to be issued to Intuit as the sole
stockholder of ISC in the Merger is equal to the value of the ISC Common Stock
to be surrendered in exchange therefor. The Checkfree Common Stock issued in the
Merger will be issued solely in exchange for the outstanding ISC Common Stock,
and no transaction other than the Merger represents, provides for or is
intended to be an adjustment to, the consideration paid for the ISC Common
Stock. No consideration that could constitute "other property" within the
meaning of Section 356 of the Code is being paid by the Company for the ISC
Common Stock in the Merger.
Intuit, as sole stockholder of ISC, is advised to consult with its
own tax adviser concerning the Federal income tax consequences of the Merger, as
well as the applicable state, local, foreign or other tax consequences, based
upon its particular facts and circumstances. See "THE MERGER -- Certain Federal
Income Tax Consequences."
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<PAGE> 17
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS AND THE ISC BOARD OF
DIRECTORS
The Board of Directors of the Company has unanimously determined
that the Merger Agreement and the Merger are advisable and fair and in the best
interests of the Company and its stockholders and unanimously recommends that
the stockholders of the Company vote in favor of the approval the issuance of
12,600,000 shares of Checkfree Common Stock pursuant to the Merger Agreement, as
such number of shares may be adjusted in accordance with the terms of the Merger
Agreement. See "THE MERGER -- Background of the Merger" and "-- Reasons for the
Merger."
The Board of Directors of ISC have unanimously determined that the
Merger Agreement and the Merger are advisable and fair and in the best interests
of ISC and its sole stockholder and have approved the Merger Agreement and the
Merger. See "THE MERGER -- Background of the Merger," "-- Reasons for the
Merger" and "-- Recommendation of the ISC Board of Directors."
RESTRICTIONS ON TRANSFER OF CHECKFREE COMMON STOCK
Intuit, as sole stockholder of ISC, is an "affiliate" of ISC for
purposes of Rule 145 under the Securities Act ("Rule 145") and immediately
following the Merger will be an "affiliate" of the Company and therefore will
not be permitted to transfer its shares of Checkfree Common Stock issued in the
Merger except (i) pursuant to an effective registration statement; (ii) in
compliance with Rule 145; or (iii) pursuant to an exemption from the
registration requirements of the Securities Act. This Prospectus/Proxy
Statement/Information Statement does not cover resales of Checkfree Common Stock
by Intuit. Pursuant to the Merger Agreement, Intuit will be granted certain
demand and piggyback registration rights by the Company that will require the
Company to register resales of Checkfree Common Stock by Intuit, under the
Securities Act, subject to the terms of a Registration Rights Agreement between
the Company and Intuit. See "THE MERGER -- Resales by Affiliates; Registration
Rights." It is Intuit's intention, as soon as practicable following
effectiveness of the Merger, to reduce its beneficial ownership interest in
Checkfree Common Stock to less than twenty percent (20%) of the outstanding
Checkfree Common Stock through sales of the shares of Checkfree Common Stock
issued in the Merger. Such sales may be made through open market sales in
accordance with Rules 144 and 145 under the Securities Act, by the exercise of
registration rights granted to Intuit in connection with the Merger, though
private sales or otherwise.
CERTAIN RELATED TRANSACTIONS
In connection with the Merger Agreement, the Company, ISC and Intuit
will enter into a certain Services and License Agreement (the "License
Agreement"), substantially all the terms of which will become operative upon
effectiveness of the Merger. The principal objectives of the License Agreement
are to: (i) establish a continuing cooperative relationship between the parties
whereby users of certain Intuit software products and services will continue to
be able to obtain electronic banking and electronic bill payment services
("banking/billpay services") from ISC or the Company through such Intuit
products; (ii) provide the means for an orderly transition in the operation and
support of several services currently offered by Intuit and ISC that are now
interdependent on certain technologies, equipment, facilities, personnel and
support services of ISC and Intuit; (iii) set forth the terms on which the
Company, ISC and Intuit will cooperate to develop, market, distribute and
support certain of their respective products and services; and (iv) provide for
the grant of certain technology licenses and mutual support and technical
cooperation agreements among the parties designed to maintain connectivity
between certain products and services offered by the parties. In partial
consideration of several of Intuit's agreements under the License Agreement, ISC
will agree to pay Intuit, in addition to certain other fees, the sum of $10
million in cash upon the closing of the Merger and an additional $10 million on
or about October 1, 1997 (the "Connectivity Fee"). Certain fees will be payable
by Intuit to ISC and the Company under the License Agreement. See "CERTAIN
RELATED TRANSACTIONS."
In connection with the Merger Agreement, Peter J. Kight, the
Company's Chairman of the Board, President and Chief Executive Officer and Mark
A. Johnson, the Company's President of Business Services, who beneficially own
14.9% and 3.6%, respectively, of the outstanding shares of the Company's Common
Stock, have executed Stockholder Agreements pursuant to which they have agreed
to vote their shares of Checkfree Common Stock in favor of the Merger and
against any proposal that is in opposition to or in competition with the Merger.
- 10 -
<PAGE> 18
Pursuant to the Merger Agreement, Intuit, as sole stockholder of ISC,
will enter into a registration rights agreement with the Company (the
"Registration Rights Agreement"), which provides that Intuit may demand that the
Company file registration statements under the Securities Act registering the
Checkfree Common Stock issued in the Merger. See "THE MERGER -- Resales by
Affiliates; Registration Rights."
REGULATORY REQUIREMENTS
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), in connection with the Merger, the
Company and ISC each filed a pre-merger notification report with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice. It is a condition to the obligations of Checkfree and ISC to consummate
the Merger that the waiting period under the HSR Act shall have expired or been
earlier terminated. See "THE MERGER -- Regulatory Approvals."
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<PAGE> 19
COMPARATIVE PER SHARE INFORMATION
The following table presents certain historical per share data for
the Company and ISC, combined pro forma per share data for the Company, and
equivalent ISC pro forma combined data. The ISC historical data is presented for
the twelve months ended January 31, 1996 and as of and for the six months ended
July 31, 1996. The Pro Forma amounts also give effect to the Servantis and
Security APL Acquisitions, which were consummated on February 21, 1996, and May
9, 1996, respectively. The following information should be read in conjunction
with, and is qualified in its entirety by, the consolidated financial
statements and accompanying notes of the Company set forth in the Company's
Transition Report on Form 10-K, the financial statements and accompanying notes
of ISC, and the Unaudited Pro Forma Condensed Combining Financial Information
appearing elsewhere in this Prospectus/Proxy Statement/Information Statement.
See "INFORMATION INCORPORATED BY REFERENCE," " FINANCIAL STATEMENTS OF ISC,"
and "UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
THE COMPANY HISTORICAL
Loss before extraordinary item $ (0.01) $ (3.69)(1)
Cash dividends declared for common stock -- --
Book value 3.32
ISC HISTORICAL
Net loss (103,433.78) (59,939.34)
Cash dividends declared for common stock -- --
Book value (deficiency) (125,225.44)
THE COMPANY PRO FORMA COMBINED
Loss before extraordinary item (0.63)(1)(2) (0.37)(1)
Cash dividends declared for common stock -- --
Book value 3.38
EQUIVALENT ISC PRO FORMA COMBINED
Net loss (79,380.00)(1)(2) (46,620.00)(1)
Cash dividends declared for common stock -- --
Book value 425,880.00
</TABLE>
(1) The June 30, 1996 historical Checkfree amounts include a charge of
$122.4 million for in-process research and development, or $3.27 per
share. The pro forma combining amounts for both periods presented do
not include the in-process research and development charge as it is
a non-recurring item, nor do the pro forma amounts include the
estimated in-process research and development charge of $120 million
related to the Merger.
(2) The pro forma combining amounts for the year ended December 31, 1995
include a charge, net of tax, of $0.24 per share ($30,240 per share
on an equivalent pro forma basis) for amortization of purchased
profits recorded in connection with the Servantis Acquisition and a
charge, net of tax, of $0.13 per share ($16,380 per share on an
equivalent pro forma basis) for amortization of intangibles for
certain connectivity and exclusivity arrangements related to the
Merger. Both of these items are fully amortized within twelve
months.
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<PAGE> 20
MARKET PRICE DATA; DIVIDEND POLICY
The Checkfree Common Stock is traded in the over-the-counter market
on the Nasdaq National Market under the symbol "CKFR." There is no established
public trading market for ISC Common Stock and, accordingly, market price
information is not available for ISC Common Stock. The following table sets
forth, for the periods indicated, the high and low sales prices for the
Checkfree Common Stock, as reported on the Nasdaq National Market. Information
with respect to the Checkfree Common Stock commences on September 28, 1995, when
the Checkfree Common Stock was first offered to the public.
<TABLE>
<CAPTION>
CHECKFREE COMMON STOCK
-------------------------------
CALENDAR PERIOD HIGH LOW
- ------------------------------------------------------- ----------- ------------
<S> <C> <C>
Fiscal 1995:
Third Quarter (September 28 to September 30) $22.875 $19.75
Fourth Quarter $29.375 $16.00
Transitional Fiscal 1996:
First Quarter $26.375 $16.50
Second Quarter $23.50 $16.875
Fiscal 1997:
First Quarter $22.125 $10.75
Second Quarter (through October 23, $24.75 $19.50
1996)
</TABLE>
The Company has paid no cash dividends since 1986. The Company
presently anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on
Checkfree Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors.
On September 13, 1996, the last full trading day prior to the public
announcement of the Merger Agreement, the last sale price per share of Checkfree
Common Stock on the Nasdaq National Market was $18.0625. The closing price per
share of Checkfree Common Stock on the Nasdaq National Market on October 23,
1996 was $20.875. The number of record holders of Checkfree Common Stock as of
October 18, 1996, was 490.
Stockholders of the Company and the sole stockholder of ISC are
advised to obtain current market quotations for shares of Checkfree Common
Stock. No assurance can be given concerning the market price of shares of
Checkfree Common Stock before or after the Effective Time. The market price of
Checkfree Common Stock will fluctuate between the date of this Prospectus/Proxy
Statement/Information Statement and the Effective Time and thereafter.
ISC has paid no cash dividends to date and does not anticipate
paying any cash dividends on the ISC Common Stock in the foreseeable future.
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<PAGE> 21
RISK FACTORS
The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Many of the following important factors discussed below have been
discussed in the Company's prior filings with the Securities and Exchange
Commission. In addition to the other information in this Prospectus/Proxy
Statement/Information Statement, stockholders of the Company and the sole
stockholder of ISC should carefully consider the following factors in
evaluating the Company and its business before making a decision regarding the
vote on the Merger. The following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
to differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Emerging Electronic Commerce Market; Security and Privacy Concerns.
The electronic commerce market is a relatively new and growing service industry.
If the electronic commerce market fails to grow or grows more slowly than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and
automated teller machine ("ATM") industries, the Company and other organizations
serving the electronic commerce market need to educate users that electronic
transactions use encryption technology and other electronic security measures
that make electronic transactions more secure than paper-based transactions.
While the Company believes that it is utilizing proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that the Company's use of such applications will be
sufficient to address the changing market conditions or the security and privacy
concerns of existing and potential customers. See "BUSINESS -- General" and "--
Services and Related Products" in the Company's Transition Report on Form 10-K.
Additionally, the Company's growth and acceptance in the electronic
commerce market is dependent on its continued growth in its target markets. See
"BUSINESS -- Services and Related Products" in the Company's Transition Report
on Form 10-K. Although demand for the Company's services and related products
continues to grow, there can be no assurance that the Company will be successful
in each of its target markets. Accordingly, the Company's inability to grow in
any one of these markets could have a material adverse effect on the Company's
business, operating results and financial condition.
Integration of Servantis and Security APL. On February 21, 1996, the
Company acquired Servantis for approximately $165.1 million, consisting of the
issuance of 5.7 million shares of Checkfree Common Stock valued at $20.00 per
share (approximately 16% of the Company's total shares outstanding following the
Servantis Acquisition) and $42.5 million in cash to repay Servantis' long-term
debt, in addition to the assumption of $38.3 million in liabilities. In
addition, on May 9, 1996, the Company acquired Security APL for approximately
$53.3 million, consisting of the issuance of 2.8 million shares of Checkfree
Common Stock valued at $18.50 per share (approximately 7% of the Company's total
shares outstanding following the Security APL Acquisition), and the assumption
of $5.5 million of liabilities. The successful and timely integration of
Checkfree, Servantis, and Security APL is critical to the future financial
performance of the Company. The Company currently estimates that the complete
integration of the three companies could take several quarters to accomplish.
The combination of the three companies will require, among other things,
integration of the companies' respective service and product offerings and
coordination of their sales and marketing and research and development efforts.
While Checkfree, Servantis, and Security APL have focused on markets which
utilize financial transaction processing, record-keeping and information
delivery, Checkfree has to date acted principally as a provider of services,
whereas Servantis and Security APL have focused on the development and support
of software systems and services used by financial institutions. In addition,
Servantis had greater revenues than Checkfree for the twelve months ended
December 31, 1995, and the absorption of a larger company may present a more
substantial integration challenge than the acquisition of a smaller company.
There can be no assurance that present and potential customers of the Company
will continue their recent buying patterns without regard to the Acquisitions,
and any significant delay or reduction in orders could have an adverse effect on
the Company's near-term business and
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results of operations. The diversion of the attention of management created by,
and any difficulties encountered in, the integration process could have an
adverse impact on the revenues and operating results of the Company. In
addition, the process of combining the three organizations could have an adverse
effect on any or all of the companies' businesses. The difficulty of combining
the three companies may be increased by the need to integrate the personnel of
and the geographic distance between the three companies. Changes brought about
by the Acquisitions may result in the loss of key employees of any or all
companies. There can be no assurance that the Company will retain the employees
it wants to retain or that the Company will realize any of the other anticipated
benefits of the Acquisitions. See "RISK FACTORS -- Acquisition Related Risks."
For transition fiscal 1996, the Company wrote-off $119.4 million of
the purchase price for Servantis and Security APL as in process research and
development. In addition, as part of the allocation of the purchase price, the
Company reduced the deferred revenues on the balance sheets of Servantis at the
date of the Servantis Acquisition due to the fact that the anticipated profits
included in deferred revenues are reflected in the purchase price of the
Servantis Acquisition. As a result, the Company did not recognize revenues or
profits of approximately $12.7 million with respect to such reduction in
deferred revenues in transition fiscal 1996. The write-off of in-process
research and development costs, and the nonrecognition of revenues or profits on
certain deferred revenues had a material adverse impact on the Company's
financial results in 1996. In addition, with the proposed acquisition of ISC the
Company expects a substantial in process research and development write-off in
fiscal 1997.
Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. In the financial institutions market, the Company's
competitors include Visa Interactive and ISC. A number of banks have developed,
and others in the future may develop, home banking services in-house.
Additionally, Intuit and Microsoft have each individually announced their own
alliances with financial institutions to offer on-line home banking and
financial services to consumers. In the business market, the Company competes
with other credit card and ACH processors. The Federal Reserve's ACH is the
national payment clearance system through which any bank can effect debit or
credit transactions to any authorized consumer checking account. There are
numerous competitors in the business market for credit card processing,
including First USA, Inc., NaBanco and Card Establishment Services (divisions of
First Data Corporation), and National Processing Company (a division of National
City Bank). The Company also faces competition in ACH processing from numerous
banks. The financial application software segment also faces significant
competition. Portfolio accounting software providers include Advent software,
PORTIA, a division of Thomson Financial, and Shaw Data, a Sun Guard Company. The
primary portfolio competition is Shaw Data. In products offered to the mortgage
services industry, the Company competes with Fiserv, FiTech, EDS, Alltel
Financial Information Services, Inc. ("Alltel"), Computer Power, Inc. ("CPI"),
Associated Software Consultants, Inc. ("ASC") and Gallagher Financial Systems,
Inc. ("GFS"). The Company's Imaging/COLD product lines compete with the products
of several companies, including International Business Machines Corporation
("IBM"), Optika ("Optika"), Image Integration Corporation ("IIC") and Computron
Software, Inc. ("Computron"). The Company competes in the recovery and
collection business with First Data Corporation, Rothenberg Systems
International ("Rothenberg") and Computer Associates International, Inc.
("Computer Associates") among others. Finally, the Company's products face
competition in the securities software and service sector principally from
SunGard Data Systems, Inc. ("SunGard"), National Computer Systems, Inc. ("NCS"),
Integrated Software Solutions ("ISS") and numerous in-house bank and transfer
agency service centers.
The Company expects competition to increase from both established
and emerging companies and that such increased competition will result in price
reductions and may result in a reduction of the Company's market share, either
or both of which could materially adversely affect the Company's business,
operating results and financial condition. The Company announced a new series of
services and pricing options in September 1995 in an attempt to appeal to
various segments of the Company's markets. One such option is to offer a bill
payment service at a lower cost in order to target new users and users who are
only interested in the electronic bill payment aspect of the Company's services.
Moreover, the Company's current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company, may respond more quickly than the Company to new or emerging
technologies or could expand to compete directly against the Company in any or
all of its target markets. Accordingly, it is possible that current or potential
competitors could rapidly acquire significant market share. Acquisitions and
consolidations are taking place in the transaction processing industry, such as
the merger between First Data Corp. and First Financial Management Corp. and the
acquisition of Litle and Company by First USA, Inc. While the Company believes
competition will increase as a result of these mergers and acquisitions, the
Company also believes
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<PAGE> 23
it is well positioned to meet such competition. There can be no assurance,
however, that the Company will be able to compete against current or future
competitors successfully or that competitive pressures faced by the Company will
not have a material adverse effect on its business, operating results and
financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "BUSINESS -- General," and "--
Competition" in the Company's Transition Report on Form 10-K.
Today, the Company is the leading provider of electronic payment
services to users of personal finance software. The Company believes that as
consumer-based on-line interactive and telecommunications services continue to
grow, retail-marketed personal financial software will become a less important
channel for the Company in acquiring new customers. The Company's strategy is to
focus increasingly on its own distribution alliances and direct marketing,
including key strategic alliances in the on-line interactive and
telecommunications industries. There can be no assurance that the Company's
strategy will be successful.
Management of Growth. The Company is currently experiencing a period
of rapid growth which has placed, and could continue to place, a significant
strain on its resources. This strain is increased by the Acquisitions and will
be further increased if the Company acquires ISC. The Company's key employees
have not had experience in managing companies larger than the Company. The
Company's ability to manage growth successfully will require the Company to
continue to improve its operational, management and financial systems and
controls as well as expand its work force. A significant increase in the
Company's customer base would necessitate the hiring of a significant number of
additional customer care and technical support personnel as well as computer
software developers and technicians, qualified candidates for which, at the
present time, are in short supply. In addition, the expansion and adaptation of
the Company's computer infrastructure will require substantial operational,
management and financial resources. Although the Company believes that its
current computer infrastructure is adequate to meet the needs of its customers
in the foreseeable future, there can be no assurance that the Company will be
able to expand and adapt its computer infrastructure to meet additional demand
on a timely basis, at a commercially reasonable cost, or at all. If the
Company's management is unable to manage growth effectively, hire needed
personnel, expand and adapt its computer infrastructure or improve its
operational, management and financial systems and controls, the Company's
business, operating results and financial condition could be materially
adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" in the Company's Transition Report on Form
10-K.
Acquisition-Related Risks. In September 1996, the Company signed a
definitive agreement to acquire ISC for 12,600,000 shares of Checkfree Common
Stock. The acquisition is expected to close in December 1996 and will be
accounted for as a purchase. While the appraisal for ISC is not yet complete,
the Company expects a substantial in process research and development write-off
at the acquisition date. In addition, ISC had been incurring operating losses
and operating losses are anticipated in 1997. The Company expects it will take
12 to 18 months to integrate ISC's bill payment and home banking operations into
the Company's operations. There can be no assurance the Company's integration
plan will be completed in the expected time frame or that the Company will
realize the operational efficiencies projected as a result of the acquisition.
In the future, the Company may pursue additional acquisitions of
complementary service or product lines, technologies or businesses. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, operating
results and financial condition. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. There can be no
assurance that some or all of these risks will not apply to the Acquisitions or
the Merger. From time to time, the Company evaluates potential acquisitions of
businesses, services, products or technologies. However, except for the Merger,
the Company has no present commitments or agreements with respect to any
material acquisition of other businesses, services, products or technologies. In
the event that such an acquisition were to occur, however, there can be no
assurance that the Company's business, operating results and financial condition
would not be materially adversely affected.
Dependence on Strategic Alliances. A principal element of the
Company's strategy is the creation and maintenance of strategic alliances that
maximize access to potential customers for the Company's electronic commerce
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<PAGE> 24
services and related products. The Company believes that these alliances enable
the Company to offer its services, software and related products to a larger
customer base than could be reached through stand-alone marketing efforts. As of
the date of this report, the Company has entered into strategic alliances with
several companies, including AT&T, ADP, Block Financial, CyberCash, EDS, Fiserv,
FiTech, Premiere, Spyglass and Spry. While the Company believes it has
established strong strategic alliances with these partners, the Company's
success depends both on the ultimate success of these partners, as well as on
the ability of its partners to successfully market the Company's services and
related products. Failure of one or more of the Company's key strategic partners
to successfully develop and sustain a market for the Company's services and
related products could have a material adverse effect on the Company's overall
performance. Additionally, failure of the Company's strategic partners to
generate new customers would likely lead to increased and more costly direct
marketing expenditures by the Company as well as a need to develop new strategic
alliances with other parties. Moreover, the Company has traditionally relied on
its strategic partners as the cornerstone of its marketing efforts to consumers
and financial institutions and, consequently, the Company has only limited
experience in the direct marketing of its services in two of its existing
markets. See "BUSINESS -- Strategic Alliances" in the Company's Transition
Report on Form 10-K.
Although the Company views its alliances as a key factor in its
overall business strategy and in the development and commercialization of its
services, software and related products, there can be no assurance that its
strategic partners view their alliances with the Company as significant for
their own businesses or that they will not reassess their commitment to the
Company at any time in the future. The Company's strategic alliance agreements
generally do not establish minimum performance requirements for the strategic
partners but instead rely on the voluntary efforts of the partners in pursuing
joint goals. The ability of the Company's strategic partners to incorporate the
Company's services, software and related products into successful commercial
ventures will depend, in part, on the Company's ability to continue to
successfully enhance its existing services, software and products and develop
new services and products. The Company's inability to meet such requirements
would delay the ongoing development of services, software and products and could
result in its strategic partners seeking alternative providers of financial
transaction services, software and related products, which would have a material
adverse impact on the Company. See "BUSINESS -- Strategic Alliances" in the
Company's Transition Report on Form 10-K.
Potential Fluctuations in Quarterly Results; Seasonality. The
Company's quarterly results of operations may fluctuate significantly as a
result of a number of factors, including changes in the Company's pricing
policies or those of its competitors, relative rates of acquisition of new
customers, delays in the introduction of new or enhanced services, software, and
related products by the Company or by its competitors or market acceptance of
such services, software and related products, other changes in operating
expenses, personnel changes and general economic conditions. In addition, the
Company's growth in new consumer customers is impacted by certain seasonal
factors such as holiday-based personal computer sales. These seasonal factors
may impact operating results by concentrating customer acquisition and set-up
costs, which may not be immediately offset by revenue increases primarily due to
introductory service price discounts. Additionally, on-line interactive service
customers generally tend to be more active users during the non-summer seasons,
potentially causing revenue fluctuations during the summer months. Servantis'
quarterly operating results have historically been highly seasonal, with sales
and earnings generally stronger in the quarters ended December 31 and June 30 of
each year and generally weaker in the quarters ended September 30 and March 31
of each year. The seasonality is due, in part, to calendar year-end buying
patterns of Servantis' financial institution customers and Servantis' sales
compensation structure, which is based on fiscal year (June 30) sales
performance. Servantis has historically operated with little or no backlog and
has no long-term contracts, and, at present, approximately half of its revenues
in each quarter result from software licenses issued in that quarter. Moreover,
the Company's intention to aggressively promote the acceptance of its electronic
commerce services and rapidly expand its customer base may adversely impact the
Company's short-term profitability. These seasonal factors will impact the
Company's operating results. Fluctuations in operating results could result in
volatility in the price of Checkfree Common Stock. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's
Transition Report on Form 10-K.
Risk of Product Defects. The software products offered by the
Company could contain errors or "bugs" that could adversely affect the
performance of the Company's software or services or damage a user's data. In
addition, as the Company increases its share of the electronic commerce services
market, software reliability and security demands will increase. The Company
attempts to limit its potential liability for warranty claims through
disclaimers in its software documentation and limitation-of-liability provisions
in its license and customer agreements. There can be no
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<PAGE> 25
assurance that the measures taken by the Company will prove effective in
limiting the Company's exposure to warranty claims. Additionally, despite the
existence of various security precautions, the Company's computer infrastructure
may be also vulnerable to viruses or similar disruptive problems caused by its
customers or third parties gaining access to the Company's processing system.
See "BUSINESS -- Technology" in the Company's Transition Report on Form 10-K.
Rapid Technological Change; Risk of Delays. The Company's success is
highly dependent on its ability to develop new and enhanced software, services
and related products that meet changing customer requirements. The market for
the Company's software, services and related products is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services and
products. There can be no assurance that the Company can successfully identify
new service opportunities and develop and bring new and enhanced software,
services and related products to market in a timely manner, that such software,
services, products or technologies will develop or will be commercially
successful, that the Company will benefit from such developments or that
services, products or technologies developed by others will not render the
Company's software, services and related products noncompetitive or obsolete. If
the Company is unable, for technological or other reasons, to develop and
introduce new services and products in a timely manner in response to changing
market conditions or customer requirements, or if new or enhanced software,
services and related products do not achieve a significant degree of market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected. See "BUSINESS -- General," "-- Services
and Related Products," and "-- Research and Development" in the Company's
Transition Report on Form 10-K.
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes all three principal financial payment
clearance systems: the Federal Reserve's ACH for electronic fund transfers; the
national credit card systems (e.g., American Express, Discover, MasterCard and
Visa) for electronic credit card settlements; and conventional paper check and
draft clearing systems for settlement of payments by check or drafts. In its use
of these established payment clearance systems, the Company generally bears the
same credit risks normally assumed by other users of these systems arising from
returned transactions caused by insufficient funds, stop payment orders, closed
accounts, frozen accounts, unauthorized use, disputes, theft or fraud. In
addition, the Company also assumes the risk of merchant fraud and transmission
errors when it is unable to have erroneously transmitted funds returned by an
unintended recipient. Merchant fraud includes such actions as inputting false
sales transactions or false credits. The Company manages all of these risks
through its risk management systems, internal controls and system security. The
Company also maintains a reserve for such credit risks and has not historically
incurred losses in excess of its reserve nor greater than 0.76% of its revenues
in any of the past five years. Past reserving experience cannot predict the
adequacy of reserves in the future. The Company believes that its risk
management and reserving practices are adequate. However, there can be no
assurance that the Company's risk management practices or reserves will be
sufficient to protect the Company from returned transactions, merchant fraud or
erroneous transmissions which could have a material adverse effect on the
Company's business, operating results and financial condition. See "BUSINESS --
Payment Clearance Systems" in the Company's Transition Report on Form 10-K.
Risk of System Failure. The Company's operations are dependent on
its ability to protect its computer equipment against damage from fire,
earthquake, power loss, telecommunications failure or similar event. All of the
Company's computer equipment, including its processing operations, is located at
its facilities in Columbus, Ohio, Norcross, Georgia, Chicago, Illinois and
Austin, Texas. A disproportionate amount of the Company's computer equipment,
including its primary processing operations, is located at its headquarters
facility in Columbus, Ohio. Although the Company is considering moving some of
its computer processing equipment to another site, this measure will not
eliminate the significant risk to the Company's operations from a natural
disaster or system failure at one of these two sites. Any damage or failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "BUSINESS --
Technology" in the Company's Transition Report on Form 10-K.
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<PAGE> 26
Limited Protection of Proprietary Technology; Risk of Third Party
Infringement Claims. The Company regards its financial transaction services and
related products such as its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party nondisclosure agreements, and other intellectual property protection
methods to protect its services and related products.
The Company has been granted a patent for certain features of its
electronic bill payment processing system. See "BUSINESS -- Proprietary Rights"
in the Company's Transition Report on Form 10-K. While the Company believes that
the ownership of the patent is a significant factor in its business, its success
does not depend only on the ownership of the patent or future patents, but also
on the innovative skills, technical competence, quality of service and marketing
abilities of its personnel. The Company believes its patent provides a measure
of security against competition, and the Company intends to enforce its patent
against infringement by third parties. If the Company's patent is found to be
invalid, to the extent it has or would in the future serve as a barrier to entry
in this marketplace, there may be increased competition in the market. See
"BUSINESS -- Competition" in the Company's Transition Report on Form 10-K and
"RISK FACTORS -- Intense Competition."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy the Company's
services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
Dependence on Key Personnel; Lack of Employment Agreements. The
Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, service and related product
development and operational personnel, including its Chairman, President, and
Chief Executive Officer, Peter J. Kight, and its President of Business Services,
Mark A. Johnson. The Company's operations could be affected adversely if, for
any reason, either Mr. Kight or Mr. Johnson ceased to be active in the Company's
management. The Company maintains proprietary nondisclosure and noncompete
agreements with all of its key employees. The Company does not have employment
agreements with several of its executive officers, including Mr. Kight and Mr.
Johnson. The Company maintains key person life insurance policies on Mr. Kight.
The success of the Company depends to a large extent upon its ability to retain
and continue to attract highly skilled personnel. Competition for employees in
the electronic commerce industry is intense, and there can be no assurance that
the Company will be able to attract and retain enough qualified employees. If
the business of the Company grows, it may become increasingly difficult to hire,
train and assimilate the new employees needed. The Company's inability to retain
and attract key employees could have a material adverse effect on the Company's
business, operating results and financial condition. See "BUSINESS -- Employees"
in the Company's Transition Report on Form 10-K.
ACH Access; Termination of MasterCard and Visa Registration. The
Federal Reserve rules provide that the Company can only access the Federal
Reserve's ACH through a bank. If the Federal Reserve rules were to change to
further restrict access to the ACH or limit the Company's ability to provide ACH
transaction processing services, the Company's business could be materially
adversely affected. To process credit card transactions for merchants and
businesses, the Company must register with MasterCard and Visa as an independent
service organization through processing banks. MasterCard and Visa permit the
Company, as a registered service provider, to provide MasterCard and Visa
transaction processing services through processing banks that are members of
MasterCard or Visa. The Company's registrations with MasterCard and Visa are
renewed annually. There can be no assurance that the Company's registrations
with MasterCard and Visa will be renewed or that the current rules of MasterCard
and Visa permitting independent service providers to market transaction
processing services will remain in effect or that the terms thereof will not be
modified in the future. The non-renewal of either registration or any changes in
MasterCard or Visa rules that would prevent the registration of the Company or
limit its ability to provide MasterCard and Visa transaction processing services
would have a material adverse effect on the Company's business, operating
results and financial condition. See "BUSINESS -- Government Regulation" and "--
Payment Clearance Systems" in the Company's Transition Report on Form 10-K.
Customer Attrition. In the consumer market, the Company had an
average annual customer attrition rate of 19% for the twelve months ended June
30, 1996. Such attrition rate is approximately 20% higher than the Company's
historical customer attrition experiences. The higher attrition rate is due
primarily to the competition from ISC for bill payment processing for Quicken.
Most of the customer attrition occurs within the first few months of a new
customer's commencement of use of the services while longer-term customers have
significantly lower attrition rates. Nonetheless,
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<PAGE> 27
there can be no assurance that the Company will not experience higher customer
attrition rates in the future. Increased levels of attrition could have a
material adverse effect on the Company's business, operating results and
financial condition. See "BUSINESS -- Services and Related Products" in the
Company's Transition Report on Form 10-K.
Limited Prior Market; Volatility of Stock Price. Prior to September
28, 1995, there was no public market for Checkfree Common Stock. Although the
Company is listed on the Nasdaq National Market, there can be no assurance that
an active or liquid trading market in Checkfree Common Stock will continue. The
market price of Checkfree Common Stock is subject to significant fluctuations in
response to variations in quarterly operating results, the failure of the
Company to achieve operating results consistent with securities analysts'
projections of the Company's performance, and other factors. The stock market
has experienced extreme price and volume fluctuations and volatility that has
particularly affected the market prices of many technology, emerging growth and
developmental stage companies. Such fluctuations and volatility have often been
unrelated or disproportionate to the operating performance of such companies.
Factors such as announcements of the introduction of new or enhanced services or
related products by the Company or its competitors, announcements of joint
development efforts or corporate partnerships in the electronic commerce market,
market conditions in the technology, banking, telecommunications and other
emerging growth sectors, and rumors relating to the Company or its competitors
may have a significant impact on the market price of Checkfree Common Stock.
Dilution. Pursuant to the Merger, Intuit, as sole stockholder of
ISC, will experience an immediate and substantial dilution in the net book value
per share of Checkfree Common Stock at the Effective Time. Assuming the issuance
of 12,600,000 shares of Checkfree Common Stock at the closing price per share of
Checkfree Common Stock on October 23, 1996, of $20.875, Intuit will experience a
dilution of $17.50 per share to the pro forma combined book value of $3.38 per
share.
Control by Principal Stockholders. Upon completion of the Merger
(assuming the issuance of 12,600,000 shares of Checkfree Common Stock), the
directors, executive officers and principal stockholders of the Company
(including Intuit) and their affiliates will collectively own approximately
53.4% of the outstanding Checkfree Common Stock. Upon completion of the Merger,
Intuit will own approximately 23.2% of the issued and outstanding Checkfree
Common Stock. As a result, these stockholders will be able to exercise influence
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" in the Company's Transition Report on Form 10-K.
Shares Eligible for Future Sale; Possible Adverse Effect on Market
Price. Upon completion of the Merger (assuming the issuance of 12,600,000 shares
of Checkfree Common Stock), there will be 54.3 million shares of Checkfree
Common Stock outstanding. Of these shares, 14.1 million shares will be held by
nonaffiliates of the Company and are freely tradeable without restriction or
further registration under the Securities Act. The holders of the remaining 40.2
million shares are or will be entitled to resell them only pursuant to a
registration statement under the Securities Act or an applicable exemption from
registration thereunder such as an exemption provided by Rule 144, Rule 145, or
Rule 701 under the Securities Act. Additionally, as of June 30, 1996, the
Company had outstanding options to purchase approximately 2.9 million shares of
Checkfree Common Stock at a weighted average exercise price of $4.58, of which
options for approximately 1.4 million shares of Checkfree Common Stock were
exercisable as of June 30, 1996 at a weighted average exercise price of $1.16
per share.
Additionally, the 5.7 million shares of Checkfree Common Stock
issued by the Company to the shareholders of Servantis on February 21, 1996 in
connection with the Servantis Acquisition are available for resale, subject in
certain cases to the quarterly volume limitations of Rules 144 and 145 under the
Securities Act. The approximately 2.8 million shares of Checkfree Common Stock
issued by the Company to the shareholders of Security APL on May 9, 1996 in
connection with the Security APL Acquisition will be available for resale,
subject in certain cases to the quarterly volume limitations of Rules 144 and
145 under the Securities Act, after May 9, 1998 except as otherwise provided
pursuant to a registration rights agreement between the Company and Security
APL's stockholders (the "Security APL Registration Rights Agreement"). The
Security APL Registration Rights Agreement provides that shareholders of
Security APL will receive three demand registration rights, the first being
exercisable after September 1, 1996. The subsequent demand registration rights
will be available no earlier than 180 days after the effectiveness of a previous
registration period. The shares of Checkfree Common Stock received in the
Security APL Acquisition will no longer
- 20 -
<PAGE> 28
be registrable after May 9, 1998. During each registration period, the Security
APL shareholders who hold in the aggregate more than 50% of the then registrable
shares will be able to demand registration of up to 25% of the original number
of shares received in the Security APL Acquisition as long as the aggregate
price to the public, net any underwriting discounts and commissions, of the
registered shares will exceed $5,000,000. In addition to demand registration
rights, if at any time or from time to time on or before January 9, 1998, the
Company shall determine to register any of its shares, Security APL shareholders
will have the opportunity to include their shares in such registration and in
any underwriting involved with the registration. These "piggy-back" registration
rights are subject to certain limitations, including the right of the Company to
exclude shares from an underwritten offering if the managing underwriter
determines that market conditions require such limitation.
Further, the 12,600,000 shares of Checkfree Common Stock, as
adjusted in accordance with the terms of the Merger Agreement, to be issued by
the Company to Intuit in connection with the Merger will be available for resale
immediately following the Merger, subject to the quarterly volume limitations of
Rules 144 and 145 under the Securities Act. Pursuant to the Merger Agreement,
the Company will enter into a Registration Rights Agreement that grants Intuit
certain demand registration rights and "piggy-back" registrtation rights.
Under the Registration Rights Agreement, Intuit may make one such demand per
calendar year commencing in 1997. The minimum number of shares of Checkfree
Common Stock requested by Intuit to be registered is 20% of the shares issued
to Intuit in the Merger; provided, however, that the first such request may be
for a lesser number of shares as would reduce Intuit's ownership of Checkfree
Common Stock to less than 20% of the total Checkfree Common Stock outstanding.
If Intuit utilizes the demand registration rights, Intuit shall bear the
expense of all discounts, commissions or other amounts payable to underwriters
or brokers, if any, in connection with such offering, as well as one-half of
all other expenses incurred in connection with the registration, including
without limitation all federal and "blue sky" registration and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company and for Intuit. The Company is not obligated to act on a demand under
the Registration Rights Agreement if: (i) in any particular jurisdiction in
which the Company would be required to execute a general consent to service of
process in effecting such registration unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act; (ii) within ten (10) days of the receipt of a registration request, the
Company gives written notice to Intuit of the Company's intention to file a
registration statement for the sale of securities by the Company within 30 days
of such request, in which event, (x) Intuit may exercise its piggyback
registration rights (as described below), (y) the Company shall employ all
reasonable efforts to cause its registration statement to become effective, and
(z) if the Company abandons its registration statement, the Company shall renew
its best efforts to register the securities that were the subject of Intuit's
demand; (iii) during the period starting with the filing of and ending ninety
(90) days immediately following the effective date of any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan); (iv) the Company furnishes Intuit a certificate stating that in the good
faith judgment of the Company's Board of Directors it would be seriously
detrimental to the Company or its stockholders for a registration statement to
be filed in the near future, in which case the Company's obligation to register
Intuit's shares of Checkfree Common Stock shall be deferred for up to one
hundred and twenty (120) days from the date of receipt of the written request
from Intuit; or (v) less than one hundred and eighty (180) days shall have
expired from the effectiveness of a previous registration under the
Registration Rights Agreement. Additionally, under the Registration Rights
Agreement, the Company is required to notify Intuit at least twenty (20) days
prior to filing a registration statement under the Securities Act for purposes
of effecting a public offering of the Company's securities and Intuit may
register its shares of Checkfree Common Stock issued in the Merger under such
registration statement in certain instances. If Intuit is given the opportunity
to include its shares in such a registration statement, then Intuit may not
make a demand for registration for one hundred and eighty (180) days after the
earlier of the termination of such offering or the effectiveness of such
registration statement. If Intuit exercises its piggyback registration rights,
Intuit shall bear the cost of all discounts, commissions or other amounts
payable to underwriters or brokers and fees and disbursements of counsel for
Intuit in connection with such offering. All other expenses incurred in
connection with a piggyback registration, including without limitation all
federal and "blue sky" registration and qualification fees, printers' and
accounting fees, and fees and disbursements of counsel for the Company, shall
be borne by the Company. The Company's obligations to register Checkfree Common
Stock issued to Intuit in the Merger will expire (i) when all such shares have
been registered and sold by Intuit or (ii) after the fifth anniversary of the
Effective Time of the Merger; provided, that if the Company exercises its right
described in (iii) above to defer a demand registration requested by Intuit,
then the date for expiration of the Registration Rights Agreement will be
extended by one year for each time the Company exercises the deferral right. It
is Intuit's intention, as soon as reasonably practicable following
effectiveness of the Merger, to reduce its beneficial ownership interest in
Checkfree Common Stock to less than twenty percent (20%) of the outstanding
Checkfree Common Stock through sales of the shares of Checkfree Common Stock
issued in the Merger. Such sales may be made through open market sales in
- 21 -
<PAGE> 29
accordance with Rules 144 and 145 under the Securities Act, by the exercise of
registration rights granted to Intuit in connection with the Merger, though
private sales or otherwise. See "THE MERGER -- Resales By Affiliates;
Registration Rights."
Sales of substantial amounts of Checkfree Common Stock in the public
market or the prospect of such sales could adversely affect the market price of
Checkfree Common Stock.
Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation and By-Laws. Certain provisions of Delaware law and
the Company's Certificate of Incorporation and By-Laws 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, control of the Company. The Company's
Certificate of Incorporation provides for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms. Such
classification of the Board of Directors expands the time required to change the
composition of a majority of directors and may tend to discourage a proxy
contest or other takeover bid for the Company. Certain provisions of Delaware
law and the Company's Certificate of Incorporation allow the Company to issue
preferred stock with rights senior to those of Checkfree Common Stock without
any further vote or action by the stockholders. The issuance of shares of
preferred stock, $.01 par value, of the Company (the "Checkfree Preferred
Stock") could decrease the amount of earnings and assets available for
distribution to the holders of Checkfree Common Stock or could adversely affect
the rights and powers, including voting rights, of the holders of Checkfree
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of Checkfree Common Stock.
Government Regulation. Management believes that the Company is not
required to be licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. There
can be no assurance that a federal or state agency will not attempt to regulate
providers of electronic commerce services such as the Company which could impede
the Company's ability to do business in the regulator's jurisdiction. In
addition, through its processing agreements, the Company agrees to comply with
the data, recordkeeping, processing and other requirements of applicable federal
and state laws and regulations, Federal Reserve Bank operating letters and the
National Automated Clearing House Association Operating Rules imposed on the
Company's processing banks. In conducting various aspects of its business, the
Company is subject to various laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and is also subject
to the electronic funds transfer rules embodied in Regulation E, promulgated by
the Federal Reserve Board. Given the expansion of the electronic commerce
market, it is possible that the Federal Reserve might revise Regulation E or
adopt new rules for electronic funds transfer affecting users other than
consumers. Because of growth in the electronic commerce market, Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating the electronic commerce market. If enacted,
such laws, rules and regulations could be imposed on the Company's business and
industry and could have a material adverse effect on the Company's business,
operating results and financial condition. See "BUSINESS -- Government
Regulation" in the Company's Transition Report on Form 10-K.
Future Capital Needs; Uncertainty of Additional Financing. The
Company currently anticipates that its available cash resources and funds from
operations will be sufficient to meet its presently anticipated and, upon
completion of the Merger, its projected working capital and capital expenditure
requirements both for the short-term and through at least December 31, 1997. The
Company may need to raise additional funds through public or private debt or
equity financings in order to take advantage of unanticipated opportunities,
including more rapid expansion or acquisitions of complementary businesses or
technologies, or to develop new or enhanced services and related products or
otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the then current stockholders of the Company will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of Checkfree Common Stock. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may not be able to take advantage of unanticipated opportunities,
develop new or enhanced services and related products or otherwise respond to
unanticipated competitive pressures and the Company's business, operating
results and financial condition could be materially adversely affected. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Company's Transition Report on Form 10-K.
- 22 -
<PAGE> 30
Dependence on CompuServe. The Company has an agreement with
CompuServe to collect monthly subscription fees from CompuServe's approximately
four million on-line interactive subscribers. The agreement renews automatically
for three year terms unless either party gives notice of intent not to renew at
least 60 days before the end of the term. The Company and CompuServe renewed a
three year agreement in June 1995. The June 1995 renewal permits CompuServe to
enter into an agreement with another payment processor during the three year
renewal term, provided that CompuServe has given the Company reasonable
opportunity to bid on retaining CompuServe's payment collection business and
pays the Company a termination fee if the Company's services are not retained.
Recently, the Company substantially reduced its prices to CompuServe based on an
increased volume of transactions attributable to its business. During fiscal
1993, 1994 and 1995, the Company derived approximately 10%, 11% and 13%,
respectively, of its revenues from CompuServe. Such CompuServe revenues were
less than 10% of total revenues for transition fiscal 1996. Although the Company
believes its relationship with CompuServe is positive, there can be no assurance
that CompuServe will continue its business relationship with the Company upon
expiration or early termination of the agreement, that CompuServe will maintain
its number of subscribers at historical levels, or that the Company will realize
revenues from CompuServe at the levels it has in the past. Loss of the
relationship with CompuServe or a reduction of revenues from CompuServe will
have a material adverse effect on the Company's business, operating results and
financial condition. See "BUSINESS -- Services and Related Products" and Note 16
to Consolidated Financial Statements in the Company's Transition Report on Form
10-K.
RECENT DEVELOPMENTS
On August 15, 1996, the Company and SunGard SSI Inc., a wholly-owned
subsidiary of SunGard Data Systems Inc. ("SSI"), entered into an Asset
Acquisition Agreement whereby the Company through its subsidiaries sold
substantially all the assets related to its securities certificate accounting
software business (CSSII) (the "SunGard Acquisition"). The SunGard Acquisition
was completed on October 1, 1996. The total consideration paid by SSI was $20
million, with $1 million of such consideration held back and payable on April 1,
1998. In addition, SSI assumed certain specified liabilities of Servantis
Systems and Servantis Services related to the securities products business.
- 23 -
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CHECKFREE
The selected consolidated financial data for the six months ended
June 30, 1996 and each of the years in the three year period ended December 31,
1995 and as of June 30, 1996 and as of December 31, 1994 and 1995 have been
derived from the Company's financial statements included in the Company's
Transition Report on Form 10-K which have been audited by Deloitte & Touche LLP,
independent certified public accountants, whose report thereon is included in
the Company's Transition Report on Form 10-K. The selected consolidated
financial data for the years ended December 31, 1991 and 1992 and as of December
31, 1991, 1992, and 1993 have been derived from audited financial statements of
the Company which are not included in the Company's Transition Report on Form
10-K. The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included in the Company's Transition Report on Form 10-K. See
"INFORMATION INCORPORATED BY REFERENCE" and "RECENT DEVELOPMENTS."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and
merchant discount $ 16,322 $ 22,201 $ 28,986 $ 38,282 $ 49,330 $ 18,890 $ 33,305
License fees -- -- -- -- -- 4,691 10,970
Maintenance fees -- -- -- -- -- -- 1,978
Other 9,334 -- 1,906 984 -- -- 4,787
-------- -------- -------- -------- --------- -------- ---------
Total revenues 25,656 22,201 30,892 39,266 49,330 23,581 51,040
Expenses:
Cost of processing, servicing and support 14,800 14,772 19,516 25,787 32,293 15,443 40,352
Research and development 2,960 2,418 3,678 4,826 7,009 3,085 10,177
Sales and marketing 3,566 3,466 3,730 4,553 7,405 3,168 17,513
General and administrative 1,697 1,725 2,466 2,717 4,288 1,953 8,806
In process research and development -- -- -- -- -- -- 122,358
-------- -------- -------- -------- --------- -------- ---------
Total expenses 23,023 22,381 29,390 37,883 50,995 23,649 199,206
-------- -------- -------- -------- --------- -------- ---------
Income (loss) from operations 2,633 (180) 1,502 1,383 (1,665) (68) (148,166)
Interest:
Income 493 171 165 298 2,135 535 1,659
Expense (331) (230) (279) (795) (645) (330) (325)
-------- -------- -------- -------- --------- -------- ---------
Income (loss) before income taxes 2,795 (239) 1,388 886 (175) 137 (146,832)
Income tax expense (benefit) 1,407 (159) 368 400 40 62 (8,629)
-------- -------- -------- -------- --------- -------- ---------
Income (loss) before extraordinary item 1,388 (80) 1,020 486 (215) 75 (138,203)
Extraordinary item 1,094 -- -- -- -- -- (364)
-------- -------- -------- -------- --------- -------- ---------
Net income (loss) $ 2,482 $ (80) $ 1,020 $ 486 $ (215) $ 75 $(138,567)
======== ======== ======== ======== ========= ======== =========
Net income (loss) per common and equivalent
share before extraordinary item $ 0.05 -- $ 0.04 $ 0.02 $ (0.01) $ -- $ (3.69)
Net income (loss) per common and equivalent
share $ 0.09 -- $ 0.04 $ 0.02 $ (0.01) $ -- $ (3.70)
Weighted-average common and equivalent
shares outstanding 27,153 27,127 26,886 27,103 28,219 29,299 37,420
BALANCE SHEET DATA:
Working capital $ 2,884 $ 304 $ 623 $ 11,399 $ 81,792 $ 10,481 $ 45,496
Total assets 9,820 8,059 17,669 30,512 115,642 31,696 196,230
Long-term obligations, less current portion 1,900 1,275 8,968 8,213 7,282 7,735 8,324
Total stockholders' equity 2,985 1,915 2,985 16,372 99,325 16,493 137,675
</TABLE>
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<PAGE> 32
SELECTED HISTORICAL FINANCIAL DATA OF ISC
The statement of operations data for the year ended July 31, 1996
and the balance sheet data at July 31, 1996 are derived from financial
statements of ISC which have been audited by Ernst & Young LLP, independent
auditors. The statement of operations data for the year ended July 31, 1995 and
for the periods ended July 14, 1994 and July 31, 1994, and the balance sheet
data as of December 31, 1995 are unaudited but have been prepared on the same
basis as the audited financial statements and, in the opinion of ISC management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such periods.
The selected financial data of ISC set forth below should be read in conjunction
with the Financial Statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus/Proxy Statement/Information Statement.
<TABLE>
<CAPTION>
Predecessor Entity
August 1, 1993 through July 15, 1994 Year ended July 31,
July 14, 1994 through July 31, 1994 1995 1996
------------------------ --------------------- ------------------------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations:
Net revenue $1,450 $- $3,194 $14,331
Cost of sales 552 - 1,557 7,795
Amortization of purchased software - -
1,529 1,471
Costs and Expenses:
Customer service and technical
support 215 - 499 5,049
Selling and marketing 184 - 1,479 4,191
Research and development 383 - 1,650 2,638
General and administrative 199 - 1,931 4,877
Charge for purchased research and
development - 1,388 - -
Amortization of goodwill and
intangibles - - 1,917 1,840
----- ------- ------- --------
Total Costs and Expenses 981 1,388 7,476 18,595
----- ------- ------- --------
Net loss before tax benefit (83) (1,388) (7,367) (13,530)
----- ------- ------- --------
Tax benefit - - 2,078 -
----- ------- ------- --------
Net loss $(83) $(1,388) $(5,289) $(13,530)
===== ======= ======= ========
July 31,
1995 1996
--------------------------
(in thousands)
Balance Sheet:
Cash $134 $601
Working capital (deficit) (5,504) (29,757)
Total Assets 7,094 20,808
Stockholder's Equity (Net Capital 1,007 (12,523)
Deficiency)
</TABLE>
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<PAGE> 33
UNAUDITED PRO FORMA COMBINING SELECTED FINANCIAL DATA
OF THE COMPANY AND ISC
The following table sets forth, in summary form, certain unaudited
pro forma combining financial data, giving effect to the Merger (which will be
accounted for as a purchase) as if it had occurred on June 30, 1996 for balance
sheet presentation purposes and as of January 1, 1995 for statement of
operations presentation purposes, and the pro forma adjustments described in the
Notes to the Unaudited Pro Forma Condensed Combining Financial Information. The
ISC financial data included in the pro forma amounts are for the twelve months
ended January 31, 1996 and as of and for the six months ended July 31, 1996. The
pro forma amounts also give effect to the Servantis and Security APL
Acquisitions, which were consummated on February 21, 1996, and May 9, 1996. This
information should be read in conjunction with the historical financial
statements of the Company and ISC, including the respective notes thereto, which
are either incorporated in this document by reference or included elsewhere in
this Prospectus/Proxy Statement/Information Statement, and in conjunction with
the consolidated historical financial data for the Company and ISC and the other
pro forma information, including the notes thereto, which are either
incorporated in this document by reference or included elsewhere in this
Prospectus/Proxy Statement/Information Statement. See "INFORMATION INCORPORATED
BY REFERENCE," "RECENT DEVELOPMENTS," "CONSOLIDATED FINANCIAL STATEMENTS OF
ISC," and "UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION." The
pro forma financial data are not necessarily indicative of the future financial
position or future results of operations of the combined companies, or the
financial position or results of operations of the combined companies that would
have actually occurred had the Merger or the adjustments described in the Notes
to the Unaudited Pro Forma Condensed Combining Financial Information been
consummated at the dates specified.
Unaudited Pro Forma Combining Financial Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Company Company and ISC
Historical Amounts Combining Pro Forma
Six months
Year ended Year ended ended
December 31, Six months ended December 31, June 30,
1995 June 30, 1996 1995 1996
---- -------------- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating revenues, net $49,330 $ 51,040 $117,183 $ 87,697
Loss from operations (1,665) (148,166)(1) (49,874)(1)(2) (26,800)(1)
Loss before income taxes (175) (146,832)(1) (47,712)(1)(2) (25,341)(1)
Loss before extraordinary item (215) (138,203)(1) (31,284)(1)(2) (20,083)(1)
COMMON SHARE DATA:
Loss per common share before
extraordinary item $ (0.01) $ (3.69)(1) $ (0.63)(1)(2) $ (0.37)(1)
Weighted average shares
outstanding 28,219 37,420 49,313 53,630
BALANCE SHEET DATA:
Current assets $ 90,799 $ 85,027
Total assets 196,230 250,978
</TABLE>
- 26 -
<PAGE> 34
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities 45,303 58,266
Long-term obligations, less
current portion 8,325 8,325
Total stockholders' equity 137,675 182,888
</TABLE>
(1) The June 30, 1996 historical Checkfree amounts include a charge of
$122.4 million for in-process research and development, or $3.27 per
share. The pro forma combined amounts for both periods presented do
not include the in-process research and development charge as it is
a non-recurring item, nor do the pro forma amounts include the
estimated in-process research and development charge of $120 million
related to the Merger.
(2) The pro forma combining amounts for the year ended December 31, 1995
include a pre-tax charge of $20 million ($12 million net of tax or
$0.24 per share) for amortization of purchased profits recorded in
connection with the Servantis Acquisition and a pre-tax charge of
$11 million ($6.6 million net of tax or $0.13 per share) for
amortization of intangibles for certain connectivity and exclusivity
arrangements related to the Merger. Both of these items are fully
amortized within twelve months.
THE MERGER
BACKGROUND OF THE MERGER
The Company develops and provides electronic commerce services,
financial application software and related products for financial institutions
and businesses and their customers. Prior to the Servantis Acquisition and the
Security APL Acquisition, the Company's business focused primarily on electronic
home banking, electronic bill payment, automatic accounts receivable collection
and electronic accounts payable processing. Intuit develops, markets and
supports personal finance, small business accounting, tax preparation and other
consumer software products, as well as related supplies and electronic financial
services designed to enable individuals and small businesses to automate certain
financial tasks and better manage their financial affairs. Through ISC, Intuit
provides electronic home banking and electronic bill payment services and other
on-line services.
Since 1991, the Company and Intuit have had a cooperative business
relationship through which users of Intuit's Quicken product have been able to
access and use the Company's electronic bill payment services through Quicken.
The Company compensates Intuit for enrolling Quicken users in the Company's
electronic bill payment service. Beginning in October 1995, Intuit began to
offer its own electronic bill payment service through ISC.
The companies believe that the sale of ISC to the Company will
enable the Company to leverage its transactions processing experience to realize
operational efficiencies that will increase the profitability of ISC's business
and encourage more rapid growth of the emerging electronic financial services
market. The companies also expect that the combination of ISC's business with
the Company's existing operations will enable the combined company to reach a
wider customer base and thus strengthen the Company's position in the electronic
commerce market. Intuit believes that it is in its best long-term interests to
focus the efforts of its management team on Intuit's core business of developing
and marketing "front-end" software products and services, including services for
the Internet, rather than devoting substantial management time and effort to
building ISC's transactions processing business. The Merger enables Intuit to
achieve this objective while retaining an indirect interest in ISC's business
through an ownership stake in Checkfree Common Stock.
Given their pre-existing commercial relationships, from time to time
the Company and Intuit have discussed certain joint business opportunities and
possible combinations of aspects of their businesses. In early May 1996,
representatives of the Company and Intuit had general informal discussions
regarding the possibility that the two companies might work together in some
way, including the possibility that the Company might purchase ISC. Later in
that same month, officers of both companies met in Dallas, Texas and Chicago,
Illinois to continue discussions regarding numerous potential business
alternatives and technical issues concerning the bill payment systems of the
Company and ISC.
The companies continued to explore several potential transactions and areas of
cooperation in a June 20, 1996 telephone conference call between executives of
both companies and their respective financial advisors, and in a June 25, 1996
meeting at which Peter Kight and Mark Johnson of the Company and
representatives of Alex. Brown, the Company's financial advisor, met with
Intuit's Board of Directors at an Intuit Board meeting held in San Francisco,
California. On June 30, 1996, William Campbell, James Heeger, William Harris
and Rene Lacerte of Intuit and Intuit's financial advisor met with the
Company's management team and the Company's financial advisor in Columbus, Ohio
to review financial and business information regarding the Company.
- 27 -
<PAGE> 35
In early July 1996, Intuit suspended its discussions with the Company
pending completion of an internal strategic planning review regarding Intuit's
long-term plans for ISC's electronic banking and bill payment business.
Following completion of Intuit's strategy review, during the week of
August 19, 1996, Mr. Harris of Intuit and Mr. Kight of the Company, together
with their respective financial advisors, conducted several telephone calls to
discuss alternative business propositions and to begin the initial negotiation
of the principal terms and structure under which the Company might effect a
purchase of ISC. These telephone conferences continued through the week of
August 26.
On September 8, 1996, Messrs. Campbell and Harris of Intuit,
representatives of DMG Technology Group Inc., Intuit's financial advisor, and
one of its attorneys and officers of ISC met in Columbus, Ohio with the
management of the Company, its financial advisors and its attorneys to initiate
a mutual due diligence process. Concurrently, the management teams of the
companies and their respective financial advisors and attorneys began
negotiation of the definitive terms and conditions of the Merger. Negotiations
and due diligence reviews resumed in Columbus, Ohio on September 9, 1996, and
continued throughout that week through numerous meetings and telephone
conference calls between officers of the Company, Intuit and ISC. These talks
continued through Sunday, September 15, 1996, when the parties reached agreement
on the definitive terms and conditions of the Merger Agreement and related
agreements, which were approved by the Board of Directors of Intuit on September
14, 1996, and by the Board of Directors of ISC and the Board of Directors of the
Company on the morning of September 15, 1996. The Merger Agreement was executed
at approximately 3:00 p.m. Eastern Time on September 15, 1996 and was announced
at 4:00 p.m. Eastern Time on September 15, 1996 by Intuit and at 9:00 a.m.
Eastern Time on September 16, 1996 by the Company.
Following announcement of the Merger Agreement, the parties and their
attorneys continued negotiation of the License Agreement and anticipate
execution of that agreement prior to consummation of the Merger.
The terms and conditions of the Merger were determined in arms' length
negotiations between the management teams and Board of Directors of the Company,
Intuit and ISC with advice from their respective financial advisors and lawyers,
after evaluations of the current financial condition, earnings potential and
market position of the Company and ISC, respectively, as well as the business
prospects of the combined company.
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS
The management of the Company believes that the Merger offers
significant potential benefits to the Company. ISC provides electronic home
banking, bill payment and other on-line services to financial institutions and
their customers. To perform these services, ISC operates a network of servers
that perform the "back-end" computer processing and data storage functions that
enable these on-line financial transactions. To date, ISC's services have been
marketed to and designed primarily for users of Intuit's Quicken personal
finance software program. ISC's capability as an electronic commerce service
provider is expected to complement and enhance the Company's ability to provide
financial institutions with comprehensive, readily marketable electronic
commerce products and services and to increase the Company's customer base.
Acquisition of ISC offers the Company the opportunity, through integration of
both companies' electronic transaction processing and remote delivery technology
and the Company's software products and electronic funds transfer and software
development expertise, to provide an enhanced range of electronic commerce
services and related products for financial institutions, businesses, and their
customers. Management believes that financial institutions and businesses, as
well as their customers, will with increasing rapidity convert from paper to
electronic alternatives for effecting and managing transactions and financial
information, and that the acquisition of ISC will enhance the Company's ability
to participate in that expanding and increasingly competitive marketplace.
For the reasons described above, the Company's Board of Directors at
its meeting held on September 15, 1996 unanimously determined that the Merger
and the Merger Agreement are advisable and fair and in the best interests of the
Company and its stockholders and have approved the Merger and the Merger
Agreement and recommend that holders of Checkfree Common Stock approve the
issuance of 12,600,000 shares of Checkfree Common Stock pursuant to the Merger
Agreement, as such number of shares may be adjusted in accordance with the terms
of the Merger Agreement.
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OPINION OF CHECKFREE FINANCIAL ADVISOR
The Company retained Alex. Brown on June 8, 1996 to act as the
Company's financial advisor in connection with a possible business transaction
with Intuit, including rendering its opinion to the Company's Board of Directors
as to the fairness to the Company, from a financial point of view, of the Merger
Consideration, when considered with reference to the $20.0 million cash
Connectivity Fee to be paid to Intuit for certain agreements and services
pursuant to the License Agreement, to the Company. The Merger Consideration and
the Connectivity Fee are collectively referred to below as the "Transaction
Consideration."
At the September 15, 1996 meeting of the Company's Board of Directors,
representatives of Alex. Brown made a presentation with respect to the Merger
and rendered to the Company's Board of Directors its opinion that, as of such
date, and subject to the assumptions made, matters considered and limitations
set forth in such opinion and summarized below, the Transaction Consideration
was fair, from a financial point of view, to the Company. No limitations were
imposed by the Company's Board of Directors upon Alex. Brown with respect to the
investigations made or procedures followed by it in rendering its opinion.
THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED SEPTEMBER 15, 1996
(THE "ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. THE COMPANY'S
STOCKHOLDERS ARE URGED TO READ THE ALEX. BROWN OPINION IN ITS ENTIRETY. THE
ALEX. BROWN OPINION IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS, ADDRESSES
ONLY THE FAIRNESS OF THE TRANSACTION CONSIDERATION TO THE COMPANY FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY COMPANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE CHECKFREE SPECIAL
MEETING. THE ALEX. BROWN OPINION WAS RENDERED TO THE COMPANY'S BOARD OF
DIRECTORS FOR ITS CONSIDERATION IN DETERMINING WHETHER TO APPROVE THE MERGER
AGREEMENT. THE DISCUSSION OF THE ALEX. BROWN OPINION IN THIS PROSPECTUS/PROXY
STATEMENT/INFORMATION STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE ALEX. BROWN OPINION.
In connection with the Alex. Brown Opinion, Alex. Brown reviewed
certain publicly available financial information and other information
concerning the Company, Intuit and ISC and certain internal financial analyses
and other information furnished to it by the Company, Intuit and ISC. Alex.
Brown also participated in discussions with members of the senior managements of
the Company, Intuit and ISC regarding the businesses and prospects of the
Company and ISC independently and the combined company. In addition, Alex. Brown
(i) reviewed the reported prices and trading activity for the Checkfree Common
Stock, (ii) compared certain financial information and stock market information
for the Company and ISC with similar information for certain other companies
whose securities are publicly traded, (iii) reviewed the financial terms of
certain recent business combinations, (iv) reviewed a draft of the Merger
Agreement dated September 14, 1996, and (v) performed such other studies and
analyses and considered such other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, Alex. Brown
assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of the information furnished to or otherwise reviewed
by or discussed with it for purposes of rendering its opinion. With respect to
the information relating to the prospects of the Company and ISC provided to
Alex. Brown by the Company, Intuit and ISC, Alex. Brown assumed that such
information reflected the best currently available judgments and estimates of
the respective managements of the Company, Intuit and ISC as to the likely
future financial performances of the Company and ISC and of the combined entity.
Alex. Brown did not make an independent evaluation or appraisal of the assets of
the Company or ISC, nor has Alex. Brown been furnished with any such evaluation
or appraisal. With the Company's Board of Directors' permission, the Alex. Brown
Opinion did not address any adjustment to the Merger Consideration that may
occur pursuant to Section 2.02 of the Merger Agreement. Alex. Brown also assumed
with the Company's Board of Directors' permission that the License Agreement
effectively grants rights to connectivity to certain Intuit software products.
The Alex. Brown Opinion is based on market, economic and other conditions as
they existed and could be evaluated as of the date of the opinion letter.
The following is a summary of the analyses performed and factors
considered by Alex. Brown in connection with rendering the Alex. Brown Opinion.
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HISTORICAL FINANCIAL POSITION. In rendering its opinion, Alex. Brown
reviewed and analyzed the historical and current financial condition of the
Company and ISC, which included (i) an assessment of the Company's and ISC's
recent financial statements; (ii) an analysis of the Company's and ISC's
revenue, growth and operating performance trends; (iii) an assessment of the
Company's margin changes and leverage and ISC's margin changes; and (iv) an
analysis of the relative growth rates of the Company's different lines of
business, including retail services, Servantis software, corporate services and
Security APL, and of ISC.
HISTORICAL STOCK PRICE PERFORMANCE. Alex. Brown reviewed and analyzed
the daily closing per share market prices and trading volume, for Checkfree
Common Stock, from September 28, 1995 to September 13, 1996 and, for Intuit
Common Stock, from September 14, 1995 to September 13, 1996. Alex. Brown also
compared the closing price of the Checkfree Common Stock on September 13, 1996
of $18.06 to the average closing prices of the Checkfree Common Stock prices of
$16.96, $16.65, $14.24, $15.07 and $17.30 over the 5-, 15-, 30-, 60- and 90-day
periods ending on September 13, 1996, respectively. Alex. Brown noted that the
Transaction Consideration based on each of these closing stock prices was $244.6
million, $230.7 million, $226.8 million, $196.4 million, $206.9 million and
$234.9 million, respectively. This information was presented to give the
Company's Board of Directors background information regarding the respective
stock prices of the Company and Intuit over the periods indicated.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. This analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements described below) relating to the Company and ISC to certain
corresponding information from a group of five publicly traded electronic
commerce companies (consisting of First Data Corporation, Harbinger Corporation,
Premenos Technology Corp., Quickresponse Services and Sterling Commerce, Inc.
(collectively, the "Selected Electronic Commerce Companies")) and from a group
of four publicly traded internet software related companies (consisting of
Broadvision, Inc., Connect, Inc., E*TRADE Group, Inc. and Open Market, Inc.
(collectively, the "Selected Internet Software Companies")). Such financial
information included, among other things, (i) ratios of common equity market
value as adjusted for debt and cash ("Adjusted Value") to revenues and earnings
before interest expense and income taxes ("EBIT"), each for the latest reported
12-month period as derived from publicly available information; and (ii) ratios
of Adjusted Value to estimated revenues and EBIT for the Company's fiscal year
ending June 30, 1997 ("Fiscal 1997"). The financial information used in
connection with the multiples provided below with respect to the Company, the
Selected Electronic Software Companies and the Selected Internet Software
Companies was based on the latest reported 12-month period as derived from
publicly available information and on estimated revenues and EBIT for fiscal
1997 as reported by selected securities research analysts. Alex. Brown noted
that, on a trailing 12-month basis, the multiple of Adjusted Value to revenues
was 5.1x for the Company, compared to a range of 4.4x to 9.0x, with a mean of
6.9x, for the Selected Electronic Commerce Companies, and a range of 5.5x to
37.9x, with a mean of 23.5x, for the Selected Internet Software Companies, and
that the multiple of Adjusted Value to EBIT was not meaningful for the Company.
Alex. Brown also noted that, for fiscal 1997, the multiple of Adjusted Value to
estimated revenues was 4.3x for the Company, compared to a range of 3.4x to
7.0x, with a mean of 4.9x for the Selected Electronic Commerce Companies, and a
range of 6.2x to 9.9x with a mean of 8.0x for the Selected Internet Software
Companies, and that the multiple of Adjusted Value to estimated EBIT was not
meaningful for the Company. As a result of the foregoing procedures, Alex. Brown
noted that the above multiples applied to (i) the trailing 12 month revenues of
ISC implied a range of enterprise values of $68.2 million to $139.7 million with
a mean of $106.0 million and a median of $97.7 million based on the Selected
Electronic Commerce Companies, and a range of $85.2 million to $585.3 million
with a mean of $362.6 million and a median of $390.0 million based on the
Selected Internet Software Companies, (ii) the estimated Fiscal 1997 revenues of
ISC implied a range of enterprise values of $146.5 million to $304.1 million
with a mean of $213.8 million and a median of $216.0 million based on the
Selected Electronic Commerce Companies, and a range of $268.6 million to $430.2
million with a mean of $349.4 million and a median of $349.4 million based on
the Selected Internet Software Companies, and (iii) the $46 million in Fiscal
1997 revenues of ISC contemplated by Section 4.14 of the Merger Agreement (which
provides for Intuit, subject to certain conditions, to pay to the Company the
amount, if any, by which $46 million exceeds actual ISC Fiscal 1997 revenues)
implied a range of enterprise values of $155.0 million to $321.8 million with a
mean of $226.2 million and a median of $228.5 million based on the Selected
Electronic Commerce Companies, and a range of $284.2 million to $455.1 million
with a mean of $369.7 million and a median of $369.7 million based on the
Selected Internet Software Companies, in each case versus the Transaction
Consideration of $244.6 million (based on the September 13, 1996 closing price
of $18.06 of Checkfree Common Stock).
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ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Alex. Brown
reviewed the financial terms, to the extent publicly available, of ten proposed,
pending or completed mergers and acquisitions since August 1995 involving high
technology companies experiencing relatively high revenue growth rates (the
"Selected Transactions"). Alex. Brown noted that there had been no acquisitions
of on-line bill payment companies with publicly available financial terms in the
recent past and thus that none of the Selected Transactions involved companies
in businesses similar to ISC's business. Instead, the Selected Transactions
involved acquisitions of companies, in related industries generally, with
revenue growth rates similar to ISC's. Alex. Brown calculated various financial
multiples based on certain publicly available information for each of the
Selected Transactions and compared them to corresponding financial multiples for
the Merger. The ten transactions reviewed, in reverse chronological order of
public announcement, were: Secure Computing/Enigma Logic (June 26, 1996), Pure
Software/Atria Software (June 6, 1996), Secure Computing/Border Network
Technologies (May 28, 1996), MFS Communications/UUNet Technologies (April 30,
1996), Cisco Systems/StrataCom (April 21, 1996), Security Dynamics
Technologies/RSA Data Security (April 13, 1996), IBM/Tivoli Systems (January 31,
1996), Madge/Teleos (January 27, 1996), Cisco Systems/Grand Junction (September
27, 1995) and ArcSys/Integrated Silicon Systems (August 12, 1995). Alex. Brown
noted that the multiple of adjusted purchase price (purchase price adjusted for
debt and cash) to trailing 12-month revenues for the Selected Transactions
applied to the trailing 12 month revenues of ISC implied a range of enterprise
values of $117.0 million to $537.6 million with a mean of $271.8 million and a
median of $271.6 million versus the Transaction Consideration of $244.6 million
(based on the September 13, 1996 closing price of $18.06 per share of the
Checkfree Common Stock). All multiples for the Selected Transactions were based
on public information available at the time of announcement of such transaction,
without taking into account differing market and other conditions during the
period during which the Selected Transactions occurred.
CONTRIBUTION ANALYSIS. Alex. Brown analyzed the relative contributions
of the Company and ISC, as compared to Intuit's relative ownership of
approximately 22.7% of the outstanding Checkfree Common Stock on a fully diluted
basis (Intuit's receipt of a total of $20.0 million in licensing fees therefore
not having an effect on this analysis), to the pro forma income statement of the
combined company, based on projections of the managements of the Company, Intuit
and ISC. This analysis showed that on a pro forma combined basis (excluding (i)
the effect of any synergies that may be realized as a result of the Merger, and
(ii) non-recurring expenses relating to the Merger), based on the Company's
1996, 1997, 1998 and 1999 fiscal years, the Company and ISC would account for
approximately 90.4% and 9.6%, 80.0% and 20.0%, 75.1% and 24.9%, and 73.6% and
26.4%, respectively, of the combined company's pro forma revenue, and
approximately 100.0% and 0.0%, 89.6% and 10.4%, 82.9% and 17.1%, and 79.3% and
20.7%, respectively, of the combined company's pro forma gross profit.
Alex. Brown also analyzed the relative contributions of the Company's
retail line of business and ISC to the pro forma income statement of the
combined company's retail line of business, based on managements' projections
for their respective companies. This analysis showed that on a pro forma
combined basis (excluding (i) the effect of any synergies that may be realized
as a result of the Merger, and (ii) non-recurring expenses relating to the
Merger), based on the Company's 1996, 1997, 1998 and 1999 fiscal years, the
Company and ISC would account for approximately 67.2% and 32.8%, 53.5% and
46.5%, 53.9% and 46.1%, and 58.6% and 41.4%, respectively, of the combined
company's retail line of business pro forma revenue, and approximately 99.8% and
0.2%, 71.9% and 28.1%, 65.4% and 34.6%, and 65.3% and 34.7%, respectively, of
the combined company's retail line of business pro forma gross profit.
DISCOUNTED CASH FLOW ANALYSIS. Alex. Brown performed discounted cash
flow analyses for ISC. The discounted cash flow approach values a business based
on the current value of the future cash flow that the business will generate. To
establish a current value under this approach, future cash flow must be
estimated and an appropriate discount rate determined. Alex. Brown used
estimates of projected financial performance for ISC for the fiscal years 1997
through 2001 prepared by managements of the Company, Intuit and ISC. Alex. Brown
aggregated the present value of the cash flows through fiscal 2001 with the
present value of a range of terminal values. Alex. Brown discounted these cash
flows at discount rates ranging from 20.0% to 27.5%. The terminal value was
computed based on perpetuity growth rates ranging from 10.0% to 14.0%. This
analysis indicated a range of equity values of $181.4 million to $538.8 million
versus the Transaction Consideration of $244.6 million (based on the Company's
September 13, 1996 closing price of $18.06 per share).
PRO FORMA COMBINED EARNINGS ANALYSIS. Alex. Brown analyzed certain pro
forma effects of the Merger. Based on such analysis, Alex. Brown computed the
resulting dilution/accretion to the combined company's EPS estimate
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for the fiscal years ending June 30, 1997, 1998 and 1999, pursuant to the Merger
before and after taking into account any potential cost savings and other
synergies that the Company and ISC could achieve if the Merger were consummated
and before nonrecurring costs relating to the Merger. Alex. Brown noted that
before taking into account any potential cost savings and other synergies and
before certain nonrecurring costs relating to the Merger, the Merger would be
approximately 37.0%, 264.2% and 16.8% dilutive to the combined company's EPS for
the fiscal years ending June 30, 1997, 1998 and 1999, respectively. Alex. Brown
also noted that after taking into account potential cost savings and other
synergies, and before nonrecurring costs relating to the Merger, the Merger
would be approximately 12.4% dilutive to the combined company's EPS for the
fiscal year ending June 30, 1997, not meaningful for the fiscal year ending June
30, 1998 and 100.5% accretive to the combined company's EPS for the fiscal year
ending June 30, 1999. There can be no assurance that the combined company will
be able to realize savings and synergies in the amounts identified, or at all,
following the Merger.
Alex. Brown also noted that based on the above analysis, before taking
into account any potential cost savings and other synergies and before certain
nonrecurring costs relating to the Merger and excluding goodwill, the Merger
would be approximately 16.1% and 5.3% dilutive to the combined company's EPS for
the fiscal years ending June 30, 1997 and 1998, respectively, and 46.8%
accretive to the combined company's EPS for the fiscal year ending June 30,
1999. Alex. Brown also noted that, utilizing the above analysis after taking
into account any potential cost savings and other synergies, before certain
nonrecurring costs relating to the Merger and excluding goodwill, the Merger
would be approximately 8.5% accretive to the combined company's EPS for the
fiscal year ending June 30, 1997, not meaningful for the fiscal year 1998 and
164.1% accretive to the combined company's EPS for the fiscal year ending June
30, 1999.
RELEVANT MARKET AND ECONOMIC FACTORS. In rendering its opinion, Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the technology sector, and the current level of economic
activity.
No company used in the analysis of other publicly traded companies nor
any transaction used in the analysis of selected mergers and acquisitions
summarized above is identical to the Company, ISC or the Merger. Accordingly,
such analyses must take into account differences in the financial and operating
characteristics of the Selected Electronic Commerce Companies, the Selected
Internet Software Companies and the companies in the Selected Transactions and
other factors that would affect the public trading value and acquisition value
of the Selected Electronic Commerce Companies, the Selected Internet Software
Companies and the Selected Transactions, respectively. In particular, the
companies in the Selected Transactions were selected based primarily on the
basis of their rapid revenue growth, not on the similarity of their operating
characteristics.
While the foregoing summary describes all analyses and factors that
Alex. Brown deemed material in its presentation to the Company's Board of
Directors, it is not a comprehensive description of all analyses and factors
considered by Alex. Brown. The preparation of a fairness opinion is a complex
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Alex. Brown believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the evaluation process underlying the Alex. Brown
Opinion. In performing its analyses, Alex. Brown considered general economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company, Intuit and ISC. The analyses performed by Alex. Brown
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold. Furthermore, no opinion is being expressed as to the prices at
which shares of Checkfree Common Stock may trade at any future time.
Pursuant to a letter agreement dated September 8, 1996 between the
Company and Alex. Brown, the fees to date payable to Alex. Brown have been a
$100,000 retainer fee and $500,000 for rendering the Alex. Brown Opinion, which
amounts will be credited against the final fee of $2,000,000, payable upon
consummation of the Merger. In addition, the Company has agreed to reimburse
Alex. Brown for its reasonable out-of-pocket expenses incurred in connection
with rendering financial advisory services, including fees and disbursements of
its legal counsel. The Company has agreed to indemnify Alex. Brown and its
directors, officers, agents, employees and controlling persons,
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for certain costs, expenses, losses, claims, damages and liabilities related to
or arising out of its rendering of services under its engagement as financial
advisor.
The Company's Board of Directors retained Alex. Brown to act as its
advisor based upon prior advisory work rendered by Alex. Brown to the Company
and Alex. Brown's service as co-manager of the initial public offering of
Checkfree Common Stock in 1995 and based upon Alex. Brown's qualifications,
reputation, experience and expertise. Alex. Brown is an internationally
recognized investment banking firm and, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for corporate and other purposes. Alex. Brown may
actively trade the securities of the Company and Intuit for its own account and
for the account of its customers and, accordingly, may at any time hold a long
or short position in such securities. Alex. Brown maintains a market in the
common stock of the Company and Intuit and regularly publishes research reports
regarding the Company, Intuit, the technology industry and the businesses and
securities of publicly owned companies in that industry.
ISC'S REASONS FOR THE MERGER; RECOMMENDATION OF THE ISC BOARD OF DIRECTORS
ISC's Board of Directors believe that approval of the Merger and the
Merger Agreement is advisable for ISC's sole stockholder for the following
reasons, among others:
- As a result of the Merger, the combined Company may be able to
maximize operational efficiencies and synergies to improve the
value and profitability of ISC's business.
- The Merger should encourage banks and other financial
institutions to more rapidly accelerate implementation of
electronic financial services industry, thus potentially
providing Intuit a more robust market for ISC's products and
services.
- The Merger will enable Intuit to reduce its current operating
losses from ISC's operations and focus its management's
efforts on its core business of developing and marketing
"front-end" software products and services, including
electronic commerce services for the Internet, while
maintaining an investment in the electronic financial
transaction processing business through a significant
ownership stake in Checkfree's Common Stock.
In evaluating the proposed Merger, the Board of Directors of ISC
considered a variety of factors, including without limitation the following: (i)
the emergence of significant competitors in the electronic financial services
industry; (ii) ISC's review of the Company's operations; (iii) the relative
market positions of the Company and ISC and the potential for increased market
penetration by a combination of ISC with the Company; (iv) the Company's
experience in managing sophisticated transactions processing operations and its
ability to leverage that expertise to realize the full potential of the
post-Merger combined entity; (v) the Company's potential financial performance;
(vi) the projected impact of ISC's operations on Intuit's future financial
results; and (vi) the terms of the Merger Agreement.
For the reasons described above, the ISC Board of Directors at its
meeting held on September 15, 1996 unanimously determined that the Merger and
the Merger Agreement are advisable and fair and in the best interests of ISC and
its sole stockholder and have approved the Merger and the Merger Agreement and
recommend that Intuit, the sole stockholder ISC, approve the Merger and the
Merger Agreement.
REQUIRED VOTE
Under the Delaware GCL, approval of the Merger and the Merger Agreement
and the transactions contemplated thereby requires the affirmative vote of the
sole stockholder of ISC.
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The affirmative vote of the holders of a majority of the outstanding
shares of Checkfree Common Stock voting on the Merger is necessary to approve
the issuance of 12,600,000 shares of Checkfree Common Stock pursuant to the
Merger Agreement, as such number of shares may be adjusted in accordance with
the terms of the Merger Agreement. As of the Checkfree Record Date, the
directors and executive officers of the Company and their affiliates
beneficially owned __________ shares of Checkfree Common Stock (excluding shares
subject to stock options), which represent ____% of the total issued and
outstanding shares of such stock entitled to vote at the Checkfree Special
Meeting. In connection with the Merger Agreement, Peter J. Kight, the Company's
Chairman of the Board, President and Chief Executive Officer and Mark A.
Johnson, the Company's President of Business Services, who beneficially own
14.9% and 3.6%, respectively, of the outstanding shares of the Company's Common
Stock, have executed Stockholder Agreements pursuant to which they have agreed
to vote their shares of Checkfree Common Stock in favor of the Merger and the
issuance of the Merger Consideration and against any proposal that is in
opposition to or in competition with the Merger.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Prospectus/Proxy
Statement/Information Statement and is incorporated herein by reference. Such
summary is qualified in its entirety by reference to the Merger Agreement.
Stockholders are urged to read the Merger Agreement carefully.
The Merger Agreement provides that, following the approval of the
issuance of the Merger Consideration by the stockholders of the Checkfree Common
Stock and approval of the Merger by the sole stockholder of ISC and the
satisfaction or waiver of the other conditions to the Merger, Acquisition will
be merged with and into ISC, with ISC continuing as the surviving corporation of
the Merger and becoming a wholly owned subsidiary of the Company.
Upon the satisfaction or waiver of all conditions to the Merger, the
Merger will become effective upon the filing of a certificate of merger by
Acquisition and ISC with the Secretary of State of the State of Delaware in
accordance with the Delaware GCL. The Effective Time of the Merger is expected
to occur on or about __________ __, 1996.
MERGER CONSIDERATION GENERALLY. In the Merger, all outstanding shares
of ISC Common Stock shall be converted into the right to receive the Merger
Consideration. Subject to the Merger Consideration Adjustment (as defined
below), the Merger Consideration will be 12,600,000 shares of Checkfree Common
Stock, of which 11,340,000 shares shall be issued to the sole stockholder of ISC
Common Stock at the Effective Time and 1,260,000 shares (the "Escrow Shares")
shall be held in escrow pursuant to an Escrow Agreement between the Company,
Intuit and a third-party escrow agent (the "Escrow Agreement"). The Escrow
Shares shall be released from escrow and delivered to the sole stockholder of
ISC one (1) year after the Closing Date, subject to the terms of the Escrow
Agreement.
MERGER CONSIDERATION ADJUSTMENT. In the event that, after the date of
the Merger Agreement and prior to closing of the Merger, ISC incurs, realizes,
or otherwise experiences a material adverse change (other than a change arising
or resulting, directly or indirectly, from industry conditions or the public
announcement of, or the response or reaction of customers, vendors, licensors,
investors, ISC employees or others to, the Merger Agreement, the Merger, or any
of the agreements or transactions contemplated by the Merger Agreement or
entered into in connection with the Merger Agreement or the Merger) in its
financial condition, properties, assets, liabilities, business, operations, or
results of operations (a "Material Adverse Change"), the Merger Consideration
shall be adjusted as follows (the "Merger Consideration Adjustment"): (i) if the
Company, Intuit and ISC agree that a Material Adverse Change occurred, but are
unable to mutually agree in writing on the amount of a Merger Consideration
Adjustment within ten (10) days after the date on which Intuit and ISC receive
notice of a Material Adverse Change from the Company, then the amount of the
Merger Consideration Adjustment (if any) shall be determined in accordance with
the appraisal procedure described below; (ii) if ISC and Intuit do not agree
with the Company's claim in any notice that a Material Adverse Change occurred,
and Intuit, ISC and the Company have not agreed in writing on the amount of a
Merger Consideration Adjustment within ten (10) days after ISC and Intuit
receive notice of the Company's claim that a Material Adverse Change occurred,
then, within twenty (20) days after receipt of such notice, the parties shall
submit to mandatory binding arbitration the sole issue of whether or not such a
Material Adverse Change occurred. The arbitration will be conducted by a single
arbitrator, mutually selected by the parties, who shall decide only the issue of
whether or not a Material Adverse Change occurred in the manner set forth in the
notice. The arbitrator's determination as to whether
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or not such a Material Adverse Change occurred shall be conclusive, final,
non-appealable and binding upon each of the parties. If the arbitrator
determines that no Material Adverse Change occurred, then no Merger
Consideration Adjustment shall be made; and if the arbitrator determines that a
Material Adverse Change has occurred, then the amount of the Merger
Consideration Adjustment shall be determined by the appraisal procedure
described below. There may not be more than one Merger Consideration Adjustment.
When the appraisal procedure is required to be used, the amount of the
Merger Consideration Adjustment shall be determined as follows: (A) the Company,
on the one hand, and Intuit and ISC, on the other hand, shall each select one
Qualified Appraiser (as defined below) (the "Selected Appraiser") to determine
the amount of the Merger Consideration Adjustment (if any) arising from the
Material Adverse Change; and (B) the Company, on the one hand, and Intuit and
ISC, on the other hand, shall each give the other written notice (the "Appraiser
Notice") of the identity of their respective Selected Appraiser. The Company's
Selected Appraiser is called the "Checkfree Appraiser" and the Selected
Appraiser of Intuit and ISC is called the "Intuit Appraiser." Each Selected
Appraiser shall attempt to determine the amount of the Merger Consideration
Adjustment, which, for purposes of such appraisal, shall be the number of shares
of Checkfree Common Stock equal to the quotient obtained by dividing (i) the
amount (if any) by which the fair market value of ISC was diminished as a result
of the Material Adverse Change, by (ii) the average closing price per share of
Checkfree Common Stock as reported on the Nasdaq National Market for the five
(5) trading days immediately preceding the date of the Merger Agreement (the
"Average Share Price"). After a Selected Appraiser has been selected, the
Checkfree Appraiser and the Intuit Appraiser shall each deliver to the Company
and Intuit a brief written report ("Appraisal Report") setting forth such
Selected Appraiser's appraisal and determination of the amount of the Merger
Consideration Adjustment and, unless the parties otherwise agree in writing to
the amount of the Merger Consideration Adjustment, the Checkfree Appraiser and
the Intuit Appraiser shall select a third appraiser (the "Determining
Appraiser"). The Determining Appraiser will review the Appraisal Reports and the
amount of the Merger Consideration Adjustment will be the amount set forth in
the Appraisal Report which is, in the judgment of the Determining Appraiser, the
most nearly correct. Notwithstanding the foregoing, if there is only one
Selected Appraiser because either the Company, on the one hand, or Intuit and
ISC, on the other hand, fail to select its Selected Appraiser, then unless the
parties otherwise agree in writing to the amount of the Merger Consideration
Adjustment, the amount of the Merger Consideration Adjustment shall conclusively
be deemed to be the amount thereof determined by such Selected Appraiser in its
Appraisal Report. As used herein, the term "Qualified Appraiser" means an
investment banking firm of national or regional reputation that is substantially
experienced in representing and valuing software companies in underwritten
public offerings and/or merger and acquisition transactions, provided that such
investment banking firm and its affiliates do not have a family relationship, or
a then-currently active significant business relationship with the party who
selected such appraiser, or advised or represented any of the parties in
connection with the Merger and the transactions contemplated by the Merger
Agreement.
If, prior to the Effective Time, the Company should split or combine
the outstanding shares of Checkfree Common Stock, or pay a stock dividend or
other stock distribution in Checkfree Common Stock, then the Merger
Consideration shall be appropriately adjusted to reflect such split,
combination, dividend or other distribution.
ESCROW AGREEMENT. In connection with the Merger Agreement, the Company
and Intuit will enter into the Escrow Agreement pursuant to which the Escrow
Shares shall be placed in escrow with a third-party escrow agent (the "Escrow
Agent"). Pursuant to the Merger Agreement, Intuit's maximum aggregate lifetime
liability to indemnify the Company shall not exceed thirty-five percent (35%) of
the amount obtained by multiplying the number of shares of Checkfree Common
Stock constituting the Merger Consideration, as adjusted by the Merger
Consideration Adjustment, by the Average Share Price. Under the Escrow
Agreement, if on or prior to the first (1st) anniversary of the closing of the
Merger, the Company claims to be entitled to indemnification for any claims
pursuant to the Merger Agreement (a "Claim") and the Company seeks to recover
for such indemnification by having Escrow Shares canceled and returned to the
Company, then the Company may, in addition to giving Intuit written notice of
such claim as provided in the Merger Agreement (a "Claim Notice"), promptly
notify the Escrow Agent in writing of the claim. The Company is also required to
notify Intuit and the Escrow Agent in writing (the "Escrow Share Notice") of the
bona fide number of Escrow Shares that the Company in good faith believes should
be cancelled and delivered to it as a result of the Claim (the "Claimed Escrow
Shares"), which number of shares is determined by dividing the amount of the
claim by the Average Share Price. Unless Intuit shall notify Escrow Agent and
the Company, within thirty (30) days after Intuit's receipt of both the Claim
Notice and the Escrow Share Notice, of Intuit's objection to the delivery to the
Company of the number of Claimed Escrow Shares, the Escrow Agent shall, promptly
following the expiration of such thirty (30)
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day notice period, deliver to the Company stock certificates for the number of
Escrow Shares equal to the Claimed Escrow Shares, with related stock powers
transferring the number of Claimed Escrow Shares to the Company. To the extent
that Escrow Shares are so delivered to the Company, the Claim and the Company's
right to indemnification therefor, shall be satisfied. As used herein, the term
"Contested Claim" means any Claim of the Company for indemnification under the
Merger Agreement that is contested by Intuit.
In the event that Intuit shall notify the Escrow Agent of its objection
to the delivery of Escrow Shares to the Company as provided herein, the Escrow
Agent shall continue to hold such Escrow Shares until the earlier of: (i) the
date on which the Escrow Agent receives written instructions signed by both the
Company and Intuit to deliver to the Company or Intuit, as applicable, a
specified number of Escrow Shares (the "Agreed Shares"), upon receipt of which
instructions the Escrow Agent shall deliver the Agreed Shares to the Company
and/or Intuit, as provided in such written instructions; (ii) the date the
Escrow Agent receives a copy of the award of the arbitrator as to the
disposition of a Contested Claim as a result of an arbitration pursuant to the
Escrow Agreement (as described below); or (iii) the date the Escrow Agent
receives instructions pursuant to a final order of a court of competent
jurisdiction with respect to the disposition of such Escrow Shares; provided,
however, that notwithstanding the foregoing, upon the first anniversary of the
closing of the Merger (the "Release Date"), the Escrow Agent shall release from
escrow to Intuit the stock certificates for all of the Escrow Shares then held
in escrow hereunder less (i) any Escrow Shares previously delivered to the
Company or awarded (but not yet delivered) to the Company in satisfaction of a
Contested Claim pursuant to an award of an arbitrator rendered in an arbitration
pursuant to the Escrow Agreement; and (ii) any Escrow Shares that are
potentially subject to delivery to the Company as a result of any then pending
but unresolved arbitration or litigation of a Contested Claim pursuant to the
Escrow Agreement. Any Escrow Shares held as result of clause (ii) above will be
released to the Company and/or Intuit, as applicable, in accordance with the
resolution of such Contested Claim or Claims by (i) an arbitration award of an
arbitrator in accordance with the Escrow Agreement or (ii) a written settlement
agreement executed by the Company and Intuit regarding the disposition of such
Escrow Shares.
Each Contested Claim under the Escrow Agreement for which the Company
seeks recovery from the Escrow Shares shall be promptly settled by mandatory
binding arbitration as provided herein. The final decision of the arbitrator
will be furnished to the Escrow Agent, the Company and Intuit in writing and
will constitute a conclusive determination of the issues in question, binding
upon the Company and Intuit. The Escrow Agent shall have no responsibility or
obligation to participate in any such arbitration as a party thereto.
Notwithstanding any provision of the Escrow Agreement requiring or
permitting the Company to satisfy claims by obtaining cancellation of the Escrow
Shares, if the Company for any reason becomes entitled under the Escrow
Agreement to receive and cancel any Escrow Shares in satisfaction of a claim,
then Intuit, at its sole option and discretion, may instead elect to satisfy all
or any portion of such claim with a cash payment to the Company in lieu of such
forfeiture of Escrow Shares. Similarly, nothing contained in the Escrow
Agreement or in the Merger Agreement shall be construed to require the Company
to seek recovery of a claim, in whole or in part, from Escrow Shares. The
Company shall have the absolute right, in its sole discretion, to pursue its
rights under the Merger Agreement without reference to such rights as it may
have under the Escrow Agreement, as it may elect; provided, that (unless Intuit
consents otherwise) any claim by the Company to recover Escrow Shares must be
resolved by arbitration pursuant to the Escrow Agreement or by a written
settlement agreement executed by the Company and Intuit.
ISC COMMON STOCK. At the Effective Time, the shares of ISC Common Stock
issued and outstanding immediately prior thereto will be canceled and converted
into the right to receive 12,600,000 shares of Checkfree Common Stock, as such
number of shares may be adjusted in accordance with the terms of the Merger
Agreement, subject to the terms of the Merger Agreement and the Escrow
Agreement.
FRACTIONAL SHARES. No certificates or scrip representing fractional
shares of Checkfree Common Stock will be issued upon the surrender for exchange
of certificates held by the sole stockholder of ISC, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of the Company.
CONVERSION OF ACQUISITION COMMON STOCK. At the Effective Time, each
share of common stock, $.01 par value, of Acquisition that is issued and
outstanding immediately prior to the Effective Time will, by virtue of the
Merger, automatically and without any action on the part of the holder thereof,
be converted into and become one validly issued, fully paid and nonassessable
share of ISC Common Stock.
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TREASURY STOCK. At the Effective Time, each share of the capital stock
of ISC that is held in the treasury of ISC, if any, will be canceled and retired
and no capital stock of the Company, cash or other consideration shall be paid
or delivered in exchange therefor.
CONDITIONS TO CONSUMMATION OF THE MERGER. The respective obligations of
the Company, Acquisition, Intuit, and ISC to consummate the Merger are subject
to the fulfillment or waiver by the parties of certain conditions, including:
(i) the approval and adoption by the requisite vote of the sole stockholder of
ISC and the stockholders of the Company of the Merger, the Merger Agreement and
the issuance of the Merger Consideration; (ii) the expiration or earlier
termination of any waiting period under the HSR Act; (iii) the absence of any
effective preliminary or permanent injunction or other order, decree or ruling
issued by any court of competent jurisdiction nor any statute, rule, regulation
or order entered, promulgated or enacted by any governmental, regulatory or
administrative agency or authority that would prevent the consummation of the
Merger; (iv) the effectiveness of the Registration Statement and the absence of
any effective stop order with respect thereto; (v) the execution and delivery by
Intuit and the Company of the Escrow Agreement; and (vi) the execution and
delivery by Intuit and the Company of the Registration Rights Agreement.
The obligations of Intuit and ISC to consummate the Merger are further
subject to the satisfaction or waiver of certain additional conditions,
including the following: (i) the Company and Acquisition shall have performed
and complied in all material respects with all their obligations, covenants, and
agreements required to be performed and complied with by them under the Merger
Agreement; (ii) the representations and warranties made by the Company and/or
Acquisition in the Merger Agreement shall not, as of the date of the Merger
Agreement (the "Agreement Date") have been incorrect, untrue or false in any
respect that failed to correctly state facts in existence on the Agreement Date
that constituted a Material Adverse Effect (as defined below) on the properties,
assets, financial condition, operating results or business of the Company, taken
as a whole, as of the Agreement Date; (iii) Intuit and ISC shall have received a
certificate from the Chief Executive Officer of the Company and Acquisition, to
the effect that the conditions set forth in items (i) and (ii) above have been
satisfied; (iv) the shares of Checkfree Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq National Market, subject to
official notice of issuance; and (v) Intuit and ISC shall have received the
opinion of Porter, Wright, Morris & Arthur, counsel to the Company and
Acquisition, with respect to certain matters. As used herein, the term "Material
Adverse Effect" shall mean a material adverse effect on the properties, assets,
financial condition, operating results or business of the party referred to,
taken as a whole; provided, however, that the term "Material Adverse Effect"
shall not include any such material adverse effect arising or resulting,
directly or indirectly, from industry conditions or the public announcement of,
or the response or reaction of customers, vendors, licensors, investors,
employees or others to, the Merger Agreement, the Merger, or any of the
agreements or transactions contemplated by the Merger Agreement or entered into
in connection with the Merger.
The obligations of the Company and Acquisition to consummate the Merger
are further subject to the satisfaction or waiver of certain additional
conditions, including the following: (i) ISC and Intuit shall have performed and
complied in all material respects with all their obligations, covenants, and
agreements required to be performed and complied with by them under the Merger
Agreement; (ii) the representations and warranties made by Intuit and/or ISC in
the Merger Agreement, shall not, as of the Agreement Date, have been incorrect,
untrue or false in any respect that failed to correctly state facts in existence
on the Agreement Date that constituted a Material Adverse Effect on the
properties, assets, financial condition, operating results or business of ISC,
taken as a whole, as of the Agreement Date; (iii) the Company shall have
received a certificate from the Chief Executive Officer and the Chief Financial
Officer of Intuit and ISC, to the effect that the conditions set forth in
paragraphs (i) and (ii) above have been satisfied; (iv) the Company shall have
received a certificate from the Chief Executive Officer and the Chief Financial
Officer of each of Intuit and ISC, to the effect that the ISC has not incurred,
realized, or otherwise experienced a Material Adverse Change; provided, however;
the existence of such Material Adverse Change will not entitle the Company to
terminate the Merger Agreement (and the absence of a Material Adverse Change
will not be a condition to consummation of the Merger); (vi) the Company shall
have received all consents from third parties required by the Merger Agreement;
and (vii) the Company and Acquisition shall have received the opinion of Fenwick
& West LLP, counsel to Intuit and ISC, with respect to certain matters.
REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, ISC has made
certain representations and warranties relating to, among other things: (i) its
corporate organization and qualification; (ii) its subsidiaries; (iii) its
capitalization; (iv) its corporate power and authority relative to the Merger
Agreement; (v) the absence of conflicts with
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its constituent documents and material agreements; (vi) filings required to be
made with and consents required to be obtained from governmental entities in
connection with the transactions contemplated by the Merger Agreement; (vii)
certain of its financial statements; (viii) the absence of certain events or the
incurrence of certain liabilities or obligations (since July 31, 1996); (ix) the
accuracy of information provided by ISC for inclusion herein; (x) pending or
threatened litigation; (xi) title to properties and assets; (xii) real property
interests; (xiii) intellectual property rights; (xiv) labor matters; (xv)
severance arrangements; (xvi) the filing of tax returns and payment of taxes;
(xvii) compliance with laws; (xviii) employee benefits matters; (xix)
environmental matters; (xx) certain personal property; (xxi) certain material
agreements; (xxii) insurance; (xxiii) the absence of agreements by ISC with
respect to a merger or a sale of substantially all its assets; (xxiv) claims
against officers and directors; (xxv) customers and suppliers; (xxvi) improper
and other payments; (xxvii) brokers and finders' fees; (xxviii) accounts
receivable and advances; (xxix) Examinations by the Officer of the Comptroller
of the Currency; and (xxx) the accuracy of its written statements in, and
furnished in connection with, the Merger Agreement. In the Merger Agreement
Intuit has made certain representations and warranties relating to, among other
things: (i) its corporate organization; (ii) its ownership of ISC; (iii) its
corporate power and authority relative to the Merger Agreement; (iv) the absence
of conflicts with its constituent documents and material agreements; (v) filings
required to be made with and consents required to be obtained from governmental
entities in connection with the transactions contemplated by the Merger
Agreement; (vi) the accuracy of certain information; (vii) brokers and finders'
fees; and (viii) the accuracy of its written statements in, and furnished in
connection with, the Merger Agreement. In the Merger Agreement the Company has
made certain representations and warranties relating to, among other things: (i)
its corporate organization and qualification; (ii) its subsidiaries; (iii) its
capitalization; (iv) its corporate power and authority relative to the Merger
Agreement; (v) the absence of conflicts with its constituent documents and
material agreements; (vi) filings required to be made with and consents required
to be obtained from governmental entities in connection with the transactions
contemplated by the Merger Agreement; (vii) its SEC filings and the financial
statements contained therein; (viii) the absence of certain changes or events;
(ix) the accuracy of certain information provided by it for inclusion herein;
(x) the lack of registration rights; (xi) brokers and finders' fees; (xii) title
to its property and assets; (xiii) intellectual property rights; (xiv)
environmental matters; (xv) insurance; (xvi) the absence of agreements by the
Company with respect to a merger or a sale of substantially all its assets; and
(xvii) claims against officers and directors. In the Merger Agreement,
Acquisition has made certain representations and warranties relating to, among
other things: (i) its corporate organization and qualification; (ii) its
capitalization; (iii) its corporate power and authority relative to the Merger
Agreement; (v) the absence of conflicts with its constituent documents and
material agreements; (vi) filings required to be made with and consents required
to be obtained from governmental entities in connection with the transactions
contemplated by the Merger Agreement; and (vi) the purpose for which Acquisition
was formed.
NO SOLICITATION OF TRANSACTIONS. In the Merger Agreement, Intuit and
ISC have agreed that neither they nor any of their subsidiaries nor any of their
respective affiliates, directors, officers, employees, representatives, advisors
or agents shall, directly or indirectly, encourage, solicit or initiate any
discussions, submissions of proposals or offers or negotiations with, or,
subject to the fiduciary obligations of the respective Boards of Directors of
Intuit and ISC under applicable law as advised by counsel, participate in any
negotiations or discussions with, provide any information or data of any nature
whatsoever to, otherwise cooperate in any other way with, or assist, participate
in, facilitate or encourage any effort or attempt by, any person, other than the
Company and its affiliates, representatives and agents, concerning any merger,
consolidation, sale of substantial assets, sale of shares or capital stock or
other equity securities, recapitalization, debt restructuring or similar
transaction involving ISC (such transactions being hereinafter referred to as
"Alternative Transactions"). Intuit and ISC have agreed to immediately notify
the Company if any proposal, offer, inquiry or other contact is received by, any
information is requested from, or any discussions or negotiations are sought to
be initiated or continued with, ISC in respect of an Alternative Transaction,
and shall, in any such notice to the Company, indicate the identity of the
offeror and the terms and conditions of any proposals or offers or the nature of
any inquiries or contacts, and thereafter shall keep the Company informed of the
status of any such discussions or negotiations. ISC shall not release any third
party from, or waive any provision of, any confidentiality or standstill
agreement to which ISC is a party. The Merger Agreement does not prohibit Intuit
from participating in any merger or other business combination that does not
involve the transfer of ISC Common Stock or ISC assets; provided, however, that
any third party acquiror of Intuit expressly consents to abide by the terms,
conditions and obligations of the Merger Agreement.
CERTAIN AGREEMENTS AND COVENANTS. Pursuant to the Merger Agreement, ISC
has agreed that it will conduct its business only in the ordinary course
consistent with past practice and has made certain covenants that prohibit or
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limit, without the consent of the Company, among other things: (i) the sale,
pledge, disposal, or other encumbrance of any property or assets of ISC, except
inventory and nonmaterial assets; (ii) the amendment of its certificate of
incorporation or by-laws; (iii) the split, combination, or re-classification of
any of its outstanding capital stock; (iv) the declaration, setting aside or
payment of any dividends; (v) the redemption, purchase, acquisition, or offer to
acquire, of any shares of its capital stock; (vi) the incorporation or other
formation or creation of any subsidiary; (vii) material changes in ISC's
equipment or technology; (vii) the issuance, sale, pledge, or disposition of, or
agreement to issue, sell, pledge, or dispose of, any stock of, or securities
convertible or exchangeable for, or any option, warrant or right of any kind to
acquire any shares of its capital stock of any class or other property or
assets; (viii) the acquisition of any corporation, partnership, or other
business organization or division thereof or any material amount of assets; (ix)
the incurrence or guarantee by ISC of any indebtedness for borrowed money other
than in the ordinary course of business or the refinancing of any such
indebtedness or the issuance or sale of any debt securities; (ix) the entry into
or modification of any material contract, lease, agreement, or commitment of
ISC; (xi) the termination, modification, assignment, waiver, release, or
relinquishment of any material contract right or the amendment of any material
right or claim of ISC; (xii) the discharge, satisfaction, settlement, or
compromise of any material claim, action, suit or proceeding pending or
threatened against ISC; (xiii) the making of any loan, advance or capital
contribution to, or investment in, any other person by ISC, except as may be
required under agreements in effect as of the date of the Merger Agreement, and
upon prior notice to the Company; (xiv) the alteration through merger,
liquidation, reorganization, restructuring, or in any other manner its corporate
structure or ownership; (xv) the violation or failure to perform, in any
material respect, any obligation imposed upon ISC by any applicable law, order,
decree, ordinance, government rule or regulation, or conciliation agreement;
(xvi) the granting of any increase in the salary or other compensation of, or
the amendment of any employee benefit plan applicable to, the directors,
officers or employees of ISC, except reasonable and ordinary salary increases of
employees who are not directors or executive officers of ISC, or the granting of
any bonus to any employee or the entry into any employment agreement or making
of any loan to, or the entry into any material transaction of any other nature
with any employee of ISC; (xvii) the taking of any action to institute any new
severance or termination pay practices with respect to any director, officer, or
employee of ISC or to increase the benefits payable under its severance or
termination pay practices; and (xviii) the adopting or amending, in any material
respect, any plan for the benefit or welfare of any of its directors, officers
or employees of ISC except as contemplated in the Merger Agreement or required
under applicable law or regulation.
In addition, ISC has agreed to use its best efforts to maintain its
relationships with suppliers, customers, clients and others having business
dealings with ISC and, if and as requested by the Company or Acquisition, (i)
ISC shall use its best efforts to make reasonable arrangements for
representatives of the Company to meet with customers and suppliers of ISC and
(ii) ISC shall schedule meetings of representatives of the Company with
employees of ISC. ISC has agreed to provide to the Company a draft of any
federal income tax return or material state, local or foreign tax return (other
than state or local sales and use taxes) required to be filed on behalf of ISC
or any subsidiary of ISC between the date of the Merger Agreement and the
Effective Time at least 15 days prior to the date on which such return is due.
REVENUE MAKE-UP. If the Merger is consummated, then as soon as
reasonably practicable after July 31, 1997, the Company shall deliver to Intuit
ISC's unaudited statement of operations for the twelve-month period beginning on
August 1, 1996 and ending on July 31, 1997 (such twelve-month period being
hereinafter called the "Revenue Period"), prepared by the Company in accordance
with generally accepted accounting principles consistently applied and
consistent with ISC's revenue recognition policies for its fiscal year ended
July 31, 1996 (such unaudited statement of operations is hereinafter called the
"Revenue Statement"). As used herein, the term "Gross Revenues" means ISC's
total gross revenues derived during the Revenue Period determined in accordance
with generally accepted accounting principles consistently applied and
consistent with ISC's revenue recognition policies for its fiscal year ended
July 31, 1996. ISC and the Company shall maintain complete and accurate books
and records relating to the determination of Gross Revenues.
If ISC's Gross Revenues are less than Forty-Six Million Dollars
($46,000,000), then, provided that (i) the Company and ISC have, at all times
after the Effective Time, used their respective good faith efforts to maximize
the Gross Revenues of ISC during the Revenue Period; (ii) ISC has not
discontinued or disposed of any material portion of its business or assets (as
such exist immediately prior to the Effective Time); (iii) the Company has fully
and timely paid to Intuit all fees required to be paid to Intuit under the
License Agreement; and (iv) Intuit has received from ISC the Revenue Statement
stating that the ISC's Gross Revenues for the Revenue Period are less than
Forty-Six Million
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Dollars ($46,000,000), then Intuit shall, within sixty-five (65) days after its
receipt of the Revenue Statement, pay to the Company, in cash, a sum equal to
Forty-Six Million Dollars ($46,000,000) minus the amount of the Gross Revenues
(the "Revenue Make-Up Payment"), subject to exercise of audit rights described
below. Within thirty (30) days after it receives the Revenue Statement, Intuit
may request an audit of ISC's and the Company's records pertaining to the
determination of the Gross Revenues by Intuit (the "Audit") by giving ISC and
the Company written notice (the "Audit Notice"). If the Audit reveals that the
Gross Revenues are higher than indicated in the Revenue Statement, then the
amount of the Revenue Make-Up Payment shall be reduced to the sum equal to
Forty-Six Million Dollars ($46,000,000) minus the Gross Revenues as determined
by the Audit.
TERMINATION. The Merger Agreement may be terminated by the mutual
written consent of the Boards of Directors of the Company, Intuit, and ISC; by
Intuit or ISC if the Board of Directors of the Company fails to recommend the
approval of the Merger Agreement and the Merger and the issuance of the Merger
Consideration to the Company's stockholders or recommends against the approval
of the Merger Agreement or the Merger and the issuance of the Merger
Consideration to the Company's stockholders; by either the Company or
Acquisition, on the one hand, or Intuit or ISC, on the other hand, if the
conditions to such parties' obligation to consummate the Merger are not
satisfied or complied with by March 31, 1997; or by either the Company, on the
one hand, or Intuit or ISC, on the other hand, if a representation or warranty
made in the Merger Agreement (as qualified by the schedules and other
disclosures given pursuant to the Merger Agreement) by the other party, was, as
of the Agreement Date, incorrect, untrue or false in any respect that failed to
correctly state facts in existence as of the Agreement Date and which
constituted a Material Adverse Effect on the Agreement Date.
EXCHANGE OF CERTIFICATES
KeyCorp Shareholder Services, Inc. (the "Exchange Agent") will deliver
to the sole stockholder of ISC the Merger Consideration (subject to the holdback
of and adjustments to the Merger Consideration in accordance with the terms of
the Merger Agreement and the Escrow Agreement), a letter of transmittal ("Letter
of Transmittal") and instructions for its use in effecting the surrender of
certificates representing shares of ISC Common Stock in exchange for
certificates representing shares of Checkfree Common Stock and cash in lieu of
fractional shares thereof.
Upon surrender of a certificate to the Exchange Agent, together with a
duly executed Letter of Transmittal and any other required documents, the sole
stockholder of ISC will be entitled to receive, in exchange therefor, a
certificate representing the 12,600,000 shares of Checkfree Common Stock
(subject to the holdback of, and adjustments to, the Merger Consideration in
accordance with the terms of the Merger Agreement and Escrow Agreement) and a
check representing cash in lieu of any fractional shares of Checkfree Common
Stock. No interest will be paid or will accrue on any amount payable upon
surrender of the certificates previously representing ISC Common Stock.
After the Effective Time, each certificate evidencing ISC Common Stock,
until so surrendered and exchanged, will be deemed, for all purposes, to
evidence only the right to receive the consideration into which such shares have
been converted in the Merger.
THE ISC STOCKHOLDER SHOULD NOT SUBMIT ANY STOCK CERTIFICATES NOW BUT
RATHER SHOULD ONLY SUBMIT STOCK CERTIFICATES UPON RECEIPT OF, AND TOGETHER WITH,
THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ENCLOSED THEREWITH.
STOCK EXCHANGE LISTING
A notification has been filed to list on the Nasdaq National Market the
Checkfree Common Stock issuable in connection with the Merger. Listing of such
shares of Checkfree Common Stock to be issued in the Merger, subject to official
notice of issuance, is a condition precedent to consummation of the Merger.
REGULATORY APPROVALS
Pursuant to the requirements of the HSR Act, in connection with the
Merger, the Company and ISC each filed a pre-merger notification report with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice. It is a condition to the obligations of the Company and
ISC to consummate the Merger that the waiting period under the HSR Act shall
have expired or been earlier terminated.
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ANTICIPATED ACCOUNTING TREATMENT
The Company intends to account for the Merger using the purchase method
of accounting under generally accepted accounting principles and the rules and
regulations of the Commission. Under the purchase method of accounting, the
Company will be treated as the acquiror of ISC and, as a result, the purchase
price will be allocated based on the fair value of the assets of ISC acquired
and the liabilities assumed.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the principal federal income
tax consequences of the Merger to the sole stockholder of ISC. The discussion is
based on laws, regulations, rulings and decisions currently in effect. The
discussion does not take account of rules that are applicable to the sole
stockholder of ISC that are subject to special treatment under the Code,
including without limitation, insurance companies, dealers in securities,
financial institutions, tax-exempt investors, foreign investors and stockholders
who acquired shares pursuant to the exercise of an employee stock option or
otherwise as compensation. The discussion also does not address state, local or
foreign tax consequences of the Merger. No rulings have been or will be
requested from the Internal Revenue Service with respect to the tax consequences
of the Merger.
GENERAL. The parties intend that the Merger qualify as a tax-free plan
of reorganization in accordance with the provisions of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code") by virtue of the
provisions of Section 368(a)(2)(E) of the Code. The parties believe that the
value of the Checkfree Common Stock to be issued to Intuit as the sole
stockholder of ISC in the Merger is equal to the value of the ISC Common Stock
to be surrendered in exchange therefor. The Checkfree Common Stock issued in the
Merger will be issued solely in exchange for the outstanding ISC Common Stock,
and no other transaction other than the Merger represents, provides for or is
intended to be an adjustment to, the consideration paid for the ISC Common
Stock. Except for cash paid in lieu of fractional shares, no consideration that
could constitute "other property" within the meaning of Section 356 of the Code
is being paid by the Company for the ISC Common Stock in the Merger.
Intuit, as sole stockholder of ISC, is advised to consult with its own
tax adviser concerning the Federal income tax consequences of the Merger, as
well as the applicable state, local, foreign or other tax consequences, based
upon its particular facts and circumstances.
RECEIPT OF CHECKFREE COMMON STOCK. The sole stockholder of ISC will not
recognize gain or loss upon receipt of Checkfree Common Stock in the Merger
(except for cash in lieu of fractional shares as described below) in exchange
for all shares of ISC Common Stock owned by it for federal income tax purposes.
The tax basis of the Checkfree Common Stock received in such an exchange will be
equal to the basis of the ISC Common Stock exchanged therefor (except for the
basis attributable to any fractional shares of Checkfree Common Stock for which
cash is paid, as discussed below).
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES. The sole stockholder of
ISC, upon receipt of cash in the Merger in lieu of a fractional share interest
in Checkfree Common Stock, will be treated for federal income tax purposes as
having received such fractional share interest and sold it for the cash
received. Such stockholder will recognize gain or loss as of the Effective Time
equal to the difference between the amount of cash received and the portion of
the stockholder's adjusted tax basis in the shares of ISC Common Stock exchanged
for the fractional share interest that is deemed sold. Such gain or loss will be
capital gain or loss if the stockholder holds the ISC Common Stock exchanged for
the fractional share as a capital asset and will be long-term capital gain or
loss if such ISC Common Stock is considered to have been held for more than one
year at the Effective Time.
BACKUP WITHHOLDING. Under federal income tax law concerning "backup
withholding," the Company will be required to withhold, and will withhold, 31%
of any cash payments to which the sole stockholder of ISC is entitled pursuant
to the Merger unless the holder provides its taxpayer identification number and
certifies that such number is correct or otherwise establishes that the holder
is an exempt holder (such as a corporation or certain foreign individuals,
partnerships or trusts). Each holder should sign the Substitute Form W-9
included as part of the Transmittal Letter (or in the case of a nonresident
alien or foreign entity, a Form W-8) to prevent backup withholding.
- 41 -
<PAGE> 49
RESALES BY AFFILIATES; REGISTRATION RIGHTS
Intuit, as sole stockholder of ISC, is an "affiliate" of ISC for
purposes of Rule 145 under the Securities Act ("Rule 145") will not be permitted
to transfer its shares of Checkfree Common Stock issued in the Merger except (i)
pursuant to an effective registration statement under the Securities Act; (ii)
in compliance with Rule 145; or (iii) pursuant to an exemption from the
registration requirements of the Securities Act. The Company shall be entitled
to place appropriate legends on the certificates evidencing the Checkfree Common
Stock to be received by ISC's sole stockholder pursuant to the terms of the
Merger, and to issue appropriate stock transfer instructions to the transfer
agent for Checkfree Common Stock, to the effect that the shares received or to
be received by ISC's sole stockholder pursuant to the Merger may only be sold,
transferred or otherwise conveyed pursuant to an effective registration
statement under the Securities Act, in accordance with the provisions of
paragraph (d) of Rule 145 or pursuant to an exemption from registration provided
under the Securities Act. The foregoing restrictions on the transferability of
Checkfree Common Stock shall apply to all purported sales, transfers and other
conveyances of the shares received or to be received by ISC's sole stockholder
pursuant to the Merger , whether or not ISC's sole stockholder has exchanged its
certificates previously evidencing shares of ISC Common Stock. This
Prospectus/Proxy Statement/Information Statement does not cover any resales of
Checkfree Common Stock received by Intuit.
Pursuant to the Merger Agreement, the Company will enter into a
Registration Rights Agreement that grants Intuit certain demand registration
rights and "piggy-back" registration rights. The Registration Rights Agreement
provides that Intuit may demand that the Company file registration statements
under the Securities Act registering the Checkfree Common Stock issued in the
Merger. Under the Registration Rights Agreement, Intuit may make one such demand
per calendar year commencing in 1997. The minimum number of shares of Checkfree
Common Stock requested by Intuit to be registered is 20% of the shares issued to
Intuit in the Merger; provided, however, that the first such request may be for
a lesser number of shares as would reduce Intuit's ownership of Checkfree Common
Stock to less than 20% of the total Checkfree Common Stock outstanding. If
Intuit utilizes the demand registration rights, Intuit shall bear the expense of
all discounts, commissions or other amounts payable to underwriters or brokers,
if any, in connection with such offering, as well as one-half of all other
expenses incurred in connection with the registration, including without
limitation all federal and "blue sky" registration and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the Company
and for Intuit. The Company is not obligated to act on a demand under the
Registration Rights Agreement if: (i) in any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration unless the Company is already subject to service
in such jurisdiction and except as may be required by the Securities Act; (ii)
within ten (10) days of the receipt of a registration request, the Company gives
written notice to Intuit of the Company's intention to file a registration
statement for the sale of securities by the Company within 30 days of such
request, in which event, (x) Intuit may exercise its piggyback registration
rights (as described below), (y) the Company shall employ all reasonable efforts
to cause its registration statement to become effective, and (z) if the Company
abandons its registration statement, the Company shall renew its best efforts to
register the securities that were the subject of Intuit's demand; (iii) during
the period starting with the filing of and ending ninety (90) days immediately
following the effective date of any registration statement pertaining to
securities of the Company (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan); (iv) the Company
furnishes Intuit a certificate stating that in the good faith judgment of the
Company's Board of Directors it would be seriously detrimental to the Company or
its stockholders for a registration statement to be filed in the near future, in
which case the Company's obligation to register Intuit's shares of Checkfree
Common Stock shall be deferred for up to one hundred and twenty (120) days from
the date of receipt of the written request from Intuit; or (v) less than one
hundred and eighty (180) days shall have expired from the effectiveness of a
previous registration under the Registration Rights Agreement. Additionally,
under the Registration Rights Agreement, the Company is required to notify
Intuit at least twenty (20) days prior to filing a registration statement under
the Securities Act for purposes of effecting a public offering of the Company's
securities and Intuit may register its shares of Checkfree Common Stock issued
in the Merger under such registration statement in certain instances. If Intuit
is given the opportunity to include its shares in such a registration statement,
then Intuit may not make a demand for registration for one hundred and eighty
(180) days after the earlier of the termination of such offering or the
effectiveness of such registration statement. If Intuit exercises its piggyback
registration rights, Intuit shall bear the cost of all discounts, commissions or
other amounts payable to underwriters or brokers and fees and disbursements of
counsel for Intuit in connection with such offering. All other expenses incurred
in connection with a piggyback registration, including without limitation all
federal and "blue sky" registration and qualification fees, printers' and
accounting fees, and fees and disbursements of counsel for the Company, shall be
borne by the Company. The Company's obligations to register Checkfree Common
Stock issued to Intuit in the Merger will expire (i) when all such shares have
been registered and sold by Intuit or (ii) after the fifth
- 42 -
<PAGE> 50
anniversary of the Effective Time of the Merger; provided, that if the Company
exercises its right described in (iii) above to defer a demand registration
requested by Intuit, then the date for expiration of the Registration Rights
Agreement will be extended by one year for each time the Company exercises the
deferral right.
CERTAIN RELATED TRANSACTIONS
In connection with the Merger Agreement, the Company, ISC and Intuit
will enter into the License Agreement, substantially all the terms of which will
become operative upon effectiveness of the Merger. The principal objectives of
the License Agreement are to: (i) establish a continuing cooperative
relationship between the parties whereby users of certain Intuit software
products and services will continue to be able to obtain electronic
banking/billpay services from ISC or the Company through such Intuit products;
(ii) provide the means for an orderly transition in the operation and support of
several services currently offered by Intuit and ISC that are now interdependent
on certain technologies, equipment, facilities, personnel and support services
of ISC and Intuit; (iii) set forth the terms on which the Company, ISC and
Intuit will cooperate to develop, market, distribute and support certain of
their respective products and services; and (iv) provide for the grant of
certain technology licenses and mutual support and technical cooperation
agreements among the parties designed to maintain connectivity between certain
products and services offered by the parties. The principal terms of the License
Agreement are summarized below.
Under the License Agreement, unless the parties otherwise mutually
agree, for a period of at least three (3) years following the Effective Time of
the Merger, subject to extension (the "Connectivity Term"), ISC and the Company
will: (i) incorporate in their banking/billpay services certain Intuit software
communications and/or connectivity protocols ("protocols") that will enable
ISC's and the Company's banking/billpay services to be used through Intuit
software products and services, including "Quicken" and "QuickBooks" and
Intuit's "BankNOW" service; (ii) support features included in certain Intuit
protocols and use reasonable efforts to support other data standards Intuit may
develop; and (iii) offer their banking/billpay services to users of certain
Intuit products on terms no less favorable than such services are offered to
third parties. In addition, until the earlier of termination of the Connectivity
Term or five (5) years after the Effective Time of the Merger, ISC will cause
its computer processing facilities to support software protocols used in certain
Intuit products and services and Intuit's OpenExchange protocols for electronic
commerce activities. ISC will also cooperate with Intuit and offer support to
users of Intuit products that use ISC's and/or the Company's banking/billpay
services. In addition, during the Connectivity Term, ISC and the Company will
authorize Intuit to resell ISC's and the Company's banking/billpay services
directly to Intuit customers who use such services through features incorporated
in Quicken and other Intuit "front-end" products.
During the Connectivity Term, Intuit will: (i) agree to implement and
support certain protocols of ISC and the Company (or, if the parties so agree,
Intuit's OpenExchange protocol) in all versions of Quicken released in the Fall
of 1997 that contain banking or bill payment features; (ii) use reasonable
efforts to implement and support protocols used by ISC and the Company in
certain Intuit front-end products; (iii) share certain technical information
with ISC and the Company necessary to enable them to develop products and
services that utilize Intuit protocols; and (iv) provide support to users of
Intuit products that utilize ISC's or the Company's bank/bill pay services at
mutually agreed service levels. Until the earlier of termination of the
Connectivity Term or the fifth (5th) anniversary of the Effective Time of the
Merger, Intuit will also offer banking/billpay services through designated
Intuit products to financial institutions who use ISC's or the Company's
banking/billpay services. Under the Agreement, Intuit will also grant ISC and
the Company certain license rights to connect their banking and bill payment
services to end-users through designated Intuit front-end products, including
providing such services to or through a financial institution or bank for resale
to end-users where such financial institution has an existing agreement with
Intuit authorizing it to provide such services.
Under the License Agreement, the Company will also grant Intuit a
licence to use Security APL's SECAPL Portfolio Management software and services
so as to enable Intuit to make such services available from an Intuit world
wide web site.
Intuit and ISC will also agree on certain terms under which they will
provide each other with support for certain services and operations. ISC and
Intuit will also agree that, from the Effective Time of the Merger through July
31, 1997, Intuit will conduct certain marketing activities on behalf of ISC's
electronic banking and bill payment services, with the nature of such marketing
activities to be determined by Intuit in its discretion. In addition, from the
Effective
- 43 -
<PAGE> 51
Time of the Merger until July 31, 1997, Intuit will continue to provide customer
and technical support for ISC's banking/billpay services.
Under the License Agreement, the parties mutually agree to grant each
other certain non-exclusive, royalty-free licenses to use internally certain
aspects of each other's technology solely for the purposes of fulfilling their
obligations under the License Agreement and to use certain trademarks of each
other in connection with the performance of their obligations under the License
Agreement. In addition, Intuit will grant to the Company and ISC the exclusive
right to provide banking/billpay services for Intuit's "front-end" products
through the new version releases of such products scheduled in 1997. The parties
also agree to cooperate in other ways in order to mutually support and promote
each other's businesses.
In consideration of several of Intuit's agreements under the License
Agreement, ISC will agree to pay Intuit, in addition to certain other fees, the
sum of $10 million in cash upon the closing of the Merger and an additional $10
million on or about October 1, 1997.
In connection with the Merger Agreement, Peter J. Kight, the Company's
Chairman of the Board, President and Chief Executive Officer and Mark A.
Johnson, the Company's President of Business Services, who beneficially own
14.9% and 3.6%, respectively, of the outstanding shares of the Company's Common
Stock, have executed Stockholder Agreements pursuant to which they have agreed
to vote their shares of Checkfree Common Stock in favor of the Merger and
against any proposal that is in opposition to or in competition with the Merger.
Pursuant to the Merger Agreement, Intuit, as sole stockholder of ISC,
will enter into a Registration Rights Agreement with the Company, which provides
that Intuit may demand that the Company file a registration statement under the
Securities Act registering the Checkfree Common Stock issued in the Merger. See
"THE MERGER -- Resales by Affiliates; Registration Rights."
- 44 -
<PAGE> 52
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial
information, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements of the Company set forth in the Company's
Transition Report on Form 10-K and the historical statements of ISC which are
included elsewhere in this Prospectus/Proxy Statement/Information Statement.
Effective February 21, 1996 and May 9, 1996, the Company completed its
acquisitions of Servantis and Security APL, respectively. These Acquisitions
were both accounted for as purchases. The unaudited pro forma condensed
combining statement of operations for the year ended December 31, 1995 combines
the results of operations of Checkfree, Servantis, and Security APL for the year
ended December 31, 1995 with ISC's results of operations for the twelve months
ended January 31, 1996. The unaudited pro forma condensed combining statement of
operations for the six months ended June 30, 1996 combines the Company's results
of operations for such period with the results of operations of Servantis and
Security APL prior to the Acquisitions, and the results of operations of ISC for
the six months ended July 31, 1996. The unaudited pro forma condensed combining
statements of operations for both periods give effect to the Acquisitions and
the Merger as if they had occurred on January 1, 1995, the beginning of the
earliest period presented. The unaudited pro forma condensed combining balance
sheet combines the Company's balance sheet at June 30, 1996 with ISC's balance
sheet as of July 31, 1996, giving effect to the Merger as if it has occurred on
June 30, 1996. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred had the Acquisitions and Merger been
consummated at the beginning of the period presented, nor is it necessarily
indicative of future operating results or financial position. See "INFORMATION
INCORPORATED BY REFERENCE."
- 45 -
<PAGE> 53
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
AMOUNTS AMOUNTS PRO FORMA
CHECKFREE ISC ADJUSTMENTS TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and short term investments $ 39,076 $ 601 $ (9,347)(9) $ 30,330
Accounts receivable 29,517 2,838 -- 32,355
Assets held for sale 20,000 -- -- 20,000
Prepaid expenses and other 2,206 136 -- 2,342
-------- -------- -------- --------
Total Current Assets 90,799 3,575 (9,347) 85,027
-------- -------- -------- --------
Property and equipment- net 36,567 15,919 -- 52,486
-------- -------- -------- --------
Other assets:
Capitalized software, net 34,408 -- -- 34,408
Intangible assets, net 27,508 1,314 43,287(9) 72,109
Other noncurrent assets 6,948 -- -- 6,948
-------- -------- -------- --------
Total other assets 68,864 1,314 43,287 113,465
-------- -------- -------- --------
Total Assets $196,230 $ 20,808 $ 33,940 $250,978
======== ======== ======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued and other liabilities 20,932 3,392 9,571(9) 33,895
Payable to parent -- 29,939 (29,939)(11) --
Current portion of long-term obligations 1,112 -- -- 1,112
Deferred revenues 15,439 -- -- 15,439
Deferred income taxes 7,820 -- 7,820
-------- -------- -------- --------
Total Current Liabilities 45,303 33,331 (20,368) 58,266
Accrued rent and other 195 -- -- 195
Deferred income taxes 4,732 -- (3,428)(9) 1,304
Long-term obligations, less current portion 8,325 -- -- 8,325
-------- -------- -------- --------
Total liabilities 58,555 33,331 (23,796) 68,090
Stockholders' equity 137,675 (12,523) 57,736(9)(10)(11) 182,888
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity $196,230 $ 20,808 $ 33,940 $250,978
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
- 46 -
<PAGE> 54
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS HISTORICAL SUBTOTAL
--------------------- PRO FORMA AMOUNTS PRO FORMA BEFORE
CHECKFREE SERVANTIS ADJUSTMENTS SECURITY APL ADJUSTMENTS ISC
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES, NET $49,330 $66,675 $(20,701)(5) $15,670 $ -- $110,974
-------------------------------------------------------------------------------
OPERATING EXPENSES:
COST OF PROCESSING, SERVICING, AND SUPPORT $30,293 $24,610 $ -- $ 7,041 $ -- $ 61,944
RESEARCH AND DEVELOPMENT $ 6,892 $13,483 $ -- $ 1,756 $ -- $ 22,131
SALES AND MARKETING $ 7,261 $ 6,879 $ -- $ 1,553 $ -- $ 15,693
GENERAL AND ADMINISTRATIVE $ 4,064 $11,537 $ -- $ 1,967 $ -- $ 17,568
DEPRECIATION AND AMORTIZATION $ 2,485 $11,097 $ 3,223(2) $ 1,454 $2,574(7) $ 20,833
-------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $50,995 $67,606 $ 3,223 $13,771 $2,574 $138,169
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS $(1,665) $ (931) $(23,924) $ 1,899 $(2,574) $(27,195)
-------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
INVESTMENT INCOME $ 2,135 $ 471 $ -- $ 201 $ -- $ 2,807
INTEREST EXPENSE $ (645) $(3,490) $ 3,490(3) $ -- $ -- $ (645)
-------------------------------------------------------------------------------
$ 1,490 $(3,019) $ 3,490 $ 201 $ -- $ 2,162
-------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (175) $(3,950) $(20,434) $ 2,100 $(2,574) $(25,033)
INCOME TAX EXPENSE (BENEFIT) $ 40 $(1,236) $ (7,720)(4) $ 96 $ 120(8) $ (8,700)
-------------------------------------------------------------------------------
NET INCOME (LOSS) $ (215) $(2,714) $(12,714) $ 2,004 $(2,694) $(16,333)
PREFERRED STOCK DIVIDENDS $ -- $ (797) $ 797(3) $ -- $ -- $ --
-------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHARES $ (215) $(3,511) $(11,917) $ 2,004 $(2,694) $(16,333)
===============================================================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.01)
=======
WEIGHTED AVERAGE SHARES OUTSTANDING 28,219 5,672(1) 2,822(6)
======= ======= =======
<CAPTION>
HISTORICAL
AMOUNTS PRO FORMA
ISC ADJUSTMENTS TOTAL
------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES, NET $ 6,209 $ -- $117,183
------------------------------------------
OPERATING EXPENSES:
COST OF PROCESSING, SERVICING, AND SUPPORT $ 4,940 $ -- $ 66,884
RESEARCH AND DEVELOPMENT $ 2,288 $ -- $ 24,419
SALES AND MARKETING $ 2,876 $ -- $ 18,569
GENERAL AND ADMINISTRATIVE $ 3,083 $ -- $ 20,651
DEPRECIATION AND AMORTIZATION $ 4,649 $ 11,052(12) $ 36,534
------------------------------------------
TOTAL OPERATING EXPENSES $ 17,836 $ 11,052 $167,057
------------------------------------------
INCOME (LOSS) FROM OPERATIONS $(11,627) $(11,052) $(49,874)
------------------------------------------
OTHER INCOME (EXPENSE):
INVESTMENT INCOME $ -- $ -- $ 2,807
INTEREST EXPENSE $ -- $ -- (645)
------------------------------------------
$ -- $ -- $ 2,162
------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $(11,627) $(11,052) $(47,712)
INCOME TAX EXPENSE (BENEFIT) $ (1,284) $ (6,444)(13) $(16,428)
------------------------------------------
NET INCOME (LOSS) $(10,343) $ (4,608) $(31,284)
PREFERRED STOCK DIVIDENDS $ -- $ -- $ --
------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHARES $(10,343) $ (4,608) $(31,284)
==========================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.63)
========
WEIGHTED AVERAGE SHARES OUTSTANDING 12,600(10) 49,313
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
-47-
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRE-ACQUISITION
SERVANTIS AND
HISTORICAL SECURITY APL AND SUBTOTAL HISTORICAL
AMOUNTS PRO FORMA BEFORE AMOUNTS PRO FORMA
CHECKFREE ADJUSTMENTS ISC ISC ADJUSTMENTS TOTAL
--------- ---------------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES, NET $ 51,040 $ 26,434 $ 77,474 $ 10,223 $ -- $ 87,697
--------- --------- -------- -------- ------- ---------
OPERATING EXPENSES:
COST OF PROCESSING, SERVICING,
AND SUPPORT 35,368 9,903 45,271 5,816 -- 51,087
RESEARCH AND DEVELOPMENT 9,825 1,577 11,402 1,333 -- 12,735
SALES AND MARKETING 17,337 3,174 20,511 2,068 -- 22,579
GENERAL AND ADMINISTRATIVE 7,321 3,455 10,776 2,659 -- 13,435
IN PROCESS RESEARCH AND
DEVELOPMENT 122,358 (122,358) -- -- -- --
DEPRECIATION AND AMORTIZATION 6,997 3,301 10,298 4,340 23(12) 14,661
--------- --------- -------- -------- ------- ---------
TOTAL OPERATING EXPENSES 199,206 (100,948) 98,258 16,216 23 114,497
--------- --------- -------- -------- ------- ---------
INCOME (LOSS) FROM OPERATIONS (148,166) 127,382 (20,784) (5,993) (23) (26,800)
--------- --------- -------- -------- ------- ---------
OTHER INCOME (EXPENSE):
INVESTMENT INCOME 1,659 125 1,784 -- -- 1,784
INTEREST EXPENSE (325) -- (325) -- -- (325)
--------- --------- -------- -------- ------- ---------
1,334 125 1,459 -- -- 1,459
--------- --------- -------- -------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (146,832) 127,507 (19,325) (5,993) (23) (25,341)
INCOME TAX EXPENSE (BENEFIT) (8,629) 5,105 (3,524) -- (1,734)(13) (5,258)
--------- --------- -------- -------- ------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $(138,203) $ 122,402 $(15,801) $ (5,993) $ 1,711 $ (20,083)
========= ========= ======== ======== ======= =========
INCOME (LOSS) PER COMMON SHARE $ (3.69) $ (0.37)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 37,420 3,610 12,600(10) 53,630
====== ===== ====== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
- 48 -
<PAGE> 56
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL INFORMATION
1. Adjustment to reflect the issuance of 5,671,726 shares of the Company's
common stock in exchange for all shares of Servantis' common and
preferred stock.
2. Adjustment to reflect additional depreciation and amortization expense
associated with the increase in fair value of the Servantis assets
acquired over their historical basis.
3. Adjustment to eliminate Servantis' interest expense to reflect the
pay-off of long-term debt, and elimination of Servantis' preferred
stock dividends.
4. Adjustment to reflect income tax effects of taxable, pre-tax pro forma
adjustments at the statutory rate.
5. Adjustment to reflect the impact in operating revenues for purchased
profits. The impact of purchased profits of $20 million is fully
amortized within the first twelve months after the Servantis
Acquisition.
6. Adjustment to reflect the issuance of 2,822,325 shares of the Company's
common stock in exchange for all shares of Security APL's common stock.
7. Adjustment to reflect additional amortization expense associated with
the increase in fair value of the Security APL assets over their
historical basis.
8. Adjustment to reflect income tax effects of taxable, pre-tax pro forma
adjustments at the statutory rate and the impact of federal taxes on
Security APL's historical amounts. Prior to the Security APL
Acquisition, Security APL was an S corporation.
9. Adjustments to reflect the change in net assets for the Merger based
upon preliminary estimates of fair market value as follows:
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Checkfree common stock $165,375
Net present value of cash to be paid plus estimated
acquisition costs 21,756
--------
Total purchase price $187,131
========
Allocation of purchase price:
In-process research and development 120,000
Other intangibles 44,601
Property and equipment 15,919
Deferred income taxes 3,428
Other, net 183
--------
184,131
Cash infusion from Intuit 3,000
--------
Total $187,131
========
</TABLE>
10. Adjustment to reflect the issuance of 12,600,000 shares of the
Company's common stock at $13.13 per share in exchange for all shares
of ISC's common stock, net of stock registration costs of $162,000 and
the
- 49 -
<PAGE> 57
elimination of ISC's stockholders' equity. The value per share reflects
an estimated 30% illiquidity discount for the stock issued pursuant to
the Merger.
11. Adjustment to reflect ISC's payable to parent, which will be forgiven
on the Merger date.
12. Adjustment to reflect additional amortization expense associated with
the increase in fair value of ISC assets acquired over their historical
basis. The connectivity and exclusivity intangible asset of $11 million
is fully amortized within the first twelve months of the Merger.
13. Adjustment to reflect income tax effects of taxable, pre-tax pro forma
adjustments at the statutory rate and the impact of income taxes on
ISC's historical amounts.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Note A: The unaudited pro forma condensed combining balance sheet of
the Company and ISC has been prepared as if the Merger was completed as of June
30, 1996 and was accounted for as a purchase. The total purchase price of $187.1
million was allocated to assets acquired and liabilities assumed based upon
ISC's July 31, 1996 balance sheet. Actual balance sheets of the Company and ISC
will be combined as of the effective date of the Merger.
The allocation of the ISC purchase price among the identifiable
tangible and intangible assets and purchased research and development is based
on preliminary estimates of the fair market value of those assets. Final
determination of the allocation of the purchase price will be based on
independent appraisals expected to be completed shortly after the Merger is
consummated. Accordingly, final amounts could differ from those used herein.
Purchased research and development was identified and valued through
interviews and analysis of data concerning each developmental project. Expected
future cash flows of each developmental project were discounted to present value
taking into account risks associated with the inherent difficulties and
uncertainties in completing the project, and thereby achieving technological
feasibility, and risks related to the viability of and potential changes in
future target markets. The above analysis and valuation resulted in a value of
$90.6 million for purchased research and development for Servantis, $28.8
million for Security APL, and a preliminary estimate of $120.0 million for ISC,
which have not yet reached technological feasibility and do not have alternative
future uses.
Note B: The Company's statement of operations for the year ended
December 31, 1995 has been combined with the Servantis and Security APL
statements of operations for the year ended December 31, 1995, along with the
ISC statement of operations for the twelve months ended January 31, 1996.
Additionally, the Company's statement of operations for the six month period
ended June 30, 1996 has been combined with the Servantis and Security APL
statements of operations prior to the Acquisitions, along with the ISC statement
of operations for the six months ended July 31, 1996. Actual income statements
of the Company, Servantis and Security APL were combined at the effective date
of the Acquisitions, and actual income statements of the Company and ISC will be
combined from the effective date of the Merger, with no retroactive restatement.
The unaudited pro forma condensed combining financial statements, including the
notes thereto, should be read in conjunction with the historical consolidated
financial statements of the Company and ISC, which are included elsewhere in
this Prospectus/Proxy Statement/Information Statement.
Note C: The unaudited pro forma condensed combining statements of
operations for the Company, Servantis, Security APL and ISC have been prepared
as if the Acquisitions and the Merger were completed as of January 1, 1995, the
beginning of the earliest period presented. The unaudited pro forma combined net
loss per share is based on the weighted average number of common shares of the
Company common stock outstanding during the periods, adjusted to give effect to
shares assumed to be issued had the Acquisitions and the Merger taken place as
of January 1, 1995.
Note D: The unaudited pro forma condensed combining statements of
operation do not include the value of the $90.6 million, $28.8 million and
$120.0 million (no income tax effect) of purchased research and development
arising from the Servantis Acquisition, the Security APL Acquisition and the
estimate of the Merger, respectively, as they are material, nonrecurring
charges. Likewise, an extraordinary loss of $365,000 (net of income tax benefit
of $205,000) arising from the extinguishment of certain Servantis debt as part
of the Servantis Acquisition has not been reflected in the unaudited pro forma
condensed combining statements of operations.
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CHECKFREE CORPORATION
GENERAL
The Company is a leading provider of electronic commerce services,
financial application software and related products for financial institutions
and businesses and their customers. The Company services over 700,000 consumers,
1,000 businesses and approximately 850 financial institutions (including the 500
largest banks in the United States). The Company has also signed agreements with
over 140 banks to provide electronic home banking services for the customers of
those banks. To maximize the efficiency and effectiveness of its product
development and distribution strategies, the Company has established several
strategic alliances with companies such as AT&T, ADP, Block Financial,
CyberCash, EDS, Fiserv, FiTech, MasterCard, Premier, Spyglass and Spry.
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience as a provider of electronic commerce and financial
application software and services to financial institutions substantially
enhances the Company's presence in the financial institutions market of the
electronic commerce segment. Security APL's experience as a vendor of portfolio
management and software services to institutional investment managers and
investment services to consumers enhances the Company's presence in the consumer
and financial institutions market of the electronic commerce industry. The
integration of Checkfree's electronic transaction processing and remote delivery
technology with Servantis' software products and market presence and Security
APL's portfolio management and software services has created a single vendor of
electronic commerce services and related products to an expanded customer base
of financial institutions and businesses and their customers.
Prior to the Servantis Acquisition, the Company operated its business
in one business segment, the electronic commerce segment. With the Servantis
Acquisition, the Company added financial application software as a second
business segment. The electronic commerce segment includes electronic home
banking, electronic bill payment, automatic accounts receivable collection,
electronic accounts payable processing, investment portfolio management services
and investment trading and reporting services. These services are primarily
directed to financial institutions and businesses and their customers. The
financial application software segment includes end-to-end software products for
ACH processing, account reconciliation, wire transfer, mortgage loan origination
and servicing, lease accounting and debt recovery. These products and services
are primarily directed to financial institutions and large corporations.
THE SERVANTIS ACQUISITION AND SERVANTIS
On February 21, 1996, Checkfree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of Checkfree
Common Stock valued at $20.00 per share and $42.5 million in cash to repay
Servantis' long-term debt, in addition to the assumption of $38.3 million of
liabilities. Founded in 1971, Servantis is a leading provider of electronic
commerce and financial application software and services for businesses and
financial institutions (including the 500 largest banks and over 350 mortgage
institutions in the United States). Servantis designs, markets, licenses and
supports software products for electronic corporate banking, home banking,
financial lending, regulatory compliance and document imaging. In addition,
Servantis offers software consulting and remote processing services. In
addition, Servantis offers software consulting and remote processing services.
The Company accounted for the Servantis Acquisition using the purchase method of
accounting.
THE SECURITY APL ACQUISITION AND SECURITY APL
On May 9, 1996, Checkfree acquired Security APL for approximately $53.3
million, consisting of the issuance of 2.8 million shares of Checkfree Common
Stock valued at $18.50 per share, and the assumption of $5.5 million of
liabilities. Security APL is a leading vendor of portfolio management and
software services for institutional investment managers. Security APL has been
developing and providing advanced investment analysis systems since it was
founded in 1978. Security APL believes that it is the only full-service provider
of fully-integrated portfolio management, performance measurement, trading and
reporting systems for the investment manager. Security APL's clients include
money management firms, bank trust departments, insurance companies and
brokerage houses. Security APL added an additional investment information
service by establishing its PAWWS division in August 1994. The PAWWS world-wide
web site offers individuals some of the same tools professional money managers
have to gather the information they need to make their investment decisions to
enter trades and to monitor the status of their investments. Some of the
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services available through PAWWS include portfolio accounting and allocation,
research information provided by various data suppliers, free stock quotes,
stock host lists and brokerage services. Currently, Security APL monitors more
than 300,000 portfolios for approximately 1,500 portfolio managers at over 150
firms. The Company accounted for the Security APL Acquisition using the purchase
method of accounting.
ACQUISITION
Acquisition was incorporated in Delaware in September 1996 and is a
wholly owned subsidiary of the Company formed for the purpose of facilitating
the Merger. Immediately after the consummation of the Merger and effective as of
the Effective Time, Acquisition will be merged with and into ISC, ISC will
survive the Merger and become a wholly owned subsidiary of the Company, and the
separate existence of Acquisition will cease.
The current sole director of Acquisition is Peter J. Kight. Mr. Kight
is also a director and executive officer of Checkfree. Upon consummation of the
Merger, the number of directors of ISC will remain at one.
The current executive officers of Acquisition are as follows:
Peter J. Kight............. President
Mark A. Johnson............ Executive Vice President
James S. Douglass.......... Vice President
John M. Stanton............ Treasurer and Assistant Secretary
Curtis A. Loveland......... Secretary
Robert J. Tannous.......... Assistant Secretary
OTHER INFORMATION
Checkfree Common Stock is actively traded in the over-the-counter
market under the Nasdaq symbol "CKFR." Since information regarding the Company
is readily available to investors, the Commission permits this document to be
abbreviated by incorporating information regarding the Company by reference to
certain reports and other documents filed with the Commission. See "INFORMATION
INCORPORATED BY REFERENCE." Other than as described herein, there have been no
material changes in the affairs of the Company since the filing of its
Transition Report on Form 10-K for the six months ended June 30, 1996, that have
not been described in a subsequent report filed with the Commission pursuant to
the Exchange Act.
INTUIT SERVICES CORPORATION
ISC was originally incorporated in Delaware on December 2, 1989 under
the name "National Payment Clearinghouse, Inc." ISC was acquired by Intuit in
July 1994 and later renamed Intuit Services Corporation. At the time of the
acquisition, ISC processed the online banking transactions of users of Microsoft
Money software for four banks who offered online banking to Microsoft Money
users. Following the acquisition, Intuit expanded ISC's business, constructed a
network hub (which is capable of routing multiple simultaneous connections to
different services available through ISC) and added security features designed
to protect transmitted data and to authenticate users before they are permitted
to access bank information.
Today, ISC is an operations facility for Intuit and the online products
of other companies. The operations conducted by ISC include data processing and
storage, maintenance and development of multiple online connections to other
entities (including companies other than Intuit), and telephone support for both
customer service and technical support. All online products serviced by ISC use
the same basic architecture for communicating with ISC, which is known as the
"hub." The hub performs the routing and support of all requests made by the
online product software (or the "client") and is also responsible for
maintaining security for all communications sessions. Each product requires data
storage and some processing and these functions are performed by servers
maintained by ISC. Once the hub determines the type of request from the client,
it routes the request to the appropriate server for the product in question, and
a communications session between the client and server is established.
ISC's principal business is to provide online electronic banking and
bill payment processing services (including Intuit's Online Banking and Online
Bill Payment services) to approximately 40 financial institutions (including six
of the ten largest domestic banks and American Express) and their customers, and
to a variety of merchants. ISC also
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supports BankNOW(TM), an Intuit home banking service that is available on
America Online, and Microsoft Money. ISC's online banking and online bill
payment business is described more fully below.
Online Banking. Online banking provides bank customers with the ability
to download account statement data from their bank, perform transfers of funds
from one account to another account at the same bank, and to send customer
service questions to their banks via electronic mail. ISC currently supports
online banking for over 40 institutions. On a daily basis, ISC receives the
customer statement information as of the previous day as well as any electronic
mail messages. All of this information is stored on ISC's computers so that when
the customer dials in to receive information, the hub only needs to access the
appropriate ISC server. ISC performs all customer service, bank and technical
support.
Online Bill Payment. Online bill payment allows a consumer to issue a
payment instruction for the payment of any bill. ISC processes the payment
request and determines and executes the appropriate means of remittance
delivery. The remittance methods currently available through ISC are: paper
check via United States mail, paper check via overnight messenger; and
electronically, through various connections maintained and established by ISC.
The printing of the paper checks is performed by an outside entity, which ISC
manages. ISC will also determine if a better address or method exists for making
the payment than what the customer originally instructed; for instance, if the
payee has a different address or accepts electronic payments. In addition to the
above services, online bill payment also permits customers to send electronic
mail messages and payment inquiries to billing entities. ISC is responsible for
following up with and resolving all such inquiries, and performs customer
service, billing and technical support for this service.
In addition to these services, ISC currently supports the following
Intuit services: Quicken Affinity Card download, American Express Card download,
Portfolio Price Update, Quicken Financial Network ("QFN"), Intuit Online
Marketplace, Intuit Online registration, and Investor Insight(TM). These
electronic financial services are all features accessible by the current
versions of Intuit's Quicken product, although QFN and Investor Insight can be
used without Quicken. Following the Merger, Intuit will retain all rights to
these online financial services, but in order to provide a smooth transition for
these businesses after the Company's purchase of ISC, pursuant to the License
Agreement, Sub would continue to provide the back-end processing for these
Intuit financial services under Intuit server protocols in exchange for fees
from Intuit. See "CERTAIN RELATED TRANSACTIONS."
ISC has approximately 190 employees and conducts its operations from
two facilities located in Downers' Grove and Aurora, Illinois.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
ISC was originally incorporated in Delaware on December 2, 1989 under
the name "National Payment Clearinghouse, Inc." ISC was acquired by Intuit in
July 1994 and later renamed Intuit Services Corporation. At the time of the
acquisition, ISC processed the online banking and online bill payment
transactions of users of Microsoft Money software for four banks who offered
online services to Microsoft Money users and operated a telephone-based bill
payment service. Following the acquisition, Intuit expanded ISC's business,
constructed ISC's network hub (which is capable of routing multiple simultaneous
connections to different services available through ISC), and added security
features designed to protect transmitted data and to authenticate users before
granting them access to bank information.
Today, ISC is an operations facility for Intuit and the online products
of other companies. ISC's principal business is to provide online electronic
banking and bill payment processing services (including Intuit's online banking
and online bill payment services in Quicken) to approximately 40 financial
institutions (including six of the ten largest domestic banks and American
Express), their customers, and a variety of merchants. ISC also supports
BankNOW, an Intuit home banking and bill payment service available through
America Online, and banking, bill payment and stock quote services that are
accessible through Microsoft Money. ISC's current operations include data
processing and storage, maintenance and development of multiple online
connections to other entities (including companies other than Intuit), and
telephone and electronic mail support for both customer service and technical
support.
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<PAGE> 61
A substantial majority of ISC's net revenue to date has been derived
from online banking and online bill payment services through Quicken, which
accounted for approximately 72% of net revenue in the year ended July 31, 1996.
ISC expects that online banking and online bill payment revenues through Quicken
will continue to account for a substantial majority of its total revenues for
the foreseeable future.
The business of providing online banking and bill payment services is
relatively new and a decline in demand for, or failure to achieve broad market
acceptance of, electronic banking or bill payment services, whether as a result
of competition, technological change or otherwise, would have a material adverse
effect on ISC's business, operating results and financial condition. A decline
in net revenue from these services could also have a material adverse effect on
sales of other ISC services. ISC's future financial performance will depend in
part on the successful development, introduction and customer acceptance of its
other existing services and services that it may introduce in the future. There
can be no assurance that ISC will continue to be successful in marketing any of
its current or new services.
The market for ISC's services is highly competitive, and ISC may
experience increasing pricing pressures from its current competitors and new
market entrants. Any material reduction in the price of ISC's services would
materially adversely affect ISC's business, operating results and financial
condition. In particular, because the continued operation of ISC's transaction
processing facilities involves a relatively high level of fixed costs, ISC may
be unable to reduce its operating expenses in a timely manner in response to
price reductions and lower revenues, which would have a material adverse effect
on ISC's operating results.
ISC has experienced significant fluctuations in its operating results
and anticipates that these fluctuations will continue. Operating results may
fluctuate due to factors such as the demand for ISC's services, the timing of
introduction of new services and price reductions by ISC and its competitors,
ISC's ability to develop and market new services, the timing and amount of sales
and marketing expenditures, the existence of technological difficulties in
processing systems and general economic conditions. Accordingly, ISC believes
that period-to-period comparisons of its results of operations may not be
meaningful and should not be relied upon as any indication of ISC's future
performance.
Subsequent to Intuit's acquisition of ISC, Intuit began performing
certain services for ISC, including general management, accounting, cash
management and other administrative services. The amounts charged for these
services have been determined based on proportional cost allocations and have
been agreed to by the managements of ISC and Intuit. In the opinion of ISC's
management, the allocation methods used are reasonable. Such allocations,
however, are not necessarily indicative of the costs that would have been
incurred had ISC continued to operate independent of Intuit. No formal agreement
currently exists which specifies the nature of services to be provided by Intuit
to ISC, or the charges for such services. Therefore, these amounts are not
necessarily indicative of the future charges that may be incurred by ISC.
RESULTS OF OPERATIONS
ISC was acquired by Intuit on July 15, 1994. With the exception of the
charge for purchased research and development of $1.4 million, operating
activity during the period between July 15, 1994 and July 31, 1994, which is
included in the results of operations of National Payment Clearinghouse, Inc.
(the "Predecessor"), was not significant. The charge of $1.4 million has not
been reflected in the percentages below. The following table sets forth certain
selected financial information as a percentage of ISC's net revenue for the
periods indicated:
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<PAGE> 62
As a Percentage of Net Revenue
<TABLE>
<CAPTION>
Predecessor Year Ended
Entity July 31
----------- ---------
August 1, 1993 1995 1996
through ---- ----
July 14, 1994
<S> <C> <C> <C>
Net Revenue 100% 100% 100%
Cost of sales 38% 49% 54%
Amortization of purchased software - 48% 10%
----- ------ -----
Gross profit 62% 3% 35%
Costs and expenses
Customer service and technical support 15% 16% 35%
Selling and marketing 13% 46% 29%
Research and development 26% 52% 18%
General and administrative 14% 60% 34%
Amortization of goodwill and intangibles - 60% 13%
Total operating expenses 68% 234% 130%
----- ------ -----
Net loss before tax benefit (6)% (231)% (94)%
Tax benefit - 65% -
----- ------ -----
Net loss (6)% (166)% (94)%
===== ====== =====
</TABLE>
NET REVENUE
ISC's net revenues are comprised primarily of fees received from
financial institutions for providing online banking, bill payment processing and
other services. Service revenues are recognized in the month the services are
provided. Net revenue from development agreements is recognized upon achievement
of contractual milestones.
ISC's net revenue increased 120% from $1.5 million for the period from
August 1, 1993 to July 15, 1994 (the "Predecessor Period") to $3.2 million for
the fiscal year ended July 31, 1995 ("Fiscal 1995") and by 349% to $14.3 million
for the fiscal year ended July 31, 1996 ("Fiscal 1996"). The increase from the
Predecessor Period to Fiscal 1995 was due primarily to the introduction of
online banking and bill payment services with four financial institutions
through Microsoft Money. The increase from Fiscal 1995 to Fiscal 1996 was due
primarily to the introduction of online banking and bill payment services
through Quicken as well as the addition of approximately 35 financial
institutions to ISC's program. In Fiscal 1995 and Fiscal 1996, approximately 13%
and 72%, respectively, of net revenue was derived from Intuit products.
ISC derives nearly half its revenues from five participating financial
institutions, including Wells Fargo Bank (after taking into account its
acquisition of First Interstate Bank) which accounted for approximately 17% of
ISC's net revenue for Fiscal 1996. Two customers, Chemical Bank and Chase
Manhattan Bank, have announced their intention to merge. Had this merger been
effective during Fiscal 1996, the combined entity would have accounted for
approximately 20% of ISC's net revenue in Fiscal 1996. ISC performs credit
evaluations of its customers and to date has not experienced any significant
losses. However, the insolvency of a financial institution customer could
materially adversely affect the Company's revenue streams for a period of time.
To date, ISC has not recognized any revenue from international sales or
operations.
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<PAGE> 63
COST OF SALES AND GROSS PROFIT
Cost of sales includes telecommunications expense, payment remittance
costs (both for payments made electronically and by paper draft), personnel
expenses, depreciation of processing equipment and amortization of purchased
technology. Cost of sales, including amortization of purchased software,
increased 460% from $0.6 million for the Predecessor Period to $3.1 million for
Fiscal 1995 and increased 200% to $9.3 million for Fiscal 1996. The increase in
Fiscal 1995 was due to the commencement of online banking and bill payment
through Microsoft Money, investment in additional processing capacity to connect
more financial institutions and handle a higher volume of transactions and the
amortization of purchased technology as a result of the acquisition by Intuit.
The increase in Fiscal 1996 was primarily due to significantly higher online
banking and bill payment transaction volumes and continued investment in
processing capacity. Excluding acquisition-related amortization costs, cost of
sales would have increased 167% from $0.6 million for the Predecessor Period to
$1.6 million for Fiscal 1995 and increased 388% to $7.8 million for Fiscal 1996.
As a result of the above factors, and as a result of an approximately
$1.5 million expense in both Fiscal 1995 and Fiscal 1996 representing
amortization of purchased technology incurred in connection with the acquisition
of the Predecessor by Intuit (the "Purchase"), gross profit decreased from $0.9
million, or 62% of net revenue for the Predecessor Period, to $0.1 million or 3%
of net revenue, for Fiscal 1995. Gross profit increased to $5.1 million, or 35%
of net revenue, for Fiscal 1996. In the future, gross profit may be adversely
affected by several factors including price reductions, competition, increases
in cost of sales (including higher telecommunication and/or postage rates) and
other factors.
COSTS AND EXPENSES
Customer Service and Technical Support. Customer service and technical
support expenses consist of personnel, equipment and communication costs
required to respond to financial institution and end user customer questions via
telephone and electronic mail. Customer service and technical support expenses
increased from $0.2 million, or 15% of net revenue, in the Predecessor Period,
to $0.5 million, or 16% of net revenue, for Fiscal 1995 and by approximately
913% to $5.0 million, or 35% of net revenue for Fiscal 1996. The increase in
Fiscal 1995 was due primarily to a larger customer base brought about by the
addition of new services. The substantial increase in Fiscal 1996 was due
primarily to significant growth in the number of financial institutions and end
user customers supported as a result of the introduction of online banking and
bill payment services through Microsoft Money and Quicken.
Selling and Marketing. Selling and marketing expenses consist primarily
of salaries, commissions, consulting, advertising and customer meeting expenses
and general costs. Selling and marketing expenses increased by approximately
708% from $0.2 million for the Predecessor Period to $1.5 million for Fiscal
1995 and by 183% to $4.2 million for Fiscal 1996. The increase from 1994 to 1995
was due primarily to efforts to enlist financial institution participation in
the online banking and bill payment services, while the increase from Fiscal
1995 to Fiscal 1996 was due primarily to the establishment of a product
management infrastructure, a dedicated sales force and advertising programs to
stimulate demand for the Company's services.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel-related expenses, consulting,
supplies, and depreciation for development equipment and general costs. Research
and development expenses increased 331% from $0.4 million for the Predecessor
Period to $1.6 million for Fiscal 1995 and 60% to $2.6 million for Fiscal 1996.
These increases were due primarily to higher staffing necessary to build and
maintain the online banking and bill payment processing architecture.
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
86"), requires capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on ISC's product
development process, technological feasibility is established when a product is
available for general release to customers. As such, capitalized costs have been
immaterial to date.
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General and Administrative. General and administrative expenses consist
primarily of salaries and bonuses for administrative and executive personnel,
expense for doubtful accounts, fees for professional and legal services, Intuit
corporate overhead allocations and allocated facilities costs. General and
administrative expenses increased 869% from $0.2 million for the Predecessor
Period to $1.9 million (of which $1.4 million represented ISC's allocable share
of Intuit corporate allocations for Fiscal 1995), and by 153% to $4.9 million
(of which $2.6 million represented ISC's allocable share of Intuit corporate
allocations for Fiscal 1996). The increase in Fiscal 1995 was due primarily to
the inclusion of Intuit corporate allocations and the increase in Fiscal 1996
was due to an additional facility resulting from rapid growth in ISC staffing
levels.
NET LOSS BEFORE TAX BENEFIT
As a result of the above factors and as a result of an approximately
$1.9 million expense representing amortization of goodwill and intangibles
incurred in connection with the Purchase, net loss before tax benefit increased
from $0.1 million, or (6%) of revenues for the Predecessor Period to $7.4
million, or (231%) of revenues for Fiscal 1995. The net loss before tax benefit
for the Predecessor Period and Fiscal 1995 does not include a charge of
approximately $1.4 million representing purchased research and development,
which charge was incurred during the period from July 15, 1994 to July 31, 1994.
Had such amount been included in the Predecessor Period, net loss for the
Predecessor Period would have instead increased to $1.5 million. Net loss
increased to $13.5 million, or (94%) of revenues for Fiscal 1996 as a result of
the above factors, and as a result of an approximately $1.8 million expense
representing amortization of goodwill and intangibles incurred in connection
with the Purchase.
ISC expects to incur expenses representing amortization of a customer
list and goodwill incurred in connection with the Purchase of approximately
$840,000 over the next two fiscal quarters. ISC also expects to incur expenses
representing amortization of payments under contracts not to compete and
anticipates it will amortize the remaining goodwill and intangibles balance of
$474,000 over the following twelve fiscal quarters. ISC expects to continue to
incur significant operating losses in the near future.
TAXES
The tax benefit in the financial statements for Fiscal 1995 presents
ISC on a stand-alone basis. The losses of ISC have been benefited by Intuit on a
consolidated basis. Had ISC benefited these losses, ISC would have had deferred
tax assets of approximately $0.4 million and $5.0 million as of July 31, 1995
and 1996. These deferred tax assets would have been fully offset by a valuation
allowance in both years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its acquisition, ISC financed its operations and met its
capital expenditure requirements primarily from internally generated funds.
Since its acquisition by Intuit in July 1994, ISC has funded its business with
capital contributions from Intuit and cash generated from operations. At July
31, 1996, ISC had $0.6 million in cash and cash equivalents. Since its
acquisition by Intuit, ISC has been heavily dependent upon Intuit for cash funds
necessary to offset ISC's operating losses. Absent such continued funding, ISC
would in the near future need to secure other significant sources of financing,
in addition to cash generated from operations, to continue to fund its
operations at their present level and fund anticipated cash needs for working
capital, capital expenditures and business expansion for the foreseeable future.
Operating activities used net cash of $3.5 million and $5.8 million for
Fiscal 1995 and Fiscal 1996, respectively. Investing activities used net cash of
$2.0 million and $18.1 million for Fiscal 1995 and Fiscal 1996, respectively, in
order to purchase the equipment and systems necessary to support a rapidly
expanding base of online banking and bill payment customers. Financing
activities generated cash of $5.6 million and $24.4 million for Fiscal 1995 and
Fiscal 1996, respectively, from increased funding of operations by Intuit.
ISC's principal commitments as of July 31, 1996 consist of obligations
under leases for its facilities in Downers Grove and Aurora, Illinois.
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<PAGE> 65
Without taking into account the Company's proposed acquisition of ISC,
ISC expected capital expenditures for Fiscal 1997 to be at approximately $6.5
million, substantially all of which will be for the purchase of computer
equipment and software to scale with anticipated growth of ISC's business.
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS OF THE COMPANY AND ISC
Each of the Company and ISC is incorporated in the State of Delaware.
The rights of ISC's sole stockholder are currently governed and defined by the
Delaware GCL and by the ISC Certificate of Incorporation, as amended (the "ISC
Certificate"), and the ISC By-Laws, as amended (the "ISC By-Laws"). Upon
consummation of the Merger, the sole stockholder of ISC will become a
stockholder of the Company and its rights will cease to be governed and defined
by the ISC Certificate and the ISC By-Laws and will be defined and governed by
the Company's Certificate of Incorporation, as amended (the "Checkfree
Certificate"), and the Company's By-Laws, as amended (the "Checkfree ByLaws").
Certain provisions of the Checkfree Certificate and the Checkfree By-Laws
provide different rights to stockholders from those that the ISC sole
stockholder currently has. Certain of these provisions are summarized below.
This summary is not intended to be complete and is qualified in its entirety by
reference to applicable provisions of the Delaware GCL and to the respective
corporate documents of the Company and ISC. For information as to how such
corporate documents may be obtained, see "AVAILABLE INFORMATION."
CAPITAL STOCK
The Delaware GCL requires a corporation's certificate of incorporation
to set forth the total number of shares of all classes of stock that the
corporation has authority to issue, and, for each class, the designations,
powers, preferences, rights, qualifications, limitations and restrictions
thereof.
The Checkfree Certificate currently authorizes 150,000,000 shares of
Checkfree Common Stock of which 41,517,264 shares were issued and outstanding on
June 30, 1996; and 15,000,000 shares of Checkfree Preferred Stock of which no
shares were issued and outstanding on June 30, 1996.
The ISC Certificate currently authorizes 1,000,000 shares of ISC Common
Stock of which 100 shares were issued and outstanding on July 31, 1996. ISC has
no shares of preferred stock authorized.
The provisions of the Checkfree Certificate setting the terms of the
Checkfree Common Stock are generally the same as the comparable provisions for
the ISC Certificate. Holders of Checkfree Common Stock and ISC Common Stock,
respectively, are entitled to one vote per share on all matters submitted to a
vote of stockholders, have no preemptive rights and no conversion rights, are
not subject to redemption and have no sinking fund. The Checkfree Certificated
does not provide for cumulative voting rights. Although the ISC Bylaws provide
for cumulative voting rights for the election of directors, the ISC Certificate
does not, and accordingly, under the Delaware GCL ISC stockholders are not
entitled to cumulative voting rights.
The rights, preferences and privileges of holders of Checkfree Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Checkfree Preferred Stock that the Company
may designate and issue in the future. In addition, the right of holders of
Checkfree Common Stock to receive ratably any dividends that may be declared by
the Checkfree Board of Directors is subject to preferential dividend rights of
any Checkfree Preferred Stock then outstanding. Additionally, the Company may
enter into bank credit agreements in the future which include financial
covenants restricting the payment of dividends. See "SUMMARY -- Market Price
Data; Dividend Policy."
Although no shares of Checkfree Preferred Stock are outstanding, the
Checkfree Board of Directors has the authority, without any further vote or
action by the stockholders, to issue Checkfree Preferred Stock in one or more
classes or series and to fix the number of shares, designations, powers,
preferences, rights, qualifications, limitations and restrictions thereof. The
ability of the Checkfree Board to so issue Checkfree Preferred Stock, while
providing 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 acquiring) a
majority of the outstanding voting stock of the corporation. The Company
currently has no plans to issue any Checkfree Preferred Stock.
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<PAGE> 66
VOTING POWER
Holders of Checkfree Common Stock and ISC Common Stock, respectively,
are generally entitled to one vote per share.
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
The Delaware GCL generally allows dividends to be paid out of surplus
of the corporation or out of the net profits of the corporation for the current
and/or prior fiscal year. However, no dividends may be paid if they would result
in the capital of the corporation being less than the capital represented by the
preferred stock of the corporation. Holders of both ISC Common Stock and
Checkfree Common Stock are entitled to receive dividends in such amounts and at
such times as declared by their respective Boards of Directors. Since Intuit's
acquisition of ISC in 1994, ISC has never paid cash dividends on ISC Common
Stock. The Company has paid no cash dividends since 1986. The Company presently
anticipates that all of its future earnings will be retained for the development
of its business and does not anticipate paying cash dividends on Checkfree
Common Stock in the foreseeable future. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will be based on
the Company's future earnings, financial condition, capital requirements and
other relevant factors. See "SUMMARY -- Market Price Data; Dividend Policy."
MEETINGS OF STOCKHOLDERS
The ISC By-Laws allow a special meeting to be called for any purpose
and at any time by the Chairman of the Board or the Chief Executive Officer of
ISC and require that the Chief Executive Officer of ISC call a special meeting
of stockholders upon the written request ISC's Board of Directors or the
stockholders of ISC holding a majority of the outstanding shares entitled to
vote. Except as otherwise provided by law or other provisions of the ISC
corporate documents, a quorum for any meeting of ISC's stockholders is a
majority of the votes entitled to be cast at the meeting. The Checkfree By-Laws
provide that special meetings of stockholders may be called by the President and
shall be called by the President or Secretary at the request in writing of
two-thirds of the Board of Directors of the Company. Except as otherwise
provided by law or by the Checkfree Certificate, a quorum for any meeting of the
Company stockholders is a majority of the capital stock issued and outstanding
and entitled to vote at the meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS
The ISC By-Laws do not contain procedures that must be followed for a
stockholder to either nominate individuals to the ISC Board or submit a proposal
at the ISC annual meeting of stockholders. The Checkfree By-Laws provide that
stockholders seeking to bring business before a meeting of stockholders, or to
nominate candidates for election as directors at a meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of the Company, not less than 70 days nor more than 90 days prior to the
scheduled meeting (or, if a special meeting, not later than the close of
business on the seventh day following the earlier of (i) the day on which such
notice of the date of the meeting was mailed, or (ii) the day on which public
disclosure of the date of the special meeting was made). The Checkfree By-Laws
also specify certain requirements pertaining to the form and substance of a
stockholder's notice. These provisions may preclude some stockholders from
making nominations for directors at an annual or special meeting or from
bringing other matters before the stockholders at a meeting.
Although the Company's corporate documents do not give the Company's
Board of Directors any power to approve or disapprove stockholder nominations
for the election of directors or proposals for action, the foregoing provisions
may have the effect of precluding a contest for the election of directors or the
consideration of stockholder proposals if the proper procedures are not
followed, and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the Company and its stockholders. On
the other hand, by requiring advance notice of nominations by stockholders,
these stockholder notice procedures afford the Company's Board of Directors an
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Company's Board of Directors, to
inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the stockholder notice procedures provide a
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<PAGE> 67
more orderly procedure for conducting annual meetings of stockholders and, to
the extent deemed necessary or desirable by the Company's Board of Directors,
provide the Board with an opportunity to inform stockholders, prior to such
meeting, of any business proposed to be conducted at the meeting, together with
any recommendations by the Company's Board of Directors or statements as to the
Company's Board of Director's position regarding action to be taken with respect
to such business, so that stockholders can better decide whether to attend the
meeting or to grant a proxy regarding the disposition of any such business.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Delaware GCL provides that an amendment to a corporation's
certificate of incorporation requires the recommendation of the corporation's
board of directors, the approval of a majority of all shares entitled to vote
thereon (unless a higher vote is required in the corporation's certificate of
incorporation), voting together as a single class, and the approval of a
majority of the outstanding stock of each class entitled to vote thereon. In
certain circumstances, the Checkfree Certificate requires a vote higher than the
statutory minimum.
The ISC By-Laws may be altered, amended or repealed (i) by the ISC
Board at any regular or special meeting of the ISC Board, or (ii) by the ISC
stockholders.
The Checkfree Certificate and the Checkfree By-Laws provide that
certain provisions in the Checkfree Certificate and the Checkfree By-Laws may
not be altered, amended or repealed in any respect, and new provisions
inconsistent therewith may not be adopted unless such action is approved by the
affirmative vote of the holders of at least 80% of all of the outstanding shares
of capital stock of the Company entitled to vote on such matter at a meeting of
stockholders called for that purpose, except that if the Company's Board of
Directors, by an affirmative vote of at least 66 2/3% of the entire Board of
Directors of the Company, recommends approval of such amendment to the Checkfree
Certificate or the Checkfree By-Laws to the stockholders, such approval may be
effected by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company present in person or
represented by proxy and entitled to vote on such matter at a meeting of
stockholders called for that purpose.
APPRAISAL RIGHTS
Section 262 of the Delaware GCL provides for appraisal rights in
certain circumstances to the stockholders of a corporation that is a party to a
merger. No appraisal rights will be available in the Merger if the Merger is
approved by the sole stockholder of ISC and the stockholders of the Company.
ACTION BY WRITTEN CONSENT
The Delaware GCL provides that, unless otherwise provided in the
certificate of incorporation, any action that is required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
ISC's By-Laws provide that its stockholders may take action without a
meeting, without prior notice and without a vote, upon the written consent of:
(a) stockholders having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, if at least five day's prior
written notice of the proposed action is given to each stockholder entitled to
vote thereon; or (b) all of the stockholders entitled to vote thereon, if such
prior written notice is not given. The Checkfree Certificate, on the other hand,
limits the availability of such action by written consent of the stockholders to
those actions signed by all of the holders of outstanding stock who would be
entitled to notice of such meeting.
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<PAGE> 68
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; FILLING
VACANCIES
Pursuant to the ISC By-Laws, the ISC Board shall be elected at the
annual meeting of stockholders and each director shall hold office until the
next annual meeting or until his or her successor is elected and qualifies, or
until he or she sooner dies, resigns, or is removed. The number of authorized
ISC directors is five. The ISC By-Laws provide that directors of ISC may be
removed, with or without cause, at any time, by action of a majority of the
issued and outstanding stock of ISC entitled to vote (i) present in person or
represented by proxy at a stockholders meeting provided that the notice for the
meeting names the director or directors proposed to be removed at such meeting,
or (ii) by consent in writing. Any vacancies in the ISC Board for any reason may
be filled by action of a majority of the stockholders entitled to vote at a
meeting or by written consent or, under certain circumstances, by ISC's Board of
Directors. The directors chosen to fill a vacancy shall hold office until the
next meeting of stockholders at which the election of directors is in the
regular order of business, and until a successor has been elected and qualifies
or until such director dies, resigns, or is removed.
The Checkfree Certificate provides for the Checkfree Board of Directors
to be divided into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of the Company's Board of Directors
will be elected each year. Classification of the Company's Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a proxy contest or other takeover bid for the
Company. Moreover, under the Delaware GCL, in the case of a corporation having a
classified board of directors, the stockholders may remove a director only for
cause. In addition, the Checkfree Certificate provides that any director or the
entire Board of Directors of the Company may be removed from office at any time,
but only for cause and only by the affirmative vote of the holders of at least
80% of all of the outstanding shares of capital stock of the Company entitled to
vote on the election of directors at a meeting of stockholders called for that
purpose, except that if the Board of Directors of the Company, by an affirmative
vote of at least 66 2/3% of the entire Board of Directors, recommends removal of
a director to the stockholders, such removal may be effected by the affirmative
vote of the holders of at least a majority of the outstanding shares of capital
stock of the Company present in person or represented by proxy and entitled to
vote on the election of directors at a meeting of stockholders called for that
purpose. These provisions, when coupled with provisions of the Checkfree
Certificate authorizing only the Board of Directors of the Company to fill
vacant directorships, will preclude stockholders of Checkfree from removing
incumbent directors without cause, and simultaneously gaining control of the
Company's Board of Directors by filling the vacancies with their own nominees.
Under the Checkfree Certificate, holders of Checkfree Common Stock are
not entitled to cumulative voting in the election of directors. Although the ISC
Bylaws provide for cumulative voting in the election of directors, the ISC
Certificate does not, and accordingly, under the Delaware GCL ISC Stockholders
are not entitled to cumulative voting rights. Accordingly, with respect to both
corporations, holders of a majority of the shares of common stock entitled to
vote in any election of directors of such corporation may elect all of the
directors standing for election. Classification of the Company's directors has
the effect of making it more difficult for stockholders to change the
composition of the Company's Board of Directors. At least two annual meetings of
stockholders, instead of one, generally will be required to effect a change in
the majority of a classified board. Such a delay may help ensure that incumbent
directors, if confronted by a holder attempting to force a proxy contest, a
tender or exchange offer, or any other extraordinary corporate transaction,
would have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interests of the stockholders. See "RISK FACTORS -- Anti- Takeover Provisions;
Certain Provisions of Delaware Law; Certificate of Incorporation and By-Laws."
The term "cause" is not defined in either the ISC or Checkfree
Certificate or the Delaware GCL. Consequently, any question concerning the legal
standard for "cause" would have to be judicially determined and such a
determination could be difficult, expensive and time consuming.
LIMITATIONS ON DIRECTOR LIABILITY
Section 102 of the Delaware GCL allows a Delaware corporation to limit
or eliminate the personal liability of directors to the corporation and its
stockholders for monetary damages for breach of fiduciary duty as a director.
However, this provision excludes any limitation on liability (a) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (b)
for acts or omissions not in good faith or which involved intentional misconduct
or
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<PAGE> 69
a knowing violation of law, (c) for intentional or negligent payment of unlawful
dividends or stock purchases or redemptions or (d) for any transaction from
which the director derived an improper personal benefit. Moreover, while this
provision provides directors with protection from awards for monetary damages
for breaches of their duty of care, it does not eliminate such duty.
Accordingly, this provision will have no effect on the availability of equitable
remedies such as an injunction or rescission based on a director's breach of his
or her duty of care. Finally, this provision applies to an officer of a
corporation only if he or she is a director of such corporation and is acting in
his or her capacity as director, and does not apply to officers of the
corporation who are not directors. The Checkfree Certificate provides for the
limitation of liability permitted by Section 102, but the ISC Certificate does
not.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware GCL permits a Delaware corporation to
indemnify any officer or director who is a party (or is threatened to be made a
party) to any threatened, pending or completed action, suit or proceeding by
reason of the fact that he or she is or was a director, officer, or employee of
the corporation. Such indemnification must be approved by a majority vote of the
directors who were not parties to the action, suit, or proceeding, whether or
not a quorum, and may be provided only if and to the extent the officer or
director to be indemnified acted in good faith and in a manner he or she
reasonably believed to be in (or not opposed to) the best interests of the
corporation. The Checkfree By-Laws provide generally for the indemnification of
officers and directors permitted by Section 145, however the ISC By-Laws contain
no such provision.
INTERESTED STOCKHOLDER TRANSACTIONS
Section 203 of the Delaware GCL prohibits certain transactions between
a Delaware corporation and an "interested stockholder" unless the corporation
has opted to exclude itself from the coverage of Section 203 by amending its
certificate of incorporation or by-laws or by action of its stockholders to
exempt itself from such coverage. ISC has not made such an election. Section 203
does not apply to ISC, however, because ISC Common Stock is not listed on a
national securities exchange, authorized for quotation on an inter-dealer system
of a registered national securities association or held of record by more than
2,000 stockholders. Although Section 203 permits a corporation to elect not to
be governed by its provisions, the Company to date has not made this election.
PREEMPTIVE RIGHTS
Neither the Company nor ISC stockholders have preemptive rights to
purchase or subscribe for additional securities of the Company upon any future
issuance by such corporation of such securities.
REPURCHASE AND REDEMPTION OF STOCK
Delaware corporations may generally purchase or redeem their own shares
of capital stock. Both the ISC Certificate and the Checkfree Certificate are
silent on the issue of redemption.
AMENDMENT TO THE COMPANY'S
1995 STOCK OPTION PLAN
The proposed amendment to the 1995 Stock Option Plan would increase the
number of shares of Checkfree Common Stock subject to the plan from 2,630,700
shares to 5,000,000 shares. Approval of this amendment requires the affirmative
vote of the holders of a majority of the shares of Checkfree Common Stock
represented at the Checkfree Special Meeting. THE BOARD OF DIRECTORS OF
THE COMPANY RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE 1995 STOCK
OPTION PLAN.
1995 STOCK OPTION PLAN
The Company's Board of Directors believes that providing selected
persons with an opportunity to invest in the Company will give them additional
incentive to increase their efforts on behalf of the Company and will enable the
Company to attract and retain the best available associates, officers,
directors, consultants and advisers. The description in this Prospectus/Proxy
Statement/Information Statement of the 1995 Stock Option Plan is included solely
as a
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<PAGE> 70
summary, does not purport to be complete and is qualified in its entirety by the
Amended and Restated 1995 Stock Option Plan attached hereto as Appendix C. The
Company's Board of Directors has approved an amendment to the 1995 Stock Option
Plan to increase the number of shares of Checkfree Common Stock reserved for
issuance upon the exercise of options granted under the 1995 Stock Option Plan
from 2,630,700 shares to 5,000,000 shares. The Company's Board of Directors has
approved the increase of the shares of Checkfree Common Stock subject to the
1995 Stock Option Plan in view of the recent increases in the number of
employees of the Company after the Acquisitions and the anticipated increases as
a result of the Merger.
The 1995 Stock Option Plan was adopted by Checkfree's Board of
Directors on August 8, 1995 and approved by the stockholders as of August 8,
1995. The amendment increasing the number of shares of Checkfree Common Stock
issuable under the 1995 Stock Option Plan was adopted by Checkfree's Board of
Directors on October 18, 1996. The 1995 Stock Option Plan provides for the grant
of options to key associates, officers, directors, consultants and advisers who
render services to the Company The options may be either Incentive Options or
Nonqualified Options.
The 1995 Stock Option Plan is administered by the Stock Option and
Compensation Committee of the Board of Directors, which is authorized, subject
to the provisions of the 1995 Stock Option Plan, to determine to whom and at
what time the stock options may be granted, the designation of the option as
either an Incentive Option or Nonqualified Option, the per share exercise price,
the duration of each option, the number of shares subject to each option, any
restrictions on such shares, the rate and manner of exercise and the timing and
form of payment.
An Incentive Option may not have an exercise price less than fair
market value of the Common Stock on the date of grant or an exercise period that
exceeds ten years from the date of grant and is subject to certain other
limitations which allow the optionholder to qualify for favorable tax treatment.
None of these restrictions applies to the grant of Nonqualified Options, which
may have an exercise price less than the fair market value of the underlying
Common Stock on the date of grant and may be exercisable for an indeterminate
period of time. The Stock Option and Compensation Committee also has discretion
under the 1995 Stock Option Plan to make cash grants to optionholders that are
intended to offset a portion of the taxes payable upon exercise of Nonqualified
Options or on certain dispositions of shares acquired under Incentive Options.
The exercise price of the option may be paid in cash or, with the
consent of the Stock Option and Compensation Committee, (i) by delivery of
previously acquired shares of Common Stock valued at their fair market value on
the date they are tendered, (ii) by delivery of a full recourse promissory note
for the portion of the exercise price in excess of the par value of the shares
subject to the option, the terms and conditions of which will be determined by
the Stock Option and Compensation Committee, and in cash for the par value of
the shares, (iii) by any combination of the foregoing methods, or (iv) by
delivery of written instructions to forward the notice of exercise to a broker
or dealer and to deliver to a specified account a certificate for the shares
purchased upon exercise of the option and a copy of irrevocable instructions to
the broker or dealer to deliver the purchase price of the shares to the Company.
An option is not transferable except by will or by the laws of descent
and distribution and may be exercised, during the lifetime of the optionee, only
by the optionee or by the optionee's guardian or legal representative.
Any option granted under the 1995 Stock Option Plan will terminate
automatically (i) 30 days after the employee's termination of employment with
the Company (other than by reason of death or disability or for cause), and (ii)
one year after the employee's death or termination of employment by reason of
disability unless the option expires earlier by its terms. Options not
exercisable as of the date of a change in control of the Company will become
exercisable immediately as of such date. The 1995 Stock Option Plan terminates
on August 8, 2005, unless earlier terminated by the Board of Directors.
As of September 30, 1996, options to purchase an aggregate of 1,632,545
shares of Checkfree Common Stock (net of options canceled) had been granted
pursuant to the 1995 Stock Option Plan, options to purchase 323,550 shares had
been exercised, options to purchase 1,308,995 shares remained outstanding, and
only 998,155 shares remained available for future grant. As of September 30,
1996, the market value of all shares of Checkfree Common Stock subject to
outstanding options under the 1995 Stock Option Plan and all of the Company's
stock option plans were approximately $26,179,900 and $68,628,440, respectively
(based upon the closing sale price of the Checkfree Common Stock as reported on
the Nasdaq National Market on September 30, 1996 of $20.00 per share). During
the 1995 fiscal
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<PAGE> 71
year and the transition period ended June 30, 1996, options covering 40,423
shares and 902,651 shares, respectively, of Checkfree Common Stock were granted
to employees of the Company under the 1995 Stock Option Plan. Shares underlying
presently exercisable, but unexercised, options will constitute outstanding
shares of Checkfree Common Stock for purposes of calculating the Company's net
income per share. The market value of the 5,000,000 shares of Checkfree Common
Stock to be subject to the 1995 Stock Option Plan was approximately $100,000,000
as of September 30, 1996.
As of September 30, 1996, the following current directors and executive
officers named in the Company's Transition Report on Form 10-K for the year
ended June 30, 1996 had been granted options under the 1995 Stock Option Plan as
follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS AVERAGE EXERCISE
NAME GRANTED PRICE PER SHARE
- -------------------------- ----------------- ----------------
<S> <C> <C>
Peter J. Kight 1,000 $19.38
Mark A. Johnson 1,000 $19.38
James S. Douglass 100,000 $11.25
Kenneth J. Benvenuto 219,742 $11.58
John M. Stanton 13,000 $18.32
Lynn D. Busing 68,290 $14.67
Geoffrey D. Gill 8,816 $ 9.80
Claude A. Thomas 20,000 $23.63
William P. Boardman 15,000 $14.56
</TABLE>
Since adoption of the 1995 Stock Option Plan: (i) all current executive
officers, as a group, have been granted options under the 1995 Stock Option Plan
covering 431,848 shares of Checkfree Common Stock which represents approximately
26.5% of the total number of options granted pursuant to the 1995 Stock Option
Plan; (ii) all directors who are not executive officers, as a group, have been
granted options under the 1995 Stock Option Plan covering 15,000 shares of
Checkfree Common Stock which represents approximately 0.9% of the total number
of options granted pursuant to the 1995 Stock Option Plan; and (iii) all current
employees, excluding executive officers, as a group, have been granted options
under the 1995 Stock Option Plan covering 1,185,697 shares of Checkfree Common
Stock which represents approximately 72.6% of the total number of options
granted pursuant to the 1995 Stock Option Plan
FEDERAL INCOME TAX CONSEQUENCES
The 1995 Stock Option Plan permits the granting of Incentive Stock
Options as well as Non-Statutory Stock Options. Generally, no income is
recognized when either type of option is granted to the optionholder, but the
subsequent tax treatment differs widely.
Non-Statutory Stock Options. Upon the exercise of a Non-Statutory Stock
Option, the excess of the fair market value of the shares on the date of
exercise over the option price is compensation to the optionholder at the time
of the exercise. The tax basis for the shares purchased is their fair market
value on the date of exercise. Any gain or loss realized upon a later sale of
the shares for an amount in excess of or less than their tax basis will be taxed
as capital gain
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<PAGE> 72
or loss, respectively, with the character of the gain or loss (short-term or
long-term) depending upon how long the shares were held since exercise.
Incentive Stock Options. Generally, no regular taxable income is
recognized upon the exercise of an Incentive Stock Option. The tax basis of the
shares acquired will be the exercise price. In order to receive this favorable
treatment, shares acquired pursuant to the exercise of an Incentive Stock Option
may not be disposed of within two years after the date the option was granted,
nor within one year after the exercise date (the "Holding Periods"). If the
shares are sold before the end of the Holding Periods, the amount of that gain
which equals the lesser of the difference between the fair market value on the
exercise date and the option price or the difference between the sale price and
the option price is taxed as ordinary income and the balance, if any, as
short-term or long-term capital gain, depending upon how long the shares were
held. If the Holding Periods are met, all gain or loss realized upon a later
sale of the shares for an amount in excess of or less than their tax basis will
be taxed as a long-term capital gain or loss, respectively.
Alternative Minimum Tax. For purposes of determining the optionholder's
alternative minimum taxable income subject to the alternative minimum tax, the
exercise of an Incentive Stock Option by an optionholder will result in the
recognition of taxable income at the time of the exercise of the option in an
amount equal to the excess of the fair market value of the shares on the
exercise date over the option price. The alternative minimum tax is paid only to
the extent it exceeds an individual's regular tax. It is imposed at a rate of
26% on the first $175,000 of alternative minimum taxable income in excess of the
applicable exemption amount and at a rate of 28% for any alternative minimum
taxable income over that amount. The exemption amount is phased out for higher
income taxpayers.
Exercise with Previously-Owned Shares. All options granted under the
1995 Stock Option Plan may be exercised with payment either in cash or, if
authorized in its sole discretion by the Company's Board of Directors, in
previously-owned shares of Checkfree Common Stock at their then fair market
value, or in a combination of both. When previously-owned shares ("Old Shares")
are used to purchase shares ("New Shares") upon the exercise of an Incentive
Stock Option or a Non-Statutory Stock Option, no gain or loss is recognized by
the optionholder to the extent that the total value of the Old Shares
surrendered does not exceed the total value of all of the New Shares received.
If, as would almost always be the case, the value of the New Shares exceeds the
value of the Old Shares, the excess amount is not regular taxable income to the
optionholder, if the option exercised is an Incentive Stock Option and the
Holding Periods discussed above are met for the Old Shares at the time of
exercise. The New Shares would also be subject to the Holding Periods discussed
above. On the other hand, if the option exercised is a Non-Statutory Stock
Option, the excess amount is taxable as ordinary income.
Checkfree Deduction. No tax deduction is available to the Company in
connection with the exercise of an Incentive Stock Option if the Holding Periods
discussed above are met. The Company, however, is entitled to a tax deduction in
connection with the exercise of an Incentive Stock Option if the Holding Periods
discussed above are not met, in an amount equal to the ordinary income
recognized by the optionholder (conditioned upon proper reporting and tax
withholding and subject to possible deduction limitations). The Company is
entitled to a tax deduction in connection with a Non-Statutory Stock Option
equal to the compensation income recognized by the optionholder upon the grant
date or the exercise date (conditioned upon proper reporting and tax withholding
and subject to possible deduction limitations).
1993 Tax Act. The Budget Reconciliation Act of 1993 (the "1993 Act")
increased the difference between the maximum ordinary income tax rate and the
preferential tax rate on long-term capital gains. The 1993 Act has also limited
a corporation's ability to deduct certain nonqualifying compensation.
Section 162(m). Code Section 162 (m) of the Internal Revenue Code of
1986, as amended, no longer permits the Company to deduct non-performance-based
compensation in excess of $1,000,000 per year paid to certain covered officers.
The Company believes that compensation paid pursuant to the 1995 Stock Option
Plan should qualify as performance-based compensation and therefore, Code
Section 162(m) should not cause the Company to be denied a deduction for
compensation paid to certain covered officers pursuant to the 1995 Stock Option
Plan.
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ADOPTION OF THE COMPANY'S
ASSOCIATE STOCK PURCHASE PLAN
The Associate Stock Purchase Plan, if adopted, would authorize the sale
of up to 1,000,000 shares of Checkfree Common Stock to eligible employees.
Approval of the proposal to adopt the Stock Purchase Plan requires the
affirmative vote of the holders of a majority of the shares of Checkfree Common
Stock present in person or by proxy and entitled to vote at the Checkfree
Special Meeting. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR
APPROVAL OF THE ADOPTION OF THE STOCK PURCHASE PLAN.
THE ASSOCIATE STOCK PURCHASE PLAN
In October 1996, the Board of Directors of the Company adopted the
Associate Stock Purchase Plan. The description in this Prospectus/Proxy
Statement/Information Statement of the Associate Stock Purchase Plan is included
solely as a summary, does not purport to be complete and is qualified in its
entirety by the Associate Stock Purchase Plan attached hereto as Appendix D.
The Associate Stock Purchase Plan is an arrangement under which the
employees of the Company and its subsidiaries may purchase Checkfree Common
Stock at a discounted price through payroll deductions. The purpose of the
Associate Stock Purchase Plan is to provide incentives to employees of the
Company and its subsidiaries, to attract individuals with a high degree of
training, experience, expertise and ability, to provide an opportunity to such
individuals to acquire a proprietary interest in the success of the Company, to
increase their interest in the Company's welfare, to align their interests with
those of the Company stockholders and to encourage them to remain with the
Company.
The Associate Stock Purchase Plan will be administered by the Stock
Option and Compensation Committee (the "Committee") or any other committee
members of the Board of Directors appointed to administer the Associate Stock
Purchase Plan. The Committee may delegate its authority to an administrator.
Any individual who is an employee of the Company or any approved
subsidiary of the Company whose customary employment with the Company or any
approved subsidiary is at least twenty (20) hours per week and who has been
employed by the Company for a period of at least ninety (90) days is eligible to
participate in the Associate Stock Purchase Plan. The number of individuals who
are eligible employees of the Company as of September 30, 1996 is approximately
1,200.
Notwithstanding the eligibility provisions described above, no employee
of the Company or any approved subsidiary shall be granted an option to purchase
Checkfree Common Stock under the Associate Stock Purchase Plan (i) if,
immediately after the grant, such employee would own capital stock of the
Company and/or hold outstanding options to purchase such stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of shares of the Company or (ii) which permits his or her rights to purchase
stock under all employee stock purchase plans of the Company and its
subsidiaries to accrue at a rate which exceeds $25,000 worth of stock
(determined at the time such option is granted) for any calendar year in which
such option would be outstanding at any time.
Eligible employees are entitled to participate in one or both of the
offering periods ("Offering Periods") conducted under the Associate Stock
Purchase Plan during each calendar year. The Offering Periods commence January 1
and July 1 of each year and end on the following June 30 or December 31,
respectively, provided, however, that the Committee may change the duration of
the Offering Periods, but in no event shall an option granted under the
Associate Stock Purchase Plan be exercisable more than twenty-seven (27) months
from its date of grant. During each Offering Period, eligible employees may
direct and authorize the Company to make payroll deductions during the Offering
Period in an amount from one percent (1%) to fifteen percent (15%) of such
employee's compensation which he or she receives during the Offering Period. All
payroll deductions made for a participant are credited to his or her account
under the Associate Stock Purchase Plan. A participant may not make additional
payments into such account. The Company's Board of Directors may limit the
number of shares of Checkfree Common Stock that participants can acquire in any
Offering Period by giving notice to employees prior to commencement of such
Offering Period.
- 66 -
<PAGE> 74
On the first day of each Offering Period, each eligible employee
participating in such Offering Period is granted an option to purchase on the
last day of each Offering Period (at the applicable purchase price) up to a
number of shares of Checkfree Common Stock determined by dividing such
employee's payroll deductions accumulated during the Offering Period by the
applicable purchase price. The Company does not receive any consideration for
the grant of any options.
On the last day of each Offering Period, each participating employee
purchases shares at a purchase price per share in amount equal to eighty-five
percent (85%) of the fair market value of a share of Checkfree Common Stock on
the first trading day of each Offering Period or on the last trading day of each
Offering Period, whichever is lower.
A participant in the Associate Stock Purchase Plan may discontinue his
or her participation in the plan by notifying the Company. Unless allowed by the
Committee, a participant in the Associate Stock Purchase Plan may not increase
or decrease his or her participation in the plan during an Offering Period.
The maximum number of shares of Checkfree Common Stock which will be
issued pursuant to the Associate Stock Purchase Plan shall be 1,000,000 shares,
subject to appropriate adjustment if there is any increase, reduction, or change
or exchange or Checkfree Common Stock for a different number or kind of shares
or other securities of the Company by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, share dividend, share
split or reverse split, combination or exchange of shares, repurchase of
Checkfree Common Stock or change in corporate structure. The Committee shall
conclusively determine such appropriate adjustments, if any, to be made under
the Associate Stock Purchase Plan. The market value of the 1,000,000 shares of
Checkfree Common Stock to be subject to the Associate Stock Purchase Plan was
approximately $20,000,000 at September 30, 1996.
The Company's Board of Directors may at any time and for any reason, no
more than once every six months, amend, modify, suspend or terminate the
Associate Stock Purchase Plan provided no such termination can affect options
previously granted. The Associate Stock Purchase Plan, subject to the Company's
Board of Directors' right to terminate the Plan, will automatically terminate on
December 31, 2006.
FEDERAL INCOME TAX CONSEQUENCES
Options granted under the Associate Stock Purchase Plan are intended to
constitute qualified stock options in an "employee stock purchase plan" under
Section 423 of the Code. In general, no taxable income will be realized at the
time an option is granted pursuant to the Associate Stock Purchase Plan (i.e.,
the Enrollment Date) or at the time of purchase of shares of Checkfree Common
Stock pursuant to the Associate Stock Purchase Plan. Upon disposition of shares
(other than a transfer by a decedent to his or her estate) two years or more
after the date of the grant of the option and at least one year after acquiring
such shares, a participant will recognize as ordinary income (and not as gain
upon the sale or exchange of a capital asset) an amount equal to the lesser of:
(i) The excess of the fair market value of the shares on the date of
disposition over the amount paid for such shares, or
(ii) 15% of the fair market value of the shares at the time of grant of
the option.
In addition, a participant may incur a capital gain in an amount equal
to the difference between the sale price of the shares and the basis in the
shares (i.e., purchase price plus the amount, if any, taxed to the participant
as ordinary income described above).
Upon disposition of the shares (including any gifts of shares) within
two years after the date when a participant is granted an option or within one
year after the date a participant acquires such shares, the participant
generally will have ordinary income equal to the excess of the fair market value
of the shares on the date of purchase over the amount paid for the shares. In
addition, the participant may incur a capital gain or loss in an amount equal to
the difference between the amount realized upon the sale of the shares and basis
in the shares (i.e., purchase price plus the amount, if any, taxed to the
participant as ordinary income as described above).
- 67 -
<PAGE> 75
In the event that the sale of shares acquired upon the exercise of an
option could subject a participant to liability under Section 16(b) of the
Securities Exchange Act of 1934, the time for determining the amount of ordinary
income, for reporting such income, and for commencing the holding period for
capital gains purposes is postponed until the restrictions of Section 16(b) no
longer apply. The amount of ordinary income reportable and the amount of the
Company's corresponding deduction will be measured by the excess of the fair
market value per share on such later date over the exercise price paid for the
shares. However, by making an appropriate election under Section 83(b) of the
Code within 30 days of the exercise date of an option, a participant may treat
the acquired shares for income tax purposes as if they were not restricted under
said Section 16(b).
Upon a disposition of any shares of Checkfree Common Stock received
pursuant to the exercise of any option under the Associate Stock Purchase Plan
or any event resulting in taxable compensation to a participant, the Company
will have the right to require the participant to remit to the Company an amount
sufficient to satisfy all federal, state and local requirements as to income tax
withholding and employee contributions to employment taxes or, alternatively, in
the Committee's sole discretion, the Company may withhold all such amounts from
other cash compensation then being paid to the participant by the Company.
EXPERTS
The consolidated financial statements of the Company as of June 30,
1996 and December 31, 1995 and 1994, and for the six months ended June 30, 1996
and each of the three years in the period ended December 31, 1995 and the
related financial statement schedule incorporated in this Prospectus/Proxy
Statement/Information Statement from the Company's Transition Report on Form
10-K for the six months ended June 30, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing. It is anticipated that representatives of Deloitte & Touche LLP will
be present at the Checkfree Special Meeting and will respond to appropriate
questions and to make a statement if such representatives so desire.
The financial statements of ISC at July 31, 1996 and for the year
ending July 31, 1996, included in this Prospectus/Proxy Statement/Information
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
LEGAL OPINION
The validity of the Checkfree Common Stock to be issued to the sole
stockholder of ISC pursuant to the Merger and certain other legal matters in
connection with the Merger will be passed upon for the Company by Porter,
Wright, Morris & Arthur, Columbus, Ohio. Partners of Porter, Wright, Morris &
Arthur who participated in the preparation of this Prospectus/Proxy
Statement/Registration Statement beneficially own an aggregate of 37,614 shares
of Checkfree Common Stock consisting of a combination of stock and options
exercisable within 60 days after the date of this Prospectus/Proxy
Statement/Information Statement. See "Certain Relationships and Related
Transactions" in the Company's Transition Report on Form 10-K.
- 68 -
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS OF ISC
Independent Auditors' Report...................................... F-2
Balance Sheets ................................................... F-3
Statements of Operations.......................................... F-4
Statements of Stockholders' Equity (Net Capital Deficiency) ...... F-5
Statements of Cash Flows ......................................... F-6
Notes to Financial Statements .................................... F-7
F- 1
<PAGE> 77
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Intuit Services Corporation
We have audited the accompanying balance sheet of Intuit Services Corporation (a
wholly owned subsidiary of Intuit Inc.) as of July 31, 1996, and the related
statements of operations, stockholder's equity (net capital deficiency), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intuit Services Corporation at
July 31, 1996, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
October 22, 1996
F-2
<PAGE> 78
Intuit Services Corporation
Balance Sheets
<TABLE>
<CAPTION>
JULY 31,
1995 1996
---------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 134,825 $ 600,523
Accounts receivable, net of allowance for doubtful accounts of $107,328 and
$548,904 in 1995 and 1996, respectively 389,158 2,837,798
Other current assets 59,395 136,321
---------------------------------------------
Total current assets 583,378 3,574,642
Property and equipment, net 1,885,038 15,918,603
Intangible assets, net 3,398,238 903,238
Goodwill, net 1,227,695 411,695
---------------------------------------------
Total assets $ 7,094,349 $ 20,808,178
=============================================
LIABILITIES AND STOCKHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 280,564 $ 2,484,620
Payable to parent 5,572,614 29,939,069
Accrued compensation 75,038 623,775
Other accrued liabilities 158,780 283,258
---------------------------------------------
Total current liabilities 6,086,996 33,330,722
Commitments
STOCKHOLDER'S EQUITY
(Net capital deficiency):
Common stock, $1.00 par value; 1,000,000 shares authorized; 100 shares issued
and outstanding 100 100
Additional paid-in capital 7,684,900 7,684,900
Accumulated deficit (6,677,647) (20,207,544)
---------------------------------------------
Total Stockholder's equity (net capital deficiency) 1,007,353 (12,522,544)
---------------------------------------------
$ 7,094,349 $ 20,808,178
=============================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 79
Intuit Services Corporation
Statements of Operations
<TABLE>
<CAPTION>
PREDECESSOR ENTITY
-----------------------
AUGUST 1, JULY 15,
1993 1994
THROUGH THROUGH YEAR ENDED JULY 31,
JULY 14, JULY 31, ------------------------------------
1994 1994 1995 1996
----------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue $1,450,170 $ - $ 3,194,442 $ 14,331,308
Cost of sales 551,881 - 1,556,639 7,795,287
Amortization of purchased software - - 1,529,000 1,471,000
----------------------------------------------------------------------------
Gross profit 898,289 - 108,803 5,065,021
Costs and expenses:
Customer service and technical support 214,620 - 498,657 5,048,985
Selling and marketing 183,960 - 1,479,000 4,190,819
Research and development 383,251 - 1,649,904 2,638,264
General and administrative 199,290 - 1,931,108 4,876,850
Charge for purchased research and development
- 1,388,476 - -
Amortization of goodwill and intangibles - - 1,917,000 1,840,000
----------------------------------------------------------------------------
Total costs and expenses 981,121 1,388,476 7,475,669 18,594,918
----------------------------------------------------------------------------
Net loss before tax benefit (82,832) (1,388,476) (7,366,866) (13,529,897)
Tax benefit - - 2,077,695 -
----------------------------------------------------------------------------
Net loss $ (82,832) $(1,388,476) $(5,289,171) $(13,529,897)
============================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 80
Intuit Services Corporation
Statement of Stockholder's Equity (Net Capital Deficiency)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDER'S
COMMON STOCK ADDITIONAL EQUITY
---------------------------------- PAID -IN ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1993
(predecessor entity - unaudited) 410,033 $ 106,351 $ - $ 288,397 $ 394,748
Net loss through July 14, 1994
(predecessor entity - unaudited) - - - (82,832) (82,832)
---------------------------------------------------------------------------------
Balance at July 14, 1994
(predecessor entity - unaudited) 410,033 106,351 - 205,565 311,916
Effects of merger with Intuit Inc. (unaudited) (409,933) (106,251) 7,684,900 (205,565) 7,373,084
Net loss from July 15, 1994
to July 31, 1994 (unaudited) - - - (1,388,476) (1,388,476)
---------------------------------------------------------------------------------
Balance at July 31, 1994 (unaudited) 100 100 7,684,900 (1,388,476) 6,296,524
Net loss (unaudited) - - - (5,289,171) (5,289,171)
---------------------------------------------------------------------------------
Balance at July 31, 1995 (unaudited) 100 100 7,684,900 (6,677,647) 1,007,353
Net loss - - - (13,529,897) (13,529,897)
---------------------------------------------------------------------------------
Balance at July 31, 1996 100 $ 100 $7,684,900 $(20,207,544) $(12,522,544)
=================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 81
Intuit Services Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
PREDECESSOR
ENTITY
-----------
AUGUST 1, JULY 15,
1993 1994
THROUGH THROUGH YEAR ENDED JULY 31,
JULY 14, JULY 31, ------------------------------
1994 1994 1995 1996
----------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(82,832) $(1,388,476) $(5,289,171) $(13,529,897)
Adjustments to reconcile net loss to net cash used in
operating activities:
Charge for purchased research and development
- 1,388,476 - -
Amortization of purchased software - - 1,529,000 1,471,000
Amortization of goodwill and intangibles - - 1,917,000 1,840,000
Depreciation and amortization 42,731 - 177,019 4,024,134
----------------------------------------------------------
Net loss before charges for purchased research and
development, amortization and depreciation
(40,101) - (1,666,152) (6,194,763)
Net changes:
Accounts receivable (129,357) - (190,997) (2,448,640)
Other current assets 1,620 - (49,106) (76,926)
Accounts payable 18,070 - 246,222 2,204,056
Accrued compensation - - 75,038 548,737
Deferred income taxes (3,049) - (2,087,325) -
Other accrued liabilities - - 158,780 124,478
----------------------------------------------------------
Net cash used in operating activities (152,817) - (3,513,540) (5,843,058)
----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment 49,342 - (1,993,706) (18,057,699)
CASH FLOWS FROM FINANCING ACTIVITIES
Payable to parent - - 5,572,614 24,366,455
----------------------------------------------------------
Increase in cash and cash equivalents (103,475) - 65,368 465,698
Cash and cash equivalents at beginning of period
172,932 69,457 69,457 134,825
----------------------------------------------------------
Cash and cash equivalents at end of period $ 69,457 $ 69,457 $ 134,825 $ 600,523
==========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 82
Intuit Services Corporation
Notes to Financial Statements
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
Intuit Services Corporation (the "Company") is a wholly owned subsidiary of
Intuit Inc. ("Intuit"). The Company provides electronic banking processing
services and bill payment.
On July 14, 1994, Intuit acquired all the common stock of National Payment
Clearinghouse, Inc. (the "Predecessor"). The acquisition was accomplished
through a merger between the Predecessor and Intuit Acquisition Corp., a wholly
owned subsidiary of Intuit (which then changed its name to Intuit Services
Corporation). The merger was treated as a tax-free reorganization for income tax
purposes.
The accompanying financial statements present the results of operations, cash
flows, and changes in stockholder's equity for the Predecessor through July
14, 1994 and of Intuit Services Corporation thereafter. For practical purposes,
the actual cutoff date was July 31, 1994; however, with the exception of the
charge for purchased research and development, the operating activity between
July 15, 1994 and July 31, 1994, which is included in the Predecessor, was not
significant.
In accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 54, and as a result of Intuit's acquisition of the Predecessor, the Company
has utilized the "push-down" basis of accounting and has reflected in its
financial statements the excess of cost over the book value of the net assets
acquired, determined in accordance with the purchase method of accounting.
Accordingly, the purchase price paid by Intuit was allocated to the identifiable
assets and liabilities, including purchased research and development, which was
charged to the Company's operations at the time of the acquisition. This new
basis of accounting resulted in costs in excess of net assets acquired of
approximately $9.5 million, of which $1.4 million was written off as purchased
research and development in the period ended July 31, 1994. The remaining $8.1
million of identified intangibles and goodwill are being amortized over periods
of between one and five years. The amount by which the purchase price exceeded
the Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements.
F-7
<PAGE> 83
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
Subsequent to the acquisition, Intuit began performing certain services for the
Company (see Note 2), including general management, accounting, cash management,
and other administrative services. The amounts charged to the Company for such
services have been determined based on proportional cost allocations in
accordance with Staff Accounting Bulletin No. 55, and have been agreed to by the
management of the Company and Intuit. In the opinion of the Company management,
the allocation methods used are reasonable. Such allocations, however, are not
necessarily indicative of costs that would have been incurred had the Company
continued to operate independent of Intuit. No formal agreement currently exists
which specifies the nature of services to be provided by Intuit to the Company,
or the charges for such services. Therefore, the 1996 amounts are not
necessarily indicative of the future charges to be incurred by the Company.
The Company's parent, Intuit Inc., develops, markets and supports personal
finance, small business accounting and tax preparation software products and
electronic services to enable individuals, professionals and small businesses to
automate commonly performed financial tasks.
UNAUDITED INFORMATION
Information for the predecessor entity for the period from August 1, 1993
through July 14, 1994, and for the Company for the period from July 15, 1994
through July 31, 1994 and for the twelve months ended July 31, 1995 is
unaudited.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining the collectibility of accounts
receivable and assessing the carrying value of remaining purchased intangible
balances. Actual results could differ from those estimates.
F-8
<PAGE> 84
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs incurred to establish the technological
feasibility of computer software products are charged to operations as incurred.
Software development costs have been expensed in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and ends when a product is available for general
release to customers. Such costs have been immaterial to date.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Customer service and technical support costs include customer inquiries and
telephone assistance. The costs of post-contract customer support are included
in customer service and technical support expenses and are not included in cost
of goods sold.
CASH
The Company maintains its cash accounts at one large banking institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives or remaining
lease terms.
F-9
<PAGE> 85
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment consist of:
<TABLE>
<CAPTION>
JULY 31,
1995 1996
---------------------------------------------
(Unaudited)
<S> <C> <C>
Machinery and equipment $ 1,813,876 $ 16,392,950
Furniture and fixtures 265,879 2,344,289
Leasehold improvements 103,074 1,503,289
---------------------------------------------
2,182,829 20,240,528
Less accumulated depreciation and amortization
(297,791) (4,321,925)
---------------------------------------------
$1,885,038 $15,918,603
=============================================
</TABLE>
GOODWILL AND INTANGIBLE ASSETS
The excess cost over the fair value of net assets acquired (goodwill) and the
cost of identified intangibles are being amortized on a straight-line basis over
the following periods:
<TABLE>
<CAPTION>
NET BALANCE AT JULY 31,
---------------------------------------------
LIFE IN YEARS 1995 1996
-------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Goodwill 3 $1,227,695 $411,695
Customer lists 3 $1,294,238 $430,238
Covenant not to complete 5 $ 633,000 $473,000
Purchased technology 2 $1,471,000 $ -
</TABLE>
F-10
<PAGE> 86
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The intangible asset balances presented above are net of total accumulated
amortization of $3,446,000 and $6,757,000 at July 31, 1995 and 1996,
respectively.
The carrying value of goodwill and intangible assets is reviewed on a regular
basis for the existence of facts or circumstances both internally and externally
that may suggest impairment. To date no such impairment has been indicated.
Should there be an impairment in the future, the Company will measure the amount
of the impairment based on undiscounted expected future cash flows from the
impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
CONCENTRATION OF CREDIT RISK
The Company generates all its revenue from the sale of on-line banking and bill
payment services provided to banking institutions as these services are
performed. Revenue is recognized, net of discounts, when service is provided.
Financial investments that potentially subject the Company to concentration of
credit risk consist principally of trade accounts receivable. The credit risk in
the Company's accounts receivable is mitigated by the fact that the Company
performs ongoing credit evaluations of its customers' financial condition,
accounts receivable are primarily derived from customers in North America and
the customers are large, recognized banking institutions. Generally, no
collateral is required. The Company maintains reserves for estimated credit
losses and such losses have historically been within management's expectations.
F-11
<PAGE> 87
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
2. RELATED PARTY TRANSACTIONS
Beginning in fiscal 1995, certain Intuit corporate expenses, primarily related
to executive management time, accounting, cash management, and other
administrative services, have been allocated to the Company. Total expenses
allocated were $1,395,000 and $1,840,000 for the years ended July 31, 1995 and
1996, respectively. Additionally, Intuit has advanced the Company funds for
operating requirements and for purchases of property and equipment. These
expense allocations and the funds advanced have been recorded as a payable to
parent in the accompanying financial statements. The average balances
outstanding during the years ended July 31, 1995 and 1996 totaled $2,786,000 and
$18,491,000, respectively. No interest expense has been charged on the payable
due to Intuit.
3. COMMITMENTS
OPERATING LEASES
The Company leases its office facilities under an operating lease agreement. The
lease requires monthly rental payments in varying amounts through September
2001. This lease also requires the Company to pay all property taxes, normal
maintenance, and insurance on the leased facilities.
Future minimum lease payments under the noncancelable operating lease as of July
31, 1996 is as follows:
<TABLE>
<S> <C>
1997 $ 363,000
1998 372,000
1999 380,000
2000 345,000
2001 56,000
----------
$1,516,000
==========
</TABLE>
Total rental expense under this lease was approximately $69,000, $73,000 and
$419,000, for the period from August 1, 1993 to July 14, 1994 and the years
ended July 31, 1995 and 1996, respectively.
F-12
<PAGE> 88
Intuit Services Corporation
Notes to Financial Statements (continued)
(Information at July 31, 1995 and for the year ended July 31, 1995 is unaudited)
4. STOCK OPTIONS
Upon acquisition by Intuit, stock options outstanding from the Predecessor
entity were assumed by Intuit. No stock options have been issued by the Company.
Certain ISC employees have been awarded options under Intuit's 1993 Equity
Incentive Plan.
5. INCOME TAXES
The tax position in the financial statements presents the Company on a
stand-alone basis. The losses of the Company were benefited by Intuit on a
consolidated basis. Had the Company benefited the losses, the Company would
have had deferred tax assets of approximately $400,000 and $5,000,000 as of July
31, 1995 and 1996. These deferred tax assets would relate primarily to net
operating loss carryforwards, and would have been fully offset by a valuation
allowance in both years.
6. SUBSEQUENT EVENT
On September 16, 1996, Intuit Inc. announced plans to sell the Company to
CheckFree Corporation ("CheckFree") in exchange for 12.6 million shares of
CheckFree common stock. Subject to regulatory and CheckFree stockholder
approval, the transaction is expected to be finalized by the end of calendar
year 1996. Upon completion of the transaction, the balance of the payable to
Intuit will be forgiven by Intuit.
F-13
<PAGE> 89
Appendix A
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
CHECKFREE CORPORATION
CHECKFREE ACQUISITION CORPORATION II
INTUIT INC.
AND
INTUIT SERVICES CORPORATION
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Dated as of September 15, 1996
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TABLE OF CONTENTS
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ARTICLE I
THE MERGER
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SECTION 1.01 The Merger...............................................................
SECTION 1.02 Effect of the Merger.....................................................
SECTION 1.03 Consummation of the Merger ..............................................
SECTION 1.04 Charter; By-Laws; Directors and Officers.................................
SECTION 1.05 Acknowledgement Regarding the Company's Assets...........................
SECTION 1.06 Further Assurances.......................................................
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01 Conversion of Securities of the Company..................................
SECTION 2.02 Merger Consideration Adjustment..........................................
SECTION 2.03 Release of Escrow Shares.................................................
SECTION 2.04 Conversion of Acquisition Common Stock...................................
SECTION 2.05 Surrender and Exchange of Shares.........................................
SECTION 2.06 Closing of Stock Transfer Books..........................................
SECTION 2.07 Closing ........................................................
SECTION 2.08 Tax-Free Reorganization..................................................
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Representations and Warranties of Holdings and the Company...............
SECTION 3.02 Representations and Warranties of Holdings...............................
SECTION 3.03 Representations and Warranties of Parent.................................
SECTION 3.04 Representations and Warranties of Acquisition............................
ARTICLE IV
COVENANTS
SECTION 4.01 Conduct of the Company's Business........................................
SECTION 4.02 Registration Statement; Stockholder Approval, Etc........................
SECTION 4.03 Access to Information....................................................
SECTION 4.04 Further Assurances.......................................................
SECTION 4.05 Inquiries and Negotiations...............................................
SECTION 4.06 Notification of Certain Matters..........................................
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SECTION 4.07 Compliance with the Securities Act........................................
SECTION 4.08 Conduct of Parent's Business..............................................
SECTION 4.09 Employment and Severance Liabilities......................................
SECTION 4.10 Contractual Obligations...................................................
SECTION 4.11 Indemnity.................................................................
SECTION 4.12 Agreements Executed.......................................................
SECTION 4.13 Stockholder Agreements and Proxies........................................
SECTION 4.14 Revenue Make-Up...........................................................
SECTION 4.15 Board Visitation Rights...................................................
SECTION 4.16 Reimbursement for Certain Charges and Costs...............................
SECTION 4.17 Debt......................................................................
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 Conditions to Each Party's Obligation to Effect the Merger...............
SECTION 5.02 Conditions to the Obligation of Holdings and the Company
to Effect the Merger.....................................................
SECTION 5.03 Conditions to the Obligation of Parent and Acquisition
to Effect the Merger......................................................
ARTICLE VI
TERMINATION AND ABANDONMENT
SECTION 6.01 Termination and Abandonment..............................................
SECTION 6.02 Effect of Termination....................................................
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 Indemnification by Holdings................................................
SECTION 7.02 Claims.....................................................................
SECTION 7.03 Notice and Defense of Third-Party Claims...................................
SECTION 7.04 Settlement or Compromise...................................................
SECTION 7.05 Limitations on Indemnification.............................................
ARTICLE VIII
NONCOMPETITION AGREEMENT
SECTION 8.01 Certain Acknowledgments....................................................
SECTION 8.02 Noncompetition Agreement...................................................
SECTION 8.03 Exception..................................................................
SECTION 8.04 No Objection or Defense....................................................
SECTION 8.05 Enforcement of Noncompetition Agreement....................................
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SECTION 8.06 Early Termination of Noncompetition Agreement............................
SECTION 8.07 Effect on Acquiror.......................................................
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Survival of Representations and Warranties...............................
SECTION 9.02 Interpretation of Representations and Warranties.........................
SECTION 9.03 Reliance by Parent and Acquisition.......................................
SECTION 9.04 Expenses, Etc............................................................
SECTION 9.05 Publicity................................................................
SECTION 9.06 Execution in Counterparts................................................
SECTION 9.07 Notices..................................................................
SECTION 9.08 Waivers..................................................................
SECTION 9.09 Amendments, Supplements, Etc.............................................
SECTION 9.10 Entire Agreement.........................................................
SECTION 9.11 Applicable Law...........................................................
SECTION 9.12 Binding Effect, Benefits.................................................
SECTION 9.13 Assignability............................................................
SECTION 9.14 Severability.............................................................
SECTION 9.15 Variation and Amendment..................................................
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INDEX TO SCHEDULES AND EXHIBITS
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Schedule Description
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1.05 Illinois-Located Assets and Properties Owned by Holdings
3.01(c) Capitalization/Stockholders
3.01(e) Certain Conflicts
3.01(f) Consents
3.01(g) Certain Liabilities
3.01(h) Certain Changes or Events
3.01(j) Litigation
3.01(k) Liens and Encumbrances
3.01(l) Real Property Interests
3.01(m) Intellectual Property Rights
3.01(n) Labor Matters
3.01(o) Severance Arrangements
3.01(p) Taxes
3.01(q) Permits
3.01(r) Employee Benefit Plans
3.01(s) Environmental Matters
3.01(u) Material Contracts
3.01(v) Insurance
3.01(x) Claims Against Officers and Directors
3.01(y) Customers; Suppliers, etc.
3.01(z) Improper Payments
3.01(aa) Brokers
3.01(bb) Accounts Receivable
3.02(d) Certain Conflicts
3.02(e) Consents
3.02(g) Brokers
3.03(b) Subsidiaries
3.03(c) Capitalization
3.03(f) Consent
3.03(j) Registration Rights
3.03(k) Brokers
4.09 Employment and Severance Liabilities
4.10 Contractual Obligations of Holdings
4.16 Reimbursement Matters
9.04 Expenses
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Exhibits Description
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Exhibit A Parent Tax Representation Certificate
Exhibit B Services and License Agreement
Exhibit C Assignment and License Agreement
Exhibit D Stock Restriction Agreement
Exhibit E Shareholder Agreement and Proxy
Exhibit F Escrow Agreement
Exhibit G Registration Rights Agreement
Exhibit H Opinions of Porter, Wright, Morris & Arthur
Exhibit I Opinions of Fenwick & West LLP
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 15, 1996 (the
"Effective Date"), among CHECKFREE CORPORATION, a Delaware corporation
("Parent"), CHECKFREE ACQUISITION CORPORATION II, a Delaware corporation and a
wholly owned subsidiary of Parent ("Acquisition"), INTUIT INC., a Delaware
corporation ("Holdings"), and INTUIT SERVICES CORPORATION, a Delaware
corporation (the "Company"). The Company and Acquisition are hereinafter
sometimes referred to as the "Constituent Corporations" and the Company as the
"Surviving Corporation."
WHEREAS, Parent, Acquisition, Holdings, and the Company desire that
Acquisition merge with and into the Company (the "Merger"), upon the terms and
conditions set forth herein and in accordance with the General Corporation Law
of the State of Delaware (the "Delaware GCL") with the result that the Company
shall continue as the surviving corporation and the separate existence of
Acquisition shall cease; and
WHEREAS, Parent, Acquisition, Holdings, and the Company desire that at
the Effective Time (as hereinafter defined) all outstanding shares of the
capital stock of the Company be converted into the right to receive fully paid
and nonassessable shares of Common Stock, $.01 par value, of Parent ("Parent
Common Stock"), as hereinafter provided; and
WHEREAS, Parent, Acquisition, Holdings, and the Company desire that,
immediately after the Effective Time and solely as a result of the Merger,
Parent will own all the issued and outstanding shares of the capital stock of
the Surviving Corporation; and
WHEREAS, for Federal income tax purposes, it is intended that the
Merger qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"); and
WHEREAS, the respective Boards of Directors of Parent, Acquisition,
Holdings, and the Company, have approved the Merger;
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto hereby agree as follows:
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ARTICLE I
THE MERGER
SECTION 1.01 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, in accordance with this Agreement and the
Delaware GCL, Acquisition shall be merged with and into the Company, the
separate existence of Acquisition shall cease, and the Company shall continue as
the Surviving Corporation under the corporate name of "CHECKFREE SERVICES
CORPORATION."
SECTION 1.02 Effect of the Merger. Upon the effectiveness of the
Merger, the Surviving Corporation shall succeed to, and assume all the rights
and obligations of, the Company and Acquisition in accordance with the Delaware
GCL and the Merger shall otherwise have the effects set forth in Section 259 of
the Delaware GCL.
SECTION 1.03 Consummation of the Merger. As soon as practicable after
the satisfaction or waiver of the conditions to the obligations of the parties
to effect the Merger set forth herein, provided that this Agreement has not
previously been terminated in accordance with the provisions of Section 6.01
hereof, the parties hereto will cause the Merger to be consummated by filing
with the Secretary of State of the State of Delaware a properly executed
certificate of merger in accordance with the Delaware GCL (the time of such
filing being referred to herein as the "Effective Time").
SECTION 1.04 Charter; By-Laws; Directors and Officers. The Certificate
of Incorporation of the Surviving Corporation from and after the Effective Time
shall be the Certificate of Incorporation of Acquisition as in effect
immediately prior to the Effective Time, until thereafter amended in accordance
with the provisions thereof and as provided by the Delaware GCL, except that, at
the Effective Time, Article I thereof shall be amended to read as follows: "The
name of the Corporation is "CHECKFREE SERVICES CORPORATION." The By-Laws of the
Surviving Corporation from and after the Effective Time shall be the By-Laws of
Acquisition as in effect immediately prior to the Effective Time, continuing
until thereafter amended in accordance with the provisions thereof and the
provisions of the Certificate of Incorporation of the Surviving Corporation and
as provided by the Delaware GCL. The initial directors and officers of the
Surviving Corporation shall be the directors and officers, respectively, of
Acquisition immediately prior to the Effective Time, in each case until their
removal or until their respective successors are duly elected and qualified.
SECTION 1.05 Acknowledgement Regarding the Company's Assets. For
purposes of clarifying the rights to be acquired upon consummation of the
Merger, Parent and Acquisition hereby acknowledge and agree with Holdings and
the Company that the assets set forth on Schedule 1.05 hereto, located at 2001
Butterfield Road, Suite 700, 800 and 900, Downer's Grove, Illinois and 444 North
Commerce Street, Aurora, Illinois are as of the Effective Date of this
Agreement, owned by Holdings.
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SECTION 1.06 Further Assurances. Subject to the provisions of Section
1.05 hereof, if at any time after the Effective Time the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments or
assurances or any other acts or things are necessary, desirable or proper (i) to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation,
its right, title or interest in, to or under any of the rights, privileges,
powers, franchises, properties or assets of either of the Constituent
Corporations, or (ii) otherwise to carry out the purposes of this Agreement, the
Surviving Corporation and its proper officers and directors or their designees
shall be authorized to execute and deliver, in the name and on behalf of either
of the Constituent Corporations, all such deeds, bills of sale, assignments and
assurances and do, in the name and on behalf of such Constituent Corporation,
all such other acts and things necessary, desirable or proper to vest, perfect
or confirm its right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of such Constituent
Corporation and otherwise to carry out the purposes of this Agreement; provided,
however, that the Surviving Corporation shall have no rights under this Section
1.06 in connection with any of Holdings' assets, properties, services,
businesses or properties.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01 Conversion of Securities of the Company. By virtue of the
Merger and without the need for any action on the part of the holders of the
capital stock of the Company, at the Effective Time, all outstanding shares of
the capital stock of the Company (excluding shares held in the treasury of the
Company, which shall be canceled as provided in paragraph (c) below, and subject
to Section 2.05(c) hereof) shall be converted into the right to receive fully
paid and nonassessable shares of Parent Common Stock on the following basis:
(a) Merger Consideration. The shares of Common Stock, $1.00
par value, of the Company (the "Company Common Stock") that are issued and
outstanding immediately prior to the Effective Time shall be converted into the
right to receive 12,600,000 shares of Parent Common Stock, subject to the
potential adjustment set forth in Section 2.02 hereof, as follows (the "Merger
Consideration"):
(i) 11,340,000 shares of Parent Common Stock shall be
issued to the sole stockholder of the Company Common Stock at
Closing (as hereinafter defined); and
(ii) 1,260,000 shares of Parent Common Stock (the
"Escrow Shares") shall be issued to the sole stockholder of
the Company Common Stock subject to Section 2.03 below. Upon
any adjustment of the Merger Consideration pursuant to
Section 2.02, the number of shares of Parent Common Stock
that are Escrow Shares shall be reduced in proportion to such
Merger Consideration Adjustment (as hereinafter defined).
If, prior to the Effective Time, Parent recapitalizes through a subdivision of
its outstanding shares into a greater number of shares, or a combination of its
outstanding shares into a lesser number of shares, or reorganizes, reclassifies
or otherwise changes its outstanding shares into the same or a
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different number of shares of other classes or series, or declares a dividend on
its outstanding shares payable in shares of its capital stock or securities
convertible into shares of its capital stock (a "Capital Change"), then the
number of shares of Parent Common Stock constituting the Merger Consideration
shall be adjusted appropriately to reflect each such Capital Change.
(b) Company Common Stock. At the Effective Time, each share of
Company Common Stock that is issued and outstanding immediately prior to the
Effective Time shall be canceled and converted into the right to receive that
number of shares of Parent Common Stock equal to the quotient obtained by
dividing the Merger Consideration by the number of shares of Company Common
Stock that are issued and outstanding immediately prior to the Effective Time.
(c) Treasury Stock. At the Effective Time, each share of
capital stock of the Company that is then held in the treasury of the Company
(if any) shall be canceled and retired and no capital stock of Parent and no
cash or other consideration shall be paid or delivered in exchange therefor.
SECTION 2.02 Merger Consideration Adjustment. In the event that, after
the date of this Agreement and prior to the Closing, the Company incurs,
realizes, or otherwise experiences a Material Adverse Change (as hereinafter
defined) in its financial condition, properties, assets, liabilities, Business
(as defined herein), operations, or results of operations, then at or prior to
the Effective Time, the Merger Consideration shall be adjusted as follows:
(a) Change Notice. If Parent believes that the Company has
incurred, realized, or otherwise experienced a Material Adverse Change in its
financial condition, properties, assets, liabilities, Business (as defined
herein), operations, or results of operations and Parent desires a Merger
Consideration Adjustment (as defined below), then Parent must prior to Closing
give Holdings and the Company written notice of Parent's claim that such a
Material Adverse Change has occurred (the "Change Notice"), which Change Notice
shall state with specificity the grounds on which Parent contends that such
Material Adverse Change has occurred and Parent's proposal for a Merger
Consideration Adjustment. Parent may only make one (1) request for a Merger
Consideration Adjustment.
(b) Attempt to Agree. Following their receipt of the Change
Notice, Parent, Holdings and the Company will in good faith consider Parent's
assertions set forth in the Change Notice and will use their best efforts to in
good faith reach a mutual agreement, as promptly as practicable, as to the
amount by which the Merger Consideration shall be reduced by reason of the
Material Adverse Change described in the Change Notice (the "Merger
Consideration Adjustment"). In attempting to reach an agreement as to the Merger
Consideration Adjustment, the parties will consider, among other things, the
extent (if any) to which the fair market value of the Company has been
diminished by the Material Adverse Change described in the Change Notice. If
Parent, Holdings and the Company agree to a Merger Consideration Adjustment,
then they shall execute a written agreement to such effect (the "Merger
Consideration Agreement") setting forth the amount of the Merger Consideration
Adjustment they have agreed to.
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(c) Dispute Resolution Procedure.
(i) Agreement on Material Adverse Change. If Parent,
Holdings and the Company agree that a Material Adverse Change in the Company's
financial condition, properties, assets, liabilities, Business, operations, or
results of operations occurred after the Effective Date of this Agreement and
prior to the Closing Date (as hereinafter defined), but are unable to mutually
agree in writing on the amount of a Merger Consideration Adjustment within ten
(10) days after the date on which Holdings and the Company receive the Change
Notice (the "Receipt Date"), then the amount of the Merger Consideration
Adjustment (if any) shall be determined in accordance with the appraisal
procedure set forth in Section 2.02(c)(iii) below.
(ii) No Agreement on Material Adverse Change. If
Holdings and the Company do not agree with Parent's assertion in the Change
Notice that a Material Adverse Change in the Company's financial condition,
properties, assets, liabilities, Business, operations, or results of operations
occurred after the Effective Date of this Agreement and prior to the Closing
Date, and Parent, Holdings and the Company have not agreed in writing on the
amount of a Merger Consideration Adjustment within ten (10) days after the
Receipt Date, then, within twenty (20) days after the Receipt Date, the parties
shall submit to mandatory binding arbitration the sole issue of whether or not
such a Material Adverse Change occurred. Such arbitration shall be conducted in
Chicago, Illinois in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, and shall be concluded within
thirty (30) days to the extent reasonably practicable. The arbitration will be
conducted by a single arbitrator, mutually selected by the parties, who shall
decide only the issue of whether or not a Material Adverse Change in the
Company's financial condition, properties, assets, liabilities, Business,
operations, or results of operations occurred after the Effective Date of this
Agreement and prior to the Closing Date in the manner set forth in the Change
Notice. The arbitrator's determination as to whether or not such a Material
Adverse Change occurred after the Effective Date of this Agreement and prior to
the Closing Date shall be conclusive, final, non-appealable and binding upon
each of the parties to this Agreement and judgment may be entered upon the
arbitrator's determination in accordance with applicable law in any court having
competent jurisdiction over the matter. In connection with the arbitration
proceedings, the parties will be entitled to conduct discovery in scope, timing,
types, and under such procedures as such parties would otherwise be afforded had
the dispute or controversy hereunder been subject to the Federal Rules of Civil
Procedure. If the arbitrator determines that no Material Adverse Change occurred
after the Effective Date of this Agreement, then no Merger Consideration
Adjustment shall be made; and if the arbitrator determines that a Material
Adverse Change has occurred after the Effective Date of this Agreement, then the
amount of the Merger Consideration Adjustment shall be determined by the
appraisal procedure set forth in Section 2.02(c)(iii) below (unless the parties
otherwise agree in writing). The foregoing agreement to arbitrate shall be
specifically enforceable under the prevailing arbitration law.
(iii) Appraisal Procedure. When the appraisal
procedure set forth in this subparagraph is required to be used by the
provisions of subparagraph 2.02(c)(i) or (ii), then the amount of the Merger
Consideration Adjustment shall be determined as follows. Within twenty (20) days
after the Receipt Date (or within ten (10) days after the completion of the
arbitration referred to in Section 2.02(c)(ii) if such arbitration occurs) (A)
Parent, on the one hand, and Holdings and the
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Company, on the other hand, shall each select one Qualified Appraiser (as
defined below) (the "Selected Appraiser") to determine the amount of the Merger
Consideration Adjustment (if any) arising from the Material Adverse Change set
forth in the Change Notice; and (B) Parent, on the one hand, and Holdings and
the Company, on the other hand, shall each give the other written notice (the
"Appraiser Notice") of the identity of their respective Selected Appraiser.
Parent's Selected Appraiser is sometimes hereinafter called the "Parent
Appraiser" and the Selected Appraiser of Holdings and the Company is sometimes
hereinafter called the "Holdings Appraiser." The Company shall provide each
side's Selected Appraiser with full access during normal business hours to the
Company's facilities, products, personnel, books, records and financial
statements (subject to the execution of reasonable confidentiality agreements by
such Selected Appraisers) solely for purposes of assisting the Selected
Appraisers in determining the amount of the Merger Consideration Adjustment.
Each Selected Appraiser shall attempt to determine the amount of the Merger
Consideration Adjustment, which, for purposes of such appraisal, shall be the
number of shares of the Parent's Common Stock equal to the quotient obtained by
dividing (i) the amount (if any) by which the fair market value of the Company
was diminished from the Effective Date of this Agreement to the Closing Date as
a result of the Material Adverse Change described in the Change Notice, by (ii)
the average closing price per share of the Parent's Common Stock as reported on
the Nasdaq National Market (the "Nasdaq NM") for the five (5) trading days
immediately preceding the Effective Date of this Agreement. Within ten (10) days
after a Selected Appraiser has been selected, the Parent Appraiser and the
Holdings Appraiser shall each deliver to Parent and Holdings a brief written
report (the "Appraisal Report") setting forth such Selected Appraiser's
appraisal and determination of the amount of the Merger Consideration Adjustment
and, unless the parties otherwise agree in writing to the amount of the Merger
Consideration Adjustment, the Parent Appraiser and the Holdings Appraiser shall
select a third appraiser (the "Determining Appraiser") which shall also be a
Qualified Appraiser. The Determining Appraiser will review the Appraisal Reports
and the amount of the Merger Adjustment will be the amount set forth in the
Appraisal Report which is, in the judgment of the Determining Appraiser, the
most nearly correct; provided, however, that notwithstanding the foregoing, if
there is only one Selected Appraiser because Parent, on the one hand, or
Holdings or the Company, on the other hand, fail to select its Selected
Appraiser, then unless the parties otherwise agree in writing to the amount of
the Merger Consideration Adjustment, the amount of the Merger Consideration
Adjustment shall conclusively be deemed to be the amount thereof determined by
such Selected Appraiser in its Appraisal Report. Parent, on the one hand, and
Holdings, on the other hand, shall pay the fees and expenses charged by such
party's Selected Appraiser and shall share equally the fees and expenses charged
by the Determining Appraiser. As used herein, the term "Qualified Appraiser"
means an investment banking firm of national or regional reputation that is
substantially experienced in representing and valuing software companies in
underwritten public offerings and/or merger and acquisition transactions,
provided that such investment banking firm and its affiliates do not have a
family relationship, or a then-currently active significant business
relationship with the party who selected such appraiser, or advised or
represented any of the parties in connection with this Agreement and the
transactions contemplated hereunder.
(iv) Efforts to Agree. Nothing in this paragraph
shall prevent the parties from further efforts to reach a mutual agreement on
the amount of the Merger Consideration Adjustment (if any) while the arbitration
procedure and/or the appraisal procedure described in
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Sections 2.02(c)(ii) and (iii) above is pending and any mutual written agreement
reached by Parent, Holdings and the Company regarding the amount of the Merger
Consideration Adjustment shall be the conclusive, final, non-appealable and
determinative resolution of the amount of the Merger Consideration Adjustment,
binding upon each of the parties hereto.
(d) Material Adverse Change. As used herein, "Material Adverse
Change" means a material adverse change other than a change arising or
resulting, directly or indirectly, from industry conditions or the public
announcement of, or the response or reaction of customers, vendors, licensors,
investors, Company employees or others to, this Agreement, the Merger, or any of
the agreements or transactions contemplated by this Agreement or entered into in
connection with this Agreement or the Merger.
(e) Meaning of Merger Consideration. From and after the
effectiveness of any Merger Consideration Adjustment in accordance with this
Section 2.02, the term "Merger Consideration" as used in this Agreement, shall
mean the reduced amount of Merger Consideration to be paid to Holdings as the
sole stockholder of the Company pursuant to Section 2 of this Agreement, as
modified by the Merger Consideration Adjustment.
SECTION 2.03 Release of Escrow Shares. The Escrow Shares shall be
released from escrow and delivered to Holdings one (1) year after the Closing
Date, subject to the terms of the Escrow Agreement (as hereinafter defined) and
the provisions of Article VII. The rights of Parent and Acquisition under
Article VII shall not be in any manner limited to the Escrow Shares, but shall
be subject to the limitations set forth in Article VII.
SECTION 2.04 Conversion of Acquisition Common Stock. At the Effective
Time, each share of Common Stock, $.01 par value, of Acquisition that is issued
and outstanding immediately prior to the Effective Time shall remain outstanding
and, by virtue of the Merger, automatically and without the need for any action
on the part of the holder thereof, shall be converted into and become one (1)
validly issued, fully paid and nonassessable share of Common Stock of the
Surviving Corporation.
SECTION 2.05 Surrender and Exchange of Shares.
(a) At the Effective Time, each holder of an outstanding
certificate or certificates that immediately prior thereto represented shares of
the capital stock of the Company shall surrender the same to Parent or its
agent, and each such holder shall be entitled upon such surrender to receive in
exchange therefor, without cost to it, the number of shares of Parent Common
Stock into which the shares theretofore represented by the certificate so
surrendered shall have been converted as provided in Section 2.01 hereof, and
the certificate or certificates so surrendered in exchange for such
consideration shall forthwith be canceled by Parent.
(b) If a certificate representing shares of the capital stock
of the Company has been lost, stolen or destroyed, the holder of such
certificate shall submit an affidavit describing the lost, stolen or destroyed
certificate, the number of shares evidenced thereby and affirming the status of
that certificate in lieu of surrendering such certificate to Parent, which shall
deem such certificate
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canceled; provided that Parent may require the holder of such certificate to
provide Parent with a bond in such amount as Parent may direct as a condition to
paying any consideration hereunder. Until so surrendered, the outstanding
certificates that, prior to the Effective Time, represented shares of the
capital stock of the Company that shall have been converted as aforesaid shall
be deemed for all corporate purposes, except as hereinafter provided, to
evidence the ownership of the Merger Consideration into which such shares have
been so converted.
(c) No certificates or scrip representing fractional shares of
Parent Common Stock shall be issued upon the surrender for exchange of
certificates held by stockholders of the Company, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of Parent. Each holder of shares of the capital stock of the Company
who would otherwise have been entitled to receive in the Merger a fraction of a
share of Parent Common Stock (after taking into account all certificates
surrendered by such holder) shall be entitled to receive from Parent at the
Effective Time, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Parent Common Stock multiplied by the average
of the per share closing prices on the Nasdaq NM of shares of Parent Common
Stock during the five (5) consecutive trading days immediately preceding the
Effective Date of this Agreement. It is understood (i) that the payment of cash
in lieu of fractional shares of Parent Common Stock is solely for the purpose of
avoiding the expense and inconvenience to Parent of issuing fractional shares
and does not represent separately bargained-for consideration; and (ii) that no
holder of shares of Company capital stock will receive cash in lieu of
fractional shares of Parent Common Stock in an amount greater than the value of
one full share of Parent Common Stock.
SECTION 2.06 Closing of Stock Transfer Books. On and after the
Effective Time, there shall be no transfers on the stock transfer books of the
Company or Parent of shares of capital stock of the Company that were issued and
outstanding immediately prior to the Effective Time.
SECTION 2.07 Closing. The closing (the "Closing") shall be scheduled to
occur at the offices of Porter, Wright, Morris & Arthur, Columbus, Ohio at 10:00
a.m. local time, on a date as soon as practicable (but in any event not later
than the third business day, unless otherwise agreed) after the satisfaction or
waiver of the conditions to the obligations of the parties to effect the Merger
set forth herein. The Closing, and all transactions to occur at the Closing,
shall be deemed to have taken place at, and shall be effective as of, the close
of business on the date of closing (the "Closing Date").
SECTION 2.08 Tax-Free Reorganization. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Internal Revenue
Code by virtue of the provisions of Section 368(a)(2)(E) of the Internal Revenue
Code. The parties believe that the value of the Parent Common Stock to be issued
to Holdings as the sole stockholder of the Company in the Merger is equal to the
value of the Company Common Stock to be surrendered in exchange therefor. The
Parent Common Stock issued in the Merger will be issued solely in exchange for
the Company's outstanding Common Stock, and no other transaction other than the
Merger represents, provides for or is intended to be an adjustment to, the
consideration paid for the Company's Common Stock. Except for cash paid in lieu
of fractional shares, no consideration that could constitute "other property"
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within the meaning of Section 356 of the Internal Revenue Code is being paid by
Parent for the Company Common Stock in the Merger. The parties will not take a
position on any tax returns that is inconsistent with the provisions of this
Section . In addition, Parent represents now, and as of the Effective Time, that
it intends to continue the Company's historic business or use a significant
portion of the Company's business assets in a business. Concurrently herewith,
and again at the Closing, Parent shall execute and deliver to Holdings a
certificate substantially in the form of Exhibit A. The provisions and
representations contained or referred to in this Section 2.08 and in Exhibit A
shall survive until the expiration of the applicable statute of limitations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Representations and Warranties of Holdings and the
Company. Holdings and the Company, jointly and severally, represent and warrant
to Parent and Acquisition, except as set forth in the Holdings/Company
Disclosure Letter dated of even date herewith that is being delivered to Parent
concurrently herewith (the "Holdings/Company Disclosure Letter"), as follows:
(a) Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own or lease and operate its properties and assets and to carry on its business
as it is now being conducted. The Company is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction in
which the character of its properties owned or leased or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified would not have a Company Material Adverse Effect (as hereinafter
defined). As used in this Agreement, the term "Company Material Adverse Effect"
shall mean a material adverse effect on the properties, assets, financial
condition, operating results or business of the Company, taken as a whole;
provided, however, that the term "Company Material Adverse Effect" shall not
include any such material adverse effect arising or resulting, directly or
indirectly, from industry conditions or the public announcement of, or the
response or reaction of customers, vendors, licensors, investors, Company
employees or others to, this Agreement, the Merger, or any of the agreements or
transactions contemplated by this Agreement or entered into in connection with
this Agreement or the Merger.
(b) Subsidiaries. The Company does not have any subsidiaries
or ownership of any equity interest in any corporation, partnership, joint
venture, or other business entity.
For purposes of this Agreement, the term
"subsidiary," when used with respect to Holdings or the Company, shall mean any
corporation or other business entity a majority of whose outstanding equity
securities is at the time owned, directly or indirectly, by either Holdings, the
Company, and/or one or more of their other subsidiaries.
(c) Capitalization. The authorized capital stock of the
Company consists of 1,000,000 shares of Company Common Stock, $1.00 par value
per share. A total of 100 shares of Company Common Stock are issued and
outstanding, all of which were duly authorized and validly
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issued and are fully paid and nonassessable. No subscription, warrant, option,
call, commitment, convertible security, stock appreciation or other right
(contingent or other) to purchase or acquire any shares of any class of capital
stock of the Company is authorized or outstanding and there is not any
commitment of the Company to issue any shares, warrants, options, or other such
rights or to distribute to holders of any class of its capital stock any
evidences of indebtedness or assets. Except as set forth on Schedule 3.01(c),
the Company does not have any obligation (contingent or other) to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof. Schedule 3.01(c) sets forth a complete and correct list of the holders
of record of the Company Common Stock and the holders of all options or other
rights, if any, to purchase Company Common Stock, including by name of the
holder the number of shares or the number of shares obtainable on exercise of
options or rights held.
(d) Authority Relative to Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution, delivery and
performance of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors and no other corporate approvals or proceedings on the part
of the Company are necessary to authorize this Agreement and the transactions
contemplated hereby, other than the approval and adoption of this Agreement by
the sole stockholder of the Company as required by the Delaware GCL. This
Agreement has been duly executed and delivered by the Company and, subject to
obtaining such stockholder approval, constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to the effect, if any, of (a) applicable bankruptcy and other
similar laws affecting the rights of creditors generally, (b) rules of law
governing specific performance, injunctive relief and other equitable remedies,
and (c) the limitations imposed by public policy on the enforceability of
provisions requiring indemnification in connection with the offering, issuance
or sale of securities. The Company's Board of Directors has by the requisite
vote (i) determined that this Agreement and the Merger is advisable and fair and
in the best interests of the Company and its sole stockholder and (ii) resolved
to recommend the approval of this Agreement and the Merger by the Company's sole
stockholder and to submit this Agreement and the Merger to the Company's sole
stockholder for its consideration and approval when the Company is permitted to
do so by applicable law. The affirmative vote of the holders of a majority of
the outstanding Company Common Stock is the only vote of the holders of any
class or series of the Company's capital stock necessary to approve this
Agreement, the Merger and the transactions contemplated hereby and thereby.
(e) Non-Contravention. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of the Company or (ii) except as set
forth on Schedule 3.01(e) hereof, result in any violation of, conflict with, or
default (or an event which with notice or lapse of time or both would constitute
a default) or loss of a benefit under, or permit the termination of or the
acceleration of any obligation under, any material mortgage, indenture, lease,
agreement or other instrument to which the Company is a party or by which its
assets are bound, permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
business conducted by the Company (the "Business") or to the Company or their
respective properties, or (iii) result in the
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creation or imposition of any liens, claims, charges, restrictions, rights of
others, security interests, prior assignments or other encumbrances
(collectively, "Claims") in favor of any third person or entity upon any of the
assets of the Company, other than any such violation, conflict, default, loss,
termination or acceleration that would not have a Company Material Adverse
Effect.
(f) Consents. Except as set forth on Schedule 3.01(f), no
consent, approval, order or authorization of, or registration, declaration or
filing with, any Federal, state, local or foreign governmental or regulatory
authority is required to be made or obtained by the Company in connection with
the execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated hereby, except for (i)
compliance by the Company with the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act"), (ii) the filing of a certificate of merger with the
Secretary of State of the State of Delaware in accordance with the Delaware GCL
and (iii) such consents, approvals, orders or authorizations which if not
obtained, or registrations, declarations or filings which if not made, would not
have a Company Material Adverse Effect or materially adversely affect the
ability of the Company to consummate the transactions contemplated hereby or the
ability of the Surviving Corporation or any of its subsidiaries to conduct the
Business after the Effective Time.
(g) Financial Statements, Etc. The Company has furnished to
Parent the unaudited balance sheet of the Company of July 31, 1996 and the
related statements of operations for each of the two years ended July 31, 1996
and 1995, certified by the principal financial officer of the Company. The
foregoing unaudited financial statements of the Company shall be collectively
referred to as the "Financial Statements." All such Financial Statements
(including any related schedules and/or notes, if any) have been prepared in a
manner consistent with the manner with which Holdings has prepared financial
statements for the Company and Holdings' other subsidiaries under accounting
principles consistently applied and consistent with prior periods, except that
such statements are subject to year end adjustments (which consist of normal
recurring accruals) and do not contain footnote disclosures. Such balance sheet
fairly presents in all material respects the financial position of the Company
as of its respective date, and such statements of operations fairly present in
all material respects the results of operations of the Company for the
respective periods then ended, subject to normal year-end adjustments and the
absence of footnote disclosures.
Except as and to the extent (i) reflected on the
unaudited balance sheet of the Company as of July 31, 1996 referred to above,
(ii) incurred since July 31, 1996 in the ordinary course of business consistent
with past practice, or (iii) set forth on Schedule 3.01(g) hereto, the Company
does not have any liabilities or obligations of any kind or nature, whether
known or unknown or secured or unsecured (whether absolute, accrued, contingent
or otherwise, and whether due or to become due) that would be required to be
reflected on a balance sheet, or the notes thereto, prepared in accordance with
generally accepted accounting principles. Between July 31, 1996 and the
Effective Date of this Agreement, the Company has not suffered any Company
Material Adverse Effect.
(h) Absence of Certain Changes or Events. Except as set forth
on Schedule 3.01(h) hereto, or as otherwise disclosed in the Financial
Statements of the Company, since July 31, 1996, the Company has not (i) issued
any stock, bonds or other corporate securities, (ii) borrowed
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<PAGE> 106
or refinanced any amount or incurred any liabilities (absolute or contingent) in
excess of $50,000, other than trade payables incurred in the ordinary course of
business consistent with past practice, (iii) discharged or satisfied any claim
in excess of $100,000 or incurred or paid any obligation or liability (absolute
or contingent) other than current liabilities shown on the balance sheet of the
Company as of July 31, 1996 and current liabilities incurred since the date of
such balance sheet in the ordinary course of business consistent with past
practice, (iv) declared or made any payment or distribution to stockholders or
purchased or redeemed any shares of its capital stock or other securities, (v)
mortgaged, pledged or subjected to lien any of its assets, tangible or
intangible, other than liens for current real property taxes not yet due and
payable, (vi) sold, assigned or transferred any of its tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practice or as otherwise contemplated hereby, (vii) sold,
assigned or transferred any Intellectual Property Rights (as hereinafter
defined) or other intangible assets, (viii) waived any rights of substantial
value, whether or not in the ordinary course of business, (ix) entered into,
adopted, amended or terminated any bonus, profit sharing, compensation,
termination, stock option, stock appreciation right, restricted stock,
performance unit, pension, retirement, deferred compensation, employment,
severance or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit of any director, officer or employee of the Company,
or increased in any manner the compensation or fringe benefits of any director
or officer of the Company, or increased the compensation or fringe benefits of
any executive officer of the Company other than in the ordinary course of
business consistent with past practices, or made any payment of a cash bonus to
any director or officer or to any employee of, or consultant or agent to, the
Company or made any other material change in the terms or conditions of
employment, (x) announced any plan or legally binding commitment to create any
employee benefit plan, program or arrangement or to amend or modify in any
material respect any existing employee benefit plan, program or arrangement,
(xi) eliminated the vesting conditions or otherwise accelerated the payment of
any compensation, (xii) suffered any damage, destruction or loss to any of its
assets or properties, (xiii) made any change in its accounting systems,
policies, principles or practices, (xiv) made any loans to any person, (xv)
incurred damage, destruction, or loss, whether or not covered by insurance,
affecting the properties, assets, or Business of the Company, (xvi) made any
change with respect to management, supervisory, or other key personnel of the
Company, (xvii) paid or discharged a lien or liability not appearing on the
Financial Statements, or (xviii) to the extent not otherwise set forth herein,
taken any action described in Section 4.01 hereof. Between July 31, 1996 and the
Effective Date of this Agreement, there has not been a Material Adverse Change
(as defined in Section 2.02(d)) in the financial condition, properties, assets,
liabilities, Business, operations, results of operations of the Company.
(i) Certain Information. Provided that Parent allows Holdings
and the Company to modify any information regarding Holdings or the Company
contained therein, none of the information supplied by the Company for inclusion
in the Registration Statement or the Proxy Statement/Prospectus (as hereinafter
defined) will, at the respective times such documents or any amendments or
supplements thereto are filed with the SEC, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that no representation is made by the Company with
respect to information supplied by Parent which relates to the Parent,
Acquisition, or any affiliate or associate of Parent for inclusion in the
Registration Statement or the
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<PAGE> 107
Proxy Statement/Prospectus. Provided that Parent allows Holdings and the Company
to modify any information regarding Holdings or the Company contained therein,
none of the information relating to the Company included in the Registration
Statement or the Proxy Statement/Prospectus that has been supplied by the
Company and/or Holdings will, at the time the Proxy Statement/Prospectus is
distributed to the Company's and/or Parent's stockholders, be false or
misleading with respect to any material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(j) Actions Pending. Except as set forth on Schedule 3.01(j)
hereto, (i) there is no action, suit, dispute, investigation, proceeding or
claim pending or, to the knowledge of Holdings and the Company, threatened
against or affecting the Company, or its properties or rights, or the Business,
before any court, administrative agency, governmental body, arbitrator, mediator
or other dispute resolution body, and the Company is not aware of any facts or
circumstances which are reasonably likely to give rise to any such action, suit,
dispute, investigation, proceeding or claim, (ii) the Company is not subject to
any order, judgment, decree, injunction, stipulation, or consent order of or
with any court or other governmental agency, and (iii) the Company has not
entered into any agreement to settle or compromise any proceeding pending or
threatened against it which has involved any obligation other than the payment
of money or for which the Company has any continuing obligation, which (in the
case of each of clauses (i), (ii) and (iii) of this Section 3.01(j)) is
reasonably likely to have a Company Material Adverse Effect or which might
materially and adversely affect the ability of the Company to consummate the
transactions contemplated hereby, or materially and adversely affect the ability
of Parent to conduct the Business after the Effective Time.
(k) Title to Properties. The Company has good and valid title
to the properties and assets reflected on the unaudited balance sheet of the
Company as of July 31, 1996 other than nonmaterial properties and assets
disposed of in the ordinary course of business consistent with past practice
since the date of such balance sheet, and all such properties and assets are
free and clear of Claims, except (i) as described on Schedule 3.01(k) hereto,
(ii) liens for current taxes not yet due, and (iii) minor imperfections of
title, if any, not material in amount and not materially detracting from the
value or impairing the use of the property subject thereto or impairing the
operations or proposed operations of the Company (collectively, "Permitted
Liens"). Such properties and assets constitute all of the assets necessary to
conduct the Business substantially in the same manner as it has been conducted
prior to the date hereof.
(l) Real Property Interests. Schedule 3.01(l) hereto sets
forth a complete and accurate list of (i) the real properties owned by the
Company (the "Fee Properties") and (ii) the real properties leased by the
Company (the "Leased Properties"). The Company has good and marketable fee
simple title to the Fee Properties and good and marketable leasehold title to
the Leased Properties, listed on Schedule 3.01(l), free and clear of all Claims,
tenants and occupants except for Permitted Liens. Complete and accurate copies
of all leases or other agreements relating to the Leased Properties have been
delivered to Parent and there have been no material changes or amendments to
such leases or agreements since such delivery. The Company is the lawful owner
of all improvements and fixtures located on the Fee Properties and all moveable
fixtures located at
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the Leased Properties, free and clear of all Claims except for Permitted Liens.
Each lease or other agreement relating to the Leased Properties is a valid and
subsisting agreement, without any material default of the Company thereunder and
without any material default thereunder of the other party thereto, and such
leases and agreements give the Company the right to use or occupy, as the case
may be, all real properties as are sufficient and adequate to operate the
Business as it is currently being conducted. Except as set forth on Schedule
3.01(l), the Company's possession of such property has not been disturbed nor
has any claim relating to the Company's title to or possession of such property
been asserted against the Company that would have a Company Material Adverse
Effect.
(m) Intellectual Property Rights. The patents, trademarks and
trade names, trademark and trade name registrations, service mark, brand mark
and brand name registrations, copyrights, inventions, know-how, trade secrets,
proprietary processes and information, software source and object code, the
applications therefor and the licenses with respect thereto (collectively,
"Intellectual Property Rights") listed on Schedule 3.01(m) hereto constitute all
material proprietary rights owned or held by the Company that are necessary to
the conduct of the Business. Except as set forth on Schedule 3.01(m), (i) the
Company conducts the Business without any known infringement or claim of
infringement of any Intellectual Property Right of others and the conduct by the
Surviving Corporation after the Effective Time of the Business, in substantially
the same manner as it is currently conducted, will not constitute a breach or
violation of any agreement relating to the Intellectual Property Rights listed
on Schedule 3.01(m) (other than as a result of agreements to which Parent or any
of its affiliates is a party); (ii) the Company is, and after the consummation
of the Merger will be, the sole and exclusive owner of each Intellectual
Property Right listed on Schedule 3.01(m), free and clear of any Claims (other
than Permitted Liens), and, to the knowledge of Holdings and the Company, no
person is challenging, infringing, misappropriating or otherwise violating any
such Intellectual Property Rights or claiming that the conduct of the Business,
infringes, misappropriates or otherwise violates the Intellectual Property
Rights of any third party; (iii) the Company is not aware of any impediment to
the registration of any trademark that is the subject of any application for
registration listed on Schedule 3.01(m) that would have a Company Material
Adverse Effect; (iv) none of the Intellectual Property Rights listed on Schedule
3.01(m) is the subject of any outstanding order, ruling, decree, judgment or
stipulation specifically binding on the Company; (v) to the knowledge of
Holdings and the Company, none of the activities of any employee of the Company
on behalf thereof violates any obligations of such employee to third parties,
including, without limitation, confidentiality or noncompetition obligations
under agreements with a former employer; (vi) the Company is not aware of any
unauthorized use by a third party of any computer software programs or
applications that the Company considers to be a trade secret belonging to the
Company; (vii) the Company has taken and is taking reasonable precautions to
protect all material trade secrets and other confidential information relating
to its proprietary computer software programs and applications or included in
the Intellectual Property Rights that are material to the conduct of the
Business; and (viii) the execution, delivery, and performance of this Agreement
and the consummation of the Merger will not constitute a breach or default of
any Intellectual Property Rights that are material to the conduct of the
Business.
(n) Labor Matters. The Company is not a party to any
collective bargaining or union agreement, and no such agreement is applicable to
any employees of the Company. There are
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<PAGE> 109
not any controversies between the Company and any of such employees that might
reasonably be expected to result in a Company Material Adverse Effect, or any
unresolved labor union grievances or unfair labor practice or labor arbitration
proceedings pending, or threatened relating to the Business. There are no labor
unions or other organizations representing or purporting to represent any
employees of the Company and there are not any organizational efforts currently
being made or threatened involving any of such employees. Except as set forth on
Schedule 3.01(n) hereto, the Company is in compliance in all material respects
with all laws and regulations or other legal or contractual requirements
regarding the terms and conditions of employment of employees, former employees
or prospective employees or other labor related matters, including, without
limitation, laws, rules, regulations, orders, rulings, conciliation agreements,
decrees, judgments and awards relating to wages, hours, the payment of social
security and similar taxes, equal employment opportunity, employment
discrimination, fair labor standards and occupational health and safety,
wrongful discharge or violation of the personal rights of employees, former
employees or prospective employees. The Company is not liable for any material
amount of arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing.
(o) Severance Arrangements. Except as set forth on Schedule
3.01(o) hereto, the Company is not party to any agreement with any employee (i)
the benefits of which (including, without limitation, severance benefits) are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving the Company of the nature of any of the transactions
contemplated by this Agreement or (ii) providing severance benefits in excess of
those generally available under the Company's severance policies (which are
described on Schedule 3.01(o)), or which are conditioned upon a change of
control, after the termination of employment of such employees regardless of the
reason for such termination of employment, and the Company is not a party to any
employment agreement or compensation guarantee extending for a period longer
than one year. Schedule 3.01(o) sets forth all employment agreements and
compensation guarantees, regardless of duration, to which the Company is a
party. Except as a result of actions taken by Parent or the Surviving
Corporation, no amounts will be due or payable to any employee of the Company
under any such severance arrangement or otherwise by virtue of the refusal of
such employee to accept the offer of employment of the Surviving Corporation.
(p) Taxes.
(i) Except as set forth on Schedule 3.01(p) hereto,
the Company or an affiliate on behalf of the Company has (A) timely
filed all Federal and all material state, local and foreign returns,
declarations, reports, estimates, information returns and statements
relating to the Company's operations ("Returns") required to be filed
by it in respect of any Taxes (as hereinafter defined), (B) timely paid
all Taxes that are due and payable with respect to the periods covered
by the Tax Returns referred to in clause (A) without regard to whether
such Taxes have been assessed (except for audit adjustments not
material in the aggregate or to the extent that liability therefor is
reserved for in the Company's most recent unaudited financial
statements), (C) established reserves that are adequate for the payment
of all Taxes not yet due and payable with respect to the results of
operations of the Company, and (D) complied in all material respects
with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes and has in all material respects timely
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withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over.
(ii) The Company has no liability for the Taxes of
any Person or entity other than the Company under Regulation 1.1502-6
of the Internal Revenue Code.
(iii) Schedule 3.01(p) sets forth the last taxable
period through which the Federal income Tax Returns of the Company have
been examined by the Internal Revenue Service or otherwise closed. All
deficiencies asserted as a result of such examinations and any
examination by any applicable state, local or foreign taxing authority
which have not been or will not be appealed or contested in a timely
manner have been paid, fully settled or adequately provided for in the
Company's most recent audited financial statements. Except as set forth
on Schedule 3.01(p), no Federal, state, local or foreign Tax audits or
other administrative proceedings or court proceedings are currently
pending with regard to any Federal or material state, local or foreign
Taxes for which the Company would be liable, and no deficiency for any
such Taxes has been proposed, asserted or assessed or threatened
pursuant to such examination of the Company by such Federal, state,
local or foreign taxing authority with respect to any period.
(iv) Except as set forth on Schedule 3.01(p), the
Company has not executed or entered into (or prior to the Effective
Time will execute or enter into) with the Internal Revenue Service or
any taxing authority (A) any agreement or other document extending or
having the effect of extending the period for assessments or collection
of any Federal, state, local or foreign Taxes for which the Company
would be liable or (B) a closing agreement pursuant to Section 7121 of
the Internal Revenue Code, or any predecessor provision thereof or any
similar provision of state, local or foreign income tax law that
relates to the assets or operations of the Company.
(v) Except as set forth on Schedule 3.01(p), the
Company is not a party to any agreement providing for the allocation or
sharing of liability for any Taxes.
(vi) The Company has made available to Parent
complete and accurate copies of all income and franchise Tax Returns
pertaining solely to the Company and all material other Tax Returns
pertaining solely to the Company filed by or on behalf of the Company
for the taxable years ending on or prior to July 31, 1996.
(vii) The Company is not a "U.S. real property
holding corporation" (as defined in Section 897(c)(2) of the Internal
Revenue Code), and neither the Company nor any stockholder of the
Company is a non-resident alien individual, foreign corporation,
foreign partnership, or foreign trust.
For purposes of this Agreement, "Taxes" shall mean
all Federal, state, local, foreign or other taxing authority income, franchise,
sales, use, ad valorem, property, payroll, social security, unemployment,
assets, value added, withholding, excise, severance, transfer, employment,
alternative or add-on minimum and other taxes, charges, fees, levies, imposts,
duties or other
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<PAGE> 111
assessments, together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority.
(q) Compliance with Law; Permits. The Company is not in
default in any material respect under any order or decree of any court,
governmental authority, arbitrator or arbitration board or tribunal that is
specifically binding on the Company or under any laws, ordinances, governmental
rules or regulations to which the Company or any of its respective properties or
assets is subject. Schedule 3.01(q) hereto sets forth a list of all material
permits, authorizations, approvals, registrations, variances and licenses
("Permits") issued to or used by the Company in connection with the conduct of
the Business; such Permits constitute all Permits necessary for the Company to
own, use and maintain its properties and assets or required for the conduct of
the Business in substantially the same manner as it is currently conducted. Each
Permit listed on Schedule 3.01(q) is in full force and effect and no proceeding
is pending or threatened to modify, suspend, revoke or otherwise limit any of
such Permits and no administrative or governmental actions have been taken or
threatened in connection with the expiration or renewal of any of such Permits.
Except as set forth on Schedule 3.01(q), neither the Company nor Parent or
Acquisition will be required, as a result of the consummation of the
transactions contemplated hereby, to obtain or renew any Permits.
(r) Employee Benefit Plans.
(i) Schedule 3.01(r) hereto sets forth a complete and
accurate list of each plan, program, arrangement, agreement or
commitment that is an employment, consulting or deferred compensation
agreement, or an executive compensation, incentive bonus or other
bonus, employee pension, profit-sharing, savings, retirement, stock
option, stock purchase, severance pay, life, health, disability or
accident insurance plan, or vacation or other employee benefit plan,
program, arrangement, agreement or commitment, including, without
limitation, each employee benefit plan (as defined under Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") in which employees of the Company participate that is (i)
maintained by the Company or any trade or business (whether or not
incorporated) which, together with the Company, would be treated as a
single employer under Title IV of ERISA or Section 414 of the Internal
Revenue Code (collectively, the "ERISA Affiliates") or (ii) to which
any ERISA Affiliate contributes or has any obligation to contribute to,
or has or may have any liability (including, without limitation, a
liability arising out of an indemnification, guarantee, hold harmless
or similar agreement) (collectively, the "Plans"). Each Plan is
identified on Schedule 3.01(r), to the extent applicable, as one or
more of the following: an "employee pension plan" (as defined in
Section 3(2)(A) of ERISA), an "employee welfare plan" (as defined in
Section 3(1) of ERISA), or as a plan intended to be qualified under
Section 401 of the Internal Revenue Code.
(ii) The Plans have been, and currently are in
compliance, in all material respects, with all laws and regulations
applicable to the Plans under which noncompliance would have a Company
Material Adverse Effect, including, without limitation, ERISA and the
Internal Revenue Code.
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<PAGE> 112
(iii) Except as set forth on Schedule 3.01(r), no
ERISA Affiliate has maintained, adopted or established, contributed to
or been required to contribute to, or otherwise participated in or been
required to participate in, any employee benefit plan or other program
or arrangement subject to Title IV of ERISA (including, without
limitation, a "multi-employer plan" (as defined in Section 3(37) of
ERISA), a multiple employer plan (as defined in Section 210 of ERISA)
and a defined benefit plan (as defined in Section 3(35) of ERISA)).
(iv) Except as set forth on Schedule 3.01(r), the
Company neither provides nor may be required to provide and no Plan,
other than a Plan that is an employee pension benefit plan (within the
meaning of Section 3(2)(A) of ERISA), provides or may be required to
provide benefits, including, without limitation, death, health or
medical benefits (whether or not insured), with respect to current or
former employees of the Company beyond their retirement or other
termination of service with the Company (other than (A) coverage
mandated by applicable law, (B) deferred compensation benefits accrued
as liabilities on the books of the Company, or (C) benefits the full
cost of which is borne by the current or former employee (or his or her
beneficiary)). No ERISA Affiliate maintains any Plan under which any
employee or former employee of the Company may receive medical benefits
which cannot be modified or terminated by the ERISA Affiliates at any
time without the consent of any person, and no employees or former
employees of the Company will have any claim in respect of such
benefits as of the Effective Time.
(v) The transactions contemplated hereby will not
result in (i) any portion of any amount paid or payable by the Company
to a "disqualified individual" (within the meaning of Section 280G(c)
of the Internal Revenue Code and the regulations promulgated
thereunder), whether paid or payable in cash, securities of the Company
or otherwise and whether considered alone or in conjunction with any
other amount paid or payable to such a "disqualified individual," being
an "excess parachute payment" within the meaning of Section 280G(b)(1)
of the Internal Revenue Code and the regulations promulgated
thereunder, (ii) any employee of the Company being entitled to
severance pay, unemployment compensation (other than payments by state
unemployment compensation program), or any other payment, (iii) an
acceleration of the time of payment (other than eligibility for a
distribution from a defined contribution plan) or vesting or an
increase in the amount of compensation due to any such employee or
former employee of the Company or (iv) any prohibited transaction
described in Section 406 of ERISA or Section 4975 of the Internal
Revenue Code for which an exemption is not available.
(vi) No ERISA Affiliates has incurred any material
liability with respect to any Plan under ERISA (including, without
limitation, Title I or Title IV thereof, other than liability for
premiums due to the Pension Benefit Guaranty Corporation which are
current if applicable), the Internal Revenue Code or other applicable
law for which the Company may be held liable, which has not been
satisfied in full or been accrued on the balance sheet of the Company
as of July 31, 1996 pending full satisfaction, and no event has
occurred, and there exists no condition or set of circumstances, which
could result in the imposition of any material liability on the Company
not set forth in or reserved in the Company's unaudited
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balance sheet at July 31, 1996 under ERISA, the Internal Revenue Code
or other applicable law with respect to any Plan.
(vii) With respect to each Plan subject to Section
412 of the Internal Revenue Code that is funded wholly or partially
through an insurance policy, all premiums required to have been paid to
date under the insurance policy have been paid, and, except as set
forth on Schedule 3.01(r), as of the Effective Time there will be no
liability of the Company under any such insurance policy or ancillary
agreement with respect to such insurance policy in the nature of a
retroactive rate adjustment, loss sharing arrangement or other actual
or contingent liability arising wholly or partially out of events
occurring prior to the Effective Time.
(viii) None of the ERISA Affiliates has made any
contribution to any Plan that may be subject to any excise tax under
Section 4972 of the Internal Revenue Code for which the Company may be
held liable.
(s) Environmental Matters. The Company is in compliance in all
material respects with all Federal, state or local statutes, ordinances, orders,
judgments, rulings or regulations relating to environmental pollution or to
environmental regulation or control. Except as set forth on Schedule 3.01(s)
hereto, neither the Company nor any of its respective officers, employees,
representatives or agents has treated, stored, processed, discharged, spilled or
otherwise disposed of any substance defined as hazardous or toxic by any
applicable Federal, state or local law, rule, regulation, order or directive, or
any waste or by-product thereof, at any real property or any other facility
owned, leased or used by the Company, in material violation of any applicable
statutes, regulations, ordinances or directives of any governmental authority or
court, which violations may result in any material liability to the Company,
taken as a whole. Except as set forth on Schedule 3.01(s), no employee of the
Company or other person has ever made a claim or demand against the Company
based on alleged damage to health caused by any such hazardous or toxic
substance or by any waste or by-product thereof. Except as set forth on Schedule
3.01(s), the Company has not been charged by any governmental authority with
improperly using, handling, storing, discharging or disposing of any such
hazardous or toxic substance or waste or by-product thereof or with causing or
permitting any pollution of any body of water. Except as set forth on Schedule
3.01(s), to the best knowledge of Holdings and the Company, the Fee or Leased
Properties and the Business are not subject to any pending or threatened
administrative or judicial proceeding under any environmental law and there are
no facts or circumstances known to the Company which are reasonably likely to
give rise to any proceeding. Except as set forth on Schedule 3.01(s), to the
best knowledge of Holdings and the Company, there are no inactive, closed, or
abandoned storage or disposal areas or facilities or underground storage tanks
on the Fee or Leased Properties.
(t) Personal Property. The Company has provided Parent lists
of (i) all of the tangible personal property used by the Company in its business
having an original acquisition cost of $50,000 or more, and (ii) all leases of
personal property binding upon the Company having an annual rental in excess of
$25,000. All of such tangible personal property is presently utilized by the
Company in the ordinary course of its business and is in good repair, ordinary
wear and tear excepted.
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<PAGE> 114
(u) Contracts. Schedule 3.01(u) lists all contracts and
arrangements of the following types to which the Company is a party or by which
it is bound and which are material to the conduct of the Business or to the
financial condition or results of operations of the Company, taken as a whole,
including without limitation the following:
(i) any contract or arrangement with a sales
representative, distributor, dealer, broker, sales agency, advertising
agency or other person engaged in sales, distribution or promotional
activities, or any contract to act as one of the foregoing on behalf of
any person, which is not terminable by the Company on 30 or fewer days
notice;
(ii) any contract or arrangement of any nature which
involves the payment or receipt of cash or other property, an
unperformed commitment, or goods or services, having a value in excess
of $100,000;
(iii) any contract or arrangement pursuant to which
the Company has made or will make loans or advances, or has or will
have incurred indebtedness for borrowed money or become a guarantor or
surety or pledged its credit on or otherwise become responsible with
respect to any undertaking of another (except for the negotiation or
collection of negotiable instruments in transactions in the ordinary
course of business) in excess of $50,000;
(iv) any indenture, credit agreement, loan agreement,
note, mortgage, security agreement, lease of real property or personal
property, loan commitment or other contract or arrangement relating to
the borrowing of funds, an extension of credit or financing;
(v) any contract or arrangement involving a
partnership, a limited liability company, a joint venture or other
cooperative undertaking requiring a sharing of assets or technology of
the Company;
(vi) any contract or arrangement involving any
restrictions with respect to the geographical area of operations or
scope or type of business of the Company;
(vii) any power of attorney or agency agreement or
arrangement with any person pursuant to which such person is granted
the authority to act for or on behalf of the Company, or the Company is
granted the authority to act for or on behalf of any person;
(viii) any contract not fully performed and relating
to any acquisition or disposition of the Company or any predecessor in
interest of the Company, or any acquisition or disposition of any
subsidiary, division, line of business, or real property of the
Company;
(ix) any contract or arrangement with a customer or
financial institution;
(x) all such contracts and arrangements between the
Company and Holdings or its affiliates that are material to the
operations of the Company; and
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<PAGE> 115
(xi) any contract not specified above which the
cancellation, breach, or nonperformance of would constitute a Company
Material Adverse Effect.
The Company has delivered to Parent complete and accurate copies of the
contracts and agreements set forth on Schedule 3.01(u), and each such contract
or agreement is a valid and subsisting agreement, without any material default
of the Company thereunder and, to Holdings' and the Company's knowledge, without
any material default thereunder of the other party thereto. Except as set forth
on Schedule 3.01(u), the Company has not received notice of any cancellation or
termination of, or of any threat to cancel or terminate, any of such contracts
or agreements required to be listed on Schedule 3.01(u) where such cancellation
or termination would have a Company Material Adverse Effect.
(v) Insurance.
(i) All policies of fire, liability, workers'
compensation and other forms of insurance providing insurance coverage
to or for the Company for events or occurrences arising or taking place
in the case of occurrence type insurance, and for claims made and/or
suits commenced in the case of claims-made type insurance, between the
Effective Date of this Agreement and the Effective Time, are listed on
Schedule 3.01(v) hereto, and, except as set forth on Schedule 3.01(v),
all premiums with respect thereto have been paid, and no notice of
cancellation or termination has been received with respect to any such
policy. All such policies are in full force and effect, and, except as
set forth on Schedule 3.01(v), provide insurance in such amounts and
against such risks as Holdings and the Company believe are customary
for companies engaged in similar businesses to protect the employees,
properties, assets, businesses and operations of the Company. All such
policies will remain in full force and effect and will not be adversely
modified or affected by, or terminate or lapse by reason of, any of the
transactions contemplated hereby, except by reason of an insurer's
assessment of Parent or the conduct of the Business after the Effective
Time.
(ii) The Company has provided Parent information
concerning all claims, which (including related claims which in the
aggregate) exceed $50,000 and which have been made by the Company in
the last two years under any workers' compensation, general liability,
property, directors' and officers' liability or other insurance policy
applicable to the Company or any of its properties. Except as set forth
in written materials provided by the Company to Parent, there are no
pending or threatened claims under any insurance policy, the outcome of
which would have a Company Material Adverse Effect.
(w) Pending Transactions. Except for this Agreement and the
transactions contemplated hereby, the Company is not a party to or bound by any
agreement, negotiation, discussion, commitment or undertaking with respect to a
merger or consolidation with, or an acquisition of all or substantially all of
the property and assets of, any other corporation or person or the sale, lease
or exchange of all or substantially all of its properties and assets to any
other person.
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<PAGE> 116
(x) Claims Against Officers and Directors. Except as set forth
on Schedule 3.01(x), to the knowledge of Holdings and the Company, there are no
pending or threatened claims against any director, officer, employee or agent of
the Company which could give rise to any claim for indemnification against the
Company.
(y) Customers, Suppliers, Etc. The Company has provided Parent
information concerning the 15 largest customers of the Company in terms of
revenue to the Company ("Major Customers") and the 10 largest suppliers in terms
of charges to the Company ("Major Suppliers") during the fiscal year ended July
31, 1996. Except to the extent set forth in Schedule 3.01(y), between July 31,
1996 and the Effective Date of this Agreement: (i) there has not been any
material dispute between the Company and any Major Customer or Major Supplier;
(ii) the Company did not receive notice from any Major Customer stating that
such Major Customer intends to reduce its purchases from the Company; or (iii)
the Company did not receive notice from any Major Supplier stating that such
Major Supplier intends to reduce its sale of goods or services to the Company.
(z) Improper and Other Payments. Except as set forth on
Schedule 3.01(z), neither the Company nor, to the knowledge of Holdings and the
Company, any director, officer, employee, agent or representative of the
Company, nor any person acting on behalf of any of them, has (i) made, paid or
received any bribes, kickbacks or other similar payments to or from any person,
whether lawful or unlawful, (ii) made any unlawful contributions, directly or
indirectly, to a domestic or foreign political party or candidate, or (iii) made
any improper foreign payment (as defined in the Foreign Corrupt Practices Act).
(aa) Brokers. Except as set forth on Schedule 3.01(aa), the
Company has not used any broker or finder in connection with the transactions
contemplated hereby, and the Company has not nor will have any liability or
otherwise suffer or incur any loss as a result of or in connection with any
brokerage or finder's fee or other commission of any person retained by the
Company or the sole stockholder of the Company in connection with any of the
transactions contemplated by this Agreement.
(bb) Accounts Receivable and Advances. Except as disclosed on
Schedule 3.01(bb), (i) each account receivable of the Company (collectively, the
"Accounts Receivable") represents a sale made in the ordinary course of business
other than to affiliates and which arose pursuant to an enforceable written
contract for a bona fide sale of goods or for services performed, and the
Company has performed all of its obligations to produce the goods or perform the
services to which such Accounts Receivable relates, and (ii) no Account
Receivable is subject to any claim for reduction, counterclaim, set-off,
recoupment or other claim for credit, allowances or adjustments by the obligor
thereof, in an amount individually or in the aggregate that would have a Company
Material Adverse Effect.
(cc) OCC Examination. The Office of the Comptroller of the
Currency ("OCC") has not notified the Company of, nor imposed upon the Company,
any order, judgment, decree, injunction, stipulation, liability, obligation,
violation, fine, penalty, or burden that has material and adverse financial
consequences on the Company or its Business.
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<PAGE> 117
(dd) Accuracy of Statements. Neither this Agreement, the
Holdings/Company Disclosure Letter, nor any schedule, exhibit, statement, list,
document, certificate or other information furnished or to be furnished by or on
behalf of the Company to Parent in connection with this Agreement, when read
together, or any of the transactions contemplated hereby contains or will
contain any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they are made, not misleading.
SECTION 3.02 Representations and Warranties of Holdings. Except as set
forth in the Holdings/Company Disclosure Letter, Holdings represents and
warrants to Parent and Acquisition as follows:
(a) Organization and Qualification. Holdings is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
(b) Ownership. Holdings owns beneficially and of record 100%
of the Company Common Stock, free and clear of any liens, claims, charges,
restrictions, rights of others, security interests, prior assignments or other
encumbrances.
(c) Authority Relative to Agreement. Holdings has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution, delivery and
performance of this Agreement by Holdings and the consummation by Holdings of
the transactions contemplated hereby have been duly authorized by Holdings'
Board of Directors and no other corporate approvals or proceedings on the part
of Holdings are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Holdings and constitutes the legal, valid and binding obligation of Holdings,
enforceable against Holdings in accordance with its terms, subject to the
effect, if any, of (a) applicable bankruptcy and other similar laws affecting
the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies, and (c) the
limitations imposed by public policy on the enforceability of provisions
requiring indemnification in connection with the offering, issuance or sale of
securities. No approval of the holders of any class or series of Holdings'
capital stock is necessary to approve this Agreement, the Merger and the
transactions contemplated hereby and thereby.
(d) Non-Contravention. The execution and delivery of this
Agreement by Holdings and the consummation by Holdings of the transactions
contemplated hereby will not (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of Holdings or (ii) except as set forth
on Schedule 3.02(d) hereof, result in any violation of, conflict with, or
default (or an event which with notice or lapse of time or both would constitute
a default) or loss of a benefit under, or permit the termination of or the
acceleration of any obligation under, any mortgage, indenture, lease, agreement
or other instrument, permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company's Business as conducted by the Company or the Company's properties, or
(iii) result in the creation or imposition of any Claim in favor of any third
person or entity upon any of the assets of the
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<PAGE> 118
Company or the Company's Business, other than any such violation, conflict,
default, loss, termination or acceleration that would not have a Company
Material Adverse Effect.
(e) Consents. Except as set forth on Schedule 3.02(e), no
consent, approval, order or authorization of, or registration, declaration or
filing with, any Federal, state, local or foreign governmental or regulatory
authority is required to be made or obtained by Holdings or any of its
subsidiaries in connection with the execution and delivery of this Agreement by
Holdings or the consummation by Holdings of the transactions contemplated
hereby, except for (i) compliance by Holdings with the HSR Act, (ii) filing with
the SEC of such reports, schedules, and information under Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated by the
SEC thereunder, as may be required to be filed by Holdings in connection with
this Agreement, the Merger, and other transactions contemplated hereby, (iii)
the filing of a certificate of merger with the Secretary of State of the State
of Delaware in accordance with the Delaware GCL, and (iv) such consents,
approvals, orders or authorizations which if not obtained, or registrations,
declarations or filings which if not made, would not materially adversely affect
the ability of Holdings to consummate the transactions contemplated hereby and
thereby.
(f) Certain Information. Provided that Parent allows Holdings
and the Company to modify any information regarding Holdings or the Company
contained therein, none of the information supplied by Holdings for inclusion in
the Registration Statement or the Proxy Statement/Prospectus will, at the
respective times such documents or any amendments or supplements thereto are
filed with the SEC, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that no
representation is made by Holdings with respect to information supplied by
Parent which relates to the Parent or any affiliate or associate of Parent for
inclusion in the Registration Statement or the Proxy Statement/Prospectus.
Provided that Parent allows Holdings and the Company to modify any information
regarding Holdings or the Company contained therein, none of the information
relating to Holdings and its subsidiaries included in the Registration Statement
or the Proxy Statement/Prospectus that has been supplied by Holdings or its
subsidiaries will, at the time the Proxy Statement/Prospectus is distributed to
the Company's and/or Parent's stockholders, be false or misleading with respect
to any material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(g) Brokers. Except as set forth on Schedule 3.02(h), neither
Holdings nor any of its subsidiaries has used any broker or finder in connection
with the transactions contemplated hereby, and neither Holdings nor any of its
subsidiaries has or shall have any liability or otherwise suffer or incur any
loss as a result of or in connection with any brokerage or finder's fee or other
commission of any person retained by Holdings, any of its subsidiaries, or the
stockholders of Holdings in connection with any of the transactions contemplated
by this Agreement.
(h) Accuracy of Statements. Neither this Agreement nor any
schedule, exhibit, statement, list, document, certificate or other information
furnished or to be furnished by or on behalf of Holdings to Parent in connection
with this Agreement or any of the transactions contemplated
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<PAGE> 119
hereby contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they are made, not
misleading.
SECTION 3.03 Representations and Warranties of Parent. Except as set
forth in the Parent Disclosure Letter dated of even date herewith, Parent
represents and warrants to Holdings and the Company as follows:
(a) Organization and Qualification. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own or
lease and operate its properties and assets and to carry on its business as it
is now being conducted. Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Parent Material Adverse Effect (as hereinafter defined). As used in this
Agreement, the term "Parent Material Adverse Effect" shall mean a material
adverse effect on the properties, assets, financial condition, operating results
or business of Parent, taken as a whole; provided, however, that the term
"Parent Material Adverse Effect" shall not include any such material adverse
effect arising or resulting, directly or indirectly, from industry conditions or
the public announcement of, or the response or reaction of customers, vendors,
licensors, investors, Parent employees or others to, this Agreement, the Merger,
or any of the agreements or transactions contemplated by this Agreement or
entered into in connection with this Agreement or the Merger.
(b) Subsidiaries. Schedule 3.03(b) includes a complete and
accurate list of each subsidiary of the Parent, indicating the jurisdiction of
incorporation and the nature and level of ownership in such subsidiary by the
Parent, any subsidiary of the Parent and any other person. Complete and correct
copies of the certificate of incorporation and by-laws of the Parent and of each
subsidiary of the Parent have previously been delivered to the Company. Except
as set forth on Schedule 3.03(b) hereto, neither the Parent nor any of its
subsidiaries owns of record or beneficially, directly or indirectly, (i) any
shares of outstanding capital stock or securities convertible into capital stock
of any other corporation or (ii) any participating interest in any partnership,
joint venture or other noncorporate business enterprise. Each subsidiary of the
Parent is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to own or lease and operate its properties and
assets and to carry on its business as it is now being conducted. Each
subsidiary of the Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Parent Material Adverse Effect. All the outstanding shares of capital
stock of the Parent's subsidiaries are duly authorized, validly issued, fully
paid and nonassessable and, except as set forth on Schedule 3.03(b), are owned
by the Parent or by a wholly owned subsidiary of the Parent free and clear of
any Claims, and there are no proxies or voting or transfer agreements or
understandings outstanding with respect to any such shares. Without limiting the
foregoing representations and warranties, Parent owns beneficially of record all
of the issued and outstanding shares of the capital stock of Acquisition free
and clear of all Claims.
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<PAGE> 120
For purposes of this Agreement, the term "subsidiary," when
used with respect to the Parent, shall mean any corporation or other business
entity a majority of whose outstanding equity securities is at the time owned,
directly or indirectly, by the Parent and/or one or more other subsidiaries of
the Parent.
(c) Capitalization. The authorized capital stock of Parent consists
of 150,000,000 shares of Parent Common Stock and 15,000,000 shares of Parent
Preferred Stock, and, as of August 31, 1996, 41,669,035 shares of Parent Common
Stock were issued and outstanding, all of which were duly authorized and validly
issued and are fully paid and nonassessable, and no shares of Parent Preferred
Stock were issued and outstanding. As of August 31, 1996, Parent had outstanding
options to purchase up to a total of 3,387,803 shares of Parent Common Stock.
Except as provided in the immediately preceding sentence or in Schedule 3.03(c)
hereto, Parent has, no subscription, warrant, option, convertible security,
stock appreciation or other right (contingent or other) to purchase or acquire
any shares of any class of capital stock of Parent that is authorized or
outstanding and there is not any commitment of Parent to issue any shares,
warrants, options or other such rights or to distribute to holders of any class
of its capital stock any evidences of indebtedness or assets. Except as
disclosed in Schedule 3.03, Parent does not have any obligation (contingent or
other) to purchase, redeem or otherwise acquire any shares of its capital stock
or any interest therein or to pay any dividend or make any other distribution in
respect thereof.
(d) Authority Relative to Agreements. Parent has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement by Parent
and the consummation by Parent of the transactions contemplated hereby have been
duly authorized by the Board of Directors of Parent, and except for approval by
the stockholders of Parent, no other corporate approvals or proceedings on the
part of Parent are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Parent and constitutes the legal, valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms, subject to the effect,
if any, of (a) applicable bankruptcy and other similar laws affecting the rights
of creditors generally, (b) rules of law governing specific performance,
injunctive relief and other equitable remedies, and (c) the limitations imposed
by public policy on the enforceability of provisions requiring indemnification
in connection with the offering, issuance or sale of securities. The Parent's
Board of Directors has by the requisite vote of its Board of Directors present
(i) determined that this Agreement and the Merger is advisable and fair and in
the best interests of the Parent and its stockholders, and (ii) resolved to
recommend the approval of this Agreement and the Merger by the Parent's
stockholders and directed that the Merger be submitted for consideration by such
stockholders. The affirmative vote of the holders of a majority of the
outstanding Parent Common Stock is the only vote of the holders of any class or
series of the Parent's capital stock necessary to approve this Agreement, the
Merger, and the transactions contemplated hereby and thereby.
(e) Non-Contravention. The execution and delivery of this Agreement
by Parent and the consummation by Parent of the transactions contemplated hereby
will not (i) violate or conflict with any provision of the Certificate of
Incorporation or By-Laws of Parent, (ii) result in any violation of, conflict
with, or default (or an event which with notice or lapse of time or both would
constitute a default) or loss of a benefit under, or permit the termination of
or the acceleration
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<PAGE> 121
of any obligation under, any material mortgage, indenture, lease, agreement or
other instrument to which Parent is a party or by which its assets are bound,
permit, concession, grant, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Parent or any of its
subsidiaries or their respective properties, or (iii) result in the creation or
imposition of any Claim in favor of any third person or entity upon any of the
assets of Parent or any of its subsidiaries, other than any such violation,
conflict, default, loss, termination or acceleration that would not have a
Parent Material Adverse Effect or adversely affect the ability of Parent to
consummate the Merger or any other transaction contemplated hereby.
(f) Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Federal, state, local or foreign
governmental or regulatory authority is required to be made or obtained by
Parent in connection with the execution and delivery of this Agreement by Parent
or the consummation by Parent of the transactions contemplated hereby, except
for (i) compliance by Parent with the HSR Act, (ii) filings pursuant to the
Securities Act as contemplated by Section 4.02 hereof, (iii) the filing of a
certificate of merger with the Secretary of State of the State of Delaware in
accordance with the Delaware GCL, (iv) any licenses, permits, franchises or
other governmental authorizations pertaining to the Business that are required
as a result of the consummation of the transactions contemplated hereby, (v) the
consents described in Schedule 3.03(f), and (vi) such consents, approvals,
orders or authorizations which if not obtained, or registrations, declarations
or filings which if not made, would not have a Parent Material Adverse Effect or
materially adversely affect the ability of Parent to consummate the transactions
contemplated hereby or to conduct the Business after the Effective Time.
(g) SEC Filings. Parent has filed all forms, reports and documents
required to be filed with the SEC since September 28, 1995, and Parent has made
available to the Company, as filed with the SEC, complete and accurate copies of
all reports, statements and registration statements (including Current Reports
on Form 8-K) filed by Parent with the SEC since September 28, 1995, in each case
including all amendments and supplements (collectively, the "Parent SEC
Filings"). The Parent SEC Filings (including, without limitation, any financial
statements or schedules included therein) (i) were prepared in compliance with
the requirements of the Securities Act or Exchange Act, as the case may be, and
(ii) did not at the time of filing (or if amended, supplemented or superseded by
a filing prior to the date hereof, on the date of that filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
The financial statements of Parent included in the Parent SEC
Filings have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied and consistent with prior periods
indicated (except as otherwise noted therein or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) and fairly present (subject,
in the case of unaudited statements, to normal, recurring year-end adjustments
and any other adjustments described therein) the consolidated financial position
of Parent and its consolidated subsidiaries as at the dates thereof and the
consolidated results of operations and cash flows of Parent and its consolidated
subsidiaries for the periods then ended. Since June 30, 1996, there has been no
change in any of the significant accounting (including tax accounting) policies,
practices or procedures of
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the Parent or any of its subsidiaries. Except for liabilities or obligations
that are accrued or reserved against in Parent's financial statements included
in the Parent SEC Reports neither of Parent or its subsidiaries has any
liabilities or obligations (whether absolute, accrued, contingent or otherwise,
and whether due or to become due) that would be required by GAAP to be reflected
on a consolidated balance sheet, or the notes thereto, or which would have a
Parent Material Adverse Affect.
(h) Absence of Certain Changes or Events. Except as set forth in the
Parent SEC Filings made through the date hereof, (i) Parent has not conducted
its business and operations other than in the ordinary course of business and
consistent with past practices or taken any of the actions set forth in Section
4.02 hereof and (ii) there has not been any fact, event, circumstance or change
affecting or relating to Parent or its subsidiaries that has caused or is
reasonably likely to cause a Material Adverse Change in Parent's financial
condition, properties, assets, liabilities, business, operations, or results of
operations. As used with reference Parent, the term "Material Adverse Change"
refers to a material adverse change other than a change arising or resulting,
directly or indirectly, from industry conditions or the public announcement of,
or the response or reaction of customers, vendors, licensors, investors, Parent
employees or others to, this Agreement, the Merger, or any of the agreements or
transactions contemplated by this Agreement or entered into in connection with
this Agreement of the Merger.
(i) Certain Information. None of the information supplied by Parent
or Acquisition for inclusion in the Registration Statement or the Proxy
Statement/Prospectus (as defined in Section 4.02 hereof) will, at the respective
times such documents or any amendments or supplements thereto are filed with the
SEC, contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except no
representation is made by Parent or Acquisition with respect to information
supplied by the Company which relates to the Company or any affiliate or
associate of the Company for inclusion in the Registration Statement or the
Proxy Statement/Prospectus. None of the information relating to Parent included
in the Registration Statement or the Proxy Statement/Prospectus that has been
supplied by Parent will, at the time the Proxy Statement/Prospectus is
distributed to the Company's and/or Parent's stockholders, be false or
misleading with respect to any material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(j) Registration Rights. Except as set forth on Schedule 3.03(j) and
except as otherwise provided for in this Agreement, Parent is not a party to any
agreement obligating or requiring it to register under the Securities Act any
Parent Common Stock or other security of Parent.
(k) Brokers. Except as set forth on Schedule 3.03(k), neither Parent
nor any of its subsidiaries has used any broker or finder in connection with the
transactions contemplated hereby, and neither Parent nor any of its subsidiaries
has or shall have any liability or otherwise suffer or incur any loss as a
result of or in connection with any brokerage or finder's fee or other
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commission of any person retained by Parent or any of its subsidiaries in
connection with any of the transactions contemplated by this Agreement.
(l) Title to Properties. Parent has good and valid title to the
properties and assets reflected on the audited balance sheet of Parent as of
June 30, 1996 other than nonmaterial properties and assets disposed of in the
ordinary course of business consistent with past practice since the date of such
balance sheet, and all such properties and assets are free and clear of Claims,
except (i) as described in the Parent SEC Filings, (ii) liens for current taxes
not yet due, and (iii) minor imperfections of title, if any, not material in
amount and not materially detracting from the value or impairing the use of the
property subject thereto or impairing the operations or proposed operations of
the Company (collectively, "Permitted Liens"). Such properties and assets
constitute all of the assets necessary to conduct Parent's business
substantially in the same manner as it has been conducted prior to the date
hereof.
(m) Intellectual Property Rights. The patents, trademarks and trade
names, trademark and trade name registrations, service mark, brand mark and
brand name registrations, copyrights, inventions, know-how, trade secrets,
proprietary processes and information, software source and object code, the
applications therefor and the licenses with respect thereto (collectively,
"Intellectual Property Rights") currently owned by, or licensed to, Parent and
its subsidiaries hereto constitute all material proprietary rights owned or held
by Parent or its subsidiaries that are necessary to the conduct of Parent's
business as currently conducted. Except as set forth in the Parent SEC Filings,
Parent and its subsidiaries conduct their business without any known
infringement or claim of infringement of any Intellectual Property Right of
others; (ii) to the knowledge of Parent, no person is challenging, infringing,
misappropriating or otherwise violating any such Intellectual Property Rights or
claiming that the conduct by Parent of its business, infringes, misappropriates
or otherwise violates the Intellectual Property Rights of any third party; (iii)
none of the Intellectual Property Rights currently used by Parent is the subject
of any outstanding order, ruling, decree, judgment or stipulation specifically
binding on Parent; (v) to the knowledge of Parent, none of the activities of any
employee of Parent or its subsidiaries on behalf thereof violates any
obligations of such employee to third parties, including, without limitation,
confidentiality or noncompetition obligations under agreements with a former
employer; (vi) Parent is not aware of any unauthorized use by a third party of
any computer software programs or applications that Parent considers to be a
trade secret belonging to the Company; (vii) Parent has taken and is taking
reasonable precautions to protect all material trade secrets and other
confidential information relating to its proprietary computer software programs
and applications or included in the Intellectual Property Rights that are
material to the conduct of its business; and (viii) the execution, delivery, and
performance of this Agreement and the consummation of the Merger will not
constitute a breach or default of any Intellectual Property Rights that are
material to the conduct of Parent's business.
(n) Environmental Matters. Parent and its subsidiaries are in
compliance in all material respects with all Federal, state or local statutes,
ordinances, orders, judgments, rulings or regulations relating to environmental
pollution or to environmental regulation or control. Parent has not been charged
by any governmental authority with improperly using, handling, storing,
discharging or disposing of any such hazardous or toxic substance or waste or
by-product thereof or with causing or permitting any pollution of any body of
water. To the best knowledge of Parent
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no properties or facilities used by Parent or its subsidiaries are subject to
any pending or threatened administrative or judicial proceeding under any
environmental law and there are no facts or circumstances known to Parent which
are reasonably likely to give rise to any proceeding. To the best knowledge of
Parent, there are no inactive, closed, or abandoned storage or disposal areas or
facilities or underground storage tanks on the properties or facilities used by
Parent or its subsidiaries.
(o) Insurance. All policies of fire, liability, workers'
compensation and other forms of insurance providing insurance coverage to or for
Parent are in full force and effect, and provide insurance in such amounts and
against such risks as Parent believes are customary for companies engaged in
similar businesses to protect the employees, properties, assets, businesses and
operations of Parent and its subsidiaries. All such policies will remain in full
force and effect and will not be adversely modified or affected by, or terminate
or lapse by reason of, any of the transactions contemplated hereby, except by
reason of an insurer's assessment of Parent or the conduct of the Business after
the Effective Time.
(p) Pending Transactions. Except for this Agreement and the
transactions contemplated hereby, Parent is not a party to or bound by any
agreement, negotiation, discussion, commitment or undertaking with respect to a
merger or consolidation with, or an acquisition of all or substantially all of
the property and assets of, any other corporation or person or the sale, lease
or exchange of all or substantially all of its properties and assets to any
other person.
(q) Claims Against Officers and Directors. To the knowledge of
Parent, there are no pending or threatened claims against any director, officer,
employee or agent of the Company which could give rise to any claim for
indemnification against the Company.
SECTION 3.04 Representations and Warranties of Acquisition. Acquisition
represents and warrants to Holdings and the Company as follows:
(a) Organization and Qualification. Acquisition is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own or
lease and operate its properties and assets and to carry on its business as it
is now being conducted. Acquisition is duly qualified as a foreign corporation
to do business, and is in good standing, in each jurisdiction in which the
character of its properties owned or leased or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not have a material adverse effect on the financial condition, operating
results or business of Acquisition.
(b) Capitalization. The authorized capital stock of Acquisition
consists of 3,000 shares of Common Stock, $.01 par value. As of the date hereof,
100 shares of Common Stock are issued and outstanding, all of which were duly
authorized and validly issued and are fully paid and nonassessable, and all such
shares are owned of record and beneficially by Parent free of all Claims, and no
shares of Common Stock are held in the treasury of Acquisition. Acquisition has
no commitments to issue or sell any shares of its capital stock or any
securities or obligations convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire from
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Acquisition, any shares of its capital stock, and no securities or obligations
evidencing any such rights are outstanding.
(c) Authority Relative to Agreement. Acquisition has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement by
Acquisition and the consummation by Acquisition of the transactions contemplated
hereby have been duly authorized by the Board of Directors of Acquisition and by
Parent as its sole stockholder, and no other corporate approvals or proceedings
on the part of Acquisition are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Acquisition and constitutes the legal, valid and binding obligation
of Acquisition, enforceable against Acquisition in accordance with its terms
subject to the effect, if any, of (a) applicable bankruptcy and other similar
laws affecting the rights of creditors generally, (b) rules of law governing
specific performance, injunctive relief and other equitable remedies, and (c)
the limitations imposed by public policy on the enforceability of provisions
requiring indemnification in connection with the offering, issuance or sale of
securities.
(d) Non-Contravention. The execution and delivery of this Agreement
by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby will not (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of Acquisition or (ii) result in any
violation of, conflict with, or default (or an event which with notice or lapse
of time or both would constitute a default) or loss of a benefit under, or
permit the termination of or the acceleration of any obligation under, any
material mortgage, indenture, lease, agreement, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Acquisition or
its properties.
(e) Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Federal, state, local or foreign
governmental or regulatory authority is required to be made or obtained by
Acquisition in connection with the execution and delivery of this Agreement by
Acquisition or the consummation by Acquisition of the transactions contemplated
hereby, except for (i) compliance by Acquisition with the HSR Act, (ii) the
filing of a certificate of merger with the Secretary of State of the State of
Delaware in accordance with the Delaware GCL, and (iii) any licenses, permits,
franchises or other governmental authorizations pertaining to the Business that
are required as a result of the consummation of the transactions contemplated
hereby.
(f) Other Matters. Acquisition has been formed for the sole purpose
of effecting the Merger and, except as contemplated by this Agreement,
Acquisition has not conducted any business activities and does not have any
material liabilities or obligations.
ARTICLE IV
COVENANTS
SECTION 4.01 Conduct of the Company's Business. The Company covenants
and agrees that, prior to the Effective Time, unless Parent shall otherwise
consent in writing and except as
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otherwise expressly contemplated by this Agreement or by any other contract or
agreement that the Company may enter into with Parent and/or Holdings:
(a) the business of the Company shall be conducted only in,
and the Company shall not take any action except in, the ordinary
course of business consistent with past practice and the Company shall
use its best efforts to preserve intact its present business
organization, keep available the services of its current officers and
employees, maintain its assets (other than those permitted to be
disposed of hereunder) in good repair and condition, maintain its books
of account and records in the usual, regular and ordinary manner and
preserve its goodwill and ongoing business;
(b) the Company shall not directly or indirectly do any of the
following: (i) issue, sell, pledge, dispose of or encumber any property
or assets (including Intellectual Property Rights) of the Company,
except inventory and immaterial assets in the ordinary course of
business consistent with past practice; (ii) amend or propose to amend
its Certificate of Incorporation or By-Laws; (iii) split, combine or
reclassify any outstanding shares of its capital stock, or declare, set
aside or pay any dividend payable in cash, stock, property or otherwise
with respect to such shares (except for any dividends paid in the
ordinary course to the Company); (iv) redeem, purchase, acquire or
offer to acquire (or permit any of its subsidiaries to redeem,
purchase, acquire or offer to acquire) any shares of its capital stock;
(v) incorporate or otherwise form or create any subsidiary; (vi)
materially change the Company's equipment or technology; or (vii) enter
into any contract, agreement, commitment or arrangement with respect to
any of the matters set forth in this paragraph (b);
(c) the Company shall not (i) issue, sell, pledge or dispose
of, or agree to issue, sell, pledge or dispose of, any additional
shares of, or securities convertible or exchangeable for, or any
options, warrants or rights of any kind to acquire any shares of, its
capital stock of any class or other property or assets; (ii) acquire
(by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division
thereof or any material amount of assets; (iii) incur or guarantee any
indebtedness for borrowed money other than in the ordinary course of
business and consistent with past practices, or refinance any such
indebtedness or issue or sell any debt securities; (iv) enter into or
modify any material contract, lease, agreement or commitment, or permit
or perform any act that would cause a material breach of any such
contract, lease, agreement or commitment; (v) terminate, modify,
assign, waive, release or relinquish any material contract rights or
amend any material rights or claims; (vi) discharge or satisfy any
material claim or settle or compromise any material claim, action, suit
or proceeding pending or threatened against the Company (or, if the
Company may be liable or obligated to provide indemnification to its
directors or officers), against the Company's directors or officers,
before any court, governmental agency or arbitrator; (vii) make any
loans, advances or capital contributions to or investments in, any
other person, except as may be required under agreements in effect as
of and identified on Schedule 3.01(u) hereto and upon prior notice to
Parent; (viii) alter through merger, liquidation, reorganization,
restructuring or in any other manner the corporate structure or
ownership of the Company; (ix) violate or fail to perform, in any
material respect, any obligation imposed upon the Company by any
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applicable laws, orders or decrees, ordinances, government rules or
regulations or conciliation agreements; or (x) to the extent not
described herein, take any action described in Section 3.01(h) hereof;
(d) the Company shall not grant any increase in the salary or
other compensation of its directors, officers or employees, except
reasonable salary increases for employees or executive officers of the
Company, in the ordinary course of business consistent with past
practice, or grant any bonus to any employee or enter into any
employment agreement or make any loan to or enter into any material
transaction of any other nature with any employee of the Company;
(e) the Company shall not take any action to institute any new
severance or termination pay practices with respect to any directors,
officers or employees of the Company or to increase the benefits
payable under its severance or termination pay practices;
(f) the Company shall not adopt or amend, in any material
respect, any plan for the benefit or welfare of any directors, officers
or employees of the Company, except as contemplated hereby or as may be
required by applicable law or regulation;
(g) the Company shall use its best efforts, to the extent not
prohibited by the foregoing provisions of this Section 4.01, to
maintain its relationships with its suppliers and customers, clients,
and others having business dealings with it, and if and as requested by
Parent or Acquisition, (i) the Company shall use its best efforts to
make reasonable arrangements for representatives of Parent or
Acquisition to meet with customers and suppliers of the Company, and
(ii) the Company shall schedule, and the management of the Company
shall participate in, meetings of representatives of Parent or
Acquisition with employees of the Company for purposes of dealing with
the transition issues related to the Merger;
(h) the Company shall provide to Parent a draft of any Federal
income Tax return pertaining only to the Company or material state,
local or foreign Tax return (other than state or local sales and use
taxes) pertaining only to the Company required to be filed on behalf of
the Company between the Effective Date of this Agreement and the
Effective Time at least 15 days prior to the date on which such return
is due; and
(i) the Company shall respond to inquiries of and shall
consult with Parent as to the management, Business, and affairs of the
Company; provided, however, that the final decisions as to the conduct
of the management, Business, and affairs of the Company shall remain
with the Company.
SECTION 4.02 Registration Statement; Stockholder Approval; Etc.
(a) Parent, Holdings, and the Company shall, in consultation
with each other, prepare a joint proxy statement pertaining to the Merger and
containing the recommendation of the Board of Directors of each of Parent and
the Company to approve and adopt this Agreement and the
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Merger as promptly as reasonably practicable after the date hereof. The
Company's proxy or information statement shall also constitute the prospectus
included in the Registration Statement to be filed by Parent pursuant to Section
4.02(b) hereof (the "Proxy Statement/Prospectus"). Parent, Holdings, and the
Company shall cooperate fully with each other in the preparation of the Proxy
Statement/Prospectus and any amendments and supplements thereto, and Parent,
Holdings, and the Company will provide any audited and unaudited financial
statements that may be required by the applicable rules of the Securities and
Exchange Commission or otherwise to be included in the Proxy
Statement/Prospectus. The Proxy Statement/Prospectus shall not be distributed,
and no amendment or supplement thereto shall be made by Parent, Holdings, or the
Company, without the prior consent of any other party and its counsel. Each of
Parent and the Company shall cause a definitive Proxy Statement/Prospectus to be
distributed to its stockholders entitled to vote upon the Merger promptly
following the effective date of the Registration Statement.
(b) (i) As promptly as reasonably practicable after the date
hereof, Parent shall prepare and file with the SEC under the Exchange Act and
the Securities Act, a Registration Statement on Form S-4 (the "Registration
Statement") with respect to the approval of the Merger and the issuance of the
shares of Parent Common Stock to be issued in the Merger, and shall use its best
efforts to have the Proxy Statement and Registration Statement declared
effective by the SEC as promptly as practicable. Parent shall also take any
action required to be taken under state blue sky or other securities laws in
connection with the issuance of shares of Parent Common Stock in the Merger.
(ii) As soon as reasonably practicable after the effective
date of the Registration Statement, Parent shall take all action necessary,
subject to and in accordance with the Delaware GCL and its Certificate of
Incorporation and By-Laws, to obtain the requisite approval and adoption of this
Agreement and the Merger by the Parent's stockholders at a duly called meeting
pursuant to the Delaware GCL and shall take such other actions as may be
required by applicable law and the applicable rules of the Nasdaq NM. The Board
of Directors of the Parent has determined that the Merger is advisable and in
the best interests of the stockholders of the Parent and shall recommend that
Parent's stockholders vote to approve and adopt this Agreement and the Merger
and any other matters to be submitted to Parent's stockholders in connection
therewith.
(iii) Holdings and the Company shall cooperate fully with
Parent in the preparation of the Proxy Statement/Prospectus and the Registration
Statement and any amendments and supplements thereto and shall furnish Parent
with all information and shall take such other action as Parent may reasonably
request in connection therewith. Holdings and the Company shall provide Parent
with all pro forma financial information required by Regulation S-X to be
included in the Registration Statement or in any other filing that is required
to be made by Parent pursuant to the Securities Act or the Exchange Act in
connection with the Merger. All such pro forma financial information shall be
prepared in accordance with Regulation S-X and shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
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(c) As soon as reasonably practicable after the effective date
of the Registration Statement, the Company and Parent shall take all action
necessary, subject to and in accordance with the Delaware GCL and its
Certificate of Incorporation and By-Laws, to obtain the requisite approval and
adoption of this Agreement and the Merger by their respective stockholders at a
duly called meeting or by written consents pursuant to Section 228 of the
Delaware GCL and shall take such other actions as may be required by applicable
law. The Board of Directors of the Company and Parent have each determined that
the Merger is advisable and in the best interests of their respective
stockholders and shall recommend that their respective stockholders vote to
approve and adopt this Agreement and the Merger and any other matters to be
submitted to such stockholders in connection therewith.
(d) Parent shall notify Holdings and the Company of the
receipt of any comments of the SEC with respect to (and of any requests by the
SEC for amendments or supplements to) the Proxy Statement/Prospectus or the
Registration Statement, or for additional information within 24 hours after
receipt thereof from the SEC, and shall promptly supply Holdings and the Company
with copies of all correspondence between Parent (or its representatives) and
the SEC (or its staff) with respect thereto within 24 hours after receipt
thereof from the SEC. If, at any time prior to the approval of the Merger by
Parent's or the Company's stockholders, any event should occur relating to or
affecting Holdings, the Company, Parent or Acquisition, or to their respective
officers or directors, which event should be described in an amendment or
supplement to the Proxy Statement/Prospectus or the Registration Statement, the
parties shall promptly inform one another and shall cooperate in promptly
preparing, filing and clearing with the SEC and, if required by applicable
securities laws, distributing to Parent's or the Company's stockholders, such
amendment or supplement.
(e) Parent shall cause the Parent Common Stock to be issued in
the Merger, to be listed on the Nasdaq NM, subject to official notice of
issuance.
SECTION 4.03 Access to Information.
(a) Each of Parent, Holdings, and the Company shall, and shall
cause its respective subsidiaries, officers, directors, employees,
representatives, advisors and agents to, afford, from the date hereof to the
Effective Time, the officers, employees, representatives, advisors and agents of
the other party complete access at all reasonable times to its officers,
employees, agents, properties, books, records and workpapers, and shall furnish
each other party all financial, operating and other information and data as
Parent, Holdings, or Company, through its officers, employees or agents, may
reasonably request and shall promptly furnish to the other monthly operating and
financial reports in such form as Parent, Holdings, or the Company shall
reasonably request. For each calendar month that ends between August 1, 1996
through the Closing Date, the Company will within thirty days after the end of
such month prepare and deliver to Parent unaudited monthly balance sheets and
statements of operations for the Company, that shall fairly present the
financial condition and the results of operations of the Company in all material
respects.
(b) The Company, at least three business days prior to the
Effective Time, shall deliver to Parent a list setting forth the names and
locations of each bank or other financial institution
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at which the Company has an account (giving the account numbers) or safe deposit
box and the names of all persons authorized to draw thereon or have access
thereto, and the names of all persons, if any, now holding powers of attorney or
comparable delegation of authority from the Company and a summary statement
thereof.
(c) Each of Parent, Holdings, and the Company shall, and shall
cause its respective officers, directors, employees, representatives, advisors
and agents to, afford the officers, employees, representatives, advisors and
agents of the other party with access to such information concerning Parent or
the Company as may be necessary for each party to ascertain the accuracy and
completeness of the information supplied by Parent, Holdings, or the Company for
inclusion in any pre-merger notification report filed under the HSR Act (and any
additional information or documentary material supplied in response to any
request pursuant to Section 7A(e) of the HSR Act and the regulations thereunder)
or in the Proxy Statement/Prospectus.
(d) If this Agreement is terminated, each of the parties
hereto shall, and shall cause its officers, employees, representatives, advisors
and agents to, destroy or return to the other party all confidential documents,
work papers and other materials, and all copies thereof, obtained by it or on
its behalf from such other party as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution and delivery hereof.
(e) Each of the parties hereto and its officers and employees
shall not disclose or use any information so obtained, except as required by
applicable law or legal process or by any applicable rules or regulations of a
national securities exchange or the NASD upon the advice of counsel, without the
prior written consent of the other party; provided that any such information may
be disclosed to a party's financial advisors, accountants, counsel and other
representatives, as may be appropriate or required in connection with the
transactions contemplated hereby, but only if such persons shall be specifically
informed by such party of the confidential nature of such information and agree
to comply with the restrictions contained herein. The agreements contained in
this Section 4.03(e) do not apply to information that (i) is or becomes
generally available to the public other than as a result of a disclosure by a
receiving party or its representatives, (ii) can be demonstrated to have been
known to the receiving party on a non-confidential basis prior to its receipt,
(iii) becomes available to a party on a non-confidential basis from a source not
bound by any duty of confidentiality to the other party or (iv) is independently
developed by a receiving party without reference to any confidential
information.
If any party or any of its respective representatives becomes
required by law (by deposition, interrogatory, request for documents, subpoena,
civil investigative demand, or similar process) or otherwise become required to
disclose any confidential information or material the recipient party will
provide the disclosing party with prompt prior written notice of such
requirement so that the disclosing party may seek a protective order or other
remedy, or waive compliance with the terms of this Agreement. If such protective
order or other remedy is not obtained, or if the disclosing party is required to
waive compliance with the provisions hereof, the recipient party will furnish
only that portion of the confidential information or material which it is
advised by written opinion of counsel is legally required and exercise all
reasonable efforts to obtain assurance that confidential treatment, if
available, will be accorded such confidential information or material.
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(f) No investigation pursuant to this Section 4.03 shall
affect, add to, or subtract from any representations or warranties of the
parties hereto or the conditions to the obligations of the parties hereto to
effect the Merger.
SECTION 4.04 Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its best efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the Merger and all other transactions contemplated by
this Agreement, including, without limitation, using all reasonable efforts to
obtain all necessary waivers, consents and approvals and to effect all necessary
registrations and filings and to cause the conditions to Closing set forth in
Article V hereof to be promptly fulfilled; provided, that the foregoing shall
not require Parent to agree to make, or to require or permit the Company to
make, or require Holdings to make any divestiture of a significant asset in
order to obtain any waiver, consent or approval.
SECTION 4.05 Inquiries and Negotiations. Neither Holdings, the Company
nor any of their subsidiaries, nor any of their respective affiliates,
directors, officers, employees, representatives, advisors or agents, shall,
directly or indirectly, encourage, solicit or initiate any discussions,
submissions of proposals or offers or negotiations with, or, subject to the
fiduciary obligations of the Board of Directors of the Company and the Board of
Directors of Holdings under applicable law as advised by counsel, participate in
any negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise cooperate in any other way with, or assist or
participate in, facilitate or encourage any effort or attempt by, any person,
other than Parent and its affiliates, representatives and agents, concerning any
merger, consolidation, sale of substantial assets, sale of shares of capital
stock or other equity securities, recapitalization, debt restructuring or
similar transaction involving the Company, or any division of the Company (such
transactions being hereinafter referred to as "Alternative Transactions").
Holdings and the Company shall immediately notify Parent if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with,
the Company in respect of an Alternative Transaction, and shall, in any such
notice to Parent, indicate the identity of the offeror and the terms and
conditions of any proposals or offers or the nature of any inquiries or
contacts, and thereafter shall keep Parent informed of the status and terms of
any such proposals or offers and the status of any such discussions or
negotiations. The Company shall not release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which the Company
is a party. Nothing herein shall prevent Holdings from participating in any
merger or other business combination that does not involve the transfer of the
Company Common Stock or the Company's assets; provided, however, that any third
party acquiror of Holdings expressly consents to abide by the terms, conditions,
and obligations of this Agreement.
SECTION 4.06 Notification of Certain Matters. Holdings and the Company
shall give prompt notice to Parent and Acquisition, and Parent and Acquisition
shall give prompt notice to Holdings and the Company, of (i) the occurrence, or
failure to occur, of any event that such party believes would cause any of its
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time and (ii) any failure of Holdings, the Company, Parent or
Acquisition, as the case may be, or any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or
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agreement to be complied with or satisfied by it hereunder; provided, however,
that failure to give such notice shall not constitute a waiver of any defense
that may be validly asserted.
SECTION 4.07 Compliance with the Securities Act. Prior to the Effective
Time, the Company shall deliver to Parent a list identifying all persons who
might, in its opinion, be deemed to be "affiliates" of the Company for purposes
of Rule 145 under the Securities Act (the "Affiliates"). The Company shall use
its best efforts to cause each person who is identified as an Affiliate to
deliver to Parent on or prior to the Effective Time a written agreement, in such
form as may be agreed to by the parties, that he will not offer to sell, sell or
otherwise dispose of any of the shares of Parent Common Stock issued to him in
connection with the Merger, except pursuant to an effective registration
statement or in compliance with Rule 145 or pursuant to an exemption from the
registration requirements of the Securities Act. Parent shall be entitled to
place appropriate legends on the certificates evidencing the Parent Common Stock
to be received by Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stock transfer instructions to the transfer agent for Parent
Common Stock, to the effect that the shares received or to be received by such
Affiliate pursuant to this Agreement may only be sold, transferred or otherwise
conveyed, and the holder thereof may only reduce his interest in or risks
relating to such shares, pursuant to an effective registration statement under
the Securities Act or in accordance with the provisions of paragraph (d) of Rule
145 or pursuant to an exemption from registration provided under the Securities
Act. The foregoing restrictions on the transferability of Parent Common Stock
shall apply to all purported sales, transfers and other conveyances of the
shares received or to be received by such Affiliate pursuant to this Agreement
and to all purported reductions in the interest in or risks relating to such
shares, whether or not such Affiliate has exchanged the certificates previously
evidencing shares of the Company's capital stock, into which such shares were
converted.
SECTION 4.08 Conduct of Parent's Business. Parent covenants and agrees
that, prior to the Effective Time, unless the Company shall otherwise agree in
writing, or as otherwise expressly contemplated by this Agreement:
(a) the business of Parent and its subsidiaries shall be
conducted only in the ordinary course of business consistent with past practice;
(b) Parent shall not (i) amend its Certificate of
Incorporation (other than to increase the number of authorized shares of capital
stock of Parent) or (ii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property;
(c) Parent shall not authorize for issuance, issue or sell or
agree to issue or sell any shares of, or rights to acquire or convert into any
shares of, its capital stock, except for (i) the issuance of options or rights
pursuant to existing employee benefit plans or arrangements in a manner and in
amounts consistent with past practice, (ii) the issuance of shares of Parent
Common Stock upon the exercise of options or other rights to purchase Parent
Common Stock outstanding on the Effective Date of this Agreement or upon the
exercise of options or other rights described in the immediately preceding
clause (i), (iii) the issuance of Parent Common Stock pursuant to the agreements
set forth on Schedule 3.03(c), and (iv) the issuance of up to an additional
5,000,000 shares (as may be adjusted from time to time for stock splits or stock
dividends) of Parent Common
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Stock, or options or rights to purchase such shares of stock, for any other
corporate purpose, including acquisitions; and
(d) neither Parent nor Acquisition shall take any action that
would jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
SECTION 4.09 Employment and Severance Liabilities. Holdings covenants
and agrees that it will retain any and all employment and severance liabilities
and obligations for the employees and former employees of the Company
specifically listed on Schedule 4.09 hereof.
SECTION 4.10 Contractual Obligations. Holdings covenants and agrees
that it will honor and comply in all material respects with any and all
obligations and/or liabilities that it is contractually bound to, or otherwise
obligated for under the contracts, agreements, and arrangements listed on
Schedule 4.10 hereof insofar as they involve the Business of the Company.
SECTION 4.11 Indemnity. Parent agrees to defend, indemnify and hold
Holdings harmless from and against, any and all suits, claims, demands, actions,
causes of action, loss, damages, liabilities, cost and expense (including but
not limited to reasonably attorneys' fees and court costs and costs of other
professionals) arising in any manner out of any failure of Parent or the Company
after the Effective Time, to comply with or perform any contractual or other
obligation to which the Company is now, or hereafter becomes, bound or
obligated.
SECTION 4.12 Agreements Executed. Concurrently with their execution of
this Agreement, the applicable parties hereto shall execute and deliver to each
other: (a) that certain Services and License Agreement by and among Parent,
Holdings and the Company, a copy of which is attached hereto as Exhibit B and
incorporated herein by reference (the "Services and License Agreement"); (b) an
Assignment and License Agreement by and between Holdings and the Company which
is attached hereto as Exhibit C and incorporated herein by reference; (c) a
Stock Restriction Agreement, which is attached hereto as Exhibit D and
incorporated herein by reference.
SECTION 4.13 Stockholder Agreements and Proxies. Peter J. Kight and
Mark A. Johnson shall, concurrently with the execution of this Agreement by
Holdings and the Company, each have executed and delivered to Holdings (i) a
Stockholder Agreement and (ii) an Irrevocable Proxy, copies of which are
attached hereto as Exhibit E and incorporated herein by reference. Parent shall
use its best efforts to cause Tribune Company to also execute and deliver such a
Stockholder Agreement and Irrevocable Proxy as soon as practicable.
SECTION 4.14 Revenue Make-Up.
(a) As soon as reasonably practicable after July 31, 1997,
Parent shall deliver to Holdings the Company's unaudited statement of operations
for the twelve-month period beginning on August 1, 1996 and ending on July 31,
1997 (such twelve-month period being hereinafter called the "Revenue Period"),
prepared by Parent's auditors in accordance with generally accepted accounting
principles consistently applied and consistent with the Company's revenue
recognition
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policies for its fiscal year ended July 31, 1996 (such unaudited statement of
operations is hereinafter called the "Revenue Statement"). As used herein, the
term "Gross Revenues" means the Company's total gross revenues derived during
the Revenue Period determined in accordance with generally accepted accounting
principles consistently applied and consistent with the Company's revenue
recognition policies for its fiscal year ended July 31, 1996. The Company and
Parent shall maintain complete and accurate books and records relating to the
determination of Gross Revenues.
(b) If the Company's Gross Revenues are less than Forty-Six
Million Dollars ($46,000,000), then, provided that (i) Parent and the Company
have, at all times after the Effective Time, used their respective good faith
efforts to maximize the Gross Revenues of the Company during the Revenue Period;
(ii) the Company has not discontinued or disposed of any material portion of its
business or assets (as such exist immediately prior to the Effective Time);
(iii) Parent has fully and timely paid to Holdings all fees required to be paid
to Holdings under Section 8.1.5 of the Services and License Agreement; and (iv)
Holdings has received from the Company the Revenue Statement stating that the
Company's Gross Revenues for the Revenue Period are less than Forty-Six Million
Dollars ($46,000,000), Holdings shall, within sixty-five (65) days after its
receipt of the Revenue Statement, pay to Parent, in cash, a sum equal to
Forty-Six Million Dollars ($46,000,000) minus the amount of the Gross Revenues
(the "Revenue Make-Up Payment"), subject to the provisions of paragraph (c)
below.
(c) Within thirty (30) days after it receives the Revenue
Statement, Holdings may request an audit of the Company's and Parent's records
pertaining to the determination of the Gross Revenues by Holdings' auditors (the
"Audit") by giving the Company and Parent written notice (the "Audit Notice").
Upon timely submission of the Audit Notice, Holdings' auditor may perform the
Audit during business hours and the Company and Parent shall cooperate in good
faith in facilitating such Audit and promptly making available all records
necessary to enable Holdings' Auditor to perform the Audit. The Audit shall be
completed within sixty (60) days after Holdings receives the Revenue Statement
(subject to potential extension due to failure by the Company or Parent to
cooperate and provide records as required above). If the Audit reveals that the
Gross Revenues are higher than indicated in the Revenue Statement, then the
amount of the Revenue Make-Up Payment shall be reduced to the sum equal to
Forty-Six Million Dollars ($46,000,000) minus the Gross Revenues as determined
by the Audit.
SECTION 4.15 Board Visitation Rights. So long as Holdings holds no less
than ten percent (10%) of the outstanding shares of the Parent Common Stock,
Parent will permit one (1) representative of Holdings (the "Designee") to attend
all meetings of Parent's Board of Directors in a non-voting observer capacity.
Parent will also timely provide such Designee with copies of all notices,
minutes and other materials that it provides to its directors with respect to
such meetings. Holdings may change its Designee from time to time with the prior
written consent of Parent, which will not unreasonably be withheld. Holdings'
initial designee will be Eric C. W. Dunn. Nothing contained herein shall require
Parent to permit the Designee to have access to information, including Board
minutes, or to attend or to participate in meetings of the Board of Directors
which, in the reasonable judgment of Parent's Board of Directors, pertains to
matters with respect to which Holdings' interests may conflict with those of
Parent prior to public disclosure by Parent of such matters or which the
Parent's Board of Directors deems the presence of such Designee would unduly
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prohibit the full discussion of any matter before Parent's Board of Directors.
In addition, the Designee would be required to first sign a reasonable
nondisclosure and confidentiality agreement as appropriate for a public company
and which would impose on the Designee the same confidentiality obligations he
would have if he were in fact a member of Parent's Board of Directors.
SECTION 4.16 Reimbursement for Certain Charges and Costs.
(a) Holdings covenants and agrees that it will reimburse
Parent for any charges, costs, or penalties associated with, or arising out of
matters listed on Schedule 4.16.
(b) Reimbursements made pursuant to this Section 4.16 shall be
paid in cash and shall be in addition to, not in lieu of, and not set off
against any right of payment, by indemnification or otherwise, or Merger
Consideration Adjustment, required by any other provision of this Agreement.
(c) Prior to any obligation on Holdings to reimburse Parent,
Parent must give notice of such right to reimbursement within six (6) months
after the Effective Time (except for Item G on Schedule 4.16 which shall be
within eighteen (18) months after the Effective Date of this Agreement) and
shall provide Holdings with reasonable documentation of Parent's reimbursement
claim.
SECTION 4.17 Debt. Holdings covenants and agrees that, at Closing, the
Company will have no debt and will have $3,000,000 in cash.
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) this Agreement and the Merger shall have been approved and
adopted by the requisite vote of (i) the sole stockholder of the Company and
(ii) the stockholders of Parent;
(b) the expiration or earlier termination of any waiting
period under the HSR Act shall have occurred;
(c) no preliminary or permanent injunction or other order,
decree or ruling issued by any court of competent jurisdiction nor any statute,
rule, regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that would
prevent the consummation of the Merger as contemplated hereby;
(d) the Registration Statement shall have been declared
effective and no stop order with respect thereto shall be in effect at the
Effective Time;
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(e) the execution and delivery by Parent and Holdings of an
escrow agreement (the "Escrow Agreement"), a copy of which is attached hereto as
Exhibit F and incorporated herein by reference; and
(f) the execution and delivery by Parent and Holdings of a
Registration Rights Agreement, which is attached hereto as Exhibit G and
incorporated herein by reference.
SECTION 5.02 Conditions to the Obligation of Holdings and the Company
to Effect the Merger. The obligation of Holdings and the Company to effect the
Merger shall be subject to the fulfillment at or prior to the Effective Time of
the following additional conditions:
(a) Parent and Acquisition shall have performed and complied
in all material respects with all their obligations, covenants, and agreements
required to be performed and complied with by them under this Agreement at or
prior to the Effective Time;
(b) the representations and warranties made by Parent and/or
Acquisition in Sections 3.03 and 3.04 hereof (as qualified by the schedules
hereto and the Parent Disclosure Letter), shall not, as of the Effective Date of
this Agreement, have been incorrect, untrue or false in any respect that failed
to correctly state facts in existence on the Effective Date of this Agreement
that constituted a Parent Material Adverse Effect on the Effective Date of this
Agreement;
(c) Holdings and the Company shall have received a certificate
from the Chief Executive Officer of Parent and Acquisition, dated as of the
Effective Time, to the effect that the conditions set forth in paragraphs (a)
and (b) above have been satisfied;
(d) the shares of Parent Common Stock to be issued in the
Merger shall have been approved for listing on the Nasdaq NM, subject to
official notice of issuance; and
(e) Holdings and the Company shall have received the opinion
of Porter, Wright, Morris & Arthur, counsel to Parent and Acquisition, with
respect to the matters set forth on Exhibit H and incorporated herein by
reference, subject to appropriate limitations and qualifications.
SECTION 5.03 Conditions to the Obligation of Parent and Acquisition to
Effect the Merger. The obligation of Parent and Acquisition to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of the
following additional conditions:
(a) Holdings and the Company shall have performed and complied
in all material respects with all their obligations, covenants, and agreements
required to be performed and complied with by them under this Agreement at or
prior to the Effective Time;
(b) the representations and warranties made by Holdings and/or
the Company in Sections 3.01 and 3.02 hereof (as qualified by the schedules
hereto and the Holdings/Company Disclosure Letter), shall not, as of the
Effective Date of this Agreement, have been incorrect, untrue or false in any
respect that failed to correctly state facts in existence on the Effective Date
of this
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Agreement that constituted a Company Material Adverse Effect as of the Effective
Date of this Agreement;
(c) Parent shall have received a certificate from the Chief
Executive Officer and the Chief Financial Officer of Holdings and the Company,
dated as of the Effective Time, to the effect that the conditions set forth in
paragraphs (a) and (b) above have been satisfied;
(d) Parent shall have received a certificate from the Chief
Executive Officer and the Chief Financial Officer of Holdings and the Company,
dated as of the Effective Time, to the effect that the Company has not incurred,
realized, or otherwise experienced a Material Adverse Change; provided, however;
the existence of such Material Adverse Change will not entitle Parent to
terminate this Agreement pursuant to Article VI;
(e) Parent shall have received the consents described in
Schedule 3.03(f); and
(f) Parent and Acquisition shall have received the opinion of
Fenwick & West LLP, counsel to Holdings and the Company, with respect to the
matters set forth on Exhibit I and incorporated herein by reference, subject to
appropriate limitations and qualifications.
ARTICLE VI
TERMINATION AND ABANDONMENT
SECTION 6.01 Termination and Abandonment. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval by the stockholders of Parent and the
Company:
(a) by mutual written consent approved by the Boards of
Directors of Parent, Holdings, and the Company;
(b) by Holdings or the Company if the conditions set forth in
Sections 5.01 or 5.02 shall not have been complied with, waived or performed and
such noncompliance or nonperformance shall not have been cured or eliminated (or
by its nature cannot be cured or eliminated), by Parent and Acquisition on or
before March 31, 1997; or
(c) by Holdings or the Company, if Parent's Board of Directors
fails to recommend approval of this Agreement or the Merger to Parent's
stockholders or recommends against approval of this Agreement or the Merger to
Parent's stockholders; or
(d) by Parent or Acquisition, if the conditions set forth in
Sections 5.01 or 5.03 shall not have been complied with, waived or performed and
such noncompliance or nonperformance shall not have been cured or eliminated (or
by its nature cannot be cured or eliminated), by Holdings and the Company on or
before March 31, 1997; or
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(e) by Parent, if the representations and warranties made by
Holdings and/or the Company in Sections 3.01 and 3.02 hereof (as qualified by
the schedules hereto and the Holdings/Company Disclosure Letter), shall, as of
the Effective Date of this Agreement, have been incorrect, untrue or false in
any respect that failed to correctly state facts in existence on the Effective
Date of this Agreement that constituted a Company Material Adverse Effect on the
Effective Date of this Agreement; or
(f) by Holdings or the Company, if the representations and
warranties made by Parent and/or Acquisition in Sections 3.03 and 3.04 hereof
(as qualified by the schedules hereto and the Parent Disclosure Letter), shall,
as of the Effective Date of this Agreement, have been incorrect, untrue or false
in any respect that failed to correctly state facts in existence on the
Effective Date of this Agreement that constituted a Parent Material Adverse
Effect on the Effective Date of this Agreement.
SECTION 6.02 Effect of Termination. In the event of the termination of
this Agreement and the abandonment of the Merger pursuant to Section 6.01, this
Agreement shall thereafter become void and have no effect, and no party hereto
shall have any liability to any other party hereto or its stockholders or
directors or officers on account of such termination, and each party shall be
responsible for its own expenses, except as follows: (i) the obligations imposed
by Sections 4.03(d) and 4.03(e) hereof shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any willful breach hereof.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 Indemnification by Holdings. Subject to the terms,
conditions, and limitations set forth herein, if the Merger is consummated,
Holdings agrees to indemnify Parent against, and agrees to hold Parent harmless
from, any and all actions, suits, losses, costs, claims, damages and expenses
(including reasonable attorneys' fees) (the "Losses"), incurred or suffered by
them relating to or arising out of or in connection with any material breach of,
or any material misrepresentation or inaccuracy in, any representation or
warranty made by Holdings and/or the Company in Section 3.01 or Section 3.02 of
this Agreement (as qualified by the Holdings/Company Disclosure Letter and the
schedules hereto) where such material breach or material misrepresentation or
inaccuracy existed as of the Effective Date of this Agreement; provided,
however, that the amount of Losses recoverable under the indemnity provisions of
this Article shall be reduced, dollar-for-dollar, by the amount of any insurance
proceeds paid to Parent and by the amount of tax benefits realized by Parent in
respect of such Losses. In addition, notwithstanding anything herein to the
contrary, the term "Losses" shall not include, and Parent shall not be entitled
to indemnification for, any actions, suits, losses, costs, claims, damages and
expenses (including reasonable attorneys' fees), to the extent that Parent has
recovered or been compensated or reimbursed therefor by virtue of (a) the Merger
Consideration Adjustment pursuant to Section 2.02 hereof, or (b) a Revenue
Makeup Payment made pursuant to Section 4.14 hereof, or (c) a payment made
pursuant to Section 4.16 hereof, with the purpose and intent that Parent shall
not receive a redundant or double recovery of any Losses.
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SECTION 7.02 Claims. The provisions of this Section shall be subject to
Section 7.03. As soon as is reasonably practicable after becoming aware of a
claim for indemnification under this Agreement, Parent shall promptly give
written notice to Holdings of such claim and the amount Parent believes it will
be entitled to receive hereunder in indemnification from Holdings under this
Article VII in respect of such claim; provided, that the failure of Parent to
promptly give such notice shall not relieve Holdings of its obligations except
to the extent (if any) that Holdings shall have been prejudiced thereby. If
Holdings does not object in writing to such indemnification claim within 30 days
of receiving written notice thereof, Parent shall be entitled to recover, on the
60th day after such written notice was given, from Holdings the amount of such
claim, and no later objection by Holdings shall be permitted; if Holdings agrees
that it has an indemnification obligation but objects that it is obligated to
pay only a lesser amount, Parent shall nevertheless be entitled to recover from
Holdings, on the 60th day after such notice was given, the lesser amount,
without prejudice to Parent's claim for the difference. In addition to the
amounts recoverable by Parent from Holdings pursuant to the foregoing
provisions, Parent shall also be entitled to recover from Holdings interest on
such amounts at the rate equal to the published prime rate at The Chase
Manhattan Bank, New York, New York, from, and including, the 60th day after such
notice of an indemnification claim is given to, but not including, the date such
recovery is actually made by Parent.
SECTION 7.03 Notice and Defense of Third Party Claims. Parent shall
give written notice as promptly as is reasonably practicable to Holdings of the
assertion of any claim, or the commencement of any suit, action or proceeding,
by any person or entity not a party hereto in respect of which indemnity may be
sought under Article VII of this Agreement ("Third Party Claim"); provided that
the failure of Parent to promptly give such notice shall not relieve Holdings of
its obligations except to the extent (if any) that Holdings shall have been
prejudiced thereby. If Parent does not promptly elect to defend or contest the
Third Party Claim, then Holdings, at its sole option (i) shall be free to assume
and control the prosecution or defense of any such Third Party Claim in a
reasonable manner, (ii) may take all reasonably necessary steps to contest the
Third Party Claim or to prosecute such Third Party Claim to conclusion or
settlement satisfactory to Holdings, (iii) shall notify Parent of the progress
of any such Third Party Claim, (iv) shall permit Parent, at the sole cost of
such Parent, to participate in such prosecution or defense, and (v) shall
provide Parent with reasonable access to all relevant information and
documentation relating to the Third Party Claim and Holdings' prosecution or
defense thereof. In any case, the party not in control of the defense or
prosecution of the Third Party Claim shall cooperate with the other party in the
conduct of the prosecution or defense of such Third Party Claim. If, however,
Parent reasonably determines in its judgment that representation by Holdings'
counsel of both Holdings and Parent would present such counsel with a conflict
of interest, then Parent may employ separate counsel to represent or defend it
in any such claim, action, suit or proceeding and Holdings shall pay the fees
and disbursements of such separate counsel. Whether or not Holdings chooses to
defend or prosecute any such claim, suit, action or proceeding, all of the
parties hereto shall cooperate in the defense or prosecution thereof.
SECTION 7.04 Settlement or Compromise. Neither party shall compromise
or settle any Third Party Claim without the prior written consent of either
Holdings (if Parent controls and defends such Third Party Claim) or Parent (if
Holdings controls and defends such Third Party
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Claim), such consent not to be unreasonably withheld (provided, that, in the
case of Parent, such consent shall be deemed to be unreasonably withheld if
Parent will, as part of the terms of such compromise or settlement, be fully
released of liability arising from such Third Party Claim). The person
controlling the defense of such Third Party Claim will give the other person at
least 20 days' notice of any proposed settlement or compromise of any Third
Party Claim for which it is controlling the defense.
SECTION 7.05. Limitations on Indemnification.
(a) Basket. Any indemnification pursuant to this Agreement
shall be subject to the requirement that no claim may be made until the
aggregate amount of Losses exceeds $500,000, after which time claims for
indemnification may be made for the aggregate amount of all Losses, subject to
the terms, conditions and limitations set forth herein.
(b) Maximum Liability. Holdings' total and maximum aggregate
lifetime liability under this Article VII shall not exceed a dollar amount equal
to thirty-five percent (35%) of the Merger Consideration, as adjusted pursuant
to Section 2.02 hereof, multiplied by the per share closing price of Parent
Common Stock as reported on the Nasdaq NM for the five (5) trading days
immediately preceding the Effective Date of this Agreement.
(c) Deadline for Indemnity Claims. Except as otherwise
provided in Section 7.01, Holdings shall have no liability with respect to any
matter or claim for indemnification hereunder, unless Parent notifies Holdings
in accordance with this Article VII no later than the close of business on the
first (1st) anniversary of the Effective Time of a claim for indemnification
hereunder; provided, however, that (i) claims of indemnification for Loss
suffered as a result of a material breach of the representations and warranties
under Sections 3.01(p) and (r) hereof (the "Tax Warranties") shall survive until
six (6) months after the expiration of the applicable statute of limitations
with respect to Taxes, including any extensions thereof; and (ii) such
limitation shall not apply in any matter involving intentional misrepresentation
or fraud on the part of Holdings.
ARTICLE VIII
NONCOMPETITION AGREEMENT
SECTION 8.01 Certain Acknowledgments. Holdings expressly acknowledges
that the noncompetition agreements set forth in this Article VIII are a material
part of this Agreement and are an integral part of the obligations of Holdings
hereunder; and the noncompetition agreements set forth in this Article VIII are
reasonable and necessary to protect the legitimate business interests of Parent
following the consummation of the Merger.
SECTION 8.02 Noncompetition Agreement. Except as provided in Section
8.03 below, during the period beginning on the Effective Time and ending on the
fifth (5th) anniversary of the Effective Time, except with Parent's prior
written consent, Holdings shall not, directly or indirectly, own or operate a
back-end computer-based system for processing consumer or small business remote
payment instructions in order to generate remittance information and payment
(via remote check
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printing or electronic funds transfer) to merchants in the United States of
America (the "Competing Business"). The parties agree, without limitation, that
Holdings shall not be deemed to be engaged in the Competing Business by virtue
of, nor shall Holdings be at any time prohibited from: (a) developing and
providing client-software or web/Internet-based applications which create and
transmit payment instructions or remittance information to third parties; or (b)
developing and providing client-software or web/Internet-based applications
which facilitate the on-line purchase of goods or services.
SECTION 8.03 Exception. The ownership by Holdings or any subsidiary or
affiliate controlled by Holdings of not more than five percent in the aggregate
of the outstanding securities of any public company shall not, by itself,
constitute a breach of the noncompetition agreement in Section 8.02, even if
such public company competes with Parent or engages in the Competing Business.
SECTION 8.04 No Objection or Defense. Holdings expressly waives any
objection to or defense regarding the scope, duration or geographic area of the
restriction on competition set forth in this Article VIII.
SECTION 8.05 Enforcement of Noncompetition Agreement. Holdings
expressly acknowledges that it would be extremely difficult to measure the
damage that might result form any breach of the noncompetition agreements in
this Article VIII, and that any such breach will result in irreparable injury to
Parent for which money damages could not adequately compensate. If a breach of
the noncompetition agreements in this Article VIII occurs, then Parent shall be
entitled, in addition to all other rights or remedies that it may have at law or
in equity. to have an injunction issued by any competent court enjoining and
restraining Holdings and all other persons involved therein from continuing such
breach. The existence of any claim or cause of action that Holdings or any such
other person may have against Parent shall not constitute a defense or bar to
the enforcement of any of the noncompetition agreements under this Article VIII.
If Parent must resort to litigation to enforce any of the noncompetition
agreements under this Article VIII that has a fixed term, then such term shall
be extended for a period of time equal to the period during which a breach of
such agreement was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such breach occurred or, if
later, the last day of the original fixed term of such agreement.
SECTION 8.06 Early Termination of Noncompetition Agreement. In the
event that Holdings is merged or consolidated with, or a majority of Holdings'
voting stock or all or substantially all of Holdings' assets are acquired by, a
person, corporation or other party who, at the time of such merger,
consolidation, stock or asset acquisition, is engaged in the Competing Business,
then upon the consummation of such merger, consolidation, sale, acquisition or
similar business combination, all Holdings' obligations, duties and covenants
under this Article VIII shall automatically immediately terminate and expire.
SECTION 8.07 Effect on Acquiror. In the event that Holdings is merged
or consolidated with, or a majority of Holdings' voting stock or all or
substantially all of Holdings' assets are acquired by, a person, corporation or
other party (the "Acquiror"), and the provisions of Section 8.06
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do not apply, then the Acquiror shall not be bound by or obligated under any of
Holdings' obligations or duties under this Article VIII; except that such
Acquiror may not utilize technology or personnel of Holdings to engage in the
Competing Business so long as Holdings' obligations, duties and covenants under
this Article VIII remain in effect.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Survival of Representations and Warranties. Except as
otherwise specified, the representations and warranties of Holdings and the
Company contained herein shall survive the Closing for a period expiring at the
close of business on the first (1st) anniversary of the Effective Time;
provided, however, that the Tax Warranties shall survive until six (6) months
after the expiration of the applicable statute of limitations with respect to
Taxes, including any extensions thereof.
SECTION 9.02 Interpretation of Representations and Warranties. Each
representation and warranty made in this Agreement or pursuant hereto is
independent of all other representations and warranties made by the same
parties, whether or not covering related or similar matters, and must be
independently and separately satisfied. Exceptions or qualifications to any such
representation or warranty shall qualify, and shall be exceptions to, any other
representation or warranty.
SECTION 9.03 Reliance by Parent and Acquisition. Notwithstanding the
right of Parent and Acquisition to investigate the business, assets, and
financial condition of Holdings and/or the Company, and notwithstanding any
knowledge determinable by Parent or Acquisition as a result of such
investigation, Parent and Acquisition have the unqualified right to rely upon,
and have relied upon, each of the representations and warranties made by
Holdings and/or the Company in this Agreement or pursuant hereto, as qualified
by the Holdings/Company Disclosure Letter and the schedules hereto, except to
the extent that Parent or Acquisition had actual knowledge to the contrary at
the Effective Date of this Agreement.
SECTION 9.04 Expenses, Etc. Whether or not the transactions
contemplated by this Agreement are consummated, neither Holdings and the
Company, on the one hand, and Parent and Acquisition, on the other hand, shall
have any obligation to pay any of the fees and expenses of the other incident to
the negotiation, preparation and execution of this Agreement, including the fees
and expenses of counsel, accountants, investment bankers and other experts and
Parent shall pay all such fees and expenses incurred by Acquisition. Holdings
and the Company, on the one hand, and Parent and Acquisition, on the other hand,
shall indemnify the other and hold it harmless from and against any claims for
finders' fees or brokerage commissions in relation to or in connection with such
transactions as a result of any agreement or understanding between such
indemnifying party and any third party. The Company represents that, in
connection with the transactions contemplated by this Agreement, the Company has
committed to pay only the fees and expenses set forth on Schedule 9.04 hereto.
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<PAGE> 143
SECTION 9.05 Publicity; Confidentiality. Holdings, the Company, and
Parent agree that this Agreement and the exchange of information pursuant
thereto is confidential and they will not disclose or issue any press release or
make any other public announcement concerning this Agreement or the transactions
contemplated hereby without the prior consent of the other party, which will not
be unreasonably withheld, except that Holdings, the Company, or Parent may make
such public disclosure that it believes in good faith to be required by law or
any applicable rules and regulations of a national securities exchange or the
NASD (in which event such party shall consult with the other prior to making
such disclosure).
SECTION 9.06 Execution in Counterparts. For the convenience of the
parties, this Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
SECTION 9.07 Notices. All notices that are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered by hand or national
overnight courier service, transmitted by telecopy or mailed by registered or
certified mail, postage prepaid, and shall be deemed given upon receipt, as
follows:
If to Parent to:
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Telecopy Number: (614) 825-3244
Attention: Peter J. Kight
Chairman
with copies to:
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Telecopy Number: (614) 825-3244
Attention: William C. Buckham
General Counsel
and
PORTER, WRIGHT, MORRIS & ARTHUR
41 South High Street
Columbus, Ohio 43215
Telecopy Number: (614) 227-2100
Attention: Curtis A. Loveland, Esq.
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<PAGE> 144
If to Holdings and/or the Company, to:
INTUIT INC.
2535 Garcia Avenue
Mountain View, California 94043
Telecopy Number: (415) 944-3060
Attention: William H. Harris,
Executive Vice President
with a copies to:
INTUIT INC.
2535 Garcia Avenue
Mountain View, California 94043
Telecopy Number: (415) 944-6622
Attention: Catherine Valentine, Esq.
General Counsel
and
FENWICK & WEST LLP
Two Palo Alto Square
Palo Alto, California 94306
Telecopy Number: (415) 857-0361
Attention: Kenneth A. Linhares, Esq.
or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto.
SECTION 9.08 Waivers. Holdings and the Company, on the one hand, and
Parent and Acquisition, on the other hand, may, by written notice to the other,
(i) extend the time for the performance of any of the obligations or other
actions of the other under this Agreement; (ii) waive any inaccuracies in the
representations or warranties of the other contained in this Agreement or in any
document delivered pursuant to this Agreement; (iii) waive compliance with any
of the conditions of the other contained in this Agreement; or (iv) waive
performance of any of the obligations of the other under this Agreement. Except
as provided in the preceding sentence, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
SECTION 9.09 Amendments, Supplements, Etc. At any time, this Agreement
may be amended or supplemented by such additional agreements, articles or
certificates, as may be determined by the parties hereto to be necessary,
desirable or expedient to further the purposes of
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<PAGE> 145
this Agreement, or to clarify the intention of the parties hereto, or to add to
or modify the covenants, terms or conditions hereof or to effect or facilitate
any governmental approval or acceptance of this Agreement or to effect or
facilitate the filing or recording of this Agreement or the consummation of any
of the transactions contemplated hereby. Any such instrument must be in writing
and signed by all of the parties hereto.
SECTION 9.10 Entire Agreement. This Agreement and its schedules and
exhibits, and the documents to be executed or delivered at the Effective Time in
connection herewith, constitute the entire agreement among the parties hereto
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof. No representation, warranty, promise, inducement or
statement of intention has been made by any party that is not embodied in this
Agreement or such other documents, and none of the parties shall be bound by, or
be liable for, any alleged representation, warranty, promise, inducement or
statement of intention not embodied herein or therein.
SECTION 9.11 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflict of laws principles.
SECTION 9.12 Binding Effect, Benefits. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns. Except for the provisions of Article VII hereof, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
SECTION 9.13 Assignability. Neither this Agreement nor any of the
parties' rights hereunder shall be assignable by any party hereto without the
prior written consent of the other parties hereto.
SECTION 9.14 Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
SECTION 9.15 Variation and Amendment. This Agreement may be varied or
amended at any time before or after the approval and adoption of this Agreement
by the stockholders of Parent and the Company by action of the respective Boards
of Directors of Holdings, the Company, Parent, and Acquisition, without action
by the stockholders thereof, provided that after approval and adoption of this
Agreement by Parent's stockholders no such variance or amendment shall, without
consent of such stockholders, increase the consideration that the holders of the
capital stock of the Company shall be entitled to receive upon the Effective
Time pursuant to Section 2.01 hereof.
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<PAGE> 146
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
CHECKFREE CORPORATION
By /s/ Peter J. Kight
---------------------------------
CHECKFREE ACQUISITION CORPORATION II
By /s/ Peter J. Kight
---------------------------------
INTUIT INC.
By /s/ James J. Heeger
---------------------------------
INTUIT SERVICES CORPORATION
By /s/ Catherine L. Valentine
---------------------------------
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<PAGE> 147
Appendix B
[ALEX BROWN & SONS INCORPORATED LETTERHEAD]
September 15, 1996
Board of Directors
Checkfree Corporation
8275 North High Street
Columbus, Ohio 43235
Dear Sirs:
Intuit Inc. ("Intuit"), Intuit Services Corporation ("ISC"), Checkfree
Corporation ("Checkfree") and Checkfree Acquisition Corporation II, a Delaware
corporation and wholly-owned subsidiary of Checkfree (the "Merger Sub"), have
proposed to enter into an Agreement and Plan of Merger (the "Agreement").
Pursuant to the Agreement, the implementation of which is contingent on
stockholder approval by Checkfree's stockholders, Merger Sub will be merged with
and into ISC (the "Merger"), and Checkfree will issue 12,600,000 shares of
common stock, subject to adjustment as described in the Agreement (the "Equity
Consideration") to Intuit in exchange for all ISC shares. Additionally, the
Agreement provides that Checkfree will pay $10.0 million in cash to Intuit at
closing and an additional $10.0 million in cash (collectively the "License
Consideration" and, together with the Equity Consideration, (the "Merger
Consideration")) on October 30, 1997 as license fees pursuant to a license
agreement (the "License Agreement") related to connectivity to certain Intuit
software products. You have requested our opinion as to whether the Merger
Consideration is fair, from a financial point of view, to Checkfree.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to Checkfree in connection with the
transaction described above and will receive a fee for our services, a portion
of which is contingent upon the consummation of the Merger. We act as an advisor
to Checkfree from time-to-time and acted as co-manager of a public offering of
the common stock of Checkfree in 1995. Alex. Brown maintains a market in the
common stock of Checkfree and Intuit and regularly publishes research reports
regarding Checkfree, Intuit, the technology industry and the businesses and
securities of publicly owned companies in that industry. In the ordinary course
of business, Alex. Brown may actively trade the securities of both Intuit and
Checkfree for our own account and the account of our customers and, accordingly,
may at any time hold a long or short position in securities of Checkfree and
Intuit.
<PAGE> 148
In connection with our opinion, we have reviewed certain publicly
available financial information concerning Checkfree, Intuit and ISC and certain
internal financial analyses and other information furnished to us by the
respective parties. We have also participated in discussions with members of the
senior management of Checkfree, Intuit and ISC regarding the business and
prospects of Checkfree and ISC independently and the combined company. In
addition, we have (i) reviewed the reported prices and trading activity for the
common stock of Checkfree, (ii) compared certain financial information and stock
market information for Checkfree and ISC with similar information for certain
other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations, (iv) reviewed a draft
of the Agreement dated September 14, 1996 and (v) performed such other studies
and analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of
Checkfree and ISC, we have assumed that such information reflects the best
currently available estimates and judgments of the management of all three
companies as to the likely future financial performance of Checkfree and ISC. In
addition, we have not made any independent evaluation or appraisal of the assets
of Checkfree and ISC, nor have we been furnished with any such evaluation or
appraisal. With your permission, this opinion does not address any adjustment to
the Merger Consideration that may occur pursuant to Section 2.02 of the
Agreement. We also have assumed with your permission that the License Agreement
effectively grants rights to connectivity to certain Intuit software products.
Our opinion is based on market, economic and other conditions as they exist and
can be evaluated as of the date of this letter.
Our advisory services and the opinion expressed herein are provided for
the information of the Board of Directors of Checkfree and do not constitute a
recommedation to Checkfree's stockholders as to how they should vote at the
stockholder's meeting in connection with the Merger. We hereby consent, however,
to the inclusion of this opinion as an exhibit to any proxy statement
distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Merger Consideration is fair, from a financial
point of view, to Checkfree.
Very truly yours,
/s/ Alex. Brown and Sons
ALEX. BROWN & SONS INCORPORATED
<PAGE> 149
APPENDIX C
AMENDED AND RESTATED
CHECKFREE CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to
encourage stock ownership by certain key associates, officers, directors,
consultants and advisers who render services to CHECKFREE CORPORATION, a
Delaware corporation (the "Company"), and any current or future subsidiaries or
parent of the Company (the "Company Group"), by the granting of stock options
(the "Options") as provided herein. By encouraging such stock ownership, the
Company seeks to attract, retain and motivate employees, officers, directors,
consultants and advisers of training, experience and ability. The Options
granted under the Plan may be either incentive stock options ("ISOs") which meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options which do not meet such requirements ("Non-statutory
Options").
2. EFFECTIVE DATE. The Plan shall become effective on August 8, 1995,
the date the Plan was adopted by the Board of Directors of the Company and
approved by a majority of the shares of common stock of the Company entitled to
vote thereon (the "Effective Date").
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors
of the Company (the "Board"), which may, to the full extent permitted by law,
delegate all or any of its powers under the Plan to a committee (the
"Committee") which consists of not fewer than two members of the Board. If the
Committee is so appointed and to the extent such powers are delegated, all
references to the Board in the Plan shall mean and relate to the Committee. If
any class of equity securities of the Company is registered under section 12 of
the Securities Exchange Act of 1934, as amended (the "1934 Act"), all members of
the Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i)
promulgated under the 1934 Act (or any successor rule of like tenor and effect)
and "outside directors" as defined in section 162(m) of the Code and the
regulations promulgated thereunder.
(b) Subject to the provisions of the Plan, the Board is
authorized to establish, amend and rescind such rules and regulations as it may
deem appropriate for its conduct and for the proper administration of the Plan,
to make all determinations under and interpretations of, and to take such
actions in connection with, the Plan or the Options granted thereunder as it may
deem necessary or advisable. All actions taken by the Board under the Plan shall
be final and binding on all persons. No member of the Board shall be liable for
any action taken or determination made relating to the Plan, except for gross
negligence or willful misconduct.
(c) Each member of the Board shall be indemnified by the
Company against costs, expenses and liabilities (other than amounts paid in
settlements to which the Company does not consent, which consent shall not be
unreasonably withheld) reasonably incurred by such member in connection with any
action taken in relation to the Plan to which he or she may be a party by reason
of service as a member of the Board, except in relation to matters as to which
he or she shall
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<PAGE> 150
be adjudged in such action to be personally guilty of gross negligence or
willful misconduct in the performance of his or her duties. The foregoing right
to indemnification shall be in addition to such other rights as the Board member
may enjoy as a matter of law, by reason of insurance coverage of any kind, or
otherwise.
4. ELIGIBILITY.
(a) ISOs and Non-statutory Options may be granted to such key
associates of the Company Group, and Non-statutory Options only may be granted
to directors who are not employees of and to consultants and advisers who render
services to the Company Group, as the Board shall select from time to time (the
"Optionees"). More than one Option may be granted to an individual under the
Plan.
(b) No ISO may be granted to an individual who, at the time an
ISO is granted, is considered under Section 422(b)(6) of the Code to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary corporation;
provided, however, this restriction shall not apply if at the time such ISO is
granted the option price per Share of such ISO shall be at least 110% of the
fair market value of such Share, and such ISO by its terms is not exercisable
after the expiration of five years from the date it is granted. This
subparagraph 4(b) has no application to Options granted under the Plan as
Non-statutory Options.
(c) The aggregate fair market value (determined as of the date
the ISO is granted) of Shares with respect to which ISOs are exercisable for the
first time by any Optionee during any calendar year under the Plan or any other
ISO plan of the Company or the Company Group may not exceed $100,000. If an ISO
which exceeds the $100,000 limitation of this subparagraph 4(c) is granted, the
portion of such Option which is exercisable for Shares in excess of the $100,000
limitation shall be treated as a Non-statutory Option pursuant to Section 422(d)
of the Code. Except as otherwise expressly provided in the immediately preceding
sentence, this subparagraph 4(c) has no application to Options granted under the
Plan as Non-statutory Options.
5. STOCK SUBJECT TO PLAN. The stock subject to Options under the Plan
shall be shares of the common stock, $.01 par value, of the Company ("Shares").
The Shares issued pursuant to Options granted under the Plan may be authorized
and unissued Shares, Shares purchased on the open market or in a private
transaction, or Shares held as treasury stock. The aggregate number of Shares
for which Options may be granted under the Plan shall not exceed 5,000,000
shares, subject to adjustment in accordance with the terms of paragraph 12
hereof. Any Shares subject to an Option which for any reason expires or is
terminated unexercised as to such Shares and any Shares reacquired by the
Company pursuant to any forfeiture or any repurchase right hereunder may again
be the subject of an Option under the Plan. The Board, in its sole discretion,
may permit the exercise of any Option as to full Shares or fractional Shares.
Proceeds from the sale of Shares under Options shall constitute general funds of
the Company.
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<PAGE> 151
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Board shall determine whether
the Options granted are to be ISOs or Non-statutory Options and shall enter into
stock option agreements with the recipients accordingly. All Options granted
shall be authorized by the Board and, within a reasonable time after the date of
grant, shall be evidenced by stock option agreements in writing ("Stock Option
Agreements"), in such form and containing such terms and conditions not
inconsistent with the provisions of this Plan as the Board shall from time to
time determine. Any action under paragraph 12 may be reflected in an amendment
to or restatement of such Stock Option Agreements.
(b) The Board may grant Options having terms and provisions
which vary from those specified in the Plan if such Options are granted in
substitution for, or in connection with the assumption of, existing options
granted by another corporation and assumed or otherwise agreed to be provided
for by the Company pursuant to or by reason of a transaction involving a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company is a party.
7. PRICE. The option price per Share (the "Option Price") of each
Option granted under the Plan shall be determined by the Board; provided,
however, the Option Price of each ISO granted under the Plan shall not be less
than the fair market value (determined without regard to any restrictions other
than a restriction which, by its terms, will never lapse) of a Share on the date
of grant of such Option. An Option shall be considered granted on the date the
Board acts to grant the Option or such later date as the Board shall specify.
8. OPTION PERIOD. The period during which the Option may be exercised
(the "Option Period") shall be determined by the Board; provided, however, any
ISO granted under the Plan shall have an Option Period which does not exceed 10
years from the date the ISO is granted.
9. NON-TRANSFERABILITY OF OPTIONS. An Option shall not be transferable
by the Optionee otherwise than by will or the laws of descent and distribution
and may be exercised, during the lifetime of the Optionee, only by him or by his
guardian or legal representative. Notwithstanding the foregoing, an Optionee may
transfer a Non-Statutory Option to members of his or her immediate family (as
defined in Rule 16a-1 promulgated under the 1934 Act), to one or more trusts for
the benefit of such family members or to partnerships in which such family
members are the only partners if (a) the stock option agreement with respect to
such Non-Statutory Option as approved by the Committee expressly so provides and
(b) the Optionee does not receive any consideration for the transfer.
Non-Statutory Options held by such transferees are subject to the same terms and
conditions that applied to such Non-Statutory Options immediately prior to
transfer.
10. EXERCISE OF OPTIONS.
(a) Options granted hereunder will be exercisable upon the
terms and conditions and in accordance with the vesting percentages determined
by the Board in its sole discretion. Notwithstanding the foregoing or the terms
and conditions of any Stock Option Agreement to the contrary, (i) in the event
of the Optionee's termination of employment as specified in subparagraph
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11(a), the Options shall be exercisable to the extent and for the period
specified in subparagraph 11(a); (ii) in the event of the Optionee's termination
of employment as a result of disability or death as specified in subparagraph
11(b), the Options shall be exercisable to the extent and for the period
specified in subparagraph 11(b); (iii) in the event of a merger, reorganization
or sale of all or substantially all of the assets of the Company as specified in
subparagraph 12(c), the Options shall be exercisable to the extent and for the
period specified in subparagraph 12(c); and (iv) in the event of a change in
control, as defined herein, all Options held by Optionee shall become
exercisable for the period specified in subparagraph 12(d).
(b) An Option shall be exercisable only upon delivery of a
written notice to the Board, any member of the Board, the Company's Treasurer,
or any other officer of the Company designated by the Board to accept such
notices on its behalf, specifying the number of Shares for which it is
exercised.
(c) Within five business days following the date of exercise
of an Option, the Optionee or other person exercising the Option shall make full
payment of the Option Price (i) in cash; (ii) with the consent of the Board, by
tendering previously acquired Shares (valued at their fair market value as of
the date of tender); (iii) with the consent of the Board, and to the extent
permitted by applicable law, with a full recourse promissory note of the
Optionee for the portion of the Option Price in excess of the par value of
Shares subject to the Option, under terms and conditions determined by the Board
and in cash for the par value of the Shares; (iv) with the consent of the Board,
any combination of (i), (ii), or (iii); or (v) with the consent of the Board, if
the Shares subject to the Option have been registered under the Securities Act
of 1933, as amended (the "1933 Act"), and there is a regular public market for
the Shares, by delivering to the Company on the date of exercise of the Option
written notice of exercise together with:
(A) written instructions to forward a copy of such
notice of exercise to a broker or dealer as defined in Section
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and designated in such notice
("Broker"), and to deliver to the specified account maintained
with the Broker by the person exercising the Option a
certificate for the Shares purchased upon the exercise of the
Option, and
(B) a copy of irrevocable instructions to the Broker
to deliver promptly to the Company a sum equal to the purchase
price of the Shares purchased upon exercise of the Option.
If previously acquired Shares are to be used to pay the exercise price
of an ISO, the Company prior to such payment must be furnished with evidence
satisfactory to it that the acquisition of such Shares and their transfer in
payment of the exercise price satisfy the requirements of Section 422 of the
Code and other applicable laws.
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<PAGE> 153
11. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the
Company Group, other than termination of employment by reason of disability or
death or for cause, the Optionee shall have 30 days after the date of
termination of employment (but not later than the expiration date of the Stock
Option Agreement) to exercise all Options held by him or her to the extent the
same were exercisable on the date of termination; provided, however, if such
termination is due to the Optionee's retirement with the consent of the Company,
such Option shall then be exercisable to the extent of 100% of the Shares
subject thereto. The Board shall determine in each case whether a termination of
employment shall be considered a retirement with the consent of the Company and,
subject to applicable law, whether a leave of absence shall be considered a
termination of employment. The Board may cancel an Option during the 30-day
period after termination of employment referred to in this paragraph if the
Optionee engages in employment or activities contrary, in the sole opinion of
the Board, to the best interests of the Company or any parent or subsidiary of
the Company.
(b) Upon termination of an Optionee's employment by reason of
disability, as defined in subparagraph 27(a) of this Plan, or death, the
Optionee or the Optionee's personal representative, or the person or persons to
whom his or her rights under the Options pass by will or the laws of descent or
distribution, shall have one year after the date of termination of employment by
reason of disability or death (but not later than the expiration date of the
Stock Option Agreement) to exercise all Options held by Optionee to the extent
the same were exercisable on the date of the Optionee's termination of
employment; provided, however, the Board may, but shall not be required to,
permit, in its discretion, the exercise of all or any portion of any Option
granted to such Optionee not otherwise exercisable.
(c) Upon termination of an Optionee's employment for cause, as
defined herein, all Options held by such Optionee shall terminate effective on
the date of termination of employment.
12. STOCK SPLITS; MERGERS; REORGANIZATIONS; SALE OF ASSETS.
(a) In the event of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation or other change in the Company's capitalization,
the aggregate number of Shares for which Options may be granted under this Plan,
the number of Shares subject to outstanding Options and the Option Price of the
Shares subject to outstanding Options shall be proportionately adjusted or
substituted to reflect the same. The Board shall make such other adjustments to
the Options, the provisions of the Plan and the Stock Option Agreements as may
be appropriate and equitable, which adjustments may provide for the elimination
of fractional Shares.
(b) In the event of a change of the Common Stock resulting
from a merger or similar reorganization as to which the Company is the surviving
corporation, the number and kind of Shares which thereafter may be purchased
pursuant to an Option under the Plan and the number and kind of Shares then
subject to Options granted hereunder and the price per Share thereof shall
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<PAGE> 154
be appropriately adjusted in such manner as the Board may deem equitable to
prevent dilution or enlargement of the rights available or granted hereunder.
(c) Except as otherwise determined by the Board, a merger or a
similar reorganization which the Company does not survive (other than a merger
or similar reorganization involving only a change in the state of incorporation
or an internal reorganization not involving a change in control as defined
herein), or a sale of all or substantially all of the assets of the Company,
shall cause every Option hereunder to terminate, to the extent not then
exercised, unless any surviving entity agrees to assume the obligations
hereunder; provided, however, that, in the case of such a merger or similar
reorganization, or such a sale of all or substantially all of the assets of the
Company, if there is no such assumption, the Board may provide that some or all
of the unexercised portion of any one or more of the outstanding Options shall
be immediately exercisable and vested as of such date prior to such merger,
similar reorganization or sale of assets as the Board determines.
(d) If a change in control, as defined herein, occurs, all
outstanding options granted under this Plan shall then be immediately
exercisable to the extent of 100% of the Shares subject thereto notwithstanding
any contrary waiting or vesting periods specified in this Plan or in any
applicable Stock Option Agreement.
13. SALE OF OPTION SHARES. If any class of equity securities of the
Company is registered pursuant to Section 12 of the 1934 Act, any Optionee or
other person exercising the Option who is subject to Section 16 of the 1934 Act
by virtue of his or her relationship to the Company shall not sell or otherwise
dispose of the Shares subject to Option unless at least six months have elapsed
from the date of grant of the Option.
14. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by an Option until the date of
issuance of a stock certificate to the Optionee for such Shares.
15. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or
Stock Option Agreement shall confer on any Optionee any right to continue in the
employ or service of the Company or any parent or subsidiary of the Company or
interfere with the right of the Company to terminate such Optionee's employment
or other services at any time. The establishment of the Plan shall in no way,
now or hereafter, reduce, enlarge or modify the employment relationship between
the Company or any parent or subsidiary of the Company and the Optionee. Options
granted under the Plan shall not be affected by any change of duties or position
of the Optionee with the Company.
16. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the
exercise of an Option, the Board may, in its sole determination, require the
Optionee to represent in writing that the Shares being purchased are being
purchased only for investment and without any present intent at the time of the
acquisition of such Shares to sell or otherwise dispose of the same.
17. WITHHOLDING TAXES. The Company's obligation to deliver Shares upon
exercise of an Option shall be subject to the Optionee's satisfaction of all
applicable federal, state or local tax withholding obligations. The Company
shall have the right to withhold from any salary, wages, or other compensation
for services payable by the Company to or with respect to an Optionee, amounts
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sufficient to satisfy any federal, state or local withholding tax liability
attributable to such Optionee's (or any beneficiary's or personal
representative's) receipt or disposition of Shares purchased under any Option or
to take any such other action as it deems necessary to enable it to satisfy any
such tax withholding obligations. The Board, in its sole discretion, may permit
Optionees to elect to have Shares that would be acquired upon exercise of
Options (valued at their fair market value as of the date of exercise) withheld
by the Company in satisfaction of such Optionees' withholding tax liabilities.
18. EXCHANGES. The Board may permit the voluntary surrender of all or a
portion of any Option granted under the Plan to be conditioned upon the granting
to the Optionee of a new Option for the same or a different number of Shares as
the Option surrendered, or may require such voluntary surrender as a condition
precedent to a grant of a new Option to such Optionee. Subject to the provisions
of the Plan, such new Option shall be exercisable at the same price, during such
period and on such other terms and conditions as are specified by the Board at
the time the new Option is granted. Upon surrender, the Options surrendered
shall be cancelled and the Shares previously subject to them shall be available
for the grant of other Options.
19. REPURCHASE OF SHARES BY THE COMPANY. Any Shares purchased or
acquired upon exercise of an Option may, in the sole discretion of the Board, be
subject to repurchase by or forfeiture to the Company if and to the extent and
at the repurchase price, if any, specifically set forth in the Stock Option
Agreement pursuant to which the Shares were purchased or acquired. Certificates
representing Shares subject to such repurchase or forfeiture may be subject to
such escrow and stock legending provisions as may be set forth in the Stock
Option Agreement pursuant to which the Shares were purchased or acquired.
20. CONFIDENTIALITY AGREEMENTS. Upon the Company's request, each
Optionee shall execute, prior to or contemporaneously with the grant of any
Option hereunder, the Company's then standard form of agreement relating to
nondisclosure of confidential information, noncompetition and/or assignment of
inventions and related matters.
21. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Company to sell and
deliver the Shares under such Options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required. Options issued under the
Plan shall not be exercisable prior to (i) the date upon which the Company shall
have registered the Shares for which Options may be issued hereunder under the
1933 Act, and (ii) the completion of any registration or qualification of such
Shares under state law, or any ruling or regulation of any governmental body
which the Company shall, in its sole discretion, determine to be necessary or
advisable in connection therewith, or alternatively, unless the Company shall
have received an opinion from counsel to the Company stating that the exercise
of such Options may be effected without registering the Shares subject to such
Options under the l933 Act, or under state or other law.
22. ASSUMPTION. The Plan may be assumed by the successors and assigns
of the Company.
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23. EXPENSES. All expenses and costs in connection with administration
of the Plan shall be borne by the Company.
24. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
terminate, amend or modify the Plan at any time without further action on the
part of the shareholders of the Company; provided, however, that (a) in no event
shall any amendment be made to the Plan which would cause the ISOs granted
hereunder to fail to qualify as incentive stock options under the Code; (b) any
amendment to the Plan which requires the approval of the shareholders of the
Company under the Code or the regulations promulgated thereunder shall be
subject to approval by the shareholders of the Company in accordance with the
Code or such regulations; and (c) any amendment to the Plan which requires the
approval of the shareholders of the Company under the rules promulgated under
Section 16 of the 1934 Act shall be subject to the approval of the shareholders
of the Company in accordance with such rules. No amendment, modification or
termination of the Plan shall in any manner adversely affect any Option
previously granted to an Optionee under the Plan without the consent of the
Optionee or the transferee of such Option.
With the consent of the Optionee affected, the Board may amend
outstanding Options or related agreements in a manner not inconsistent with the
Plan. The Board shall have the right to amend or modify the terms and provisions
of the Plan and of any outstanding ISO's granted under the Plan to the extent
necessary to qualify any or all such Options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code.
25. TERM OF PLAN. The Plan shall become effective on the Effective
Date, subject to the approval of the Plan by the holders of a majority of the
shares of common stock of the Company entitled to vote on, or within twelve
months of, the date of the Plan's adoption by the Board, and all Options granted
prior to such approval shall be subject to such approval. The Plan shall
terminate on the tenth anniversary of the Effective Date, or such earlier date
as may be determined by the Board. Termination of the Plan, however, shall not
affect the rights of Optionees under Options previously granted to them, and all
unexpired Options shall continue in force and operation after termination of the
Plan except as they may lapse or be terminated by their own terms and
conditions.
26. LIMITATION OF LIABILITY. The liability of the Company under this
Plan or in connection with any exercise of an Option is limited to the
obligations expressly set forth in the Plan and in any Stock Option Agreements,
and no term or provision of this Plan or of any Stock Option Agreements shall be
construed to impose any further or additional duties, obligations or costs on
the Company not expressly set forth in the Plan or the Stock Option Agreements.
27. DEFINITIONS.
(a) Disability. "Disability," as used herein, shall mean a
physical or mental condition resulting from bodily injury, disease, or mental
disorder which renders the Optionee incapable of continuing the Optionee's usual
and customary employment or service with the Company Group.
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(b) Fair Market Value. If the Shares are publicly traded, the
term "fair market value" as used in this Plan shall mean (a) the closing price
quoted in the NASDAQ National Market System, if the shares are so quoted, (b)
the last quote reported by NASDAQ for small-cap issues, if the shares are so
quoted, (c) the mean between the bid and asked prices as reported by NASDAQ, if
the Shares are so quoted, or (d) if the Shares are listed on a securities
exchange, the closing price at which the Shares are quoted on such exchange, in
each case at the close of the date immediately before the Option is granted or,
if there be no quotation or sale on that date, the next previous date on which
the Shares were quoted or traded. In all other cases, the fair market value
shall be determined by and in accordance with procedures established in good
faith by the Board and with respect to ISOs, conforming to regulations issued by
the Internal Revenue Service regarding incentive stock options.
(c) Key Associates. The term "key associates" shall include
those executive, administrative, operational and managerial employees who are
determined by the Board to be eligible for Options under the Plan.
(d) Parent and Subsidiary. The terms "subsidiary" and "parent"
as used in the Plan shall have the respective meanings set forth in sections
424(f) and (e) of the Code.
(e) Termination For Cause. The term "termination of employment
for cause" shall mean termination of employment for (a) the commission of an act
of dishonesty, including but not limited to misappropriation of funds or
property of the Company; (b) the engagement in activities or conduct injurious
to the reputation of the Company; (c) the conviction or entry of a guilty or no
contest plea to a misdemeanor involving an act of moral turpitude or a felony;
(d) the violation of any of the terms and conditions of any written agreement
the Optionee may have from time to time with the Company Group (following 30
days' written notice from the Company specifying the violation and the
employee's failure to cure such violation within such 30-day period); or (e) any
refusal to comply with the written directives, policies or regulations
established from time to time by the Board.
(f) Change In Control. A "change in control" shall be deemed
to have taken place if, as a result of a tender offer, merger, consolidation,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were directors of the Company
immediately before the Transaction shall cease to constitute a majority of the
Board of Directors of the Company or of any successor to the Company; provided,
however, that any Transaction shall not be deemed to be a change in control if
the Transaction causing such change shall have been approved by the affirmative
vote of at least a majority of the members of the Board of Directors of the
Company in office immediately prior to the change in control.
CHECKFREE CORPORATION
Adopted August 8, 1995 By: /s/ Peter J. Kight
--------------------------
Peter J. Kight, President
Amended and Restated: October 18, 1996
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FORM OF STOCK OPTION AGREEMENT
[ISO /or/ NSO] No. 95-_____
CHECKFREE CORPORATION
[INCENTIVE /OR/ NONSTATUTORY]
STOCK OPTION AGREEMENT
UNDER THE
1995 STOCK OPTION PLAN
(AS AMENDED AND RESTATED OCTOBER 18, 1996)
Checkfree Corporation (the "Company") hereby grants, effective this day
of _______________, 19__ (the "Effective Date") to _______________ (the
"Optionee") an option to purchase ____________ shares of its common stock,
without par value (the "Option Shares"), at a price of _____________ Dollars
($______) per share pursuant to the Company's 1995 Stock Option Plan as Amended
and Restated October 18, 1996 (the "Plan"), subject to the following:
1. RELATIONSHIP TO THE PLAN. This option is granted pursuant to the
Plan, and is in all respects subject to the terms, provisions and definitions of
the Plan and any amendments thereto. The Optionee acknowledges receipt of a copy
of the Plan and represents that he or she is familiar with the terms and
conditions thereof. The Optionee accepts this option subject to all the terms
and provisions of the Plan (including without limitation provisions relating to
nontransferability, exercise of the option, sale of the option shares,
termination of the option, adjustment of the number of shares subject to the
option, and the exercise price of the option). The Optionee further agrees that
all decisions and interpretations made by the Stock Option Committee (the
"Committee"), as established under the Plan, and as from time to time
constituted, are final, binding, and conclusive upon the Optionee and his or her
heirs. This option [IS/IS NOT] an Incentive Stock Option under the Plan.
2. TIME OF EXERCISE. This option may be exercised, from time to time,
in full or in part, by the Optionee to the extent the option is vested based
upon the number of full years the Optionee is an employee of the Company after
the Effective Date (the "Vested Percentage") and remains exercisable (subject to
the provisions herein and the Plan) until it has been exercised as to all of the
Shares or the _____ anniversary of the Effective Date, whichever occurs first.
The Optionee is entitled to exercise this option to the extent of the
percentage of, and not to exceed in the aggregate, the maximum number of the
Shares, based upon the Vested Percentage, from time to time, as determined in
accordance with the following schedule:
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Years of Employment Total
After the Effective Date Vested Percentage
------------------------ -----------------
Notwithstanding the foregoing, this option may not be exercised unless (i) the
Option Shares are registered under the Securities Act of 1933, as amended, and
are registered or qualified under applicable state securities or "blue sky"
laws, or (ii) the Company has received an opinion of counsel to the Company to
the effect that the option may be exercised and Option Shares may be issued by
the Company pursuant thereto without such registration or qualification. If this
option is not otherwise exercisable by reason of the foregoing sentence, the
Company will take reasonable steps to comply with applicable state and federal
securities laws in connection with such issuance.
3. METHODS OF EXERCISE. This option is exercisable by delivery to the
Company of written notice of exercise which specifies the number of shares to be
purchased and the election of the method of payment therefor, which will be one
of the methods of payment specified in subparagraph 10(c) of the Plan. If
payment is otherwise than payment in full in cash, the method of payment is
subject to the consent of the Committee. Upon receipt of payment for the shares
to be purchased pursuant to the option or, if applicable, the shares to be
delivered pursuant to the election of an alternative payment method, the Company
will deliver or cause to be delivered to the Optionee, to any other person
exercising this option, or to a broker or dealer if the method of payment
specified in clause (iv) of subparagraph 10(c) of the Plan is elected, a
certificate or certificates for the number of shares with respect to which this
option is being exercised, registered in the name of the Optionee or other
person exercising the option, or if appropriate, in the name of such broker or
dealer; provided, however, that if any law or regulation or order of the
Securities and Exchange Commission or other body having jurisdiction over the
exercise of this option will require the Company or Optionee (or other person
exercising this option) to take any action in connection with the shares then
being purchased, the delivery of the certificate or certificates for such shares
may be delayed for the period necessary to take and complete such action.
4. ACQUISITION FOR INVESTMENT. This option is granted on the condition
that the acquisition of the Option Shares hereunder will be for the account of
the Optionee (or other person exercising this option) for investment purposes
and not with a view to resale or distribution, except that such condition will
be inoperative if the Option Shares are registered under the Securities Act of
1933, as amended, or if in the opinion of counsel for the Company such shares
may be resold without registration. At the time of any exercise of the option,
the Optionee (or other person exercising this option) will execute such further
agreements as the Company may require to implement the foregoing condition and
to acknowledge the Optionee's (or such other person's) familiarity with
restrictions on the resale of the Option Shares under applicable securities
laws.
5. DISPOSITION OF SHARES. The Optionee or any other person who may
exercise this option will notify the Company within seven (7) days of any sale
or other transfer of any Option
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Shares. If any class of equity securities of the Company is registered pursuant
to section 12 of the Securities Exchange Act of 1934, as amended, and the
Optionee or any other person who may exercise this option is subject to section
16 of that Act by virtue of such Optionee's or person's relationship to the
Company, the Optionee or other person exercising this Option agrees not to sell
or otherwise dispose of any Option Shares unless at least six (6) months have
elapsed from the Effective Date.
6. WITHHOLDING. As a condition to the issuance of any of the Shares
under this Option, Optionee or any person who may exercise this Option
authorizes the Company to withhold in accordance with applicable law from any
salary, wages or other compensation for services payable by the Company to or
with respect to Optionee any and all taxes required to be withheld by the
Company under federal, state or local law as a result of such Optionee's or such
person's receipt or disposition of Shares purchased under this Option. If, for
any reason, the Company is unable to withhold all or any portion of the amount
required to be withheld, Optionee (or any person who may exercise this Option)
agrees to pay to the Company upon exercise of this Option an amount equal to the
withholding required to be made less the amount actually withheld by the
Company.
7. GENERAL. This Agreement will be construed as a contract under the
laws of the State of Ohio without reference to Ohio's choice of law rules. It
may be executed in several counterparts, all of which will constitute one
Agreement. It will bind and, subject to the terms of the Plan, benefit the
parties and their respective successors, assigns, and legal representatives.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement as of the date first above written.
OPTIONEE: CHECKFREE CORPORATION
By:
- ------------------------------ -------------------------------
Its:
-------------------------------
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APPENDIX D
CHECKFREE CORPORATION
ASSOCIATE STOCK PURCHASE PLAN
1. PURPOSE.
The CheckFree Corporation Associate Stock Purchase Plan (the "Plan") is
being established for the benefit of employees of CheckFree Corporation, a
Delaware corporation (the "Company"), and certain affiliated companies. The Plan
is intended to provide eligible employees with an opportunity to purchase shares
of common stock, $0.01 par value, of the Company (the "Shares"), through
accumulated payroll deductions. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Code, and the provisions of the Plan shall be construed in a manner
consistent with the requirements of such Section of the Code.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Capitalization" shall mean any increase, reduction, or
change or exchange of Shares for a different number or kind of shares or other
securities of the Company by reason of a reclassification, recapitalization,
merger, consolidation, reorganization, share dividend, share split or reverse
share split, combination or exchange of shares, repurchase of Shares, change in
corporate structure or otherwise.
(c) "Change in Control" of the Company shall have the meaning given in
Section 16(b) hereof.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Committee" shall mean the Stock Option and Compensation Committee
or any other committee of members of the Board appointed by the Board to
administer the Plan and to perform the functions set forth herein.
(f) "Company" shall mean CheckFree Corporation, a corporation organized
under the laws of the State of Delaware, or any successor corporation.
(g) "Compensation" shall mean the fixed salary, wages, commissions,
overtime pay and bonuses paid by an Employer to an Employee as reported by the
Employer to the United States government for federal income tax purposes,
including an Employee's portion of compensation deferral contributions pursuant
to Section 401(k) of the Code, any amount excludable pursuant to Section 125 of
the Code and/or any non-qualified compensation deferrals,
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but excluding any foreign service allowance, severance pay, expense
reimbursement or any benefit paid by a third-party payer under any employee
benefit plan maintained by the Employer.
(h) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
taken pursuant to the Employer's written leave of absence policy if such leave
is for a continuous period of not more than one year.
(i) "Designated Subsidiaries" shall mean the Subsidiaries of the
Company as of the Effective Date, and corporations which become Subsidiaries of
the Company after the Effective Date.
(j) "Effective Date" shall have the meaning set forth in Section 22
hereof.
(k) "Employee" shall mean any person, including an officer, who as of
an Offering Date is (i) regularly employed by the Company or a Designated
Subsidiary of the Company for more than twenty (20) hours per week, and (ii) who
has been employed by such Employer for a period of at least ninety (90) days.
(l) "Employer" shall mean, as to any particular Employee, the
corporation which employs such Employee, whether it is the Company or a
Designated Subsidiary of the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "Exercise Date" shall mean the last business day of each Offering
Period, except as the Committee may otherwise provide. For purposes of the Plan,
the term "business day" means a day on which there is permitted trading of the
Shares on the NASDAQ National Market or on a national securities exchange,
whichever is applicable; and if neither is applicable, a day that is not a
Saturday, Sunday or legal holiday in the State of Delaware.
(o) "Fair Market Value" per Share as of a particular date shall mean:
(i) the closing sales price, regular way for the Shares on any
national securities exchange on which the Shares are actively
traded on such date (or if such exchange was not open for
trading on such date, the next preceding date on which it was
open); or
(ii) if there is no price as specified in (i), the mean of the
last reported bid- and-asked quotations regular way, for the
Shares on such exchange on such date (or if there was no such
quotations on such date, the next preceding date); or
(iii) if there also is no price as specified in (ii), the
closing sales price, regular way, or in the absence thereof
the mean of the last reported bid-and-asked
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quotations, for the Shares on the other exchange on which the
Shares are permitted to trade having the greatest volume of trading
in the Shares during the 30-day period preceding such date, on such
date (or if there were no such quotations on such date, the next
preceding date); or
(iv) if there also is no price as specified in (iii), the
final reported sales price, or if not reported in the
following manner, the highest bid quotation, in the
over-the-counter market for the Shares as reported by the
National Association of Securities Dealers Automatic Quotation
System, or if not so reported, then as reported by the
National Quotation Bureau Incorporated, or if such
organization is not in existence, by an organization providing
similar services, on such date (or if such date is not a date
for which such system or organization generally provides
reports, then on the next preceding date for which it does
so); or
(v) if there also is no price as specified in (iv), the price
determined by the Committee by reference to the bid-and-asked
quotations for the Shares provided by members of an
association of brokers and dealers registered pursuant to
subsection 15(b) of the Exchange Act, which members make a
market in the Shares, for such recent dates as the Committee
shall determine to be appropriate for fairly determining
current fair market value; or
(vi) if there also is no price as specified in (v), the price
determined by the Committee for the date in question.
(p) "Offering Date" shall mean the first business day of each Offering
Period. In the event that the Board specifies the maximum number of Shares that
a Participant may be permitted to acquire during an Offering Period pursuant to
Section 5(b) hereof, the Offering Date of an Offering Period will be the grant
date for the options offered in such Offering Period. If no such maximum number
of Shares has been specified by the Board pursuant to Section 5(b) hereof, the
Exercise Date of an Offering Period will be the grant date for the options
offered in such Offering Period. Notwithstanding the foregoing, the first
Offering Date following the adoption of the Plan shall be the first business day
on or after the Effective Date.
(q) "Offering Period" shall mean each six (6) month period commencing
on January 1 and July 1, respectively, which periods shall end on June 30 and
December 31, respectively; provided, however, that the Committee shall have the
power to change the duration of Offering Periods; provided further, however,
that no option granted under the Plan shall be exercisable more than
twenty-seven (27) months from its date of grant. Notwithstanding the foregoing,
the first Offering Period following the adoption of the Plan shall begin on the
Effective Date and end on June 30, 1997.
(r) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an option, each of the corporations other than the Company owns shares
possessing fifty percent (50%) or more of the total combined voting power of
all classes of shares in one of the other corporations in such chain.
(s) "Participant" shall mean an Employee who participates in the
Plan.
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<PAGE> 164
(t) "Participant's Account" shall mean the account established for a
Participant pursuant to the Plan to which his or her payroll deductions, Shares
acquired under the Plan, dividends received from such Shares, and dividend
reinvestments shall be credited and from which cash distributions, cash used to
purchase Shares and distributions of Shares will be debited.
(u) "Plan" shall mean the CheckFree Corporation Associate Stock
Purchase Plan, as amended from time to time.
(v) "Shares" shall mean common stock, $0.01 par value, of the Company.
(w) "Subsidiary" shall mean any corporation (other than the Company) or
other business organization in an unbroken chain of corporations or business
organizations beginning with the Company, if, at the time of granting an option,
each of the corporations or other business organizations other than the last
corporation or such other business organization in the unbroken chain owns
shares or other voting securities possessing fifty percent (50%) or more of the
total combined voting power of all classes of shares or other voting securities
in one of the other corporations or such business organizations in such chain.
3. ELIGIBILITY.
(a) Subject to the requirements of Sections 4(b) and 20(d) hereof, any
person who is an eligible Employee as of an Offering Date shall be eligible to
participate in the Plan and be granted an option for the Offering Period
commencing on such Offering Date.
(b) Notwithstanding any provisions of the Plan to the contrary, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose shares would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own shares and/or
hold outstanding options to purchase shares possessing five percent (5%) or more
of the total combined voting power or value of all classes of shares of the
Company or of any Subsidiary or Parent of the Company, or (ii) which permits
such Employee's right to purchase shares under all employee stock purchase plans
(as described in Section 423 of the Code) of the Company and any Subsidiary or
Parent of the Company to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) of Fair Market Value of such shares (determined at the time
such option is granted) for any calendar year in which such option would be
outstanding at any time. The purpose of the limitation in the preceding sentence
is to comply with Section 423(b)(8) of the Code. If the Employee's accumulated
payroll deductions on the last day of the Offering Period would otherwise enable
the Employee to purchase Shares in excess of the Section 423(b)(8) limitation
described in this Section, the excess of the amount of the accumulated payroll
deductions over the aggregate purchase price of the Shares actually purchased
shall be credited towards the next Offering Period. In the event the Employee
elects to discontinue participation in the Plan, such amount shall be promptly
refunded to the Employee by the Company, without interest.
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4. GRANT OF OPTION; PARTICIPATION; PRICE.
(a) On each Offering Date, the Company shall commence an offering by
granting each eligible Employee an option to purchase Shares, subject to the
limitations set forth in Section 3(b) and Section 10 hereof.
(b) Each eligible Employee may elect to become a Participant in the
Plan with respect to an Offering Period, by filing an agreement with his or her
Employer authorizing payroll deductions in accordance with Section 5 hereof.
Such authorization will remain in effect for subsequent Offering Periods, until
modified or terminated by the Participant by giving written notice to his or her
Employer prior to the next occurring Exercise Date. Such authorization to make
payroll deductions must be received by the Company at least twenty (20) days
before the next succeeding Offering Date.
(c) The option price per Share subject to an offering shall be the
lesser of (i) 85% of the Fair Market Value of the Shares on the Offering Date of
reference or (ii) 85% of the Fair Market Value of the Shares on the Exercise
Date of reference; and, provided further that the option price per Share shall
never be less than the par value per Share.
5. PAYROLL DEDUCTIONS.
(a) Subject to Section 4(b) hereof, a Participant may, in accordance
with rules and procedures adopted by the Committee, authorize an after-tax
payroll deduction of any whole percentage from one percent (1%) to fifteen
percent (15%) of such Participant's Compensation each pay period. A Participant
may not increase or decrease such payroll deduction (provided that a Participant
may withdraw from the Plan under Section 8) during each Offering Period (unless
otherwise allowed by the Committee in its sole discretion). All payroll
deductions made by a Participant shall be credited to such Participant's
Account.
(b) The Board may, but need not, specify by notice to all Employees
prior to the first day of any Offering Period, a maximum number of Shares that
any Participant shall be permitted to acquire pursuant to the Plan in any
Offering Period, which maximum need not be the same for every Offering Period.
6. EXERCISE OF OPTION.
(a) Unless a Participant withdraws from the Plan as provided in Section
8 hereof, or unless the Committee otherwise provides, such Participant's
election to purchase Shares shall be exercised automatically on the Exercise
Date, and the maximum number of Shares (excluding any fractional Share, for
which purposes the purchase amount shall be rounded to the next lower whole
number of Shares) subject to such option will be purchased for such Participant
at the applicable option price with the accumulated payroll deductions.
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(b) Any cash balance remaining in a Participant's Account after the
termination of an Offering Period will be carried forward to the Participant's
Account for the purchase of Shares during the next Offering Period if the
Participant has elected to continue to participate in the Plan. Otherwise, the
Participant will receive a cash payment equal to the cash balance of his or her
account.
(c) The Shares purchased upon exercise of an option hereunder shall be
credited to the Participant's Account under the Plan within ten (10) business
days after the Exercise Date and shall be deemed to be transferred to the
Participant as of such crediting date. Except as otherwise provided herein, the
Participant shall have all rights of a shareholder with respect to credited
Shares.
7. DELIVERY OF SHARES.
(a) As promptly as practicable after receipt by the Company of a
written request for withdrawal of Shares from any Participant's Account (or, in
the discretion of the Committee, at any time after the termination of employment
of any Participant), subject to Section 20(d) hereof, the Company shall arrange
the delivery to such Participant of a share certificate representing the whole
Shares credited to the Participant's Account which the Participant requests to
withdraw. Subject to Section 7(b) hereof, withdrawals may be made no more
frequently than once each Offering Period. Shares received upon share dividends
or share splits shall be treated as having been purchased on the Exercise Date
of the Shares to which they relate.
(b) Notwithstanding anything in Section 7(a) hereof to the contrary,
Shares may be withdrawn by a Participant more than once during an Offering
Period under the following circumstances: (i) within sixty (60) days following a
Change in Control of the Company or (ii) upon the approval of the Committee, in
its sole discretion.
8. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw at any time all, but not less than all,
cash amounts in his or her account under the Plan that have not been used to
purchase Shares by giving written notice to the Company at least thirty (30)
days prior to the next occurring Exercise Date or otherwise as may be approved
by the Committee in its sole discretion. All such payroll deductions credited to
such Participant's Account shall be paid to such Participant promptly after
receipt of such Participant's notice of withdrawal and such Participant's option
for the Offering Period in which the withdrawal occurs shall be automatically
terminated. No further payroll deductions for the purchase of Shares will be
made for such Participant during such Offering Period.
(b) Upon termination of a Participant's Continuous Status as an
Employee during an Offering Period for any reason, including voluntary
termination, retirement or death, the payroll deductions credited to such
Participant's Account that have not been used to purchase Shares shall
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be returned to such Participant or, in the case of such Participant's death, to
the person or persons entitled thereto under Section 12 hereof, and such
Participant's option will be automatically terminated. Notwithstanding the
foregoing, upon the termination of a Participant's employment because of the
Participant's death, the Participant's beneficiary (designated by the
Participant in accordance with Section 12 hereof) shall have the right to elect,
by written notice given to the Company prior to the earlier of thirty (30) days
prior to the next occurring Exercise Date (or otherwise as may be determined by
the Committee in its sole discretion) under the Plan or the sixtieth (60th) day
after the Participant's death, to exercise the Participant's option for the
purchase of Shares on such Exercise Date for the purchase of the number of full
Shares which the accumulated payroll deductions in the Participant's Account at
the date of the Participant's death will purchase at the applicable option
price, and any excess in such account will be paid to such beneficiary. If no
such written notice of election is duly received by the Company, the first
sentence of this Section 8(b) shall control.
(c) Except as provided in Section 20(d) hereof, a Participant's
withdrawal from an offering will not have any effect upon such Participant's
eligibility to participate in a succeeding offering or in any similar plan which
may hereafter be adopted by the Company.
9. INTEREST.
No interest shall accrue on or be payable with respect to the payroll
deductions of a Participant credited to the Participant's Account.
10. SHARES.
(a) The maximum number of Shares which shall be reserved and available
for sale under the Plan shall be 1,000,000 Shares, which number shall be subject
to adjustment upon Changes in Capitalization of the Company as provided in
Section 16 hereof. Such Shares shall be either authorized and unissued Shares or
Shares which have been reacquired by the Company. If the total number of Shares
which would otherwise be subject to options granted pursuant to Section 4 hereof
on an Offering Date exceeds the number of Shares then available under the Plan
(after deduction of all Shares for which options have been exercised or are then
outstanding), the Committee shall make a pro rata allocation of the Shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Committee shall give written notice to each Participant of such reduction of the
number of option Shares affected thereby and shall similarly reduce the rate of
payroll deductions, if necessary.
(b) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or, at the election of the
Participant, in the name of the Participant and another person as joint tenants
with rights of survivorship.
(c) Until Shares shall have been credited to a Participant's Account in
accordance with Section 6(c) hereof, the Participant shall not have any rights
or privileges of a shareholder with respect to any Shares purchasable hereunder.
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11. ADMINISTRATION.
The Plan shall be administered by the Committee, and the Committee may
select administrator(s) to whom its duties and responsibilities hereunder may be
delegated. The Committee shall have full power and authority, subject to the
provisions of the Plan, to promulgate such rules and regulations as it deems
necessary for the proper administration of the Plan, to interpret the provisions
and supervise the administration of the Plan, and to take all action in
connection therewith or in relation thereto as it deems necessary or advisable.
Any decision evidenced by the unanimous written consent of the members of the
Committee shall be fully effective as if it had been made at a meeting duly
held. Except as otherwise provided by the Committee, each Employer shall be
charged with all expenses incurred in the administration of the Plan with
respect to such Employer's Employees. No member of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan, and all members of the Committee shall be fully
indemnified by the Company with respect to any such action, determination or
interpretation. All decisions, determinations and interpretations of the
Committee shall be final and binding on all persons, including the Company, the
Participant (or any person claiming any rights under the Plan from or through
any Participant) and any shareholder.
12. DESIGNATION OF BENEFICIARY.
(a) A Participant may file with the Company, on forms supplied by the
Company, a written designation of a beneficiary who is to receive any Shares and
cash remaining in such Participant's Account under the Plan in the event of the
Participant's death.
(b) Such designation of beneficiary may be changed by the Participant
at any time by written notice to the Company, on forms supplied by the Company.
In the event of the death of a Participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
Participant's death, the Company shall deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant in
accordance with the applicable laws of descent and distribution, or if no
spouse, dependent or relative is known to the Company, then to such other person
as the Company may designate.
13. TRANSFERABILITY.
Neither payroll deductions credited to a Participant's Account nor any
rights with regard to the exercise of an option or to receive Shares under the
Plan may be assigned, transferred, pledged or otherwise disposed of in any way
by the Participant (other than by will, the laws of descent and distribution or
as provided in Section 12 hereof). Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Section 8
hereof.
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14. USE OF FUNDS.
All payroll deductions received or held by the Company under the Plan
may be used by the Company for any corporate purpose, and the Company shall not
be obligated to segregate such funds.
15. REPORTS; PARTICIPANTS' ACCOUNTS.
The Company shall establish a Participant's Account for each
Participant in the Plan to which each Participant's payroll deductions, Shares
acquired under the Plan, dividends received from such Shares, and dividend
reinvestments shall be credited, and from which cash distributions, cash used to
purchase Shares and distributions of Shares will be debited ("Participant's
Accounts"). Statements with respect to each Participant's Account will be given
to Participants as soon as practicable following each Offering Period, which
statements will set forth the amounts of payroll deductions, dividends, dividend
reinvestments and additional cash payments, the per Share purchase price, the
number of shares purchased, the aggregate Shares in the Participant's Account
and the remaining cash balance, if any.
16. EFFECT OF CERTAIN CHANGES.
(a) In the event of a Change in Capitalization or the distribution of
an extraordinary dividend, the Committee shall conclusively determine the
appropriate equitable adjustments, if any, to be made under the Plan, including
without limitation adjustments to the number of Shares which have been
authorized for issuance under the Plan but have not yet been placed under
option, as well as the price per Share covered by each option under the Plan
which has not yet been exercised. In the event of a Change in Control of the
Company, the Offering Period shall terminate unless otherwise provided by the
Committee. For purposes of the preceding sentence, (i) the Committee may
establish the date of the event constituting the Change in Control and such date
shall be the Exercise Date for such Offering Period, or (ii) the Committee may
terminate the Plan in which case all Shares and cash amounts in a Participant's
Account shall be refunded as elsewhere provided herein.
(b) "Change in Control" shall be deemed to have occurred if (i) a
tender offer shall be made and consummated for the ownership of 50% or more of
the outstanding voting securities of the Company, (ii) the Company shall be
merged or consolidated with another corporation and as a result of such merger
or consolidation less than 50% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, (iii) the Company shall sell at least 75% of its
assets by value in a single transaction or in a series of transactions to
another corporation which is not a wholly owned subsidiary of the Company, or
(iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as
in effect on the date hereof) of the Exchange Act, shall acquire 50% or more of
the outstanding voting securities of the Company (whether directly, indirectly,
beneficially or of record). For purposes hereof, ownership of voting securities
shall take into account and shall
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include ownership as determined by applying the provisions of Rule 13d-3(d)(1)
(as in effect on the date hereof) pursuant to the Exchange Act.
17. Term of Plan.
Subject to the Board's right to discontinue the Plan (and thereby end
its Term) pursuant to Section 18 hereof, the Term of the Plan (and its last
Offering Period) shall end on December 31, 2006. Upon any discontinuance of the
Plan, unless the Committee shall determine otherwise, any assets remaining in
the Participants' accounts under the Plan shall be delivered to the respective
Participant (or the Participant's legal representative) as soon as practicable.
18. AMENDMENT TO AND DISCONTINUANCE OF PLAN.
(a) Subject to Section 18(b) hereof, the Board may at any time amend,
suspend or discontinue the Plan. Except as provided in Section 16 hereof, no
such suspension or discontinuance may adversely affect options previously
granted and no amendment may make any change in any option theretofore granted
which adversely affects the rights of any Participant which accrued prior to the
date of effectiveness of such amendment without the consent of such Participant.
No amendment shall be effective unless it receives the requisite approval of the
shareholders of the Company if such shareholder approval of such amendment is
required to comply with Rule 16b-3 under the Exchange Act or Section 423 of the
Code or to comply with any other applicable law, regulation or stock exchange
rule.
(b) For the purpose of complying with changes in the Code or ERISA, the
Board may amend, modify, suspend or terminate the Plan at any time. For the
purpose of meeting or addressing any other changes in legal requirements or any
other purpose, the Board may amend, modify, suspend or terminate the Plan only
once every six months. Subject to changes in law or other legal requirements,
including any provisions of Rule 16b-3 under the Exchange Act that would permit
otherwise, the Plan may not be amended without the consent of the holders of a
majority of the shares of Common Stock then outstanding or the vote of the
shareholders of the Company as provided in Section 20(c) hereof, to (i) any
increase in the aggregate number of shares of common stock that may be issued
under the Plan (except for adjustments pursuant to Section 16 of the Plan); (ii)
increase materially the benefits accruing to Participants under the Plan; or
(iii) modify materially the requirements as to eligibility for participation in
the Plan.
19. NOTICES.
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
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20. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW; SECTION 16 COMPLIANCE
(a) This Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to the choice of law principles thereof,
except to the extent that such law is preempted by federal law.
(b) The obligation of the Company to sell or deliver Shares
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(c) To the extent applicable hereto, the Plan is intended
to comply with Rule 16b-3 under the Exchange Act, and the Committee shall
interpret and administer the provisions of the Plan in a manner consistent
therewith. Any provisions inconsistent with such Rule shall be inoperative and
shall not affect the validity of the Plan. This Plan shall be subject to
approval by shareholders of the Company present or represented and entitled to
vote at a meeting duly held in accordance with applicable law.
(d) For any Participants subject to Section 16 of the
Exchange Act, (i) such Participants who cease participation in the Plan may not
participate again for at least six (6) months, and (ii) unless the Committee
otherwise determines after due regard for Rule 16b-3(d)(2)(i), any Shares
purchased by such Participant shall remain in such Participant's Account for six
(6) months from the Exercise Date for such Shares.
(e) Shares shall not be issued unless such issuance and
delivery shall comply with all applicable provisions of law, domestic or
foreign, and the requirements of any stock exchange upon which the Shares may
then be listed, including, in each case the rules and regulations promulgated
thereunder, and shall be further subject to the approval of counsel for the
Company with respect to such compliance, which may include a representation and
warranty from the Participant that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares.
(f) Nothing contained in this Plan, or any modification or
amendment to the Plan, or in the creation of any account, or the execution of
any subscription agreement, or the issuance of any Shares under the Plan, shall
give any Employee any right to continue employment or any legal or equitable
right against the Company or any Subsidiary, or any officer, director, or
employee thereof, except as expressly provided by the Plan.
21. WITHHOLDING OF TAXES.
By electing to participate in the Plan, each Employee acknowledges that
the Company and its participating Subsidiaries are required to withhold taxes
with respect to the amounts deducted from the Employee's Compensation and
accumulated for the benefit of the Employee under the
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Plan, and each Employee agrees that the Company and its participating
Subsidiaries may deduct additional amounts from the Employee's Compensation,
when amounts are added to the Employee's Account, used to purchase common stock
or refunded, in order to satisfy such withholding obligations. If the
Participant makes a disposition, within the meaning of Section 424(c) of the
Code and the regulations promulgated thereunder, of any Share or Shares issued
to such Participant pursuant to such Participant's exercise of an option, and
such disposition occurs within the two-year period commencing on the day after
the option is being treated as granted for purposes of Section 423 of the Code
or within the one-year period commencing on the day after the Exercise Date,
such Participant shall, within ten (10) days of such disposition, notify the
Company thereof and thereafter immediately deliver to the Participant's Employer
any amount of federal, state or local income taxes and other amounts which the
Company informs the Participant the Company is required to withhold. The
Participant's Employer may also satisfy any applicable withholding amounts by
deducting the necessary amounts of withholding from the Participant's wages and,
in the Committee's sole discretion, any other amounts owed to or held for the
account of the Participant.
22. EFFECTIVE DATE.
The Plan shall be effective (the "Effective Date") as of the latter to
occur of (a) January 1, 1997, or (b) the date on which this Plan shall have been
approved by the shareholders as set forth in Section 20(c) hereof.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Article IX of the Registrant's By-Laws (the "By-Laws") provides
that the Registrant shall, to the fullest extent permitted by applicable law as
then in effect, indemnify any person who is or was involved or threatened to be
made so involved in any action by reason of the fact that he is or was a
director or officer of the Registrant, or is or was serving at the request of
the Registrant as a director or officer of another entity. The right to
indemnification includes the right to receive payment of expenses in advance of
the final disposition of the proceeding. All indemnification rights in Article
IX are contract rights. The Registrant also may provide indemnification for
employees, agents, attorneys and representatives of the Registrant by action of
its board of directors. Article IX expressly states that no amendment to the
By-Laws or the Certificate of Incorporation shall adversely affect any right to
indemnification for acts occurring prior to such amendment. The right of
indemnification is not exclusive of any other rights of indemnification that may
be available.
In determining the right to indemnification, the Registrant has the
burden of proof that the indemnitee has not met the applicable standard of
conduct. If successful in whole or in part in such a proceeding, the indemnitee
is entitled to be indemnified for expenses incurred in connection with such
proceeding. All reasonable expenses incurred by an indemnitee in connection with
any proceeding shall be advanced by the Registrant after receipt of a statement
from the indemnitee requesting such advance.
Article IX provides that the Registrant may purchase and maintain
insurance in connection with any expenses, liability or loss relating to any
proceeding, whether or not the Registrant would have the power to indemnify the
officer, director, employee, agent, attorney, trustee or representative. The
Registrant also may enter into indemnification contracts with any of the
foregoing persons, which contracts are deemed specifically approved and
authorized by the stockholders.
Article IX provides that if any provision of Article IX is held
invalid, illegal or unenforceable, the remaining provisions of Article IX shall
not be affected. An indemnitee also may elect, as an alternative to the Article
IX procedures, to follow procedures authorized by applicable corporate law or
statute. Article IX sets forth specific procedures for the advancement of
expenses and for the determination of entitlement to indemnification.
Entitlement to indemnification shall be determined by a majority vote of
disinterested directors, by a written opinion of independent counsel under
certain circumstances or by the Registrant's stockholders if a majority of the
disinterested directors determines the issue should be submitted to the
stockholders. If the foregoing persons have not been appointed within 60 days
after the receipt of a request for indemnification, the indemnitee is deemed to
be entitled to indemnification unless the indemnitee misrepresented or omitted a
material fact in making or supporting his request for indemnification or the
indemnification is prohibited by law. The termination of an action by judgment,
order, settlement or conviction or upon a plea of nolo contendere does not
adversely affect the right of an indemnitee to indemnification or create any
presumption with respect to any standard of conduct. An indemnitee is entitled
to indemnification for expenses if he is successful on the merits, if the action
is terminated without a determination of liability on the part of the indemnitee
or if the indemnitee was not a party to the action. An indemnitee who is
determined not to be entitled to indemnification may appeal such determination
either through the courts or by arbitration.
(b) Under Section 145 of the Delaware GCL, indemnification of any
person who is or was a party or threatened to be made so in any action by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or was serving in such capacity for another corporation or other
enterprise at the request of the corporation is permitted against expenses,
fines and amounts paid in settlement actually and reasonably incurred by him in
such proceeding where the indemnified person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and in criminal actions, where he had no reasonable cause to
believe his conduct was unlawful. Indemnification is also permitted in lawsuits
brought by or on behalf of the corporation if the standards of conduct described
above are met, except that no indemnification is permitted in respect
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to any matter in which the person is adjudged to be liable to the corporation
unless a court shall determine that indemnification is fair and reasonable in
view of all the circumstances of the case. Indemnification against expenses
(including attorneys' fees) actually and reasonably incurred by directors,
officers, employees and agents is required under Section 145 of the Delaware GCL
in those cases where the person to be indemnified has been successful on the
merits or otherwise in defense of a proceeding of the type described above. In
cases where indemnification is permissive, a determination as to whether the
person met the applicable standard of conduct must be made (unless ordered by a
court) by majority vote of the disinterested directors, by independent legal
counsel, or by the stockholders. Such indemnification rights are specifically
not deemed to be exclusive of other rights of indemnification by agreement or
otherwise and the corporation is authorized to advance expenses incurred prior
to the final disposition of a matter upon receipt of an undertaking to repay
such amounts on a determination that indemnification was not permitted in the
circumstances of the case.
(c) Under Section 145 of the Delaware GCL and Article IX of the
By-Laws, the Registrant may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the Registrant,
or who serves as a director, officer, employee or agent of another corporation
or other enterprise, against liability asserted against or incurred by such
person in any such capacity whether or not the Registrant would have the power
to provide indemnity under Section 145 or the By-Laws. The Registrant has
obtained insurance which, subject to certain exceptions, insures the directors
and officers of the Registrant and its subsidiaries.
(d) The Registrant has entered into indemnification contracts with its
directors and certain officers which provides that such directors and officers
will be indemnified to the fullest extent provided by Section 145 of the
Delaware GCL (or such other future statutory provision authorizing or permitting
indemnification) against all expenses (including attorneys' fees), judgments,
fines and settlement amounts, actually and reasonably paid or incurred by them
in any action or proceeding, including any action by or in the right of the
Registrant, by reason of the fact that they were a director, officer, employee
or agent of the Registrant, or were serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
No indemnity will be provided under such indemnification contracts (i)
except to the extent that the aggregate losses to be indemnified pursuant
thereto exceed the amount for which the indemnitee is indemnified pursuant to
any directors and officers liability insurance purchased and maintained by the
Registrant; (ii) in respect to remuneration paid to an indemnitee if it shall be
determined by a final judgment that such remuneration was in violation of law;
(iii) on account of any suit in which judgment is rendered against an indemnitee
for an accounting of profits made from the purchase or sale by indemnitee of
securities of the Registrant pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions of
any federal, state or local statutory law; (iv) on account of the indemnitee's
act or omission being finally adjudged to have been not in good faith or
involving intentional misconduct or a knowing violation of law; or (v) if a
final decision by a court having jurisdiction in the matter shall determine that
such indemnification is not lawful.
(e) Article EIGHTH of the Registrant's Restated Certificate of
Incorporation provides that a director of the Registrant shall not be personally
liable to the Registrant 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 Registrant or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any unlawful payment of a dividend or
unlawful stock purchase or redemption; or (iv) for any transaction from which
the director derived any improper personal benefit.
The above discussion of the Registrant's By-Laws, Restated Certificate
of Incorporation, indemnification agreements, and of Section 145 of the Delaware
GCL is not intended to be exhaustive and is respectively qualified in its
entirety by such By-Laws, Restated Certificate of Incorporation and statutes.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
2(a) Agreement and Plan of Merger, dated as of January 15,
1996, among the Company, Checkfree Acquisition
Corporation, and Servantis Systems Holdings, Inc.
(Reference is made to Exhibit 2 to the Current Report
on Form 8-K, dated January 15, 1996, filed with the
Securities and Exchange Commission on January 16,
1996, and incorporated herein by reference.)
2(b) Agreement and Plan of Merger, dated as of March 21,
1996, among the Company, ISC Acquisition Corporation,
and Security APL, Inc. (Reference is made to Exhibit
2 to the Current Report on Form 8-K, dated March 21,
1996, as amended, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
2(c) Amendment to Agreement and Plan of Merger, dated as
of April 30, 1996, among the Company, ISC Acquisition
Corporation, and Security APL, Inc. (Reference is
made to Exhibit 2(c) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
2(d) Agreement and Plan of Merger, dated as of September
15, 1996, among the Registrant, Checkfree Acquisition
Corporation II, Intuit Inc., and Intuit Services
Corporation (Reference is made to Exhibit 2 to
Current Report on Form 8-K, dated September 15, 1996,
filed with the Securities and Exchange Commission on
September 26, 1996, and incorporated herein by
reference.)
3(a) Restated Certificate of Incorporation of the
Registrant. (Reference is made to Exhibit 3(a) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
3(b) Amended and Restated By-Laws of the Registrant.
(Reference is made to Exhibit 3(b) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Registrant's Restated Certificate of
Incorporation (contained in the Registrant's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the
Registrant's Amended and Restated By-Laws (contained
in the Registrant's Amended and Restated By-Laws
filed as Exhibit 3(b) hereto).
5 * Opinion of Porter, Wright, Morris & Arthur
regarding legality.
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10(a) Checkfree Corporation 1995 Stock Option Plan.
(Reference is made to Exhibit 10(a) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(b) Checkfree Corporation Amended and Restated 1993 Stock
Option Plan. (Reference is made to Exhibit 10(b) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(c) Checkfree Corporation Second Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 10(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(d) Checkfree Corporation Second Amended and Restated
1983 Incentive Stock Option Plan. (Reference is made
to Exhibit 10(d) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(e) Form of Indemnification Agreement. (Reference is made
to Exhibit 10(a) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(f) Schedule identifying material details of
Indemnification Agreements substantially identical to
Exhibit 10(e). (Reference is made to Exhibit 10(f) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(g) Voting Agreement, dated November 30, 1994, among
Peter J. Kight, Greylock Limited Partnership, and
Highland Capital Partners Limited Partnership.
(Reference is made to Exhibit 10(g) to Registration
Statement on Form S-1, as amended (Registration No.
33- 95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(h) Voting Agreement, dated December 2, 1994, among Peter
J. Kight, Mark A. Johnson, Greylock Limited
Partnership, Highland Capital Partners Limited
Partnership and Tribune Company. (Reference is made
to Exhibit 10(h) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(i) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Peter J. Kight and
the Company. (Reference is made to Exhibit 10(i) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(j) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Mark A. Johnson and
the Company. (Reference is made to Exhibit 10(j) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(k) Stock Purchase Agreement, dated December 2, 1994,
between the Company and Tribune Company. (Reference
is made to Exhibit 10(k) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
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10(l) Stock Transfer Restriction Agreement, dated December
2, 1994, among Peter J. Kight, Mark A. Johnson, and
Tribune Company. (Reference is made to Exhibit 10(l)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(m) Investment Agreement, dated November 9, 1983, among
the Company (formerly, Aegis Systems, Inc.), The
Midland Mutual Life Insurance Company, The Columbus
Mutual Life Insurance Company, Grange Mutual Casualty
Company, and North American National Corp. (Reference
is made to Exhibit 10(m) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(n) Stock Purchase Agreement, dated March 17, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(n) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(o) Amending Agreement, dated November 30, 1994, and
letter agreement, dated September 24, 1992, between
the Company and Mark D. Phelan. (Reference is made to
Exhibit 10(v) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(p) Joint Development and Marketing Agreement, dated
August 2, 1995, between the Company and ADP, Inc.
(Reference is made to Exhibit 10(w) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(q) Bill Payment and Remote Banking Services Agreement,
dated March 25, 1993, between the Company and
MasterCard International Incorporated. (Reference is
made to Exhibit 10(x) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(r) Amendment to Bill Payment and Remote Banking Services
Agreement, dated December 1, 1994, between the
Company and MasterCard International Incorporated.
(Reference is made to Exhibit 10(y) to Registration
Statement on Form S-1, as amended (Registration No.
33- 95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(s) Agreement and Release, dated October 16, 1995,
between the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(z) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(t) Electronic Bill Payment Services Marketing Agreement,
dated April 26, 1995, between the Company and AT&T
Corporation. (Reference is made to Exhibit 10(z) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(u) Amendment One to Electronic Bill Payment Services
Marketing Agreement, dated November 1, 1995, between
the Company and AT&T Corporation. (Reference is made
to Exhibit 10(bb) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)**
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<PAGE> 178
10(v) Marketing and License Agreement, dated August 14,
1995, among the Company, Virtual Open Network
Environment, and Spyglass, Inc. (Reference is made to
Exhibit 10(aa) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(w) Automatic Payment Collection Agreement, dated July
28, 1993, between the Company and CompuServe,
Incorporated (with addenda). (Reference is made to
Exhibit 10(bb) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(x) Automatic Payment Collection Agreement, dated August
22, 1994, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(cc) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(y) Data Capture Credit Card Terminal Processing
Agreement, dated August 22, 1994, between the Company
and Spry, Inc. (Reference is made to Exhibit 10(dd)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(z) Reproduction and Distribution Agreement, dated July
27, 1995, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(ee) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(aa) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech, Inc.
(Reference is made to Exhibit 10(gg) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(bb) Amendment to Bill Payment and Remote Banking Services
Agreement, dated July 1, 1995, between the Company
and FiTech, Inc. (Reference is made to Exhibit 10(hh)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(cc) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(dd) Merchant Processing Agreement, dated March 13, 1995,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(jj) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(ee) Cooperative Marketing Agreement, dated March 14,
1991, between the Company and Intuit Corporation
(including addendum and notice). (Reference is made
to Exhibit 10(kk) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
II-6
<PAGE> 179
10(ff) Loan and Stock Restriction Agreement, dated December
16, 1992, between the Company and Mark D. Phelan.
(Reference is made to Exhibit 10(ll) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(gg) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark D. Phelan.
(Reference is made to Exhibit 10(mm) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(hh) Promissory Note, dated December 16, 1992, of Mark D.
Phelan. (Reference is made to Exhibit 10(nn) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ii) Loan and Stock Restriction Agreement, dated December
16, 1992, between the Company and Mark A. Johnson.
(Reference is made to Exhibit 10(oo) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(jj) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark A. Johnson.
(Reference is made to Exhibit 10(pp) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(kk) Promissory Note, dated December 16, 1992, of Mark A.
Johnson. (Reference is made to Exhibit 10(qq) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ll) Lease, dated August 1, 1993, between the Company and
The Director of Development of the State of Ohio.
(Reference is made to Exhibit 10(rr) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(mm) Guaranty Agreement, dated August 1, 1993, between the
Company and The Provident Bank. (Reference is made to
Exhibit 10(ss) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(nn) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(oo) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
II-7
<PAGE> 180
10(pp) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company as
mortgagor and Society National Bank as mortgagee.
(Reference is made to Exhibit 10(vv) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(qq) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(rr) Commercial Note Variable Rate, dated January 3, 1995,
of the Company. (Reference is made to Exhibit 10(xx)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ss) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference is
made to Exhibit 10(yy) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(tt) Agreement, dated August 29, 1995, between the Company
and Nationwide Mutual Insurance Company. (Reference
is made to Exhibit 10(zz) to Registration Statement
on Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(uu) Agreement, dated September 8, 1995, among the
Company, The Midland Life Insurance Company, The
Columbus Life Insurance Company, Grange Mutual
Casualty Company, and Pan Western Life Insurance
Company. (Reference is made to Exhibit 10(aaa) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(vv) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(ww) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(xx) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(yy) License Agreement, December 29, 1995, between the
Company and Premiere Communications, Inc. (Reference
is made to Exhibit 10(ggg) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
II-8
<PAGE> 181
10(zz) Payment Services, Software Development and Marketing
Agreement, dated as of February 27, 1996, between the
Company and CyberCash. (Reference is made to Exhibit
10(a) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.) **
10(aaa) Termination of Voting Agreement, dated as of April
19, 1996, among Peter J. Kight, Mark A. Johnson,
Greylock Limited Partnership, Highland Capital
Partners Limited Partnership and Tribune Company.
(Reference is made to Exhibit 10(b) to the Form 10-Q
for the quarter ended March 31, 1996, filed with the
Securities and Exchange Commission, and incorporated
herein by reference.)
10(bbb) Voting Agreement, dated as of April 19, 1996, among
Peter J. Kight, Mark A. Johnson, and Tribune Company.
(Reference is made to Exhibit 10(c) to the Form 10-Q
for the quarter ended March 31, 1996, filed with the
Securities and Exchange Commission, and incorporated
herein by reference.)
10(ccc) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(ddd) Executive Employment Agreement between the Company
and Robert E. Bowers. (Reference is made to Exhibit
10(e) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(eee) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(fff) Executive Employment Agreement between the Company
and James M. Garrett. (Reference is made to Exhibit
10(g) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ggg) Executive Employment Agreement between the Company
and James Robert Lewis, III. (Reference is made to
Exhibit 10(h) to the Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(hhh) Executive Employment Agreement between the Company
and Jay N. Whipple, III. (Reference is made to
Exhibit 10(i) to the Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(iii) Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996. (Reference is made to Exhibit 10(qqq) to the
Transition Report on Form 10-K for the six months
ended June 30, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(jjj) * Checkfree Corporation Amended and Restated 1995
Stock Option Plan.
10(kkk) * Checkfree Corporation Associate Stock Purchase
Plan.
10(lll) * Stockholder Agreement between Intuit Inc. and Peter
J. Kight, as a shareholder of the Company.
10(mmm) * Stockholder Agreement between Intuit Inc. and Mark
A. Johnson, as a shareholder of the Company.
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<PAGE> 182
10(nnn) * Stock Restriction Agreement between the Company and
Intuit Inc.
10(ooo) * Form of Escrow Agreement among the Company, Intuit
Inc. and a to be named Escrow Agent.
10(ppp) * Form of Registration Rights Agreement between the
Company and Intuit Inc.
13 * The Company's Transition Report on Form 10-K for
the six months ended June 30, 1996.
21 Subsidiaries of the Company. (Reference is made to
Exhibit 21 of the Transition Report on Form 10-K for
the six months ended June 30, 1996, filed with the
Securities and Exchange Commission, and incorporated
herein by reference.)
23(a) Consent of Porter, Wright, Morris & Arthur (included
in Exhibit 5 ).
23(b) * Consent of Ernst & Young, LLP.
23(c) * Consent of Deloitte & Touche LLP.
23(d) * Consent of Alex. Brown & Sons, Incorporated.
24 * Powers of Attorney.
99 * Form of Proxy Card.
- ----------------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule, included in the
Company's transition report on Form 10-K and incorporated by reference herein,
should be read in conjunction with the Consolidated Financial Statements
contained elsewhere therein.
Schedule 2 -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
(c) FAIRNESS OPINION
A copy of the opinion of Alex. Brown & Sons, Incorporated is
attached as Appendix B to this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes: (1) to file during any
period in which offers or sales are being made, a post effective amendment to
this registration statement: (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume or securities offered (if the total dollar value of
securities offered
II-10
<PAGE> 183
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement; (2) that for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be anew 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; (3)
to remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of the Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Registration Statement, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbus,
State of Ohio, on October 28, 1996.
CHECKFREE CORPORATION
By: /s/ Peter J. Kight
----------------------------------
Peter J. Kight, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Kight President, Chief Executive Officer, October 28, 1996
- ------------------------------- and Chairman of the Board
Peter J. Kight (Principal Executive Officer)
*Mark A. Johnson President Business Services October 28, 1996
- ------------------------------- and Director
Mark A. Johnson
*James S. Douglass Executive Vice President-Finance and October 28, 1996
- ------------------------------- Chief Financial Officer
James S. Douglass (Principal Financial Officer)
*John M. Stanton Vice President and Treasurer October 28, 1996
- ------------------------------- (Principal Accounting Officer)
John M. Stanton
*William P. Boardman Director October 28, 1996
- -------------------------------
William P. Boardman
*George R. Manser Director October 28, 1996
- -------------------------------
George R. Manser
*Eugene F. Quinn Director October 28, 1996
- -------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director October 28, 1996
- -------------------------------
Jeffrey M. Wilkins
*By: /s/ Curtis A. Loveland
- --------------------------------------------
Curtis A. Loveland, attorney-in-fact
for each of the persons indicated
</TABLE>
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<PAGE> 185
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CHECKFREE CORPORATION
EXHIBITS
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of January 15,
1996, among the Company, Checkfree Acquisition
Corporation, and Servantis Systems Holdings, Inc.
(Reference is made to Exhibit 2 to the Current Report on
Form 8-K, dated January 15, 1996, filed with the
Securities and Exchange Commission on January 16, 1996,
and incorporated herein by reference.)
2(b) Agreement and Plan of Merger, dated as of March 21, 1996,
among the Company, ISC Acquisition Corporation, and
Security APL, Inc. (Reference is made to Exhibit 2 to the
Current Report on Form 8-K, dated March 21, 1996, as
amended, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
2(c) Amendment to Agreement and Plan of Merger, dated as of
April 30, 1996, among the Company, ISC Acquisition
Corporation, and Security APL, Inc. (Reference is made to
Exhibit 2(c) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
2(d) Agreement and Plan of Merger, dated as of September 15,
1996, among the Registrant, Checkfree Acquisition
Corporation II, Intuit Inc., and Intuit Services
Corporation (Reference is made to Exhibit 2 to Current
Report on Form 8- K, dated September 15, 1996, filed with
the Securities and Exchange Commission on September 26,
1996, and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the Registrant.
(Reference is made to Exhibit 3(a) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)
3(b) Amended and Restated By-Laws of the Registrant. (Reference
is made to Exhibit 3(b) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14, 1995,
and incorporated herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is made to
Exhibit 3(c) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
</TABLE>
<PAGE> 187
<TABLE>
<CAPTION>
<S> <C> <C>
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Registrant's Restated Certificate of
Incorporation (contained in the Registrant's Restated
Certificate of Incorporation filed as Exhibit 3(a) hereto)
and Articles II, III, IV, VI and VIII of the Registrant's
Amended and Restated By-Laws (contained in the
Registrant's Amended and Restated By-Laws filed as Exhibit
3(b) hereto).
5 * Opinion of Porter, Wright, Morris & Arthur
regarding legality.
10(a) Checkfree Corporation 1995 Stock Option Plan. (Reference
is made to Exhibit 10(a) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14, 1995,
and incorporated herein by reference.)
10(b) Checkfree Corporation Amended and Restated 1993 Stock
Option Plan. (Reference is made to Exhibit 10(b) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(c) Checkfree Corporation Second Amended and Restated 1983
Non-Statutory Stock Option Plan. (Reference is made to
Exhibit 10(c) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(d) Checkfree Corporation Second Amended and Restated 1983
Incentive Stock Option Plan. (Reference is made to Exhibit
10(d) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(e) Form of Indemnification Agreement. (Reference is made to
Exhibit 10(a) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(f) Schedule identifying material details of Indemnification
Agreements substantially identical to Exhibit 10(e).
(Reference is made to Exhibit 10(f) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)
10(g) Voting Agreement, dated November 30, 1994, among Peter J.
Kight, Greylock Limited Partnership, and Highland Capital
Partners Limited Partnership. (Reference is made to
Exhibit
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10(g) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(h) Voting Agreement, dated December 2, 1994, among Peter J.
Kight, Mark A. Johnson, Greylock Limited Partnership,
Highland Capital Partners Limited Partnership and Tribune
Company. (Reference is made to Exhibit 10(h) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(i) Noncompete, Nondisclosure, and Assignment Agreement, dated
February 1, 1990, between Peter J. Kight and the Company.
(Reference is made to Exhibit 10(i) to Registration
Statement on Form S-1, as amended (Registration No. 33-
95738), filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by reference.)
10(j) Noncompete, Nondisclosure, and Assignment Agreement, dated
February 1, 1990, between Mark A. Johnson and the Company.
(Reference is made to Exhibit 10(j) to Registration
Statement on Form S-1, as amended (Registration No. 33-
95738), filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by reference.)
10(k) Stock Purchase Agreement, dated December 2, 1994, between
the Company and Tribune Company. (Reference is made to
Exhibit 10(k) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(l) Stock Transfer Restriction Agreement, dated December 2,
1994, among Peter J. Kight, Mark A. Johnson, and Tribune
Company. (Reference is made to Exhibit 10(l) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(m) Investment Agreement, dated November 9, 1983, among the
Company (formerly, Aegis Systems, Inc.), The Midland
Mutual Life Insurance Company, The Columbus Mutual Life
Insurance Company, Grange Mutual Casualty Company, and
North American National Corp. (Reference is made to
Exhibit 10(m) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
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10(n) Stock Purchase Agreement, dated March 17, 1988, between
the Company and Nationwide Mutual Insurance Company.
(Reference is made to Exhibit 10(n) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)
10(o) Amending Agreement, dated November 30, 1994, and letter
agreement, dated September 24, 1992, between the Company
and Mark D. Phelan. (Reference is made to Exhibit 10(v) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(p) Joint Development and Marketing Agreement, dated August 2,
1995, between the Company and ADP, Inc. (Reference is made
to Exhibit 10(w) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)**
10(q) Bill Payment and Remote Banking Services Agreement, dated
March 25, 1993, between the Company and MasterCard
International Incorporated. (Reference is made to Exhibit
10(x) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)**
10(r) Amendment to Bill Payment and Remote Banking Services
Agreement, dated December 1, 1994, between the Company and
MasterCard International Incorporated. (Reference is made
to Exhibit 10(y) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)**
10(s) Agreement and Release, dated October 16, 1995, between the
Company and MasterCard International Incorporated.
(Reference is made to Exhibit 10(z) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission,
and incorporated herein by reference.)**
10(t) Electronic Bill Payment Services Marketing Agreement,
dated April 26, 1995, between the Company and AT&T
Corporation. (Reference is made to Exhibit 10(z) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)**
10(u) Amendment One to Electronic Bill Payment Services
Marketing Agreement, dated November 1, 1995, between the
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Company and AT&T Corporation. (Reference is made to
Exhibit 10(bb) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the
Securities and Exchange Commission, and incorporated
herein by reference.)**
10(v) Marketing and License Agreement, dated August 14, 1995,
among the Company, Virtual Open Network Environment, and
Spyglass, Inc. (Reference is made to Exhibit 10(aa) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)**
10(w) Automatic Payment Collection Agreement, dated July 28,
1993, between the Company and CompuServe, Incorporated
(with addenda). (Reference is made to Exhibit 10(bb) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)**
10(x) Automatic Payment Collection Agreement, dated August 22,
1994, between the Company and Spry, Inc. (Reference is
made to Exhibit 10(cc) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14, 1995,
and incorporated herein by reference.)
10(y) Data Capture Credit Card Terminal Processing Agreement,
dated August 22, 1994, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(dd) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)**
10(z) Reproduction and Distribution Agreement, dated July 27,
1995, between the Company and Spry, Inc. (Reference is
made to Exhibit 10(ee) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14, 1995,
and incorporated herein by reference.)**
10(aa) Electronic Bill Payment Services Agreement, dated March
10, 1995, between the Company and FiTech, Inc. (Reference
is made to Exhibit 10(gg) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
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<PAGE> 191
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10(bb) Amendment to Bill Payment and Remote Banking Services
Agreement, dated July 1, 1995, between the Company and
FiTech, Inc. (Reference is made to Exhibit 10(hh) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)**
10(cc) ACH Operations Agreement, dated April 1, 1994, between the
Company and Society National Bank. (Reference is made to
Exhibit 10(ii) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(dd) Merchant Processing Agreement, dated March 13, 1995,
between the Company and Society National Bank. (Reference
is made to Exhibit 10(jj) to Registration Statement on
Form S- 1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ee) Cooperative Marketing Agreement, dated March 14, 1991,
between the Company and Intuit Corporation (including
addendum and notice). (Reference is made to Exhibit 10(kk)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(ff) Loan and Stock Restriction Agreement, dated December 16,
1992, between the Company and Mark D. Phelan. (Reference
is made to Exhibit 10(ll) to Registration Statement on
Form S- 1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(gg) Stock Pledge and Security Agreement, dated December 16,
1992, between the Company and Mark D. Phelan. (Reference
is made to Exhibit 10(mm) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(hh) Promissory Note, dated December 16, 1992, of Mark D.
Phelan. (Reference is made to Exhibit 10(nn) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
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<PAGE> 192
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10(ii) Loan and Stock Restriction Agreement, dated December 16,
1992, between the Company and Mark A. Johnson. (Reference
is made to Exhibit 10(oo) to Registration Statement on
Form S- 1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(jj) Stock Pledge and Security Agreement, dated December 16,
1992, between the Company and Mark A. Johnson. (Reference
is made to Exhibit 10(pp) to Registration Statement on
Form S- 1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(kk) Promissory Note, dated December 16, 1992, of Mark A.
Johnson. (Reference is made to Exhibit 10(qq) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(ll) Lease, dated August 1, 1993, between the Company and The
Director of Development of the State of Ohio. (Reference
is made to Exhibit 10(rr) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(mm) Guaranty Agreement, dated August 1, 1993, between the
Company and The Provident Bank. (Reference is made to
Exhibit 10(ss) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(nn) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(oo) Irrevocable Letter of Credit from Society National Bank
for the Company, dated August 25, 1993 (including second
renewal thereof). (Reference is made to Exhibit 10(uu) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the Securities
and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(pp) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company as
mortgagor and Society National Bank as mortgagee.
(Reference is made to Exhibit 10(vv) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)
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<PAGE> 193
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10(qq) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank. (Reference
is made to Exhibit 10(ww) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(rr) Commercial Note Variable Rate, dated January 3, 1995, of
the Company. (Reference is made to Exhibit 10(xx) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and incorporated
herein by reference.)
10(ss) Reimbursement Agreement, dated August 25, 1993, between
the Company and Peter J. Kight. (Reference is made to
Exhibit 10(yy) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(tt) Agreement, dated August 29, 1995, between the Company and
Nationwide Mutual Insurance Company. (Reference is made to
Exhibit 10(zz) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(uu) Agreement, dated September 8, 1995, among the Company, The
Midland Life Insurance Company, The Columbus Life
Insurance Company, Grange Mutual Casualty Company, and Pan
Western Life Insurance Company. (Reference is made to
Exhibit 10(aaa) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(vv) License Agreement, dated October 27, 1995, between the
Company and Block Financial Corporation. (Reference is
made to Exhibit 10(ddd) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, filed with
the Securities and Exchange Commission, and incorporated
herein by reference.)**
10(ww) Joint Marketing and Trademark License Agreement, dated
December 28, 1995, between the Company and Electronic Data
Systems Corporation. (Reference is made to Exhibit 10(eee)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)**
10(xx) Joint Marketing Agreement, dated November 3, 1995, between
the Company and Fiserv, Inc. (Reference is made to Exhibit
10(fff) to the Company's Annual Report on Form 10-K for
the
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<PAGE> 194
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year ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(yy) License Agreement, December 29, 1995, between the Company
and Premiere Communications, Inc. (Reference is made to
Exhibit 10(ggg) to the Company's Annual Report on Form 10-
K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission, and incorporated
herein by reference.)**
10(zz) Payment Services, Software Development and Marketing
Agreement, dated as of February 27, 1996, between the
Company and CyberCash. (Reference is made to Exhibit 10(a)
to the Form 10-Q for the quarter ended March 31, 1996,
filed with the Securities and Exchange Commission, and
incorporated herein by reference.) **
10(aaa) Termination of Voting Agreement, dated as of April 19,
1996, among Peter J. Kight, Mark A. Johnson, Greylock
Limited Partnership, Highland Capital Partners Limited
Partnership and Tribune Company. (Reference is made to
Exhibit 10(b) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(bbb) Voting Agreement, dated as of April 19, 1996, among Peter
J. Kight, Mark A. Johnson, and Tribune Company. (Reference
is made to Exhibit 10(c) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(ccc) Executive Employment Agreement between the Company and
Kenneth J. Benvenuto. (Reference is made to Exhibit 10(d)
to the Form 10-Q for the quarter ended March 31, 1996,
filed with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(ddd) Executive Employment Agreement between the Company and
Robert E. Bowers. (Reference is made to Exhibit 10(e) to
the Form 10-Q for the quarter ended March 31, 1996, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(eee) Executive Employment Agreement between the Company and
Lynn D. Busing. (Reference is made to Exhibit 10(f) to the
Form 10-Q for the quarter ended March 31, 1996, filed with
the Securities and Exchange Commission, and incorporated
herein by reference.)
10(fff) Executive Employment Agreement between the Company and
James M. Garrett. (Reference is made to Exhibit 10(g) to
the Form 10-Q for the quarter ended March 31, 1996, filed
with the
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Securities and Exchange Commission, and incorporated
herein by reference.)
10(ggg) Executive Employment Agreement between the Company and
James Robert Lewis, III. (Reference is made to Exhibit
10(h) to the Form 10-Q for the quarter ended March 31,
1996, filed with the Securities and Exchange Commission,
and incorporated herein by reference.)
10(hhh) Executive Employment Agreement between the Company and Jay
N. Whipple, III. (Reference is made to Exhibit 10(i) to
the Form 10-Q for the quarter ended March 31, 1996, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(iii) Agreement for ACH Services between the Company and The
Chase Manhattan Bank, N.A., dated as of July 1, 1996.
(Reference is made to Exhibit 10(qqq) to the Transition
Report on Form 10-K for the six months ended June 30,
1996, filed with the Securities and Exchange Commission,
and incorporated herein by reference.)
10(jjj) * Checkfree Corporation Amended and Restated 1995 Stock
Option Plan.
10(kkk) * Checkfree Corporation Associate Stock Purchase Plan.
10(lll) * Stockholder Agreement between Intuit Inc. and Peter J.
Kight, as Shareholder of the Company.
10(mmm) * Stockholder Agreement between Intuit Inc. and Mark A.
Johnson, as a Shareholder of the Company.
10(nnn) * Stock Restriction Agreement between the Company and
Intuit Inc.
10(ooo) * Form of Escrow Agreement among the Company, Intuit Inc.
and a to be named Escrow Agent.
10(ppp) * Form of Registration Rights Agreement between the Company
and Intuit Inc.
13 * The Company's Transition Report on Form 10-K for the six
months ended June 30, 1996.
21 Subsidiaries of the Company. (Reference is made to Exhibit
21 of the Transition Report on Form 10-K for the six
months ended June 30, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
23(a) Consent of Porter, Wright, Morris & Arthur (included in
Exhibit 5 ).
23(b) * Consent of Ernst & Young, LLP.
23(c) * Consent of Deloitte & Touche LLP.
23(d) * Consent of Alex. Brown & Sons, Incorporated.
24 * Powers of Attorney.
99 * Form of Proxy.
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<FN>
* Filed with this report.
** Portions of this Exhibit have been given confidential
treatment by the Securities and Exchange Commission.
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<PAGE> 1
EXHIBIT 5
[PORTER, WRIGHT, MORRIS & ARTHUR LETTERHEAD]
41 South High Street
Columbus, Ohio 43215-6194
Telephone: 614-227-2000
Facsimile: 614-227-2100
Nationwide: 800-533-2794
October 31, 1996
Checkfree Corporation
4411 East Jones Bridge Rd.
Norcross, Georgia 30092
Re: Acquisition of Intuit Services Corporation
Gentlemen:
This opinion is furnished with respect to the Registration Statement on
Form S-4 (the "Registration Statement") being filed by Checkfree Corporation
("Checkfree") with the Securities and Exchange Commission related to the
registration of 12,600,000 shares of Checkfree common stock, $.01 par value (the
"Stock"), to be issued in connection with the proposed merger (the "Merger") of
Checkfree Acquisition Corporation II, a wholly owned subsidiary of Checkfree
("Acquisition"), with and into Intuit Services Corporation ("Services"), which
will, at the time of the consummation of the Merger, be a wholly owned
subsidiary of Checkfree.
We are counsel for Checkfree and have participated in the preparation
of the Registration Statement. We have reviewed the Agreement and Plan of
Merger, dated as of September 15, 1996, among Checkfree, Acquisition, Services
and Intuit Inc. (the "Merger Agreement"), Checkfree's Certificate of
Incorporation and By-Laws, the corporate action taken to date in connection with
the Registration Statement and the issuance and sale of the Stock, and such
other documents and authorities as we deem relevant for the purpose of this
opinion.
Based upon the foregoing, we are of the opinion that:
(a) upon the proper approval of the Merger Agreement by the
shareholders of both Checkfree and Services;
(b) upon compliance with the Securities Act of 1933, as amended,
and with the Securities or "blue sky" laws of the states in
which the Stock is to be offered for sale; and
(c) at the "Effective Time," as defined in the Merger Agreement;
<PAGE> 2
Checkfree Corporation
October 30, 1996
Page -2-
the Stock, when issued and delivered as provided in the Merger Agreement in
accordance with the resolutions heretofore adopted by the Board of Directors of
Checkfree, will be legally issued, fully paid, and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Opinions" in the Information Statement/Prospectus included in the Registration
Statement.
Very truly yours,
/s/ PORTER, WRIGHT, MORRIS & ARTHUR
-------------------------------
PORTER, WRIGHT, MORRIS & ARTHUR
<PAGE> 1
EXHIBIT 10(jjj)
AMENDED AND RESTATED
CHECKFREE CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to
encourage stock ownership by certain key associates, officers, directors,
consultants and advisers who render services to CHECKFREE CORPORATION, a
Delaware corporation (the "Company"), and any current or future subsidiaries or
parent of the Company (the "Company Group"), by the granting of stock options
(the "Options") as provided herein. By encouraging such stock ownership, the
Company seeks to attract, retain and motivate employees, officers, directors,
consultants and advisers of training, experience and ability. The Options
granted under the Plan may be either incentive stock options ("ISOs") which meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options which do not meet such requirements ("Non-statutory
Options").
2. EFFECTIVE DATE. The Plan shall become effective on August 8, 1995,
the date the Plan was adopted by the Board of Directors of the Company and
approved by a majority of the shares of common stock of the Company entitled to
vote thereon (the "Effective Date").
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors
of the Company (the "Board"), which may, to the full extent permitted by law,
delegate all or any of its powers under the Plan to a committee (the
"Committee") which consists of not fewer than two members of the Board. If the
Committee is so appointed and to the extent such powers are delegated, all
references to the Board in the Plan shall mean and relate to the Committee. If
any class of equity securities of the Company is registered under section 12 of
the Securities Exchange Act of 1934, as amended (the "1934 Act"), all members of
the Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i)
promulgated under the 1934 Act (or any successor rule of like tenor and effect)
and "outside directors" as defined in section 162(m) of the Code and the
regulations promulgated thereunder.
(b) Subject to the provisions of the Plan, the Board is
authorized to establish, amend and rescind such rules and regulations as it may
deem appropriate for its conduct and for the proper administration of the Plan,
to make all determinations under and interpretations of, and to take such
actions in connection with, the Plan or the Options granted thereunder as it may
deem necessary or advisable. All actions taken by the Board under the Plan shall
be final and binding on all persons. No member of the Board shall be liable for
any action taken or determination made relating to the Plan, except for gross
negligence or willful misconduct.
(c) Each member of the Board shall be indemnified by the
Company against costs, expenses and liabilities (other than amounts paid in
settlements to which the Company does not consent, which consent shall not be
unreasonably withheld) reasonably incurred by such member in connection with any
action taken in relation to the Plan to which he or she may be a party by reason
of service as a member of the Board, except in relation to matters as to which
he or she shall
-1-
<PAGE> 2
be adjudged in such action to be personally guilty of gross negligence or
willful misconduct in the performance of his or her duties. The foregoing right
to indemnification shall be in addition to such other rights as the Board member
may enjoy as a matter of law, by reason of insurance coverage of any kind, or
otherwise.
4. ELIGIBILITY.
(a) ISOs and Non-statutory Options may be granted to such key
associates of the Company Group, and Non-statutory Options only may be granted
to directors who are not employees of and to consultants and advisers who render
services to the Company Group, as the Board shall select from time to time (the
"Optionees"). More than one Option may be granted to an individual under the
Plan.
(b) No ISO may be granted to an individual who, at the time an
ISO is granted, is considered under Section 422(b)(6) of the Code to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary corporation;
provided, however, this restriction shall not apply if at the time such ISO is
granted the option price per Share of such ISO shall be at least 110% of the
fair market value of such Share, and such ISO by its terms is not exercisable
after the expiration of five years from the date it is granted. This
subparagraph 4(b) has no application to Options granted under the Plan as
Non-statutory Options.
(c) The aggregate fair market value (determined as of the date
the ISO is granted) of Shares with respect to which ISOs are exercisable for the
first time by any Optionee during any calendar year under the Plan or any other
ISO plan of the Company or the Company Group may not exceed $100,000. If an ISO
which exceeds the $100,000 limitation of this subparagraph 4(c) is granted, the
portion of such Option which is exercisable for Shares in excess of the $100,000
limitation shall be treated as a Non-statutory Option pursuant to Section 422(d)
of the Code. Except as otherwise expressly provided in the immediately preceding
sentence, this subparagraph 4(c) has no application to Options granted under the
Plan as Non-statutory Options.
5. STOCK SUBJECT TO PLAN. The stock subject to Options under the Plan
shall be shares of the common stock, $.01 par value, of the Company ("Shares").
The Shares issued pursuant to Options granted under the Plan may be authorized
and unissued Shares, Shares purchased on the open market or in a private
transaction, or Shares held as treasury stock. The aggregate number of Shares
for which Options may be granted under the Plan shall not exceed 5,000,000
shares, subject to adjustment in accordance with the terms of paragraph 12
hereof. Any Shares subject to an Option which for any reason expires or is
terminated unexercised as to such Shares and any Shares reacquired by the
Company pursuant to any forfeiture or any repurchase right hereunder may again
be the subject of an Option under the Plan. The Board, in its sole discretion,
may permit the exercise of any Option as to full Shares or fractional Shares.
Proceeds from the sale of Shares under Options shall constitute general funds of
the Company.
-2-
<PAGE> 3
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Board shall determine whether
the Options granted are to be ISOs or Non-statutory Options and shall enter into
stock option agreements with the recipients accordingly. All Options granted
shall be authorized by the Board and, within a reasonable time after the date of
grant, shall be evidenced by stock option agreements in writing ("Stock Option
Agreements"), in such form and containing such terms and conditions not
inconsistent with the provisions of this Plan as the Board shall from time to
time determine. Any action under paragraph 12 may be reflected in an amendment
to or restatement of such Stock Option Agreements.
(b) The Board may grant Options having terms and provisions
which vary from those specified in the Plan if such Options are granted in
substitution for, or in connection with the assumption of, existing options
granted by another corporation and assumed or otherwise agreed to be provided
for by the Company pursuant to or by reason of a transaction involving a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company is a party.
7. PRICE. The option price per Share (the "Option Price") of each
Option granted under the Plan shall be determined by the Board; provided,
however, the Option Price of each ISO granted under the Plan shall not be less
than the fair market value (determined without regard to any restrictions other
than a restriction which, by its terms, will never lapse) of a Share on the date
of grant of such Option. An Option shall be considered granted on the date the
Board acts to grant the Option or such later date as the Board shall specify.
8. OPTION PERIOD. The period during which the Option may be exercised
(the "Option Period") shall be determined by the Board; provided, however, any
ISO granted under the Plan shall have an Option Period which does not exceed 10
years from the date the ISO is granted.
9. NON-TRANSFERABILITY OF OPTIONS. An Option shall not be transferable
by the Optionee otherwise than by will or the laws of descent and distribution
and may be exercised, during the lifetime of the Optionee, only by him or by his
guardian or legal representative. Notwithstanding the foregoing, an Optionee may
transfer a Non-Statutory Option to members of his or her immediate family (as
defined in Rule 16a-1 promulgated under the 1934 Act), to one or more trusts for
the benefit of such family members or to partnerships in which such family
members are the only partners if (a) the stock option agreement with respect to
such Non-Statutory Option as approved by the Committee expressly so provides and
(b) the Optionee does not receive any consideration for the transfer.
Non-Statutory Options held by such transferees are subject to the same terms and
conditions that applied to such Non-Statutory Options immediately prior to
transfer.
10. EXERCISE OF OPTIONS.
(a) Options granted hereunder will be exercisable upon the
terms and conditions and in accordance with the vesting percentages determined
by the Board in its sole discretion. Notwithstanding the foregoing or the terms
and conditions of any Stock Option Agreement to the contrary, (i) in the event
of the Optionee's termination of employment as specified in subparagraph
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<PAGE> 4
11(a), the Options shall be exercisable to the extent and for the period
specified in subparagraph 11(a); (ii) in the event of the Optionee's termination
of employment as a result of disability or death as specified in subparagraph
11(b), the Options shall be exercisable to the extent and for the period
specified in subparagraph 11(b); (iii) in the event of a merger, reorganization
or sale of all or substantially all of the assets of the Company as specified in
subparagraph 12(c), the Options shall be exercisable to the extent and for the
period specified in subparagraph 12(c); and (iv) in the event of a change in
control, as defined herein, all Options held by Optionee shall become
exercisable for the period specified in subparagraph 12(d).
(b) An Option shall be exercisable only upon delivery of a
written notice to the Board, any member of the Board, the Company's Treasurer,
or any other officer of the Company designated by the Board to accept such
notices on its behalf, specifying the number of Shares for which it is
exercised.
(c) Within five business days following the date of exercise
of an Option, the Optionee or other person exercising the Option shall make full
payment of the Option Price (i) in cash; (ii) with the consent of the Board, by
tendering previously acquired Shares (valued at their fair market value as of
the date of tender); (iii) with the consent of the Board, and to the extent
permitted by applicable law, with a full recourse promissory note of the
Optionee for the portion of the Option Price in excess of the par value of
Shares subject to the Option, under terms and conditions determined by the Board
and in cash for the par value of the Shares; (iv) with the consent of the Board,
any combination of (i), (ii), or (iii); or (v) with the consent of the Board, if
the Shares subject to the Option have been registered under the Securities Act
of 1933, as amended (the "1933 Act"), and there is a regular public market for
the Shares, by delivering to the Company on the date of exercise of the Option
written notice of exercise together with:
(A) written instructions to forward a copy of such
notice of exercise to a broker or dealer as defined in Section
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and designated in such notice
("Broker"), and to deliver to the specified account maintained
with the Broker by the person exercising the Option a
certificate for the Shares purchased upon the exercise of the
Option, and
(B) a copy of irrevocable instructions to the Broker
to deliver promptly to the Company a sum equal to the purchase
price of the Shares purchased upon exercise of the Option.
If previously acquired Shares are to be used to pay the exercise price
of an ISO, the Company prior to such payment must be furnished with evidence
satisfactory to it that the acquisition of such Shares and their transfer in
payment of the exercise price satisfy the requirements of Section 422 of the
Code and other applicable laws.
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<PAGE> 5
11. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the
Company Group, other than termination of employment by reason of disability or
death or for cause, the Optionee shall have 30 days after the date of
termination of employment (but not later than the expiration date of the Stock
Option Agreement) to exercise all Options held by him or her to the extent the
same were exercisable on the date of termination; provided, however, if such
termination is due to the Optionee's retirement with the consent of the Company,
such Option shall then be exercisable to the extent of 100% of the Shares
subject thereto. The Board shall determine in each case whether a termination of
employment shall be considered a retirement with the consent of the Company and,
subject to applicable law, whether a leave of absence shall be considered a
termination of employment. The Board may cancel an Option during the 30-day
period after termination of employment referred to in this paragraph if the
Optionee engages in employment or activities contrary, in the sole opinion of
the Board, to the best interests of the Company or any parent or subsidiary of
the Company.
(b) Upon termination of an Optionee's employment by reason of
disability, as defined in subparagraph 27(a) of this Plan, or death, the
Optionee or the Optionee's personal representative, or the person or persons to
whom his or her rights under the Options pass by will or the laws of descent or
distribution, shall have one year after the date of termination of employment by
reason of disability or death (but not later than the expiration date of the
Stock Option Agreement) to exercise all Options held by Optionee to the extent
the same were exercisable on the date of the Optionee's termination of
employment; provided, however, the Board may, but shall not be required to,
permit, in its discretion, the exercise of all or any portion of any Option
granted to such Optionee not otherwise exercisable.
(c) Upon termination of an Optionee's employment for cause, as
defined herein, all Options held by such Optionee shall terminate effective on
the date of termination of employment.
12. STOCK SPLITS; MERGERS; REORGANIZATIONS; SALE OF ASSETS.
(a) In the event of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation or other change in the Company's capitalization,
the aggregate number of Shares for which Options may be granted under this Plan,
the number of Shares subject to outstanding Options and the Option Price of the
Shares subject to outstanding Options shall be proportionately adjusted or
substituted to reflect the same. The Board shall make such other adjustments to
the Options, the provisions of the Plan and the Stock Option Agreements as may
be appropriate and equitable, which adjustments may provide for the elimination
of fractional Shares.
(b) In the event of a change of the Common Stock resulting
from a merger or similar reorganization as to which the Company is the surviving
corporation, the number and kind of Shares which thereafter may be purchased
pursuant to an Option under the Plan and the number and kind of Shares then
subject to Options granted hereunder and the price per Share thereof shall
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<PAGE> 6
be appropriately adjusted in such manner as the Board may deem equitable to
prevent dilution or enlargement of the rights available or granted hereunder.
(c) Except as otherwise determined by the Board, a merger or a
similar reorganization which the Company does not survive (other than a merger
or similar reorganization involving only a change in the state of incorporation
or an internal reorganization not involving a change in control as defined
herein), or a sale of all or substantially all of the assets of the Company,
shall cause every Option hereunder to terminate, to the extent not then
exercised, unless any surviving entity agrees to assume the obligations
hereunder; provided, however, that, in the case of such a merger or similar
reorganization, or such a sale of all or substantially all of the assets of the
Company, if there is no such assumption, the Board may provide that some or all
of the unexercised portion of any one or more of the outstanding Options shall
be immediately exercisable and vested as of such date prior to such merger,
similar reorganization or sale of assets as the Board determines.
(d) If a change in control, as defined herein, occurs, all
outstanding options granted under this Plan shall then be immediately
exercisable to the extent of 100% of the Shares subject thereto notwithstanding
any contrary waiting or vesting periods specified in this Plan or in any
applicable Stock Option Agreement.
13. SALE OF OPTION SHARES. If any class of equity securities of the
Company is registered pursuant to Section 12 of the 1934 Act, any Optionee or
other person exercising the Option who is subject to Section 16 of the 1934 Act
by virtue of his or her relationship to the Company shall not sell or otherwise
dispose of the Shares subject to Option unless at least six months have elapsed
from the date of grant of the Option.
14. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by an Option until the date of
issuance of a stock certificate to the Optionee for such Shares.
15. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or
Stock Option Agreement shall confer on any Optionee any right to continue in the
employ or service of the Company or any parent or subsidiary of the Company or
interfere with the right of the Company to terminate such Optionee's employment
or other services at any time. The establishment of the Plan shall in no way,
now or hereafter, reduce, enlarge or modify the employment relationship between
the Company or any parent or subsidiary of the Company and the Optionee. Options
granted under the Plan shall not be affected by any change of duties or position
of the Optionee with the Company.
16. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the
exercise of an Option, the Board may, in its sole determination, require the
Optionee to represent in writing that the Shares being purchased are being
purchased only for investment and without any present intent at the time of the
acquisition of such Shares to sell or otherwise dispose of the same.
17. WITHHOLDING TAXES. The Company's obligation to deliver Shares upon
exercise of an Option shall be subject to the Optionee's satisfaction of all
applicable federal, state or local tax withholding obligations. The Company
shall have the right to withhold from any salary, wages, or other compensation
for services payable by the Company to or with respect to an Optionee, amounts
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<PAGE> 7
sufficient to satisfy any federal, state or local withholding tax liability
attributable to such Optionee's (or any beneficiary's or personal
representative's) receipt or disposition of Shares purchased under any Option or
to take any such other action as it deems necessary to enable it to satisfy any
such tax withholding obligations. The Board, in its sole discretion, may permit
Optionees to elect to have Shares that would be acquired upon exercise of
Options (valued at their fair market value as of the date of exercise) withheld
by the Company in satisfaction of such Optionees' withholding tax liabilities.
18. EXCHANGES. The Board may permit the voluntary surrender of all or a
portion of any Option granted under the Plan to be conditioned upon the granting
to the Optionee of a new Option for the same or a different number of Shares as
the Option surrendered, or may require such voluntary surrender as a condition
precedent to a grant of a new Option to such Optionee. Subject to the provisions
of the Plan, such new Option shall be exercisable at the same price, during such
period and on such other terms and conditions as are specified by the Board at
the time the new Option is granted. Upon surrender, the Options surrendered
shall be cancelled and the Shares previously subject to them shall be available
for the grant of other Options.
19. REPURCHASE OF SHARES BY THE COMPANY. Any Shares purchased or
acquired upon exercise of an Option may, in the sole discretion of the Board, be
subject to repurchase by or forfeiture to the Company if and to the extent and
at the repurchase price, if any, specifically set forth in the Stock Option
Agreement pursuant to which the Shares were purchased or acquired. Certificates
representing Shares subject to such repurchase or forfeiture may be subject to
such escrow and stock legending provisions as may be set forth in the Stock
Option Agreement pursuant to which the Shares were purchased or acquired.
20. CONFIDENTIALITY AGREEMENTS. Upon the Company's request, each
Optionee shall execute, prior to or contemporaneously with the grant of any
Option hereunder, the Company's then standard form of agreement relating to
nondisclosure of confidential information, noncompetition and/or assignment of
inventions and related matters.
21. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Company to sell and
deliver the Shares under such Options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required. Options issued under the
Plan shall not be exercisable prior to (i) the date upon which the Company shall
have registered the Shares for which Options may be issued hereunder under the
1933 Act, and (ii) the completion of any registration or qualification of such
Shares under state law, or any ruling or regulation of any governmental body
which the Company shall, in its sole discretion, determine to be necessary or
advisable in connection therewith, or alternatively, unless the Company shall
have received an opinion from counsel to the Company stating that the exercise
of such Options may be effected without registering the Shares subject to such
Options under the l933 Act, or under state or other law.
22. ASSUMPTION. The Plan may be assumed by the successors and assigns
of the Company.
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<PAGE> 8
23. EXPENSES. All expenses and costs in connection with administration
of the Plan shall be borne by the Company.
24. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
terminate, amend or modify the Plan at any time without further action on the
part of the shareholders of the Company; provided, however, that (a) in no event
shall any amendment be made to the Plan which would cause the ISOs granted
hereunder to fail to qualify as incentive stock options under the Code; (b) any
amendment to the Plan which requires the approval of the shareholders of the
Company under the Code or the regulations promulgated thereunder shall be
subject to approval by the shareholders of the Company in accordance with the
Code or such regulations; and (c) any amendment to the Plan which requires the
approval of the shareholders of the Company under the rules promulgated under
Section 16 of the 1934 Act shall be subject to the approval of the shareholders
of the Company in accordance with such rules. No amendment, modification or
termination of the Plan shall in any manner adversely affect any Option
previously granted to an Optionee under the Plan without the consent of the
Optionee or the transferee of such Option.
With the consent of the Optionee affected, the Board may amend
outstanding Options or related agreements in a manner not inconsistent with the
Plan. The Board shall have the right to amend or modify the terms and provisions
of the Plan and of any outstanding ISO's granted under the Plan to the extent
necessary to qualify any or all such Options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code.
25. TERM OF PLAN. The Plan shall become effective on the Effective
Date, subject to the approval of the Plan by the holders of a majority of the
shares of common stock of the Company entitled to vote on, or within twelve
months of, the date of the Plan's adoption by the Board, and all Options granted
prior to such approval shall be subject to such approval. The Plan shall
terminate on the tenth anniversary of the Effective Date, or such earlier date
as may be determined by the Board. Termination of the Plan, however, shall not
affect the rights of Optionees under Options previously granted to them, and all
unexpired Options shall continue in force and operation after termination of the
Plan except as they may lapse or be terminated by their own terms and
conditions.
26. LIMITATION OF LIABILITY. The liability of the Company under this
Plan or in connection with any exercise of an Option is limited to the
obligations expressly set forth in the Plan and in any Stock Option Agreements,
and no term or provision of this Plan or of any Stock Option Agreements shall be
construed to impose any further or additional duties, obligations or costs on
the Company not expressly set forth in the Plan or the Stock Option Agreements.
27. DEFINITIONS.
(a) Disability. "Disability," as used herein, shall mean a
physical or mental condition resulting from bodily injury, disease, or mental
disorder which renders the Optionee incapable of continuing the Optionee's usual
and customary employment or service with the Company Group.
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<PAGE> 9
(b) Fair Market Value. If the Shares are publicly traded, the
term "fair market value" as used in this Plan shall mean (a) the closing price
quoted in the NASDAQ National Market System, if the shares are so quoted, (b)
the last quote reported by NASDAQ for small-cap issues, if the shares are so
quoted, (c) the mean between the bid and asked prices as reported by NASDAQ, if
the Shares are so quoted, or (d) if the Shares are listed on a securities
exchange, the closing price at which the Shares are quoted on such exchange, in
each case at the close of the date immediately before the Option is granted or,
if there be no quotation or sale on that date, the next previous date on which
the Shares were quoted or traded. In all other cases, the fair market value
shall be determined by and in accordance with procedures established in good
faith by the Board and with respect to ISOs, conforming to regulations issued by
the Internal Revenue Service regarding incentive stock options.
(c) Key Associates. The term "key associates" shall include
those executive, administrative, operational and managerial employees who are
determined by the Board to be eligible for Options under the Plan.
(d) Parent and Subsidiary. The terms "subsidiary" and "parent"
as used in the Plan shall have the respective meanings set forth in sections
424(f) and (e) of the Code.
(e) Termination For Cause. The term "termination of employment
for cause" shall mean termination of employment for (a) the commission of an act
of dishonesty, including but not limited to misappropriation of funds or
property of the Company; (b) the engagement in activities or conduct injurious
to the reputation of the Company; (c) the conviction or entry of a guilty or no
contest plea to a misdemeanor involving an act of moral turpitude or a felony;
(d) the violation of any of the terms and conditions of any written agreement
the Optionee may have from time to time with the Company Group (following 30
days' written notice from the Company specifying the violation and the
employee's failure to cure such violation within such 30-day period); or (e) any
refusal to comply with the written directives, policies or regulations
established from time to time by the Board.
(f) Change In Control. A "change in control" shall be deemed
to have taken place if, as a result of a tender offer, merger, consolidation,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were directors of the Company
immediately before the Transaction shall cease to constitute a majority of the
Board of Directors of the Company or of any successor to the Company; provided,
however, that any Transaction shall not be deemed to be a change in control if
the Transaction causing such change shall have been approved by the affirmative
vote of at least a majority of the members of the Board of Directors of the
Company in office immediately prior to the change in control.
CHECKFREE CORPORATION
Adopted August 8, 1995 By: /s/ Peter J. Kight
--------------------------
Peter J. Kight, President
Amended and Restated: October 18, 1996
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<PAGE> 10
FORM OF STOCK OPTION AGREEMENT
[ISO /or/ NSO] No. 95-_____
CHECKFREE CORPORATION
[INCENTIVE /OR/ NONSTATUTORY]
STOCK OPTION AGREEMENT
UNDER THE
1995 STOCK OPTION PLAN
(AS AMENDED AND RESTATED OCTOBER 18, 1996)
Checkfree Corporation (the "Company") hereby grants, effective this day
of _______________, 19__ (the "Effective Date") to _______________ (the
"Optionee") an option to purchase ____________ shares of its common stock,
without par value (the "Option Shares"), at a price of _____________ Dollars
($______) per share pursuant to the Company's 1995 Stock Option Plan as Amended
and Restated October 18, 1996 (the "Plan"), subject to the following:
1. RELATIONSHIP TO THE PLAN. This option is granted pursuant to the
Plan, and is in all respects subject to the terms, provisions and definitions of
the Plan and any amendments thereto. The Optionee acknowledges receipt of a copy
of the Plan and represents that he or she is familiar with the terms and
conditions thereof. The Optionee accepts this option subject to all the terms
and provisions of the Plan (including without limitation provisions relating to
nontransferability, exercise of the option, sale of the option shares,
termination of the option, adjustment of the number of shares subject to the
option, and the exercise price of the option). The Optionee further agrees that
all decisions and interpretations made by the Stock Option Committee (the
"Committee"), as established under the Plan, and as from time to time
constituted, are final, binding, and conclusive upon the Optionee and his or her
heirs. This option [IS/IS NOT] an Incentive Stock Option under the Plan.
2. TIME OF EXERCISE. This option may be exercised, from time to time,
in full or in part, by the Optionee to the extent the option is vested based
upon the number of full years the Optionee is an employee of the Company after
the Effective Date (the "Vested Percentage") and remains exercisable (subject to
the provisions herein and the Plan) until it has been exercised as to all of the
Shares or the _____ anniversary of the Effective Date, whichever occurs first.
The Optionee is entitled to exercise this option to the extent of the
percentage of, and not to exceed in the aggregate, the maximum number of the
Shares, based upon the Vested Percentage, from time to time, as determined in
accordance with the following schedule:
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<PAGE> 11
Years of Employment Total
After the Effective Date Vested Percentage
------------------------ -----------------
Notwithstanding the foregoing, this option may not be exercised unless (i) the
Option Shares are registered under the Securities Act of 1933, as amended, and
are registered or qualified under applicable state securities or "blue sky"
laws, or (ii) the Company has received an opinion of counsel to the Company to
the effect that the option may be exercised and Option Shares may be issued by
the Company pursuant thereto without such registration or qualification. If this
option is not otherwise exercisable by reason of the foregoing sentence, the
Company will take reasonable steps to comply with applicable state and federal
securities laws in connection with such issuance.
3. METHODS OF EXERCISE. This option is exercisable by delivery to the
Company of written notice of exercise which specifies the number of shares to be
purchased and the election of the method of payment therefor, which will be one
of the methods of payment specified in subparagraph 10(c) of the Plan. If
payment is otherwise than payment in full in cash, the method of payment is
subject to the consent of the Committee. Upon receipt of payment for the shares
to be purchased pursuant to the option or, if applicable, the shares to be
delivered pursuant to the election of an alternative payment method, the Company
will deliver or cause to be delivered to the Optionee, to any other person
exercising this option, or to a broker or dealer if the method of payment
specified in clause (iv) of subparagraph 10(c) of the Plan is elected, a
certificate or certificates for the number of shares with respect to which this
option is being exercised, registered in the name of the Optionee or other
person exercising the option, or if appropriate, in the name of such broker or
dealer; provided, however, that if any law or regulation or order of the
Securities and Exchange Commission or other body having jurisdiction over the
exercise of this option will require the Company or Optionee (or other person
exercising this option) to take any action in connection with the shares then
being purchased, the delivery of the certificate or certificates for such shares
may be delayed for the period necessary to take and complete such action.
4. ACQUISITION FOR INVESTMENT. This option is granted on the condition
that the acquisition of the Option Shares hereunder will be for the account of
the Optionee (or other person exercising this option) for investment purposes
and not with a view to resale or distribution, except that such condition will
be inoperative if the Option Shares are registered under the Securities Act of
1933, as amended, or if in the opinion of counsel for the Company such shares
may be resold without registration. At the time of any exercise of the option,
the Optionee (or other person exercising this option) will execute such further
agreements as the Company may require to implement the foregoing condition and
to acknowledge the Optionee's (or such other person's) familiarity with
restrictions on the resale of the Option Shares under applicable securities
laws.
5. DISPOSITION OF SHARES. The Optionee or any other person who may
exercise this option will notify the Company within seven (7) days of any sale
or other transfer of any Option
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<PAGE> 12
Shares. If any class of equity securities of the Company is registered pursuant
to section 12 of the Securities Exchange Act of 1934, as amended, and the
Optionee or any other person who may exercise this option is subject to section
16 of that Act by virtue of such Optionee's or person's relationship to the
Company, the Optionee or other person exercising this Option agrees not to sell
or otherwise dispose of any Option Shares unless at least six (6) months have
elapsed from the Effective Date.
6. WITHHOLDING. As a condition to the issuance of any of the Shares
under this Option, Optionee or any person who may exercise this Option
authorizes the Company to withhold in accordance with applicable law from any
salary, wages or other compensation for services payable by the Company to or
with respect to Optionee any and all taxes required to be withheld by the
Company under federal, state or local law as a result of such Optionee's or such
person's receipt or disposition of Shares purchased under this Option. If, for
any reason, the Company is unable to withhold all or any portion of the amount
required to be withheld, Optionee (or any person who may exercise this Option)
agrees to pay to the Company upon exercise of this Option an amount equal to the
withholding required to be made less the amount actually withheld by the
Company.
7. GENERAL. This Agreement will be construed as a contract under the
laws of the State of Ohio without reference to Ohio's choice of law rules. It
may be executed in several counterparts, all of which will constitute one
Agreement. It will bind and, subject to the terms of the Plan, benefit the
parties and their respective successors, assigns, and legal representatives.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement as of the date first above written.
OPTIONEE: CHECKFREE CORPORATION
By:
- ------------------------------ -------------------------------
Its:
-------------------------------
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<PAGE> 1
EXHIBIT 10(kkk)
CHECKFREE CORPORATION
ASSOCIATE STOCK PURCHASE PLAN
1. PURPOSE.
The CheckFree Corporation Associate Stock Purchase Plan (the "Plan") is
being established for the benefit of employees of CheckFree Corporation, a
Delaware corporation (the "Company"), and certain affiliated companies. The Plan
is intended to provide eligible employees with an opportunity to purchase shares
of common stock, $0.01 par value, of the Company (the "Shares"), through
accumulated payroll deductions. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Code, and the provisions of the Plan shall be construed in a manner
consistent with the requirements of such Section of the Code.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Capitalization" shall mean any increase, reduction, or
change or exchange of Shares for a different number or kind of shares or other
securities of the Company by reason of a reclassification, recapitalization,
merger, consolidation, reorganization, share dividend, share split or reverse
share split, combination or exchange of shares, repurchase of Shares, change in
corporate structure or otherwise.
(c) "Change in Control" of the Company shall have the meaning given in
Section 16(b) hereof.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Committee" shall mean the Stock Option and Compensation Committee
or any other committee of members of the Board appointed by the Board to
administer the Plan and to perform the functions set forth herein.
(f) "Company" shall mean CheckFree Corporation, a corporation organized
under the laws of the State of Delaware, or any successor corporation.
(g) "Compensation" shall mean the fixed salary, wages, commissions,
overtime pay and bonuses paid by an Employer to an Employee as reported by the
Employer to the United States government for federal income tax purposes,
including an Employee's portion of compensation deferral contributions pursuant
to Section 401(k) of the Code, any amount excludable pursuant to Section 125 of
the Code and/or any non-qualified compensation deferrals,
<PAGE> 2
but excluding any foreign service allowance, severance pay, expense
reimbursement or any benefit paid by a third-party payer under any employee
benefit plan maintained by the Employer.
(h) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
taken pursuant to the Employer's written leave of absence policy if such leave
is for a continuous period of not more than one year.
(i) "Designated Subsidiaries" shall mean the Subsidiaries of the
Company as of the Effective Date, and corporations which become Subsidiaries of
the Company after the Effective Date.
(j) "Effective Date" shall have the meaning set forth in Section 22
hereof.
(k) "Employee" shall mean any person, including an officer, who as of
an Offering Date is (i) regularly employed by the Company or a Designated
Subsidiary of the Company for more than twenty (20) hours per week, and (ii) who
has been employed by such Employer for a period of at least ninety (90) days.
(l) "Employer" shall mean, as to any particular Employee, the
corporation which employs such Employee, whether it is the Company or a
Designated Subsidiary of the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "Exercise Date" shall mean the last business day of each Offering
Period, except as the Committee may otherwise provide. For purposes of the Plan,
the term "business day" means a day on which there is permitted trading of the
Shares on the NASDAQ National Market or on a national securities exchange,
whichever is applicable; and if neither is applicable, a day that is not a
Saturday, Sunday or legal holiday in the State of Delaware.
(o) "Fair Market Value" per Share as of a particular date shall mean:
(i) the closing sales price, regular way for the Shares on any
national securities exchange on which the Shares are actively
traded on such date (or if such exchange was not open for
trading on such date, the next preceding date on which it was
open); or
(ii) if there is no price as specified in (i), the mean of the
last reported bid- and-asked quotations regular way, for the
Shares on such exchange on such date (or if there was no such
quotations on such date, the next preceding date); or
(iii) if there also is no price as specified in (ii), the
closing sales price, regular way, or in the absence thereof
the mean of the last reported bid-and-asked
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<PAGE> 3
quotations, for the Shares on the other exchange on which the
Shares are permitted to trade having the greatest volume of trading
in the Shares during the 30-day period preceding such date, on such
date (or if there were no such quotations on such date, the next
preceding date); or
(iv) if there also is no price as specified in (iii), the
final reported sales price, or if not reported in the
following manner, the highest bid quotation, in the
over-the-counter market for the Shares as reported by the
National Association of Securities Dealers Automatic Quotation
System, or if not so reported, then as reported by the
National Quotation Bureau Incorporated, or if such
organization is not in existence, by an organization providing
similar services, on such date (or if such date is not a date
for which such system or organization generally provides
reports, then on the next preceding date for which it does
so); or
(v) if there also is no price as specified in (iv), the price
determined by the Committee by reference to the bid-and-asked
quotations for the Shares provided by members of an
association of brokers and dealers registered pursuant to
subsection 15(b) of the Exchange Act, which members make a
market in the Shares, for such recent dates as the Committee
shall determine to be appropriate for fairly determining
current fair market value; or
(vi) if there also is no price as specified in (v), the price
determined by the Committee for the date in question.
(p) "Offering Date" shall mean the first business day of each Offering
Period. In the event that the Board specifies the maximum number of Shares that
a Participant may be permitted to acquire during an Offering Period pursuant to
Section 5(b) hereof, the Offering Date of an Offering Period will be the grant
date for the options offered in such Offering Period. If no such maximum number
of Shares has been specified by the Board pursuant to Section 5(b) hereof, the
Exercise Date of an Offering Period will be the grant date for the options
offered in such Offering Period. Notwithstanding the foregoing, the first
Offering Date following the adoption of the Plan shall be the first business day
on or after the Effective Date.
(q) "Offering Period" shall mean each six (6) month period commencing
on January 1 and July 1, respectively, which periods shall end on June 30 and
December 31, respectively; provided, however, that the Committee shall have the
power to change the duration of Offering Periods; provided further, however,
that no option granted under the Plan shall be exercisable more than
twenty-seven (27) months from its date of grant. Notwithstanding the foregoing,
the first Offering Period following the adoption of the Plan shall begin on the
Effective Date and end on June 30, 1997.
(r) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an option, each of the corporations other than the Company owns shares
possessing fifty percent (50%) or more of the total combined voting power of
all classes of shares in one of the other corporations in such chain.
(s) "Participant" shall mean an Employee who participates in the
Plan.
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<PAGE> 4
(t) "Participant's Account" shall mean the account established for a
Participant pursuant to the Plan to which his or her payroll deductions, Shares
acquired under the Plan, dividends received from such Shares, and dividend
reinvestments shall be credited and from which cash distributions, cash used to
purchase Shares and distributions of Shares will be debited.
(u) "Plan" shall mean the CheckFree Corporation Associate Stock
Purchase Plan, as amended from time to time.
(v) "Shares" shall mean common stock, $0.01 par value, of the Company.
(w) "Subsidiary" shall mean any corporation (other than the Company) or
other business organization in an unbroken chain of corporations or business
organizations beginning with the Company, if, at the time of granting an option,
each of the corporations or other business organizations other than the last
corporation or such other business organization in the unbroken chain owns
shares or other voting securities possessing fifty percent (50%) or more of the
total combined voting power of all classes of shares or other voting securities
in one of the other corporations or such business organizations in such chain.
3. ELIGIBILITY.
(a) Subject to the requirements of Sections 4(b) and 20(d) hereof, any
person who is an eligible Employee as of an Offering Date shall be eligible to
participate in the Plan and be granted an option for the Offering Period
commencing on such Offering Date.
(b) Notwithstanding any provisions of the Plan to the contrary, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose shares would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own shares and/or
hold outstanding options to purchase shares possessing five percent (5%) or more
of the total combined voting power or value of all classes of shares of the
Company or of any Subsidiary or Parent of the Company, or (ii) which permits
such Employee's right to purchase shares under all employee stock purchase plans
(as described in Section 423 of the Code) of the Company and any Subsidiary or
Parent of the Company to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) of Fair Market Value of such shares (determined at the time
such option is granted) for any calendar year in which such option would be
outstanding at any time. The purpose of the limitation in the preceding sentence
is to comply with Section 423(b)(8) of the Code. If the Employee's accumulated
payroll deductions on the last day of the Offering Period would otherwise enable
the Employee to purchase Shares in excess of the Section 423(b)(8) limitation
described in this Section, the excess of the amount of the accumulated payroll
deductions over the aggregate purchase price of the Shares actually purchased
shall be credited towards the next Offering Period. In the event the Employee
elects to discontinue participation in the Plan, such amount shall be promptly
refunded to the Employee by the Company, without interest.
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<PAGE> 5
4. GRANT OF OPTION; PARTICIPATION; PRICE.
(a) On each Offering Date, the Company shall commence an offering by
granting each eligible Employee an option to purchase Shares, subject to the
limitations set forth in Section 3(b) and Section 10 hereof.
(b) Each eligible Employee may elect to become a Participant in the
Plan with respect to an Offering Period, by filing an agreement with his or her
Employer authorizing payroll deductions in accordance with Section 5 hereof.
Such authorization will remain in effect for subsequent Offering Periods, until
modified or terminated by the Participant by giving written notice to his or her
Employer prior to the next occurring Exercise Date. Such authorization to make
payroll deductions must be received by the Company at least twenty (20) days
before the next succeeding Offering Date.
(c) The option price per Share subject to an offering shall be the
lesser of (i) 85% of the Fair Market Value of the Shares on the Offering Date of
reference or (ii) 85% of the Fair Market Value of the Shares on the Exercise
Date of reference; and, provided further that the option price per Share shall
never be less than the par value per Share.
5. PAYROLL DEDUCTIONS.
(a) Subject to Section 4(b) hereof, a Participant may, in accordance
with rules and procedures adopted by the Committee, authorize an after-tax
payroll deduction of any whole percentage from one percent (1%) to fifteen
percent (15%) of such Participant's Compensation each pay period. A Participant
may not increase or decrease such payroll deduction (provided that a Participant
may withdraw from the Plan under Section 8) during each Offering Period (unless
otherwise allowed by the Committee in its sole discretion). All payroll
deductions made by a Participant shall be credited to such Participant's
Account.
(b) The Board may, but need not, specify by notice to all Employees
prior to the first day of any Offering Period, a maximum number of Shares that
any Participant shall be permitted to acquire pursuant to the Plan in any
Offering Period, which maximum need not be the same for every Offering Period.
6. EXERCISE OF OPTION.
(a) Unless a Participant withdraws from the Plan as provided in Section
8 hereof, or unless the Committee otherwise provides, such Participant's
election to purchase Shares shall be exercised automatically on the Exercise
Date, and the maximum number of Shares (excluding any fractional Share, for
which purposes the purchase amount shall be rounded to the next lower whole
number of Shares) subject to such option will be purchased for such Participant
at the applicable option price with the accumulated payroll deductions.
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<PAGE> 6
(b) Any cash balance remaining in a Participant's Account after the
termination of an Offering Period will be carried forward to the Participant's
Account for the purchase of Shares during the next Offering Period if the
Participant has elected to continue to participate in the Plan. Otherwise, the
Participant will receive a cash payment equal to the cash balance of his or her
account.
(c) The Shares purchased upon exercise of an option hereunder shall be
credited to the Participant's Account under the Plan within ten (10) business
days after the Exercise Date and shall be deemed to be transferred to the
Participant as of such crediting date. Except as otherwise provided herein, the
Participant shall have all rights of a shareholder with respect to credited
Shares.
7. DELIVERY OF SHARES.
(a) As promptly as practicable after receipt by the Company of a
written request for withdrawal of Shares from any Participant's Account (or, in
the discretion of the Committee, at any time after the termination of employment
of any Participant), subject to Section 20(d) hereof, the Company shall arrange
the delivery to such Participant of a share certificate representing the whole
Shares credited to the Participant's Account which the Participant requests to
withdraw. Subject to Section 7(b) hereof, withdrawals may be made no more
frequently than once each Offering Period. Shares received upon share dividends
or share splits shall be treated as having been purchased on the Exercise Date
of the Shares to which they relate.
(b) Notwithstanding anything in Section 7(a) hereof to the contrary,
Shares may be withdrawn by a Participant more than once during an Offering
Period under the following circumstances: (i) within sixty (60) days following a
Change in Control of the Company or (ii) upon the approval of the Committee, in
its sole discretion.
8. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw at any time all, but not less than all,
cash amounts in his or her account under the Plan that have not been used to
purchase Shares by giving written notice to the Company at least thirty (30)
days prior to the next occurring Exercise Date or otherwise as may be approved
by the Committee in its sole discretion. All such payroll deductions credited to
such Participant's Account shall be paid to such Participant promptly after
receipt of such Participant's notice of withdrawal and such Participant's option
for the Offering Period in which the withdrawal occurs shall be automatically
terminated. No further payroll deductions for the purchase of Shares will be
made for such Participant during such Offering Period.
(b) Upon termination of a Participant's Continuous Status as an
Employee during an Offering Period for any reason, including voluntary
termination, retirement or death, the payroll deductions credited to such
Participant's Account that have not been used to purchase Shares shall
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<PAGE> 7
be returned to such Participant or, in the case of such Participant's death, to
the person or persons entitled thereto under Section 12 hereof, and such
Participant's option will be automatically terminated. Notwithstanding the
foregoing, upon the termination of a Participant's employment because of the
Participant's death, the Participant's beneficiary (designated by the
Participant in accordance with Section 12 hereof) shall have the right to elect,
by written notice given to the Company prior to the earlier of thirty (30) days
prior to the next occurring Exercise Date (or otherwise as may be determined by
the Committee in its sole discretion) under the Plan or the sixtieth (60th) day
after the Participant's death, to exercise the Participant's option for the
purchase of Shares on such Exercise Date for the purchase of the number of full
Shares which the accumulated payroll deductions in the Participant's Account at
the date of the Participant's death will purchase at the applicable option
price, and any excess in such account will be paid to such beneficiary. If no
such written notice of election is duly received by the Company, the first
sentence of this Section 8(b) shall control.
(c) Except as provided in Section 20(d) hereof, a Participant's
withdrawal from an offering will not have any effect upon such Participant's
eligibility to participate in a succeeding offering or in any similar plan which
may hereafter be adopted by the Company.
9. INTEREST.
No interest shall accrue on or be payable with respect to the payroll
deductions of a Participant credited to the Participant's Account.
10. SHARES.
(a) The maximum number of Shares which shall be reserved and available
for sale under the Plan shall be 1,000,000 Shares, which number shall be subject
to adjustment upon Changes in Capitalization of the Company as provided in
Section 16 hereof. Such Shares shall be either authorized and unissued Shares or
Shares which have been reacquired by the Company. If the total number of Shares
which would otherwise be subject to options granted pursuant to Section 4 hereof
on an Offering Date exceeds the number of Shares then available under the Plan
(after deduction of all Shares for which options have been exercised or are then
outstanding), the Committee shall make a pro rata allocation of the Shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Committee shall give written notice to each Participant of such reduction of the
number of option Shares affected thereby and shall similarly reduce the rate of
payroll deductions, if necessary.
(b) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or, at the election of the
Participant, in the name of the Participant and another person as joint tenants
with rights of survivorship.
(c) Until Shares shall have been credited to a Participant's Account in
accordance with Section 6(c) hereof, the Participant shall not have any rights
or privileges of a shareholder with respect to any Shares purchasable hereunder.
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<PAGE> 8
11. ADMINISTRATION.
The Plan shall be administered by the Committee, and the Committee may
select administrator(s) to whom its duties and responsibilities hereunder may be
delegated. The Committee shall have full power and authority, subject to the
provisions of the Plan, to promulgate such rules and regulations as it deems
necessary for the proper administration of the Plan, to interpret the provisions
and supervise the administration of the Plan, and to take all action in
connection therewith or in relation thereto as it deems necessary or advisable.
Any decision evidenced by the unanimous written consent of the members of the
Committee shall be fully effective as if it had been made at a meeting duly
held. Except as otherwise provided by the Committee, each Employer shall be
charged with all expenses incurred in the administration of the Plan with
respect to such Employer's Employees. No member of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan, and all members of the Committee shall be fully
indemnified by the Company with respect to any such action, determination or
interpretation. All decisions, determinations and interpretations of the
Committee shall be final and binding on all persons, including the Company, the
Participant (or any person claiming any rights under the Plan from or through
any Participant) and any shareholder.
12. DESIGNATION OF BENEFICIARY.
(a) A Participant may file with the Company, on forms supplied by the
Company, a written designation of a beneficiary who is to receive any Shares and
cash remaining in such Participant's Account under the Plan in the event of the
Participant's death.
(b) Such designation of beneficiary may be changed by the Participant
at any time by written notice to the Company, on forms supplied by the Company.
In the event of the death of a Participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
Participant's death, the Company shall deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant in
accordance with the applicable laws of descent and distribution, or if no
spouse, dependent or relative is known to the Company, then to such other person
as the Company may designate.
13. TRANSFERABILITY.
Neither payroll deductions credited to a Participant's Account nor any
rights with regard to the exercise of an option or to receive Shares under the
Plan may be assigned, transferred, pledged or otherwise disposed of in any way
by the Participant (other than by will, the laws of descent and distribution or
as provided in Section 12 hereof). Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Section 8
hereof.
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<PAGE> 9
14. USE OF FUNDS.
All payroll deductions received or held by the Company under the Plan
may be used by the Company for any corporate purpose, and the Company shall not
be obligated to segregate such funds.
15. REPORTS; PARTICIPANTS' ACCOUNTS.
The Company shall establish a Participant's Account for each
Participant in the Plan to which each Participant's payroll deductions, Shares
acquired under the Plan, dividends received from such Shares, and dividend
reinvestments shall be credited, and from which cash distributions, cash used to
purchase Shares and distributions of Shares will be debited ("Participant's
Accounts"). Statements with respect to each Participant's Account will be given
to Participants as soon as practicable following each Offering Period, which
statements will set forth the amounts of payroll deductions, dividends, dividend
reinvestments and additional cash payments, the per Share purchase price, the
number of shares purchased, the aggregate Shares in the Participant's Account
and the remaining cash balance, if any.
16. EFFECT OF CERTAIN CHANGES.
(a) In the event of a Change in Capitalization or the distribution of
an extraordinary dividend, the Committee shall conclusively determine the
appropriate equitable adjustments, if any, to be made under the Plan, including
without limitation adjustments to the number of Shares which have been
authorized for issuance under the Plan but have not yet been placed under
option, as well as the price per Share covered by each option under the Plan
which has not yet been exercised. In the event of a Change in Control of the
Company, the Offering Period shall terminate unless otherwise provided by the
Committee. For purposes of the preceding sentence, (i) the Committee may
establish the date of the event constituting the Change in Control and such date
shall be the Exercise Date for such Offering Period, or (ii) the Committee may
terminate the Plan in which case all Shares and cash amounts in a Participant's
Account shall be refunded as elsewhere provided herein.
(b) "Change in Control" shall be deemed to have occurred if (i) a
tender offer shall be made and consummated for the ownership of 50% or more of
the outstanding voting securities of the Company, (ii) the Company shall be
merged or consolidated with another corporation and as a result of such merger
or consolidation less than 50% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, (iii) the Company shall sell at least 75% of its
assets by value in a single transaction or in a series of transactions to
another corporation which is not a wholly owned subsidiary of the Company, or
(iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as
in effect on the date hereof) of the Exchange Act, shall acquire 50% or more of
the outstanding voting securities of the Company (whether directly, indirectly,
beneficially or of record). For purposes hereof, ownership of voting securities
shall take into account and shall
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<PAGE> 10
include ownership as determined by applying the provisions of Rule 13d-3(d)(1)
(as in effect on the date hereof) pursuant to the Exchange Act.
17. Term of Plan.
Subject to the Board's right to discontinue the Plan (and thereby end
its Term) pursuant to Section 18 hereof, the Term of the Plan (and its last
Offering Period) shall end on December 31, 2006. Upon any discontinuance of the
Plan, unless the Committee shall determine otherwise, any assets remaining in
the Participants' accounts under the Plan shall be delivered to the respective
Participant (or the Participant's legal representative) as soon as practicable.
18. AMENDMENT TO AND DISCONTINUANCE OF PLAN.
(a) Subject to Section 18(b) hereof, the Board may at any time amend,
suspend or discontinue the Plan. Except as provided in Section 16 hereof, no
such suspension or discontinuance may adversely affect options previously
granted and no amendment may make any change in any option theretofore granted
which adversely affects the rights of any Participant which accrued prior to the
date of effectiveness of such amendment without the consent of such Participant.
No amendment shall be effective unless it receives the requisite approval of the
shareholders of the Company if such shareholder approval of such amendment is
required to comply with Rule 16b-3 under the Exchange Act or Section 423 of the
Code or to comply with any other applicable law, regulation or stock exchange
rule.
(b) For the purpose of complying with changes in the Code or ERISA, the
Board may amend, modify, suspend or terminate the Plan at any time. For the
purpose of meeting or addressing any other changes in legal requirements or any
other purpose, the Board may amend, modify, suspend or terminate the Plan only
once every six months. Subject to changes in law or other legal requirements,
including any provisions of Rule 16b-3 under the Exchange Act that would permit
otherwise, the Plan may not be amended without the consent of the holders of a
majority of the shares of Common Stock then outstanding or the vote of the
shareholders of the Company as provided in Section 20(c) hereof, to (i) any
increase in the aggregate number of shares of common stock that may be issued
under the Plan (except for adjustments pursuant to Section 16 of the Plan); (ii)
increase materially the benefits accruing to Participants under the Plan; or
(iii) modify materially the requirements as to eligibility for participation in
the Plan.
19. NOTICES.
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
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20. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW; SECTION 16 COMPLIANCE
(a) This Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to the choice of law principles thereof,
except to the extent that such law is preempted by federal law.
(b) The obligation of the Company to sell or deliver Shares
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(c) To the extent applicable hereto, the Plan is intended
to comply with Rule 16b-3 under the Exchange Act, and the Committee shall
interpret and administer the provisions of the Plan in a manner consistent
therewith. Any provisions inconsistent with such Rule shall be inoperative and
shall not affect the validity of the Plan. This Plan shall be subject to
approval by shareholders of the Company present or represented and entitled to
vote at a meeting duly held in accordance with applicable law.
(d) For any Participants subject to Section 16 of the
Exchange Act, (i) such Participants who cease participation in the Plan may not
participate again for at least six (6) months, and (ii) unless the Committee
otherwise determines after due regard for Rule 16b-3(d)(2)(i), any Shares
purchased by such Participant shall remain in such Participant's Account for six
(6) months from the Exercise Date for such Shares.
(e) Shares shall not be issued unless such issuance and
delivery shall comply with all applicable provisions of law, domestic or
foreign, and the requirements of any stock exchange upon which the Shares may
then be listed, including, in each case the rules and regulations promulgated
thereunder, and shall be further subject to the approval of counsel for the
Company with respect to such compliance, which may include a representation and
warranty from the Participant that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares.
(f) Nothing contained in this Plan, or any modification or
amendment to the Plan, or in the creation of any account, or the execution of
any subscription agreement, or the issuance of any Shares under the Plan, shall
give any Employee any right to continue employment or any legal or equitable
right against the Company or any Subsidiary, or any officer, director, or
employee thereof, except as expressly provided by the Plan.
21. WITHHOLDING OF TAXES.
By electing to participate in the Plan, each Employee acknowledges that
the Company and its participating Subsidiaries are required to withhold taxes
with respect to the amounts deducted from the Employee's Compensation and
accumulated for the benefit of the Employee under the
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Plan, and each Employee agrees that the Company and its participating
Subsidiaries may deduct additional amounts from the Employee's Compensation,
when amounts are added to the Employee's Account, used to purchase common stock
or refunded, in order to satisfy such withholding obligations. If the
Participant makes a disposition, within the meaning of Section 424(c) of the
Code and the regulations promulgated thereunder, of any Share or Shares issued
to such Participant pursuant to such Participant's exercise of an option, and
such disposition occurs within the two-year period commencing on the day after
the option is being treated as granted for purposes of Section 423 of the Code
or within the one-year period commencing on the day after the Exercise Date,
such Participant shall, within ten (10) days of such disposition, notify the
Company thereof and thereafter immediately deliver to the Participant's Employer
any amount of federal, state or local income taxes and other amounts which the
Company informs the Participant the Company is required to withhold. The
Participant's Employer may also satisfy any applicable withholding amounts by
deducting the necessary amounts of withholding from the Participant's wages and,
in the Committee's sole discretion, any other amounts owed to or held for the
account of the Participant.
22. EFFECTIVE DATE.
The Plan shall be effective (the "Effective Date") as of the latter to
occur of (a) January 1, 1997, or (b) the date on which this Plan shall have been
approved by the shareholders as set forth in Section 20(c) hereof.
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<PAGE> 1
EXHIBIT 10(lll)
CHECKFREE CORPORATION
STOCKHOLDER AGREEMENT
This Stockholder Agreement (this "AGREEMENT") is made and entered into
as of September 15, 1996 (the "EFFECTIVE DATE") between Intuit Inc., a Delaware
corporation ("INTUIT"), and the undersigned stockholder ("STOCKHOLDER") of
Checkfree Corporation, a Delaware corporation ("CHECKFREE").
RECITALS
--------
A. Concurrently with the execution of this Agreement, Intuit,
Checkfree, Intuit Services Corporation, a Delaware corporation that is a
wholly-owned subsidiary of Intuit ("SUB"), and Checkfree Acquisition Corporation
II, a Delaware corporation that is a wholly-owned subsidiary of Checkfree
("NEWCO") have entered into an Agreement and Plan of Merger dated of even date
herewith, as such may be amended (the "PLAN"). The Plan provides that Newco will
be merged with and into Sub in a statutory merger (the "MERGER"). Pursuant to
the Merger, all the outstanding capital stock of Sub will be converted into
shares of Common Stock of Checkfree.
B. Stockholder is the beneficial owner (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) of such number of shares of the outstanding Common Stock of Checkfree as
is indicated on the final page of this Agreement (the "SHARES").
NOW, THEREFORE, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to
transfer, sell, exchange, pledge or otherwise dispose of or encumber any of the
Shares or any New Shares (as defined in Section 1.2 below), or to make any offer
or agreement relating thereto, at any time prior to the Expiration Date;
provided, however, that notwithstanding the foregoing, Stockholder may transfer,
sell, exchange, pledge or otherwise dispose of or encumber up to five percent of
the Shares owned by Stockholder on the Effective Date (exclusive of any New
Shares). As used herein, the term "EXPIRATION DATE" means the earlier to occur
of: (i) such date and time as the Merger shall become effective in accordance
with the terms and provisions of the Plan or (ii) such date and time as the Plan
is terminated in accordance with the terms of Article VI of the Plan.
1.2 NEW SHARES. Stockholder agrees that any shares of
capital stock of Checkfree that Stockholder purchases or that Stockholder in any
other manner otherwise acquires beneficial ownership of after the Effective Date
of this Agreement ("NEW SHARES") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
<PAGE> 2
2. AGREEMENT TO VOTE SHARES.
2.1 VOTING REGARDING THE MERGER. At every meeting of the stockholders
of Checkfree called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by the written consent of
the stockholders of Checkfree with respect to any of the following, Stockholder
agrees to vote the Shares and any New Shares:
(a) in favor of approval of the Plan and the Merger and any matter
that could reasonably be expected to facilitate the Plan and the Merger; and
(b) against approval of any proposal (including, but not limited to,
any proposal for a merger, consolidation, sale of assets, reorganization or
recapitalization of Checkfree with any party or any liquidation or winding up of
Checkfree) that may be made in opposition to, in competition with or as an
alternative to, or that would be likely to jeopardize or prevent, consummation
of the Merger and the Plan (each of the foregoing is hereinafter referred to as
an "OPPOSING PROPOSAL").
Stockholder further agrees not, directly or indirectly, to solicit or
encourage any offer from any party to Checkfree for an Opposing Proposal.
2.2 LIMITS. This Agreement is intended to bind Stockholder as a
stockholder of Checkfree only with respect to the specific matters set forth
herein and shall not prohibit Stockholder from acting in accordance with
Stockholder's fiduciary duties, if applicable, as a director of Checkfree.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Intuit a proxy in the form attached hereto as
EXHIBIT A (the "PROXY"), which shall be irrevocable to the extent provided in
Section 212 of the Delaware General Corporation Law, covering the total number
of Shares and New Shares of capital stock of Checkfree beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set
forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder
hereby represents, warrants and covenants to Intuit as follows:
4.1 OWNERSHIP OF SHARES. Stockholder: (a) is the beneficial owner of
the Shares, which at the Effective Date of this Agreement and at all times up
until the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (b) does not beneficially own any shares of
capital stock of Checkfree other than the Shares (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (c) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy. Stockholder is not a party
to, and will not become a party to, any voting agreement or similar agreement or
commitment, and Stockholder has not granted, and will not grant, any proxy or
similar authorization to vote any Shares or any New Shares, that would be in
conflict or inconsistent with Stockholder's obligations under this Agreement and
the Proxy.
<PAGE> 3
4.2 NO PROXY SOLICITATIONS. Stockholder will not, and will not permit
any person or entity under Stockholder's control, to: (i) solicit proxies or
become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) with respect to approval of an Opposing
Proposal or any other action in opposition to the Merger or otherwise encourage
or assist any party in taking or planning any action that would compete with,
serve as an alternative to, restrain or otherwise serve to interfere with or
inhibit the timely consummation of the Merger in accordance with the terms of
the Plan or (ii) initiate a stockholders' vote or action by written consent of
Checkfree stockholders in favor of an Opposing Proposal or any other action in
opposition to the Merger; or (ii) become a member of a "group" (as such term is
used in Section 13(d) of the Exchange Act) with respect to any voting securities
of Checkfree in favor of an Opposing Proposal or any other action in opposition
to the Merger.
5. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. TERMINATION. This Agreement shall terminate and shall have no further
force or effect after the Expiration Date.
7. MISCELLANEOUS.
7.1 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other.
7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Intuit will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Intuit upon any such violation, Intuit
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Intuit at law
or in equity.
7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be
<PAGE> 4
deemed given if delivered personally, telecopied, sent by nationally-recognized
overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following address (or at such
other address for a party as shall be specified by like notice):
If to Intuit: Intuit Inc.
2535 Garcia Avenue
Mountain View, CA 94039
Attn: Chief Executive Officer
with a copy to: Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attn: Kenneth A. Linhares
If to Stockholder: To the address for notice set forth on the last
page hereof.
With a copy to: Checkfree Corporation
8275 North High Street
Columbus, Ohio 43235
Attn: Chief Executive Officer
With a copy to: Porter, Wright, Morris & Arthur
41 South High Street, Suite 2900
Columbus, OH 43215
Attn: Curtis A. Loveland, Esq.
7.6 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware.
7.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
<PAGE> 5
INTUIT INC. STOCKHOLDER
By: /s/ James J. Heeger Name: /s/ Peter J. Kight
-------------------------- ----------------------------------
Title: Senior Vice President and CFO By: Peter J. Kight
------------------------------- ------------------------------------
Stockholder's Address for Notice:
8275 North High Street
--------------------------------
Columbus, Ohio 43235
--------------------------------
Shares beneficially owned:
6,726,000 shares of Checkfree Common
Stock
ATTACHMENTS:
- ------------
Exhibit A - Proxy
<PAGE> 6
IRREVOCABLE PROXY
(TO VOTE CHECKFREE CORPORATION STOCK)
The undersigned stockholder of Checkfree Corporation, a Delaware
corporation ("CHECKFREE"), hereby irrevocably (to the fullest extent permitted
by Section 212 of the Delaware General Corporation Law) appoints the directors
on the Board of Directors of Intuit Inc., a Delaware corporation ("INTUIT"), and
each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the fullest extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Checkfree that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Checkfree issued or
issuable in respect thereof on or after the date hereof (collectively, the
"SHARES") in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned stockholder of Checkfree as of the date of this Proxy
are listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the Expiration Date
(as defined below) and not to grant any subsequent proxies with respect to the
Shares that may be inconsistent or in conflict with the terms of this Proxy.
This proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law), is granted pursuant to that certain
Stockholder Agreement dated as of September 15, 1996 by and among Intuit and the
undersigned stockholder (the "STOCKHOLDER AGREEMENT"), and is granted in
consideration of Intuit entering into that certain Agreement and Plan of Merger
dated as of September 15, 1996, as such may be amended (the "PLAN"), by and
among Intuit, Checkfree, Intuit Services Corporation, a Delaware corporation and
wholly-owned subsidiary of Intuit ("SUB") and Checkfree Acquisition Corporation
II, a Delaware corporation that is a wholly-owned subsidiary of Checkfree
("NEWCO"). The Plan provides for the merger of Newco with and into Sub (the
"MERGER"). As used herein, the term "EXPIRATION DATE" shall mean the earlier to
occur of (i) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Plan or (ii) such date and time
as the Plan shall be terminated pursuant to Article VI thereof.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Section 228 of the Delaware General Corporation Law), at
every annual, special or adjourned meeting of the stockholders of Checkfree and
in every written consent in lieu of such meeting:
(a) in favor of approval of the Plan and the Merger and any matter
that could reasonably be expected to facilitate the Merger; and
<PAGE> 7
(b) against approval of any proposal (including, but not limited to,
any proposal for a merger, consolidation, sale of assets,
reorganization or recapitalization of Checkfree with any party or
any liquidation or winding up of Checkfree) that may be made in
opposition to, in competition with or as an alternative to, or
that would be likely to jeopardize or prevent, consummation of
the Merger and the Plan (each of the foregoing is hereinafter
referred to as an "OPPOSING PROPOSAL").
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned and any transferee of Shares.
This proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law).
Dated: September 15, 1996 /s/ Peter J. Kight
-----------------------------------
Signature of Stockholder
Peter J. Kight
-----------------------------------
Print Name of Stockholder
Shares beneficially owned:
6,726,000 shares of Checkfree Common Stock
<PAGE> 1
EXHIBIT 10(mmm)
CHECKFREE CORPORATION
STOCKHOLDER AGREEMENT
This Stockholder Agreement (this "AGREEMENT") is made and entered into
as of September 15, 1996 (the "EFFECTIVE DATE") between Intuit Inc., a Delaware
corporation ("INTUIT"), and the undersigned stockholder ("STOCKHOLDER") of
Checkfree Corporation, a Delaware corporation ("CHECKFREE").
RECITALS
--------
A. Concurrently with the execution of this Agreement, Intuit,
Checkfree, Intuit Services Corporation, a Delaware corporation that is a
wholly-owned subsidiary of Intuit ("SUB"), and Checkfree Acquisition Corporation
II, a Delaware corporation that is a wholly-owned subsidiary of Checkfree
("NEWCO") have entered into an Agreement and Plan of Merger dated of even date
herewith, as such may be amended (the "PLAN"). The Plan provides that Newco will
be merged with and into Sub in a statutory merger (the "MERGER"). Pursuant to
the Merger, all the outstanding capital stock of Sub will be converted into
shares of Common Stock of Checkfree.
B. Stockholder is the beneficial owner (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) of such number of shares of the outstanding Common Stock of Checkfree as
is indicated on the final page of this Agreement (the "SHARES").
NOW, THEREFORE, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to
transfer, sell, exchange, pledge or otherwise dispose of or encumber any of the
Shares or any New Shares (as defined in Section 1.2 below), or to make any offer
or agreement relating thereto, at any time prior to the Expiration Date;
provided, however, that notwithstanding the foregoing, Stockholder may transfer,
sell, exchange, pledge or otherwise dispose of or encumber up to five percent of
the Shares owned by Stockholder on the Effective Date (exclusive of any New
Shares). As used herein, the term "EXPIRATION DATE" means the earlier to occur
of: (i) such date and time as the Merger shall become effective in accordance
with the terms and provisions of the Plan or (ii) such date and time as the Plan
is terminated in accordance with the terms of Article VI of the Plan.
1.2 NEW SHARES. Stockholder agrees that any shares of
capital stock of Checkfree that Stockholder purchases or that Stockholder in any
other manner otherwise acquires beneficial ownership of after the Effective Date
of this Agreement ("NEW SHARES") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
<PAGE> 2
2. AGREEMENT TO VOTE SHARES.
2.1 VOTING REGARDING THE MERGER. At every meeting of the stockholders
of Checkfree called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by the written consent of
the stockholders of Checkfree with respect to any of the following, Stockholder
agrees to vote the Shares and any New Shares:
(a) in favor of approval of the Plan and the Merger and any matter
that could reasonably be expected to facilitate the Plan and the Merger; and
(b) against approval of any proposal (including, but not limited to,
any proposal for a merger, consolidation, sale of assets, reorganization or
recapitalization of Checkfree with any party or any liquidation or winding up of
Checkfree) that may be made in opposition to, in competition with or as an
alternative to, or that would be likely to jeopardize or prevent, consummation
of the Merger and the Plan (each of the foregoing is hereinafter referred to as
an "OPPOSING PROPOSAL").
Stockholder further agrees not, directly or indirectly, to solicit or
encourage any offer from any party to Checkfree for an Opposing Proposal.
2.2 LIMITS. This Agreement is intended to bind Stockholder as a
stockholder of Checkfree only with respect to the specific matters set forth
herein and shall not prohibit Stockholder from acting in accordance with
Stockholder's fiduciary duties, if applicable, as a director of Checkfree.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Intuit a proxy in the form attached hereto as
EXHIBIT A (the "PROXY"), which shall be irrevocable to the extent provided in
Section 212 of the Delaware General Corporation Law, covering the total number
of Shares and New Shares of capital stock of Checkfree beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set
forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder
hereby represents, warrants and covenants to Intuit as follows:
4.1 Ownership of Shares. Stockholder: (a) is the beneficial owner of
the Shares, which at the Effective Date of this Agreement and at all times up
until the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (b) does not beneficially own any shares of
capital stock of Checkfree other than the Shares (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (c) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy. Stockholder is not a party
to, and will not become a party to, any voting agreement or similar agreement or
commitment, and Stockholder has not granted, and will not grant, any proxy or
similar authorization to vote any Shares or any New Shares, that would be in
conflict or inconsistent with Stockholder's obligations under this Agreement and
the Proxy.
<PAGE> 3
4.2 NO PROXY SOLICITATIONS. Stockholder will not, and will not permit
any person or entity under Stockholder's control, to: (i) solicit proxies or
become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) with respect to approval of an Opposing
Proposal or any other action in opposition to the Merger or otherwise encourage
or assist any party in taking or planning any action that would compete with,
serve as an alternative to, restrain or otherwise serve to interfere with or
inhibit the timely consummation of the Merger in accordance with the terms of
the Plan or (ii) initiate a stockholders' vote or action by written consent of
Checkfree stockholders in favor of an Opposing Proposal or any other action in
opposition to the Merger; or (ii) become a member of a "group" (as such term is
used in Section 13(d) of the Exchange Act) with respect to any voting securities
of Checkfree in favor of an Opposing Proposal or any other action in opposition
to the Merger.
5. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. TERMINATION. This Agreement shall terminate and shall have no further
force or effect after the Expiration Date.
7. MISCELLANEOUS.
7.1 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other.
7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Intuit will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Intuit upon any such violation, Intuit
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Intuit at law
or in equity.
7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be
<PAGE> 4
deemed given if delivered personally, telecopied, sent by nationally-recognized
overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following address (or at such
other address for a party as shall be specified by like notice):
If to Intuit: Intuit Inc.
2535 Garcia Avenue
Mountain View, CA 94039
Attn: Chief Executive Officer
with a copy to: Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attn: Kenneth A. Linhares
If to Stockholder: To the address for notice set forth on the last
page hereof.
With a copy to: Checkfree Corporation
8275 North High Street
Columbus, Ohio 43235
Attn: Chief Executive Officer
With a copy to: Porter, Wright, Morris & Arthur
41 South High Street, Suite 2900
Columbus, OH 43215
Attn: Curtis A. Loveland, Esq.
7.6 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware.
7.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
<PAGE> 5
INTUIT INC. STOCKHOLDER
By: /s/ James J. Heeger Name: /s/ Mark A. Johnson
-------------------------- ----------------------------------
Title: Senior Vice President and CFO By: Mark A. Johnson
------------------------------- ------------------------------------
Stockholder's Address for Notice:
8275 North High Street
--------------------------------
Columbus, Ohio 43235
--------------------------------
Shares beneficially owned:
1,622,000 shares of Checkfree Common
Stock
ATTACHMENTS:
- ------------
Exhibit A - Proxy
<PAGE> 6
IRREVOCABLE PROXY
(TO VOTE CHECKFREE CORPORATION STOCK)
The undersigned stockholder of Checkfree Corporation, a Delaware
corporation ("CHECKFREE"), hereby irrevocably (to the fullest extent permitted
by Section 212 of the Delaware General Corporation Law) appoints the directors
on the Board of Directors of Intuit Inc., a Delaware corporation ("INTUIT"), and
each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the fullest extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Checkfree that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Checkfree issued or
issuable in respect thereof on or after the date hereof (collectively, the
"SHARES") in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned stockholder of Checkfree as of the date of this Proxy
are listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the Expiration Date
(as defined below) and not to grant any subsequent proxies with respect to the
Shares that may be inconsistent or in conflict with the terms of this Proxy.
This proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law), is granted pursuant to that certain
Stockholder Agreement dated as of September 15, 1996 by and among Intuit and the
undersigned stockholder (the "STOCKHOLDER AGREEMENT"), and is granted in
consideration of Intuit entering into that certain Agreement and Plan of Merger
dated as of September 15, 1996, as such may be amended (the "PLAN"), by and
among Intuit, Checkfree, Intuit Services Corporation, a Delaware corporation and
wholly-owned subsidiary of Intuit ("SUB") and Checkfree Acquisition Corporation
II, a Delaware corporation that is a wholly-owned subsidiary of Checkfree
("NEWCO"). The Plan provides for the merger of Newco with and into Sub (the
"MERGER"). As used herein, the term "EXPIRATION DATE" shall mean the earlier to
occur of (i) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Plan or (ii) such date and time
as the Plan shall be terminated pursuant to Article VI thereof.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Section 228 of the Delaware General Corporation Law), at
every annual, special or adjourned meeting of the stockholders of Checkfree and
in every written consent in lieu of such meeting:
(a) in favor of approval of the Plan and the Merger and any matter
that could reasonably be expected to facilitate the Merger; and
<PAGE> 7
(b) against approval of any proposal (including, but not limited to,
any proposal for a merger, consolidation, sale of assets,
reorganization or recapitalization of Checkfree with any party or
any liquidation or winding up of Checkfree) that may be made in
opposition to, in competition with or as an alternative to, or
that would be likely to jeopardize or prevent, consummation of
the Merger and the Plan (each of the foregoing is hereinafter
referred to as an "OPPOSING PROPOSAL").
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned and any transferee of Shares.
This proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law).
Dated: September 15, 1996 /s/ Mark A. Johnson
-----------------------------------
Signature of Stockholder
Mark A. Johnson
-----------------------------------
Print Name of Stockholder
Shares beneficially owned:
1,622,000 shares of Checkfree Common Stock
<PAGE> 1
EXHIBIT 10(nnn)
CHECKFREE CORPORATION
STOCK RESTRICTION AGREEMENT
This Agreement is made as of the 15th day of September 1996 between
Checkfree Corporation and Intuit Inc.
RECITALS
A. CHECKFREE CORPORATION, a Delaware corporation ("Parent") and INTUIT
INC., a Delaware corporation ("Holdings"), together with CHECKFREE ACQUISITION
CORPORATION II, a wholly owned subsidiary of Parent, and INTUIT SERVICES
CORPORATION, a wholly owned subsidiary of Holdings, have entered into an
Agreement and Plan of Merger of even date herewith, pursuant to which, by merger
(the "Merger"), Parent will acquire the business of Intuit Services Corporation.
B. In connection with the Merger, Parent will issue to Holdings that number
of shares of the common stock of Parent ("Parent Common Stock") specified in the
Agreement and Plan of Merger, subject to adjustment as provided therein ("Merger
Securities"), and the parties hereto desire to express in this Agreement their
agreement with respect to certain limitations on the actions which may be taken
by Holdings with respect to the Parent Common Stock issued to Holdings in the
Merger.
AGREEMENT
NOW, THEREFORE, in consideration of the Merger and of the mutual agreements
and covenants hereinafter and therein contained, the parties hereto agree as
follows:
1. RESTRICTIONS. While this Agreement remains in effect, Holdings shall not
sell, assign, or otherwise transfer or purchase any shares of Parent Common
Stock except as specifically permitted hereunder and shall be subject to the
following restrictions with respect to the taking of certain other actions with
respect to Parent Common Stock.
1.1. SALES
(i) SALES TO QUALIFIED INSTITUTIONAL BUYERS -- Holdings may sell
shares of Parent Common Stock to any Qualified Institutional Buyer, as defined
herein, where such Qualified Institutional Buyer would own, after such purchase
by it, not more than 10% of the then outstanding shares of Parent Common Stock.
"Qualified Institutional Buyer," as that term is used herein, means any person
who would be eligible, under Rule 13d-1(b)(1) under the Securities and Exchange
Act of 1934, as amended ("Exchange Act"), assuming that such person owns 5% or
more of the then outstanding shares of Parent Common Stock, to file reports of
beneficial ownership on Schedule 13G as prescribed by the Securities and
Exchange Commission ("SEC"), because such person both:
<PAGE> 2
(A) is acquiring shares of Parent Common
Stock in the ordinary course of his business
and not with the purpose nor with the effect
of changing or influencing the control of
the issuer, nor in connection with or as a
participant in any transaction having such
purpose or effect, including any transaction
subject to Rule 13d-3(b); and
(B) is (i) a broker or dealer registered
under Section 15 of the Exchange Act, (ii) a
bank as defined in Section 3(a)(6) of the
Exchange Act, (iii) an insurance company as
defined in Section 3(a)(19) of the Exchange
Act, (iv) an investment company registered
under Section 8 of the Investment Company
Act of 1940, (v) an investment advisor
registered under Section 203 of the
Investment Advisers Act of 1940, (vi) an
employee benefit plan, or pension fund which
is subject to the provisions of the Employee
Retirement Income Security Act of 1974
("ERISA") or an endowment fund, (vii) a
parent holding company, provided that the
aggregate amount held directly by the
parent, and directly and indirectly by its
subsidiaries which are not persons specified
in Rule 13d-1(b)(ii)(A)-(F) promulgated
under the Exchange Act, does not exceed one
percent of the securities of the subject
class, or (viii) a group, provided that all
the members are persons specified in Rule
13d-1(b)(ii)(A)-(G) promulgated under the
Exchange Act.
(ii) SALES TO OTHER BUYERS -- Holdings may sell shares of Parent
Common Stock to any person who is not a Qualified Institutional Buyer ("Other
Buyer") which Other Buyer would own, after such purchase by it, not more than 5%
of the then outstanding shares of Parent Common Stock. Holdings shall notify
Parent in writing of its intention to sell Parent Common Stock in advance of any
sale to an Other Buyer, and Parent shall have the right, during the five
business days following the receipt of such notice, to purchase such shares for
the price at which Holdings has agreed to sell the shares to such Other Buyer.
(iii) SALES PURSUANT TO RULE 144 AND UNDERWRITTEN PUBLIC
OFFERINGS -- Holdings may sell shares of Parent Common Stock in compliance with
SEC Rule 144 and pursuant to underwritten public offerings of Parent Common
Stock in which the parties have mutually approved the managing underwriters. Any
sales of Parent Common Stock to Qualified Institutional Buyers or to Other
Buyers, if made pursuant to this Section 1.1(iii) shall be exempt from the
restrictions set forth in Section 1.1(i) and Section 1.1(ii).
1.2. PURCHASES So long as this Agreement is in effect, Holdings may
purchase shares of Parent Common Stock only where such purchase would result in
its beneficial ownership of not more than 15% of the then outstanding shares of
Parent Common Stock, except where Holdings has received the prior written
consent of Parent's Board of Directors or its authorized representative;
provided, however, that Holdings may not hold more than the number of shares of
2
<PAGE> 3
Parent Common Stock constituting the Merger Securities so long as this Agreement
remains in effect.
1.3. SOLICITATION OF PROXY AND OTHER MATTERS
(i) SOLICITATION OF PROXIES -- Holdings will not solicit proxies
from Parent stockholders in opposition to any recommendation of Parent's Board
of Directors.
(ii) TAKEOVER BIDS -- Holdings will not initiate or participate
in any group which proposes, without the support of Parent's Board of Directors,
any change in the control of Parent, whether by tender offer, merger, or
otherwise. In any event, Holdings may, itself, make such an offer or proposal to
Parent's Board of Directors; provided, however, that any such offer or proposal
by Holdings shall be made on a strictly confidential basis and shall not be
publicly disclosed without the prior consent of Parent's Board of Directors.
2. LEGEND. The certificates representing shares of Parent Common Stock
beneficially owned by Holdings shall bear the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO AN AGREEMENT DATED
SEPTEMBER 15, 1996 BETWEEN INTUIT INC. AND
CHECKFREE CORPORATION IMPOSING CERTAIN
TRANSFER AND OTHER RESTRICTIONS ON THE HOLDER
OF SUCH SHARES.
Holdings shall deliver all shares of Parent Common Stock purchased hereunder to
Parent or its transfer agent to have this legend affixed to all such shares.
3. TERMINATION. This Agreement and the restrictions imposed hereby will
irrevocably terminate at the first time that Holdings shall beneficially own
less than 10% of the outstanding shares of Parent Common Stock, and this
Agreement shall not be revived by any subsequent transaction that results in
Holdings owning 10% or more of the outstanding shares of Parent Common Stock.
4. GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the law of the State of Delaware, without reference to its
choice of law rules.
5. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective estates, heirs, legal
representatives, successors, and assigns; provided, however, that no assignment
of any rights or obligations shall be made by any party hereto without the
written consent of each other party hereto.
3
<PAGE> 4
6. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to be given if sent by United States mail, postage
prepaid and registered or certified with required return receipt, or otherwise
personally delivered and receipted therefor, and addressed as follows (or at
such other address as may be specified by notice given pursuant hereto):
(a) If to Checkfree:
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Attn: Chief Executive Officer
with copy to:
PORTER, WRIGHT, MORRIS & ARTHUR
41 S. High Street
Columbus, OH 43215
Attn.: Curtis A. Loveland, Esq.
(b) If to Intuit:
INTUIT INC.
2535 Garcia Avenue
Mountain View, CA 94039
Attn: Chief Executive Officer
with copy to:
FENWICK & WEST LLP
Two Palo Alto Square
Palo Alto, California 94306
Attn: Kenneth A. Linhares, Esq.
7. CAPTIONS. The captions at the beginning of the several sections of this
Agreement are not a part of the context hereof, but have been inserted to assist
in locating and reading those sections. They shall be ignored in construing this
Agreement.
8. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement is held to be invalid, illegal, or unenforceable in any respect
for any reason, such invalidity, illegality, or unenforceability shall not
affect any other provisions hereof. It is the intention of the parties that if
any provision is held to be invalid, illegal, or unenforceable, there shall be
added in lieu thereof a valid and enforceable provision as similar in terms to
such provision as is possible.
4
<PAGE> 5
10. DUPLICATE ORIGINALS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be a duplicate original, and all
counterparts taken together shall constitute duplicate originals of one and the
same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CHECKFREE CORPORATION
By: /s/ Peter J. Kight
-------------------------------
Its: President and CEO
------------------------------
INTUIT INC.
By: James J. Heeger
-------------------------------
Its: Senior Vice President and CFO
------------------------------
5
<PAGE> 1
EXHIBIT 10(ooo)
ESCROW AGREEMENT
This Escrow Agreement is made and entered into this ___ day of ________,
1996 (the "EFFECTIVE DATE") by and among:
[THE TRUST DIVISION OF A BANK] ("ESCROW AGENT")
INTUIT INC. ("INTUIT")
and
CHECKFREE CORPORATION ("CHECKFREE")
WHEREAS, Intuit and CheckFree, together with CheckFree Acquisition
Corporation II and Intuit Services Corporation, have entered into an Agreement
and Plan of Merger dated September 15, 1996 (the "PLAN") pursuant to which
CheckFree will acquire, by merger (the "MERGER"), Intuit Services Corporation, a
wholly-owned subsidiary of Intuit;
WHEREAS, the consideration to Intuit for the Merger is shares of
CheckFree's common stock;
WHEREAS, Article VII of the Plan provides for indemnification of CheckFree
by Intuit under the circumstances described therein against certain losses,
costs, claims, damages, penalties and expenses (collectively referred to herein
as "CLAIMS"); and
WHEREAS, Escrow Agent is willing to act as escrow agent on the terms and
conditions set forth in this Escrow Agreement
NOW THEREFORE, IT IS AGREED THAT:
1. ESTABLISHMENT OF ESCROW FUND. Escrow Agent hereby acknowledges receipt
from CheckFree of CheckFree Common Stock Certificates Nos. _____, _____ and
_____ for an aggregate of _____ shares of Common Stock of CheckFree, registered
in the name of Intuit (the "ESCROW SHARES"), together with stock powers executed
by Intuit with respect thereto, to be held as provided in this Escrow Agreement,
CheckFree and Intuit acknowledge that the Escrow Shares are being issued in
connection with the Merger.
2. DISPOSITION OF ESCROW SHARES BY ESCROW AGENT.
(a) PURPOSE. This Escrow Agreement supplements the indemnification
provisions set forth in Article VII of the Plan.
<PAGE> 2
(b) CLAIMS BY CHECKFREE. If, on or prior to the first (1st)
anniversary of the Effective Date of this Escrow Agreement, CheckFree claims to
be entitled to indemnification for any Claims pursuant to Article VII of the
Plan and CheckFree seeks to recover for such indemnification by having Escrow
Shares cancelled and returned to CheckFree pursuant to this Agreement, then
CheckFree will, in addition to giving Intuit written notice of such Claim as
provided in Sections 7.02 and 7.03 of the Plan (a "CLAIM NOTICE"), promptly
notify the Escrow Agent in writing of the Claim and of CheckFree's intention to
have Escrow Shares cancelled in satisfaction of CheckFree's rights to
indemnification under Article VII of the Plan. CheckFree will also notify Intuit
and the Escrow Agent in writing (the "ESCROW SHARE NOTICE") of the bona fide
number of Escrow Shares that CheckFree in good faith believes should be
cancelled and delivered to it as a result of the Claim (which number of Escrow
Shares (the "CLAIMED ESCROW SHARES") shall be determined by dividing the amount
of the Claim by the Average Share Price (as defined below). The "AVERAGE SHARE
PRICE" means the average per share closing price of CheckFree Common Stock as
reported on the Nasdaq Stock Market for the last five (5) trading days
immediately preceding the effective date of the Plan, as adjusted from time to
time to reflect any Capital Change (as defined in Section 2.01 of the Plan)
occurring subsequent to the effective date of the Plan. Unless Intuit shall
notify Escrow Agent and CheckFree, within thirty (30) days after Intuit' receipt
of both the Claim Notice and the Escrow Share Notice, of Intuit's objection to
the delivery to CheckFree of the number of Claimed Escrow Shares, the Escrow
Agent shall, promptly following the expiration of such thirty (30) day notice
period, deliver to CheckFree stock certificates for the number of Escrow Shares
equal to the Claimed Escrow Shares, with related stock powers transferring the
number of Claimed Escrow Shares to CheckFree. To the extent that Escrow Shares
are so delivered to CheckFree, the Claim and CheckFree's right to
indemnification therefor, shall be satisfied. As used herein, the term
"CONTESTED CLAIM" means any Claim of CheckFree for indemnification under Article
VII hereof that is contested by Intuit.
(c) CONDITIONS TO RELEASE OF ESCROW SHARES. Subject to the
provisions of Section 2(d) of this Escrow Agreement, in the event that Intuit
shall notify the Escrow Agent of its objection to the delivery of Escrow Shares
to CheckFree as provided herein, the Escrow Agent shall continue to hold such
Escrow Shares until the earlier of: (i) the date Escrow Agent receives written
instructions signed by both CheckFree and Intuit to deliver to CheckFree or
Intuit, as applicable, a specified number of Escrow Shares (the "AGREED
SHARES"), upon receipt of which instructions the Escrow Agent shall deliver the
Agreed Shares to CheckFree or Intuit, as provided in such written instructions;
(ii) the date the Escrow Agent receives a copy of the award of the arbitrator as
to the disposition of a Contested Claim as a result of an arbitration pursuant
to Section 3 of this Escrow Agreement; or (iii) the date Escrow Agent receives
instructions pursuant to a final order of a court of competent jurisdiction with
respect to the disposition of such Escrow Shares; provided however, that
notwithstanding the foregoing (but subject to the provisions of Section 2(d)
below)), upon the first anniversary of the Effective Date of this Agreement (the
"RELEASE DATE"), the Escrow Agent will release from escrow to Intuit the stock
certificates for all of the Escrow Shares then held in escrow hereunder less (i)
any Escrow Shares previously delivered to CheckFree or awarded (but not yet
delivered) to CheckFree in satisfaction of a Contested Claim pursuant to an
award of an arbitrator
2
<PAGE> 3
rendered in an arbitration pursuant to Section 3 of this Escrow Agreement; and
(ii) any Escrow Shares that are potentially subject to delivery to CheckFree as
a result of any then pending but unresolved arbitration of a Contested Claim
pursuant to Section 3 of this Escrow Agreement. Any Escrow Shares held as result
of clause (ii) of this sentence will be released to CheckFree or Intuit, as
applicable, in accordance with the resolution of such Contested Claim or Claims
by (i) an arbitration award of an arbitrator in accordance with Section 3
hereof; or (ii) a written settlement agreement executed by CheckFree and Intuit
regarding the disposition of such shares as provided in Section 3(l) of this
Escrow Agreement.
(d) INTUIT OPTION TO PAY CLAIMS IN CASH. Notwithstanding any
provision of this Agreement requiring or permitting CheckFree to satisfy Claims
by obtaining the cancellation of Escrow Shares, if CheckFree for any reason
becomes entitled under this Agreement to receive and cancel any Escrow Shares in
satisfaction of a Claim, then Intuit, at its sole option and discretion, may
instead elect to satisfy all or any portion of such Claim with a cash payment to
CheckFree in lieu of such forfeiture of Escrow Shares (a "CASH PAYMENT
ELECTION"), in which case Intuit shall, at least one (1) day prior to the date
the Escrow Agent releases and delivers Escrow Shares to CheckFree: (i) deliver
to CheckFree a check for the amount of cash equal to the number of Escrow Shares
which CheckFree is entitled to cancel to satisfy its Claim times the Average
Share Price pursuant to such Cash Payment Election, and upon receipt thereof,
CheckFree shall execute and deliver to Intuit a written receipt for such cash
payment signed by CheckFree (the "RECEIPT") and (ii) give written notice to the
Escrow Agent of Intuit' Cash Payment Election and a copy of the Receipt. Upon
receipt of the Cash Payment Election and the Receipt, the Escrow Agent shall
retain, and not release to CheckFree on account of such Claim, a number of
Claimed Escrow Shares equal to the amount of the cash payment evidenced by the
Receipt divided by the Average Share Price. CheckFree shall cooperate with
Intuit and the Escrow Agent to facilitate Intuit's exercise of the Cash Payment
Election.
(e) RECOURSE TO ESCROW SHARES NOT REQUIRED. Nothing contained
in this Escrow Agreement or in the Plan shall be construed to require CheckFree
to seek recovery of a Claim, in whole or in part, from Escrow Shares. CheckFree
shall have the absolute right, in its sole discretion, to pursue its rights
under Article VII of the Plan without reference to such rights as it may have
under this Escrow Agreement, as it may elect; provided, that (unless Intuit
consents otherwise), any Claim by CheckFree to recover Escrow Shares must be
resolved by arbitration pursuant to Section 3 of this Escrow Agreement or by a
written settlement agreement executed by CheckFree and Intuit.
3. ARBITRATION OF CONTESTED CLAIMS.
(a) CONTESTED CLAIMS. Each Contested Claim for which CheckFree
seeks recovery from the Escrow Shares shall be promptly settled by mandatory
binding arbitration as provided herein. The final decision of the arbitrator
will be furnished to the Escrow Agent, CheckFree and Intuit in writing and will
constitute a conclusive determination of the issues in question, binding upon
CheckFree and Intuit. The Escrow Agent shall have no responsibility or
obligation to participate in any such arbitration as a party thereto.
3
<PAGE> 4
(b) ARBITRATION. Each arbitration conducted pursuant hereto
shall be conducted in Chicago, Illinois in accordance with the commercial
arbitration rules of the American Arbitration Association ("AAA RULES") then in
effect. However, in all events, these arbitration provisions will govern and
supersede any conflicting rules which may now or hereafter be contained in the
AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered
in any court having jurisdiction over the subject matter thereof.
(c) COMPENSATION OF ARBITRATOR. Any such arbitration will be
conducted before a single arbitrator who will be compensated at a rate to be
determined by CheckFree and Intuit or by the American Arbitration Association
("AAA"), but based upon reasonable hourly or daily consulting rates for the
arbitrator in the event the parties are not able to agree upon the rate of
compensation.
(d) SELECTION OF ARBITRATOR. The AAA will have the authority
to select an arbitrator from a list of arbitrators who are lawyers experienced
in the representation of software companies; provided, however, that such
arbitrator cannot be the legal counsel to CheckFree or Intuit and CheckFree and
Intuit will each have the opportunity to make such reasonable objection to any
of the arbitrators proposed by the AAA as such party may wish and that the AAA
will select the arbitrator from the list of arbitrators as to whom neither party
makes any such reasonable objection. In the event that the foregoing procedure
is not followed, CheckFree, on the one hand, and Intuit, on the other hand, will
choose one person from the list of arbitrators provided by the AAA (provided
that such person does not have a conflict of interest), and the two persons so
selected will select the arbitrator from the list provided by the AAA.
(e) PAYMENT OF COSTS. CheckFree and Intuit will bear the
expense of deposits and advances required by the arbitrator in equal
proportions, subject to recovery as an addition or offset to any award.
(f) BURDEN OF PROOF. For any Claim submitted to arbitration,
the burden of proof will be as it would be if the claim were litigated in a
judicial proceeding.
(g) AWARD. Upon the conclusion of any arbitration proceedings
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to each party to this Agreement along
with a signed copy of the award.
(h) TIMING. CheckFree and Intuit will use their best efforts
to conclude each arbitration pursuant to this Section 3 within 120 days after
the date of the giving of the Claim Notice giving rise to such arbitration.
(i) TERMS OF ARBITRATION. The arbitrator chosen in accordance
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Escrow Agreement or the Plan.
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<PAGE> 5
(j) EXCLUSIVE REMEDY. Except as specifically otherwise
provided in this Escrow Agreement or the Plan, arbitration will be the sole and
exclusive remedy of the parties for any Contested Claim that seeks recovery of
Escrow Shares.
(k) RELEASE OF ESCROW SHARES PURSUANT TO ARBITRATION AWARD.
Upon the arbitrator's issuance of a final award in such arbitration, the
arbitrator will immediately deliver a copy of such final award to the Escrow
Agent, CheckFree and Intuit. Upon its receipt of a copy of the final arbitration
award, the Escrow Agent will immediately release from escrow and transfer to
CheckFree for cancellation that number of Escrow Shares equal to the amount of
Losses (as defined in Article VII of the Plan), if any, awarded by such final
arbitration award, divided by the Average Share Price.
(l) SETTLED CLAIMS. If a Contested Claim is settled by a
written settlement agreement executed by CheckFree and Intuit, then CheckFree
and Intuit will promptly deliver such executed settlement agreement to the
Escrow Agent with written instructions signed by CheckFree and Intuit to release
to CheckFree for cancellation the number of Escrow Shares stipulated in such
settlement agreement, and upon its receipt of such written instructions, the
Escrow Agent will immediately release from escrow and transfer to CheckFree for
cancellation and/or transfer to Intuit (as applicable under the provisions of
such settlement agreement) that stipulated number of Escrow Shares.
4. TERMINATION; RELEASE OF ESCROW SHARES TO SELLER. This Escrow
Agreement shall terminate upon delivery of all of the Escrow Shares to CheckFree
pursuant to Section 2(b) or shall terminate and the Escrow Shares, or any
balance of the Escrow Shares remaining after delivery of Escrow Shares to
CheckFree pursuant to Section 2(b), shall be released and delivered to Intuit
promptly upon the later of (1) one year from the date of this Escrow Agreement,
and (2) notification to Escrow Agent of final resolution of any dispute
regarding delivery of Escrow Shares to CheckFree pursuant to Section 2(b).
5. LIABILITY OF ESCROW AGENT. Escrow Agent shall not be responsible or
liable in any manner whatsoever for the sufficiency, correctness, genuineness or
the validity of the subject matter of this Escrow Agreement or any part thereof,
or for the identity or authority of any person executing any document in
connection herewith. Escrow Agent shall not be liable to CheckFree or Intuit for
any loss or damage if Escrow Agent acts upon any written notice or other written
document which Escrow Agent, in good faith, believes to be genuine. The other
parties hereto shall indemnify and hold Escrow Agent harmless against any
claims, liabilities, or expenses arising in connection with the performance by
Escrow Agent of its services under this Escrow Agreement, other than any grossly
negligent or intentional breach of the terms of this Escrow Agreement by Escrow
Agent. Escrow Agent shall indemnify and hold harmless the other parties hereto
against any claims, liabilities or expenses arising in connection with the
grossly negligent performance, or intentional breach, by the Escrow Agent of its
obligations hereunder.
5
<PAGE> 6
6. DISPUTES. In the event of any disagreement between the parties to
this Escrow Agreement resulting in conflicting claims or demands being made upon
the Escrow Agent, Escrow Agent shall not be or become liable in any way or to
any person for its failure or refusal to act, unless such failure constitutes
gross negligence or willful misconduct of Escrow Agent, and Escrow Agent shall
be entitled to continue to refrain from acting until (a) the earlier to occur of
(i) the full and final adjudication by a court of competent jurisdiction of the
rights of all interested parties, or (ii) final agreement among all of the
interested parties which resolves all questions regarding any controversy among
them with respect to their rights or obligations hereunder, and (b) Escrow Agent
shall have been notified thereof in writing signed by all such parties or by a
court of competent jurisdiction.
7. COMPENSATION. Escrow Agent shall perform the services required
hereunder in consideration of its selection by the other parties hereto to hold
the Escrow Shares and the Stock Powers, and Escrow Agent shall receive
compensation for its services from CheckFree in accordance with the following:
(a) An initial fee of __________________________________
Dollars ($_____________), which shall be due and payable upon execution of this
Plan;
(b) CheckFree shall reimburse Escrow Agent for any of its
reasonable out of pocket expenses incurred in fulfilling its obligations
hereunder within five (5) days of receipt of a written request therefor
accompanied by such supporting documentation as CheckFree may reasonably
request.
Any amounts due from CheckFree to the Escrow Agent under this Section 7
which are not paid when due shall bear interest at the rate of 1% per month from
the date due until the date paid.
8. ASSIGNMENT. No party hereto shall have the right to assign this
Escrow Agreement to any other person or entity without the express written
consent of the other parties hereto.
9. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to be given if sent by United States mail, postage
prepaid and registered or certified with required return receipt, or otherwise
personally delivered and receipted therefor, and addressed as follows (or at
such other address as may be specified by notice given pursuant hereto):
(a) If to CheckFree:
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Attn: Chief Executive Officer
with copy to:
6
<PAGE> 7
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Attn: General Counsel
and
PORTER, WRIGHT, MORRIS & ARTHUR
41 S. High Street
Columbus, Ohio 43215
Attn.: Curtis A. Loveland, Esq.
(b) If to Intuit:
INTUIT INC.
2535 Garcia Avenue
Mountain View, CA 94039
Attn: Chief Executive Officer
with copy to:
FENWICK & WEST LLP
Two Palo Alto Square
Palo Alto, California 94306
Attn: Kenneth A. Linhares, Esq.
(c) If to Escrow Agent:
-----------------------------
-----------------------------
-----------------------------
Attn:
------------------------
10. CAPTIONS. The captions at the beginning of the several sections
of this Escrow Agreement are not a part of the context hereof, but have been
inserted to assist in locating and reading those sections. They shall be ignored
in construing this Escrow Agreement.
11. LAW APPLICABLE. This Escrow Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without regard to its conflict of law principles.
12. SEVERABILITY. In case any one or more of the provisions contained
in this Escrow Agreement is held to be invalid, illegal, or unenforceable in any
respect for any reason, such invalidity, illegality, or unenforceability shall
not affect any other provisions hereof. It is the intention of the parties that
if any provision is held to be invalid, illegal, or unenforceable, there shall
7
<PAGE> 8
be added in lieu thereof a valid and enforceable provision as similar in terms
to such provision as is possible.
13. DUPLICATE ORIGINALS. This Escrow Agreement may be executed in one or
more counterparts, each of which shall be deemed to be a duplicate original, and
all counterparts taken together shall constitute duplicate originals of one and
the same agreement.
14. BINDING EFFECT. This Escrow Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, successors,
permitted assigns, or other legal representatives.
IN WITNESS WHEREOF, the parties have caused this Escrow Agreement to be
executed by their duly-authorized officers as of the date first set forth above.
CHECKFREE CORPORATION INTUIT INC.
By: ____________________________ By: ___________________________
Its: ____________________________ Its: ___________________________
ESCROW AGENT
By: ____________________________
Its: ____________________________
8
<PAGE> 1
EXHIBIT 10(ppp)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and entered
into as of September 15, 1996 (the "EFFECTIVE DATE") by and between Checkfree
Corporation, a Delaware corporation (the "COMPANY"), and Intuit Inc., a Delaware
corporation ("INTUIT").
RECITALS
A. Intuit and the Company have entered into a certain Agreement and Plan of
Merger dated as of even date herewith (the "PLAN"), pursuant to which Checkfree
Acquisition Corporation II, a Delaware corporation and a wholly-owned subsidiary
of the Company ("NEWCO"), is to be merged with and into Intuit Services
Corporation, a Delaware corporation and a wholly-owned subsidiary of Intuit
("SUB") in a statutory merger (the "MERGER").
B. Upon consummation of the Merger, Intuit, as Sub's sole stockholder, will
receive shares of the Common Stock of the Company upon the conversion of the
outstanding stock of Sub in the Merger. As a condition to the consummation of
the Merger, the Plan provides that Intuit shall be granted certain registration
rights with respect to the shares of the Company's Common Stock to be issued to
it in the Merger, all as more fully set forth herein.
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. For purposes of this Section 1:
(a) REGISTRATION. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and the declaration or ordering of effectiveness of such
registration statement.
(b) REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES"
means: (1) all the shares of Common Stock of the Company issued to Intuit in the
Merger pursuant to the Plan, and (2) any shares of Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for, or in replacement of, all such shares of Common Stock of
the Company described in clause (1) of this subsection (b); excluding in all
cases, however, any Registrable Securities sold by a person in a transaction in
which rights under this Section 1 are not assigned in accordance with this
Agreement or any Registrable Securities sold to the public or sold pursuant to
Rule 144 promulgated under the Securities Act.
(c) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities
and Exchange Commission.
<PAGE> 2
1.2 DEMAND REGISTRATION.
(a) REQUEST BY INTUIT. If the Company shall receive at any time
after the closing of the Merger a written request ("REQUEST") from Intuit that
the Company file a registration statement under the Securities Act covering the
registration of Registrable Securities pursuant to this Section 1.2, then the
Company shall effect, as soon as practicable, the registration under the
Securities Act of all Registrable Securities which Intuit requests to be
registered in the Request, subject only to the limitations of this Section 1.2;
PROVIDED, that the Registrable Securities requested by Intuit to be registered
pursuant to such request must be at least twenty percent (20%) of the
Registrable Securities issued to Intuit in the Merger; PROVIDED, HOWEVER, that
the first such request for registration under this Section 1.2(a) may be for
such lesser number of shares of Registrable Securities as would reduce Intuit's
ownership of the Company's Common Stock to less than twenty percent (20%) of the
shares of the Company's Common Stock outstanding after such sale.
Notwithstanding the foregoing, if due to action by an underwriter as provided in
Section 1.2(b), or for any other reason beyond Intuit's control (including, but
not limited to, actions by Checkfree or any Checkfree stockholder, or any
agreement to which Checkfree is a party), Intuit is prevented from registering
the minimum number of Registrable Securities required for Intuit to request a
registration of Registrable Securities under this Section 1.2, then Intuit shall
nevertheless be entitled to have registered pursuant to this Section 1.2, such
lesser number of Registrable Securities as it is able to register.
(b) UNDERWRITING. The Registrable Securities covered by the
Request may be offered by means of an underwriting if Intuit so requests, and
Intuit shall so advise the Company as a part of its Request. If an underwriting
is requested by Intuit in its Request, then Intuit and the Company shall enter
into an underwriting agreement in customary form with the managing underwriter
or underwriters selected for such underwriting by the mutual agreement of the
Company and Intuit; PROVIDED, that neither the Company nor Intuit shall
unreasonably refuse to agree to a managing underwriter selected by the other,
but shall in good faith attempt to select mutually agreeable managing
underwriters. Notwithstanding any other provision of this Section 1.3, if the
underwriters advise the Company in writing that marketing factors require a
limitation of the number of securities to be underwritten, then the Company
shall so advise Intuit, and the number of Registrable Securities that may be
included in the underwriting shall be reduced as required by the underwriters;
PROVIDED, HOWEVER, that the number of shares of Registrable Securities to be
included in such underwriting and registration shall not be reduced unless all
other securities of the Company and any other selling securityholder are first
entirely excluded from the underwriting and registration. Any Registrable
Securities excluded and withdrawn from such underwriting shall be withdrawn from
the registration.
(c) MAXIMUM NUMBER OF DEMAND REGISTRATIONS. The Company is
obligated to effect only one (1) such registration pursuant to this Section 1.2
per calendar year, commencing with 1997.
-2-
<PAGE> 3
(d) EXPENSES. Intuit shall bear all discounts, commissions or
other amounts payable to underwriters or brokers in connection with such
offering, as well as one-half of all other expenses incurred in connection with
a registration pursuant to this Section 1.2, including without limitation all
federal and "blue sky" registration and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company and for
Intuit.
(e) RIGHTS OF THE COMPANY. Notwithstanding anything to the
contrary in this Section 1.2 or otherwise in this Agreement, the Company shall
not be obligated to take any action to effect any such registration pursuant to
this Section 1.2 as follows:
(i) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(ii) If the Company, within ten (10) days of the receipt of
a registration Request of Intuit under Section 1.2, gives written notice to
Intuit of the Company's bona fide intention to effect the filing, within thirty
(30) days of receipt of such Request, of a registration statement with the
Commission for the sale of securities by the Company (other than with respect to
a registration statement relating to a Rule 145 transaction, an offering solely
to employees or any other registration which is not appropriate for the
registration of Registrable Securities), in which event, (x) Intuit shall be
entitled to exercise its piggyback registration rights under Section 1.3 hereof
with respect to such registration, (y) the Company shall be required in good
faith to employ all reasonable efforts to cause its registration statement to
become effective and to give prompt written notice to Intuit if the Company
abandons its effort to file or causes its registration statement to become
effective, and (z) in the event the Company gives notice that it has abandoned
its registration statement efforts, the Company shall promptly renew its best
efforts to register the Registrable Securities that were the subject of the
demand registration Request if so requested in writing by Intuit within ten (10)
days after Intuit's receipt of notice that the Company has abandoned its
registration efforts;
(iii) During the period starting with the filing of and
ending on the date ninety (90) days immediately following the effective date of
any registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;
(iv) If the Company shall furnish to Intuit a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company it would be seriously detrimental, for
the specific reasons stated in such certificate, to the Company or its
shareholders for a registration statement to be filed in the near future, then
the Company's obligation to use its best efforts to register under this Section
1.2 shall be deferred for
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<PAGE> 4
a period not to exceed one hundred and twenty (120) days from the date of
receipt of the written Request from Intuit; or
(v) Unless at least one hundred and eighty (180) days shall
have expired from the effectiveness of a previous registration of Registrable
Securities pursuant to this Section 1.2 or Section 1.3 below.
Subject to the foregoing clauses (i) through (vi), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
Intuit.
1.3 PIGGYBACK REGISTRATIONS. The Company shall notify Intuit in
writing at least twenty (20) days prior to filing any registration statement
under the Securities Act for purposes of effecting a public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
EXCLUDING registration statements relating solely to any registration under
Section 1.2 of this Agreement or any employee benefit plan or a Rule 145
transaction) and will afford Intuit, subject to the terms and conditions set
forth herein, an opportunity to include in such registration statement all or
any part of the Registrable Securities then held by Intuit. Intuit shall, within
five (5) business days after receipt of the above-described notice from the
Company, so notify the Company in writing, and in such notice shall inform the
Company of the number of Registrable Securities Intuit wishes to include in such
registration statement. If Intuit decides not to include all of its Registrable
Securities in any registration statement thereafter filed by the Company, Intuit
shall nevertheless continue to have the right to include any Registrable
Securities not included in such registration statement in any subsequent
registration statement or registration statements as may be filed by the Company
with respect to offerings of its securities, all upon the terms and conditions
set forth herein. If Intuit is given the opportunity to include any of its
Registrable Securities in any registration statement filed under this Section
1.3, Intuit shall not make a request for registration under Section 1.2 hereof
for at least one hundred and eighty (180) days after the earlier of the
termination of such offering or the effectiveness of such registration statement
(a) UNDERWRITING. If a registration statement under which the
Company gives notice under this Section 1.3 is for an underwritten offering,
then the Company shall so advise Intuit. In such event, Intuit's right to
include Registrable Securities in a registration pursuant to this Section 1.3
shall be conditioned upon Intuit's participation in such underwriting and the
inclusion of Intuit's Registrable Securities in the underwriting to the extent
provided herein. Intuit shall enter into an underwriting agreement in customary
form with the managing underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of this Agreement, if the
managing underwriter determines in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriters may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and SECOND, to Intuit; PROVIDED, HOWEVER, that the right of the
underwriters to exclude shares (including
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<PAGE> 5
Registrable Securities) from the registration and underwriting as described
above shall be restricted so that: (i) the number of Registrable Securities
included in any such registration is not reduced below twenty percent (20%) of
the shares included in the registration; and (ii) all shares that are not
Registrable Securities and are held by other shareholders of the Company,
(except those shareholders with registration rights that, as of the Effective
Date of the Plan, are senior to or on a pari passu basis with those of Intuit
and are disclosed to Intuit in the Plan or any disclosure letter delivered to
Intuit pursuant to the Plan), shall first be excluded from such registration and
underwriting before any Registrable Securities are so excluded. If Intuit
disapproves of the terms of any such underwriting, Intuit may elect to withdraw
therefrom by written notice to the Company and the managing underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration.
(b) EXPENSES. Intuit shall bear all discounts, commissions or
other amounts payable to underwriters or brokers and fees and disbursements of
counsel for Intuit in connection with such offering. All other expenses incurred
in connection with a registration pursuant to this Section 1.3, including,
without limitation all federal and "blue sky" registration and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company shall be borne by the Company.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, and except as
otherwise provided in this Section or otherwise in this Agreement, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare promptly and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, keep such
registration statement effective for ninety (90) days (or until the earlier sale
of the Registrable Securities covered thereby), which registration statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any 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 in which they were made, not
misleading.
(b) Prepare promptly and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to Intuit such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as it may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by it that are
included in such registration.
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<PAGE> 6
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by Intuit, provided,
that the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriters of such offering.
(f) Notify Intuit at any time when a prospectus relating to the
Registrable Securities 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 a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(g) Furnish, at the request of Intuit, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated as of
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering and reasonably satisfactory to Intuit, addressed
to the underwriters, if any, and to Intuit, and (ii) a "comfort" letter dated as
of such date, from the independent certified public accountants of the Company,
in form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and reasonably
satisfactory to a Intuit, addressed to the underwriters, if any, and to Intuit.
(h) Make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 promulgated under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of any registration statement and any post
effective amendment thereto.
(i) Make available for inspection by Intuit, any underwriter
participating in any underwritten offering of Registrable Securities, and any
attorney, accountant or other agent retained by Intuit or any such underwriter
(collectively, the "INSPECTORS"), all pertinent documents of the Company
(collectively, the "RECORDS"), as shall be reasonably necessary to enable each
Inspector to exercise its due diligence responsibility, if and to the extent it
has any such responsibility under the Securities Act, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request for purposes of exercising such due diligence; PROVIDED,
HOWEVER, that each Inspector shall hold in confidence and shall not
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<PAGE> 7
make any disclosure (except to Intuit) of any Record or other non-public
information relating to the Company received by such Inspector unless (i) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement, (ii) the release of such Records is
ordered pursuant to a subpoena or other order from a court or government body of
competent jurisdiction or (iii) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement; and PROVIDED, FURTHER, HOWEVER, that in the event Intuit
obtains material nonpublic information concerning the Company pursuant to this
Section 1.4(i) or Section 1.4(a) or (f) or otherwise, such Inspector shall not
purchase or sell or otherwise trade in any securities of the Company in
violation of applicable law until such information is made public by the
Company. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into a confidentiality agreement (in form and substance
reasonably satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 1.4(i). Intuit agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential.
(j) Use its best efforts either to (i) cause all the Registrable
Securities covered by any registration statement to be listed on a national
securities exchange, if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or (ii) secure the quotation of the
Registrable Securities on the Nasdaq NM if such quotation is then permitted
under the rules of the Nasdaq NM.
(k) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of any
registration statement.
(l) Cooperate with Intuit and the managing underwriter or
underwriters of any offering involving Registrable Securities, if any, to
facilitate the timely preparation and delivery of certificates (not bearing any
restrictive legends) representing Registrable Securities to be sold pursuant to
a registration effected hereto, and enable such certificates to be in such
denominations or amounts as the case may be, and registered in such names as the
managing underwriter or underwriters, if any, or Intuit, may reasonable request.
(m) Take all other reasonable actions necessary to expedite and
facilitate disposition by Intuit of the Registrable Securities pursuant to the
registration statement.
1.5 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 1.2 or 1.3
that Intuit shall furnish to the Company such information regarding it, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to timely effect the registration of its
Registrable Securities.
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<PAGE> 8
1.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 1.2 or 1.3:
(a) BY THE COMPANY. To the extent permitted by law, the Company
will indemnify and hold harmless Intuit, officers and directors of Intuit, any
underwriter (as defined in the Securities Act) for Intuit and each person, if
any, who controls Intuit or such underwriter within the meaning of the
Securities Act or the Securities Exchange Act of 1934, as amended (the "1934
ACT"), against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "VIOLATION"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in a registration statement filed pursuant to this
Section 1, including any preliminary prospectus or final prospectus contained
therein or in any amendments or supplements thereto;
(ii) the omission or alleged omission to state in a
registration statement filed pursuant to this Section 1 (including any
preliminary prospectus or final prospectus contained therein or in any
amendments or supplements thereto), a material fact required to be stated
therein, or necessary to make the statements therein not misleading; or
(iii) any violation or alleged violation by the Company of
the Securities Act, the 1934 Act, any federal or state securities law or any
rule or regulation promulgated under the Securities Act, the 1934 Act or any
federal or state securities law in connection with the offering covered by such
registration statement;
and the Company will reimburse each of Intuit, such officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection 1.6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by Intuit, or by such, officer, director, underwriter or
controlling person of Intuit.
(b) BY INTUIT. To the extent permitted by law, Intuit will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, and any
underwriter, against any losses, claims, damages or liabilities (joint or
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<PAGE> 9
several) to which the Company or any such director, officer, controlling person
or underwriter may become subject under the Securities Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by Intuit expressly for use in connection with such registration; and
Intuit will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person, underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 1.6(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of Intuit, which consent shall not be unreasonably withheld;
and PROVIDED, FURTHER, that the total amounts payable in indemnity by Intuit
under this Section 1.6(b) in respect of any Violation shall not exceed the net
proceeds received by Intuit in the registered offering out of which such
Violation arises.
(c) NOTICE. Promptly after receipt by an indemnified party under
this Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim for
indemnification in respect thereof is to be made against any indemnifying party
under this Section 1.6, deliver to the indemnifying party a written notice of
the commencement of such an action and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflict of
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.6, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.6.
(d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing
indemnity agreements of the Company and Intuit are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or in the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL
PROSPECTUS"), such indemnity agreements shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) Intuit (and/or any officer,
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<PAGE> 10
director, underwriter or controlling person who may be indemnified under Section
1.6(a)), makes a claim for indemnification pursuant to this Section 1.6 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 1.6 provides for indemnification
in such case, or (ii) contribution under the Securities Act may be required on
the part of Intuit (and/or any officer, director, underwriter or controlling
person who may be indemnified under Section 1.6(a)) in circumstances for which
indemnification is provided under this Section 1.6; then, and in each such case,
the Company and Intuit (and/or such other person) or will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in proportion to their relative fault as
determined by a court of competent jurisdiction; PROVIDED, HOWEVER, that in no
event (i) shall Intuit be responsible for more than the portion represented by
the percentage that the public offering price of the Registrable Securities
offered and sold by Intuit under the registration statement bears to the public
offering price of all securities offered and sold under such registration
statement and (ii) shall Intuit be required to contribute any amount in excess
of the public offering price of all such Registrable Securities offered and sold
by Intuit pursuant to such registration statement; and in any event, no person
or entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
(f) SURVIVAL. The obligations of the Company and Intuit under
this Section 1.6 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
1.7 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, for
so long as Intuit owns any Registrable Securities, the Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the 1934 Act; and
(c) So long as Intuit owns any Registrable Securities, to furnish
to Intuit forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company as Intuit may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
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<PAGE> 11
1.8 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall have
no obligations to register Registrable Securities held by Intuit (i) if all
Registrable Securities have been registered and sold pursuant to registrations
effected pursuant to this Agreement, or (ii) after the fifth anniversary of the
"Effective Time" of Merger, as that term is defined in the Plan; provided,
however, that if the Company defers a demand registration pursuant to Section
1.2(e)(iv), then the expiration date under this clause (ii) shall be extended
for one year for each occasion on which the Company has exercised such rights.
1.9 PREFERENCE TO OUTSTANDING REGISTRATION RIGHTS. The Company has
previously entered into agreements dated as of May 6, 1996 granting to certain
holders of Common Stock of the Company issued in connection with the acquisition
of Security APL, Inc. registration rights with respect to such securities that
provides, that until May 9, 1998, the Company shall not enter into any agreement
granting any holder or prospective holder of any securities of the Company
registration rights with respect to such securities unless such new agreement
specifies that the rights of such holders under the May 6, 1996 agreements shall
have preference to the holders of such new registration rights. Accordingly,
Intuit acknowledges that its registration rights under this Agreement are
subordinate to the registration rights granted under the May 6, 1996 agreements.
1.10 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of Intuit, enter into any agreement with any holder or prospective holder of any
securities of the Company which would allow such holder or prospective holder
(a) to include such securities in any registration filed under Section 1.2, 1.3
or 1.5 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of his securities will not reduce the amount of
the Registrable Securities of Intuit which is included, or (b) to make a demand
registration which could result in such registration statement being declared
effective (i) during the effectiveness of any registration statement effected
pursuant to Section 1.2, or (ii) within one hundred twenty (120) days of the
effective date of any registration effected pursuant to Section 1.2.
2. ASSIGNMENT.
2.1 ASSIGNMENT. Notwithstanding anything herein to the contrary, the
registration rights of Intuit under Section 1 hereof may be assigned only to (a)
a party who acquires a number of shares of Company Common Stock equal to at
least fifty percent (50%) of the shares of Common Stock that constituted the
original number of Registrable Securities (as such number may be adjusted to
reflect subdivisions, combinations and stock dividends of the Company's Common
Stock) or (b) any party who acquires ownership or control of Intuit through a
merger, consolidation, sale of assets or similar business combination; PROVIDED,
HOWEVER that no party may be assigned any of the foregoing rights until the
Company is given written notice by the assigning party at the time of such
assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and PROVIDED FURTHER that any such
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<PAGE> 12
assignee shall receive such assigned rights subject to all the terms and
conditions of this Agreement, including without limitation the provisions of
this Section 2.
3. GENERAL PROVISIONS.
3.1 STANDOFF AGREEMENT. Intuit agrees, so long as it holds at least
five percent (5%) of the Company's outstanding voting equity securities, that,
upon request of the Company or the underwriters managing an underwritten
offering of the Company's securities, Intuit will not sell, make any short sale
of, loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in the registration) without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed ninety (90) days) from the effective
date of such registration as may be requested by the underwriters; provided,
that if any officer or director of the Company who owns at least one percent
(1%) of the outstanding voting equity securities of the Company does not agree
to such restrictions, then Intuit shall not be required to do so either.
3.2 NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
(a) If to Intuit, at:
Intuit Inc.
2535 Garcia Avenue
Mountain View, CA 94039
Attention: Chief Executive Officer
with a copy to:
Fenwick & West LLP
Two Palo Alto Square, Suite 800
Palo Alto, CA 9306
Attention: Kenneth A. Linhares, Esq.
(b) If to Checkfree:
Checkfree Corporation
8275 North High Street
Columbus, Ohio 43235
Attention: President
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<PAGE> 13
with a copy to:
CHECKFREE CORPORATION
8275 North High Street
Columbus, Ohio 43235
Attn: General Counsel
and
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
Attention: Curtis A. Loveland, Esq.
Any party hereto (and such party's permitted assigns) may by notice so given
provide and change its address for future notices hereunder. Notice shall
conclusively be deemed to have been given when personally delivered or when
deposited in the mail in the manner set forth above.
3.3 ENTIRE AGREEMENT. This Agreement, constitutes and contains
the entire agreement and understanding of the parties with respect to the
subject matter hereof and supersedes any and all prior negotiations,
correspondence, agreements, understandings, duties or obligations between the
parties respecting the subject matter hereof.
3.4 AMENDMENT OF RIGHTS. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Intuit (and/or any of their permitted
successors or assigns).
3.5 GOVERNING LAW. This Agreement shall be governed by and
construed exclusively in accordance with the internal laws of the State of
Delaware as applied to agreements among Delaware residents entered into and to
be performed entirely within Delaware, excluding that body of law relating to
conflict of laws and choice of law.
3.6 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, then such provision(s) shall
be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
3.7 THIRD PARTIES. Nothing in this Agreement, express or
implied, is intended to confer upon any person, other than the parties hereto
and their successors and assigns, any rights or remedies under or by reason of
this Agreement.
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<PAGE> 14
3.8 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Section 2.1, the provisions of this Agreement shall inure to the benefit of, and
shall be binding upon, the successors and permitted assigns of the parties
hereto.
3.9 CAPTIONS. The captions to sections of this Agreement have
been inserted for identification and reference purposes only and shall not be
used to construe or interpret this Agreement.
3.10 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
CHECKFREE CORPORATION INTUIT INC.
By:__________________________ By:____________________________
Title: _______________________ Title: ________________________
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<PAGE> 1
EXHIBIT 13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From January 1, 1996 To June 30, 1996
Commission File Number: 0-26802
CHECKFREE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1013521
(State or other jurisdiction of (I.R.S. Employer incorporation or organization)
Identification No.)
8275 NORTH HIGH STREET
COLUMBUS, OHIO 43235
(Address of principal executive offices,
including zip code)
(614) 825-3000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $533,246,523 on September
16, 1996.
There were 41,696,870 shares of the Registrant's Common Stock
outstanding on September 16, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
As used in this report, "Checkfree" is generally used to indicate Checkfree
Corporation prior to its acquisition of Servantis Systems Holdings, Inc. on
February 21, 1996 (the "Servantis Acquisition") and prior to its acquisition of
Security APL, Inc. on May 9, 1996 (the "Security APL Acquisition") (the
Servantis Acquisition and the Security APL Acquisition are collectively
referred to as the "Acquisitions"). "Servantis" is generally used to indicate
Servantis Systems Holdings, Inc. prior to its acquisition by Checkfree,
"Security APL" is generally used to indicate Security APL, Inc. prior to its
acquisition by Checkfree, and the term the "Company" is used to indicate the
combined company following the Acquisitions. This report contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Business -- Business Risks."
Checkfree Corporation (the "Company") is a leading provider of electronic
commerce services, financial application software and related products for
financial institutions and businesses and their customers. The Company services
over 700,000 consumers, 1,000 businesses and approximately 850 financial
institutions (including the 500 largest banks in the United States). The Company
has also signed agreements with over 140 banks to provide electronic home
banking services for the customers of those banks. To maximize the efficiency
and effectiveness of its product development and distribution strategies, the
Company has established several strategic alliances with companies such as
Automatic Data Processing, Inc. ("ADP"), AT&T Corporation ("AT&T"), Alltell
Information Services, Inc. ("Alltell"), Block Financial Corporation ("Block
Financial"), Computer Services, Inc., CyberCash, Inc. ("CyberCash"), Money
Access Service, Inc. a wholly owned subsidiary of Electronic Payment Services,
Inc. ("EPS/MAC"), Electronic Data Systems Corporation ("EDS"), First Commerce
Technologies, Inc. ("First Commerce Technologies"), Fiserv, Inc. ("Fiserv"),
FiTech, Inc. ("FiTech"), Five Paces, Inc. ("Five Paces"), Florida
Informanagement Services, Inc. ("Florida Informanagement Services"), Home
Financial Network, Internet Browser Software Companies, Premiere Communications,
Inc. ("Premiere"), Spyglass, Inc. ("Spyglass"), and SPRY, Inc. ("Spry") (an
affiliate of CompuServe, Incorporated ("CompuServe")).
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience as a provider of electronic commerce and financial
applications software and services to financial institutions substantially
enhances the Company's presence in the financial institutions market of the
electronic commerce segment. Security APL's experience as a vendor of portfolio
management and software services to institutional investment managers and
investment services to consumers enhances the Company's presence in the
consumer and financial institutions market of the electronic commerce industry.
The integration of Checkfree's electronic transaction processing and remote
delivery technology with Servantis' software products and market presence and
Security APL's portfolio management and software services has created a single
vendor of electronic commerce services and related products to an expanded
customer base of financial institutions and businesses and their customers.
Prior to the Servantis Acquisition, the Company operated its business in
one business segment, the electronic commerce segment. With the Servantis
Acquisition, the Company added financial application software as a second
business segment. The electronic commerce segment includes electronic home
banking, electronic bill payment, automatic accounts receivable collection,
electronic accounts payable processing, investment portfolio management
services and investment trading and reporting services. These services are
primarily directed to financial institutions and businesses and their
customers. The financial application software segment includes end-to-end
software products for Automated Clearing House ("ACH") processing, account
reconciliation, wire transfer, mortgage loan origination and servicing, lease
accounting and debt recovery. These products and services are primarily
directed to financial institutions and large corporations.
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has ten direct and indirect wholly owned
subsidiaries: Servantis Systems Holdings, Inc., a Delaware corporation;
Servantis Systems, Inc., a Georgia corporation; Servantis Services, Inc., a
Georgia corporation; Checkfree Software Solutions, Inc., a Delaware
corporation; Security APL, Inc., an Illinois corporation; Bow Tie Systems,
Inc., an Illinois corporation; Checkfree Acquisition Corporation II, a Delaware
corporation; Interactive Solutions Corporation, an Oregon corporation;
Checkfree Investment Corporation, a Delaware corporation; and RCM Systems,
Inc., a Wisconsin corporation. The Company's principal executive offices are
located at 8275 North High Street, Columbus, Ohio 43235 and its telephone
number is (614) 825-3000. The Company's Internet address is
http://www.checkfree.com.
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<PAGE> 3
THE SERVANTIS ACQUISITION AND SERVANTIS
On February 21, 1996, Checkfree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of the
Company's Common Stock valued at $20.00 per share and $42.5 million in cash to
repay Servantis' long-term debt, in addition to the assumption of $38.3 million
of liabilities. Founded in 1971, Servantis is a leading provider of electronic
commerce and financial applications software and services for businesses and
financial institutions (including the 500 largest banks and over 350 mortgage
institutions in the United States). Servantis designs, markets, licenses and
supports software products for electronic corporate banking, home banking,
financial lending, regulatory compliance and document imaging. In addition,
Servantis offers software consulting and remote processing services.
THE SECURITY APL ACQUISITION AND SECURITY APL
On May 9, 1996, Checkfree acquired Security APL for approximately $53.3
million, consisting of the issuance of 2.8 million shares of the Company's
Common Stock valued at $18.50 per share, and the assumption of $5.5 million of
liabilities. Security APL is a leading vendor of portfolio management and
software services for institutional investment managers. Security APL has been
developing and providing advanced investment analysis systems since it was
founded in 1978. Security APL believes that it is the only full-service
provider of fully-integrated portfolio management, performance measurement,
trading and reporting systems for the investment manager. Security APL's
clients include money management firms, bank trust departments, insurance
companies and brokerage houses. Security APL added an additional investment
information service by establishing its Portfolio Accounting World Wide
("PAWWS") division in August 1994. The PAWWS world-wide web site offers
individuals some of the same tools professional money managers have to gather
the information they need to make their investment decisions to enter trades
and to monitor the status of their investments. Some of the services available
through PAWWS include portfolio accounting and allocation, research information
provided by various data suppliers, free stock quotes, stock host lists and
brokerage services. Currently, Security APL monitors more than 300,000
portfolios for approximately 1,500 portfolio managers at over 150 firms.
POST-ACQUISITIONS STRATEGY
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions, businesses and their customers. The
integration of Checkfree's electronic transaction processing and remote
delivery technology with Servantis' software products and market presence and
Security APL's portfolio management, investment, and software services has
created a single vendor of electronic commerce services and related products to
an expanded customer base of financial institutions and businesses and their
customers. The components of the Company's strategy are to:
Offer an Expanding Range of Convenient, Easily Accessible, Secure and
Cost-Effective Services Through Multiple Delivery Channels. By integrating
Checkfree's ability to pay any bill from any checking account at any financial
institution in the United States with Servantis' capability as an electronic
commerce software provider and bank service organization, the Company intends
to enhance and expand its range of financial institutions and business
electronic commerce services. These services enable customers to execute
electronic commerce transactions through multiple delivery channels including
personal computers, telephones and the Internet.
Pursue Additional Strategic Alliances to Leverage Partners' Capabilities.
Continuing Checkfree's strategy, the Company will pursue strategic alliances
with companies that have maximum penetration and leading reputations for
quality with the Company's target customers. Through these alliances, the
Company expects to integrate its own expertise with its partners' capabilities.
Expand Sales Efforts Through Multiple Distribution Channels. The Company
intends to maximize its distribution efforts through strategic alliances with
market-leading companies through the Company's direct sales force,
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<PAGE> 4
and to a lessor extent through direct marketing campaigns. In addition, the
Company is utilizing the Internet as a distribution channel by making certain
of its services and related products available for downloading from the
Company's and third-party web sites.
Leverage Customers and Alliances Across Markets. The Company's efforts in
each target market are designed to increase its successor opportunities in its
other markets. The products and customer base of Servantis substantially
increase the Company's offerings to financial institutions, which the Company
expects will enhance its opportunity to expand its electronic commerce services
to businesses and ultimately to the end, customer users.
Expand Customer Care and Technical Support. The Company supports and
services its customers through numerous activities, including annual user group
meetings and customer satisfaction surveys, technical and non-technical support
(provided by help desk, e-mail, facsimile and bulletin board), service
implementation and training. The Company believes that providing superior
quality and accessible and reliable customer care is essential to establishing
and maintaining successful relationships with its customers.
ELECTRONIC COMMERCE MARKET OPPORTUNITY
INTRODUCTION
Over the last decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards, automated teller
machines ("ATMs"), electronic funds transfer and direct payroll deposit have
automated, simplified and reduced the costs of financial transactions for
financial institutions and businesses and their customers.
CONTINUED USE OF PAPER CHECKS
Despite these benefits, a substantial portion of financial transactions in
the U.S. are still executed by check. In 1995, approximately 57% of the total
dollar volume of consumer payments was made using checks (30.0 billion
transactions with a dollar volume of $2.1 trillion). Approximately 20% of the
total consumer payment dollar volume was made electronically, with credit card
transactions accounting for substantially all of these payments. According to
the Federal Reserve Bank of Boston, the printing, mailing and delivery of more
than 64 billion checks each year costs the equivalent of approximately 0.5% of
the U.S. Gross Domestic Product. Checks impose significant costs on financial
institutions and businesses and their customers. Time costs include the
writing, mailing, recording and processing of checks. Financial costs include
postage, processing costs and costs associated with the "float" created between
the time checks are written and cleared. Due to the limited penetration of
electronic commerce to date, many financial institutions and businesses and
their customers currently engage in a combination of electronically executed
and check-based financial transactions. This combination has increased the
difficulty, particularly for individual consumers, of tracking payments,
withdrawals and deposits, and of managing their financial affairs. As an
indicator, industry sources estimate that approximately 75% of checking account
holders in the U.S. do not balance their checkbook registers on a regular
basis.
GROWTH TRENDS IN ELECTRONIC COMMERCE
Notwithstanding the current predominant usage of checks, there are a
number of current trends that are driving increasing acceptance of electronic
commerce in the U.S.:
o Increase in Electronic Financial Transactions. Over the last
decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards,
ATMs, electronic funds transfer and direct payroll deposit
have automated, simplified and reduced the costs of
financial transactions for consumers, businesses and
financial institutions. In 1994, it is estimated that 20
billion electronic transactions were processed in the U.S.
and it is estimated that electronic transactions will grow
at a rate of 19% each year to 58 billion by the year 2000.
Industry estimates suggest that consumer retail on-line
purchases will grow significantly for the rest of the
decade, from $240 million in 1994 to an estimated $6.9
billion in the year 2000.
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<PAGE> 5
o Continuing Penetration of Personal Computers and Modems into
U.S. Households. As of December 31, 1995, an estimated 37.4
million U.S. households, or 39% of U.S. households overall,
had personal computers and approximately 21.1 million of
these computers were equipped with a modem. The number of
modem-equipped personal computers is expected to grow at a
compound annual rate of approximately 26% to 33.6 million by
the end of 1997.
o Rapid Growth in On-line Interactive Services, Particularly
in the Internet. As of December 31, 1995, an estimated 6.2
million households in the U.S. subscribed to on-line
interactive services such as CompuServe, Prodigy and America
Online. This number is expected to increase to 8 million by
year-end 1996. In addition, AT&T and Microsoft Corporation
("Microsoft") have announced that they will enter the
on-line service market. The number of households subscribing
to commercial on-line services is expected to grow at a
compound annual rate of approximately 36% to 17.7 million
from 1994 through 1998. Additionally, there are currently
over 30 million users of the Internet. Industry analysts
expect this figure to grow to 120 million by the end of
1998.
o Growth in Small Business Use of Personal Computers.
According to a 1990 U.S. Commerce Department Report, there
are over 6.8 million businesses with fewer than 10 employees
in the United States. An increasing proportion of small
businesses are using personal computers as part of their
operations. According to a U.S. Census Bureau survey,
personal computer penetration in the small business market
has risen from 40% in 1989 to 64% in 1994.
o Continuing Automation of Financial Institutions' Operations.
Financial institutions are facing increasing competition as
a result of banking deregulation and technological
innovation. The competition is not only from within the
financial institution industry, but also from new
competitors in related industries, such as insurance
companies and mutual funds. The Company believes that in an
increasingly competitive environment, financial institutions
will seek opportunities to automate their operations by
providing electronic banking, electronic bill payment and
automated portfolio services to their customers. These
services, the Company believes, will enable financial
institutions to reduce costs, generate fee-based income and
strengthen their customer relationships.
CONCLUSION
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions and businesses and
their customers. Paper transactions impose significant costs that can be
reduced through electronic execution. The continuing penetration of personal
computers and modems into U.S. households, along with the rapid growth in
on-line interactive services, are providing the technical infrastructure
required to accelerate the acceptance of electronic commerce. In addition, the
Company believes the key requirements that must be addressed to increase
acceptance of electronic commerce applications include: (i) maintenance of
industry-wide quality levels for security, accuracy, reliability and
convenience; (ii) reduction in transaction processing costs; (iii) application
of easy-to-use interfaces; and (iv) development of seamless integration with
the existing financial infrastructure and existing relationships among all
parties to a financial transaction. As a result, the Company believes that the
opportunity exists to provide an integrated set of electronic services that
further automate financial transactions for financial institutions and
businesses and their customers.
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<PAGE> 6
PRODUCTS, SERVICES AND COMPETITION
ELECTRONIC COMMERCE SEGMENT
The Company's electronic commerce services and related products are
targeted to financial institutions, businesses and their customers. To ensure
the security of all the electronic commerce transactions that the Company
processes, the Company utilizes a combination of measures, including various
proprietary security technologies and existing industry security standards such
as RSA encryption and multiple authorization and authentication technologies.
The Company is currently developing new electronic commerce services and
enhancing its existing services for each of its target markets.
Retail Services. The Company designs and develops private label payment
and home banking services and related products for financial institutions,
which in turn offer electronic payment and home banking services to their
customers. These services, now marketed under the brand name "Bank Street,"
are tailored to each financial institution's specifications and can include a
variety of services and related products including: customer delivery systems
(including personal computer desktop software, the Internet or telephone based
voice recognition units ("VRU") systems); electronic transaction processing;
ATM-like banking transactions such as balance inquiries and fund transfers;
customer service; customer billing and marketing. The Company believes that its
services offer significant benefits to financial institutions, including lower
transactions processing costs, additional fee income, potential new customers,
and attractive additional services to offer existing customers.
Revenues are generated through contracts that the Company signs with
individual financial institutions. The Company typically negotiates with the
institution an implementation fee, a base fee per customer account on the
service provided by the Company plus a variable per transaction fee which
decreases based on the volume of transactions. Contracts typically have three
year terms and generally provide for minimum fees if certain transaction
volumes are not met. The Company utilizes direct sales and strategic alliances
to market to financial institutions and has the ability to customize services
for each institution.
The Company has contracts with more than 140 financial institutions
through which electronic payment and home banking services designed by the
Company are provided to customers of the financial institutions. Some of the
financial institutions served by the Company include: Bank One, Crestar,
Chemical Bank, Merrill Lynch, Signet Bank, Wells Fargo, and USAA Federal
Savings Bank.
The Company's bill payment services are also included in certain personal
financial software products, such as Managing Your Money, Money and Quicken.
The Company pays a royalty or acquisition fee to these distribution partners.
The Company's bill payment services enable financial institution customers
and direct consumer subscribers to pay bills electronically using a variety of
devices such as personal computers and touch-tone telephones. Bills paid by
consumers using the Company's bill payment services typically include payments
such as credit card statements, monthly mortgage payments and utility bills.
Consumers can use the Company to make any payments from any checking account at
any financial institution in the United States. Recurring bills such as
mortgages can be paid automatically and scheduled in advance for an indefinite
period of time, as specified by the user. As of June 30, 1996, the Company had
approximately 729,000 consumers using bill payment and/or home banking
services.
The Company continually expands its services to accommodate consumer
demand. As an introduction to the benefits of electronic financial
transactions, the Company has developed services and related products for
consumers who want a simple, easy-to-use electronic bill payment service with
limited record keeping capability. For consumers with advanced service
requirements, the Company is developing services which provide more extensive
financial management capabilities.
Through 1995, Quicken had been the largest source of new consumer
customers for the Company. Users of Quicken accounted for approximately 11% of
the Company's revenues for transition fiscal 1996. In the latter months of
1995, Intuit, Inc. ("Intuit") began to offer on-line home banking and financial
services through Intuit Services Corporation ("ISC"), a direct competitor of
the Company. This offering began with the October 1995 release of Quicken
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for Windows 5.0 and was the first time that Quicken users were offered these
services through ISC. Currently, the Company is not mentioned as a provider of
bill payment services in the manual or on-screen version of the latest Quicken
release, for Windows, however, the Company's bill payment service may be
accessed as a bill payment option if the user requests such services from the
Company or Intuit. The Company remains the primary bill payment option for the
current Macintosh and all earlier Windows versions of Quicken. In September
1996, the Company and Intuit signed a definitive agreement whereby the Company
would acquire ISC. Under the ISC merger agreement, the Company will be the
exclusive provider of bill payment and home-banking services for Quicken
through October 1997. After October 1997, the Company will compete with other
bill payment and home banking service providers under Intuit's open protocols.
PAWWS, founded as a division of Security APL in August of 1994, provides
customized solutions for financial service providers to offer to their
customers through the Internet fully integrated, on-line trading, portfolio
accounting, quotes, news services, research and fundamental data. The Company
believes the PAWWS service offers significant benefits to financial
institutions, including lower costs by using the Internet, additional fee
income, potential new customers and attractive additional services to offer to
existing customers.
PAWWS, located at http://pawws.com, consists of a cost basis tax lot
accounting tool that allows financial institution customers to keep track of
the investments they own, and provides the customers with enough information to
make informed decisions about generating gains or losses from their portfolios
when required. PAWWS also provides a seamless connection to electronic
brokerage via various order entry screens. The PAWWS system also allows for the
integration of the third party information (e.g,. research reports, financial
news, fundamental data, etc). The Company intends to private label PAWWS as a
part of Web sites for financial institutions.
Business Services. The Company provides businesses with a variety of
services including automatic accounts receivable collection, electronic
accounts payable processing, credit risk management, database management and
fraud protection services.
The Company provides automatic accounts receivable collections for
businesses in the on-line interactive services, Internet access, health and
fitness and various other industries, enabling these businesses to collect
monthly membership or access fees through links to the customer's credit card
or bank account. Services are typically provided under exclusive contracts for
three years with automatic renewals. For providing collection services,
businesses pay the Company implementation fees, transaction fees and credit
card discount fees.
The Company is the leading provider of automatic accounts receivable
collections for on-line interactive services and Internet access providers.
Some of the Company's clients include: AT&T Interchange, CompuServe, NETCOM
On-Line Communication Services, Inc., Optigon Interactive of Planet Optigon,
Inc., The Pipeline Network, Inc., Prodigy Services Company and Spry. In
servicing these business customers, the Company processes electronic
transactions for approximately four million of their on-line consumer
subscribers. The Company also collects monthly membership fees for over 725
health and fitness centers in the United States, including Town Sports
International. The Company provides automatic accounts receivable collections
for Cellular Atlantic, Cellular One Ohio-Michigan, Century Cellular,
MobileMedia Communications, Sky-Tel and Bell South Mobility in the wireless
communications industry and for several utilities.
The Company has an agreement with CompuServe to collect monthly
subscription fees from CompuServe's on-line interactive subscribers. The
agreement renews automatically for three-year terms unless either party gives
notice of intent not to renew at least 60 days before the end of the term. The
Company and CompuServe renewed a three year agreement in June 1995. The June
1995 renewal permits CompuServe to enter into an agreement with another payment
processor during the three year renewal term, provided that CompuServe has
given the Company reasonable opportunity to bid on retaining CompuServe's
payment collection business and pays the Company a termination fee if the
Company's services are not retained. In June 1995, the Company substantially
reduced its prices to CompuServe based on an increased volume of transactions
attributable to its business. During fiscal 1993, 1994, and 1995, the Company
derived approximately 10%, 11%, and 13%, respectively, of its revenues from
CompuServe. During the six months ended June 30, 1996, CompuServe accounted
for less than 10% of the Company's revenues. Although the Company believes its
relationship with CompuServe is positive, there can be no assurance that
CompuServe will continue its business relationship with the Company upon
expiration or early termination of the agreement, that CompuServe will maintain
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its number of subscribers at historical levels, or that the Company will
realize revenues from CompuServe at the levels it has in the past. Loss of the
relationship with CompuServe or a reduction of revenues from CompuServe will
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Dependence on
CompuServe)" and Note 16 to Consolidated Financial Statements.
Portfolio Services. Through the Company's PORTVUE product, the Company
offers portfolio accounting and performance measurement to investment advisors,
brokerage firms, banks and insurance companies. Through PORTVUE, clients are
able to leverage their systems and streamline their operations. The Company
designs custom solutions with clients, allowing investment managers the kind of
functionality that dramatically increases productivity. PORTVUE offers a
full-range of Portfolio Management System solutions, including data conversion,
personnel training, trading system, graphical client reporting, performance
measurement, technical network support, interface setup and DTC processing.
Competition. Portions of the electronic commerce market are becoming
increasingly competitive. The Company faces significant competition in all of
its customer markets. In the financial institutions market, the Company's
competitors include Visa Interactive and ISC. A number of banks have developed,
and others may in the future develop, home banking services in-house.
Additionally, Microsoft has announced its own alliances with financial
institutions to offer on-line home banking and financial services to consumers.
Competition for PAWWS includes clearing firms, such as the Pershing Division of
Donaldson, Lufkin and Jenrette, which have announced that they will be offering
Internet solutions to their correspondents. Also, some firms have decided to
build their own transaction-based Web site instead of outsourcing to a third
party. Currently, the Company is not aware of other outsourcing solutions for an
Internet brokerage and portfolio accounting solution. In the business market,
the Company competes with credit card and ACH processors. The Federal Reserve's
ACH is the national payment clearance system through which any bank can effect
debit transactions to any authorized consumer checking account. There are
numerous competitors in the business market for credit card processing,
including First USA, Inc., NaBanco and Card Establishment Services (divisions of
First Data Corporation), and National Processing Company (a division of National
City Bank). The Company also faces competition in ACH processing from numerous
banks. Competition for Portfolio services includes two main segments. First are
the providers of portfolio accounting software, including Advent Software,
PORTIA, a division of Thomson Financial and Shaw Data, a SunGard Company. The
primary service bureau competitor is Shaw Data, a SunGard Company.
FINANCIAL APPLICATION SOFTWARE SEGMENT
The Company is a leading provider of electronic commerce and financial
applications software and services for businesses and financial institutions.
The Company designs, markets, licenses and supports software products for
electronic corporate banking, financial lending, regulatory compliance and
document imaging. In addition, the Company offers software consulting and
remote processing services.
The Company's financial application software revenues are derived
primarily from the sale of software licenses and software maintenance fees.
Software is sold under perpetual licenses, and maintenance fees are received
through renewable agreements. The Company also derives revenues from project
consulting services and from remote transaction processing fees.
Software products licensed by the Company provide systems that range from
back office operations to front-end interface with the clients of the Company's
customers. Applications include electronic funds transfer, electronic wholesale
banking, reconciliation, mortgage loan automation, and imaging technologies,
among others.
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The Company's software products are sold under individual brand names. Its
most significant products include:
<TABLE>
<CAPTION>
BRAND NAME FUNCTION CUSTOMERS
<S> <C> <C>
PEP+ Automated Clearing House processing Businesses and financial institutions
LSAMS Mortgage setup and file maintenance Mortgage lenders
ACCESS/INFOVUE Corporate remote banking software Businesses and financial institutions
LANPATH Document management system Businesses and financial institutions
SBA Safe box accounting Financial businesses
ARP/QMS Bank controlled account reconciliation Businesses and financial institutions
RECON+ Corporate account reconciliation Businesses and financial institutions
</TABLE>
Electronic Funds Transfer. The ACH network was developed in the 1970s to
permit the electronic transfer of funds and thus curtail the growth in the
number of paper checks in circulation. The ACH network acts as the clearing
facility for routing electronic funds transfer entries between financial
institutions. All ACH transfers are handled in a standard format established
through the National Automated Clearing House Association ("NACHA"). More than
15,000 financial institutions participate in the ACH system. There are 31
ACH's, which geographically coincide with the 12 Federal Reserve Banks, their
branches and processing centers. The Company's electronic funds transfer
products are inter-related and may be used by either businesses or financial
institutions depending on the services they offer their customers and
employees.
The Company developed the most widely used, comprehensive ACH processing
system in the United States, the Paperless Entry Processing System Plus
("PEP+"). PEP+ is an on-line, real-time system providing an operational
interface for originating and receiving electronic payments through the ACH.
The Company continues to support the Paperless Entry Processing System ("PEP"),
which was the predecessor to PEP+.
The Company offers a number of products which support the PEP+ and PEP
systems. The Corporate Automated Payment System ("CAPS"), which is licensed to
corporations, serves as an electronic bridge between corporations' in-house
accounting systems software and the ACH Network. CAPS handles both debit and
credit transactions for automated collection or disbursement applications.
Another product of the Company, the MicroACH System, allows financial
institutions to provide their corporate customers more direct access to the ACH
network. The Company licenses MicroACH to financial institutions who then
distribute MicroACH to their corporate customers. The corporation's component,
MicroACH, automatically initiates and electronically sends ACH transactions,
allowing corporations greater flexibility in cash flow management and funds
transfer. The bank's component, MicroACH File Receiver, collects transactions
from MicroACH and then uploads these transactions to a host ACH system, such as
PEP or PEP+. MicroACH operates on a PC platform and has approximately 100 bank
users.
The Company also offers Financial Electronic Data Interchange ("FEDI") in
response to the growing need for banks and corporations to be able to handle
electronic data interchange ("EDI") data for financial transactions. The
purpose of FEDI is to allow corporations and banks already using EDI
translators to electronically process business documents and make payment
transfers electronically. The FEDI system can run as a stand-alone product as
well as in conjunction with the Company's PEP+ and CAPS systems.
The Company entered the wire transfer business in 1990 with WireNet, a
PC/LAN-based wire transfer system. The Company is currently developing
WireNext, a wire transfer system built to take advantage of client-server
architecture.
Electronic Wholesale Banking. The Company's wholesale banking software
systems electronically link banks and their corporate customers, permitting
banks to reduce transaction costs. The centerpiece of this product line is the
Company's ACCESS and InfoVue products, which provide an electronic link and
graphical user interface through which a bank's
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corporate customers can receive bank account information and can initiate
banking transactions. ACCESS operates on the bank's system while InfoVue is a
Microsoft Windows-based system located at the offices of the bank's corporate
customers and is used by its customers to interface with the ACCESS system.
Banks can also use the systems as a global gateway linking their branches and
providing international cash management services to their customers worldwide.
Through the Company's electronic banking systems, corporate customers can
obtain previous and intraday account information; initiate stop payments,
account transfers and wire transfers; create payroll and tax payments; receive
lockbox, controlled disbursements and statement reports; and communicate with
the bank via E-mail messages.
Reconciliation. The Company's reconciliation products provide U.S. banks,
international banks and corporate treasury operations with automated check and
non-check reconciliations in high volume, multi-location environments. These
systems are often tailored so that banks and multi-bank holding companies may
deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. Some of the services the Company's reconciliation
products provide are automated deposit verification, consolidated bank account
reconciliations and cash mobilization, immediate and accurate funds
availability data and improved cash control.
The Company's Account Reconciliation Package ("ARP"), is one of the most
widely used account reconciliation systems in the U.S. banking industry. The
ARP/Service Management System ("ARP/SMS"), developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that immediately processes a bank's adjustment, addition, balancing and
control requests. It can provide a bank with electronic detail of all finance
transactions, account history and specific ongoing credit risk information with
respect to its customers. ARP/SMS also groups accounts across banks within bank
holding companies and allows banks to streamline their operations by
reconciling their intra-bank transactions. ARP/Quality Management System
("ARP/QMS"), a companion system to ARP/SMS, helps banks control account
reconciliation operations. ARP/PC is a PC-based checking account reconciliation
program designed for banks and corporations performing lower-volume account
reconciliations.
In 1995, the Company introduced RECON-Plus for Windows a client/server
based "horizontal" reconciliation system. RECON-Plus for Windows is most
frequently used for internal reconciliation by large businesses, financial
service firms and utilities, including the reconciliation of debit and credit
card transactions, checks, ATM transactions, ACH transfers and securities
transactions.
Mortgage Loan Automation. The Company offers a number of products for
originators and servicers of mortgage loans, as well as products designed to
help secondary-market investors manage mortgage loan portfolios. In 1987, the
Company entered the mortgage industry as a software and services provider with
a loan origination product acquired from Software Concepts, Inc. The Company
built upon those products through the acquisition of a group of mortgage
origination and mortgage portfolio management products from Fannie Mae Software
Systems, a division of the Federal National Mortgage Corporation, in 1989.
Subsequent acquisitions of Traeger and Associates, and MLN Enterprises, as well
as the mortgage software division of Dyatron, Inc., have continued to provide
additional products for the Company in this area.
The Company's primary product for mortgage loan originators is The
Mortgage Originator, which provides mortgage lenders and originators
pre-qualification information, access to the most recent product pricing,
immediate interest rate lock-ins, imaging capabilities, laser printing and
comprehensive reporting at every phase of the loan origination process. The
Mortgage Originator runs on mainframe, mid-range and PC platforms.
The Company offers mortgage originators and lenders FORUM, to manage
portfolios of originated loans for secondary market sales. This
client/server-based system is designed to either stand alone or to complement
The Mortgage Originator, and helps manage mortgage loan pipelines and
commitments to buy and sell loans.
The Company also offers a range of products designed for efficient
servicing of mortgage loans. The Loan Servicing, Accounting and Management
System ("LSAMS") offer loan setups and file maintenance, complete payment
processing capabilities, escrow disbursement and management features,
delinquency management, escrow analysis and customer service for mid-range and
mainframe platforms. The Problem Loan Series, a series of four software systems
designed to run on PCs, is designed to automate all functions and
responsibilities associated with bankruptcy and
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foreclosure proceedings. The Problem Loan Series interfaces with the other
servicing products offered by the Company as well as other industry products.
In addition, the Company offers mortgage lenders The Construction Lender,
a project management software application which provides complete loan
portfolio control and offers capabilities particular to construction loans that
standard loan systems do not offer. The Construction Lender runs on a PC
platform. The system was recently enhanced to provide project inspectors with
the capability of reporting their inspections through a portable hand-held
unit. The inspection information is then electronically transmitted into the
base system, allowing the lender faster turnaround and greatly reducing the
chance of error.
Imaging Technologies. The Company offers products and services in two
areas of document management: Computer Output to Laser Disk (COLD) and source
document processing.
LANPATH Report Manager automates report data downloaded from a mainframe
or any other computer. The software processes and indexes the reports, then
compresses and stores them permanently on optical disks. Optional modules are
available to automatically transfer report data to other PC programs, publish
reports on CD-ROMs or access reports through other networks. The Company is an
integrator of several document imaging systems and provides systems that
control the scanning, indexing and storage of source document images on optical
disk.
Lease Accounting. The Company offers two lease accounting products that
are designed to provide accounting systems for vehicle and equipment lessors.
The Automated Lease Accounting System ("ALAS") is a comprehensive, IBM
mainframe, real-time, on-line lease accounting system for larger, multiple
lessors such as the vehicle and equipment leasing departments of banks,
independent leasing companies, and corporations with captive leasing
subsidiaries. LeasTrac 2000 is a comprehensive lease accounting system for
equipment and vehicle lessors based on a client/server architecture designed to
provide quicker access and more customized functionality to manage databases.
LeasTrac 2000 uses a Microsoft Windows client with a choice of Windows/NT or
UNIX Server.
Check Processing. The Company markets and supports a line of software
products used by banks to sort and process checks. This software is designed to
work in conjunction with IBM 389X Check Sorters in the IBM CPCS and DOSCHECK
mainframe environment. The Company also provides EPOCH (Electronic Presentment
of Checks) which speeds up check settlements by allowing the electronic
presentment of checks in advance of the paper exchange. Servantis cooperates
closely with IBM in the development, servicing and marketing of each company's
check processing products and services. In addition to its software products,
the Company also offers consulting, modifications and training services to
financial institutions.
Safe Box Accounting. The Company's primary safe box accounting product,
Safe Box Accounting ("SBA") allows financial institutions to maximize fee
income in safe deposit box operations through recordkeeping and invoice
automation. License fees and maintenance fees are based on the number of safe
deposit boxes a bank has. As a dominant player in this saturated market (over
130 financial institutions use SBA), the Company hopes to expand the market
through its 1995 introduction of Vault. The Company markets Vault, a
client/server product, to smaller institutions who do not have access to
mainframe computers as well as large institutions who use client/server
technology.
Securities Recordkeeping. The Company offers software and services to
corporations for tracking their stockholders and bond holders and to banks that
offer security holder, transfer agent and paying agent services. The
Comprehensive Securities System ("CSSII") is a shareholder information and
accounting system designed to meet the recordkeeping, securities transfer and
related requirements of publicly-held corporations and utilities. While CSSII
is designed for use on IBM mainframe systems, Fastock PC, a software product
offering, is the first comprehensive shareholder information and account system
for personal computers. In August 1996, the Company announced that it had
entered into an agreement for the sale of certain CSSII assets to Shareholder
Systems Acquisition Inc., a wholly owned subsidiary of SunGard Data Systems,
Inc.
Regulatory Compliance. The Company's regulatory compliance products assist
banks and corporations to comply with a number of federal and state statutes
and regulations by tracking regulatory changes and by enabling them to report
to federal and state agencies through magnetic and electronic media. The
Information Reporting System
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("IRS") gives organizations complete, centralized, and automated control over
all of their Form 1099 reporting requirements. The Large Cash Reporting System
("LCR") automates financial institutions' ongoing compliance with the Bank
Secrecy Act and the Anti-Drug Abuse Act of 1988 and the regulations promulgated
thereunder. The Retirement Reporting System ("RRS") processes customer
retirement plans, as well as corporate pension and profit sharing plans. The
Abandoned Property and Escheatment Compliance System ("APECS") maintains
compliance and automates the management, tracking, and reporting of unclaimed
property to the appropriate governmental agencies.
Recovery Management. The Recovery Management System ("RMS") automates the
processes required to legally recover debts that have been written off.
Although credit card issuers have been the traditional clients for RMS,
utilities, leasing companies, and lawyers involved in the debt recovery process
are target markets for RMS sales. The product is also available for use on an
IBM Mainframe, IBM AS/400 as well as UNIX platforms.
Licenses. The Company generally grants non-exclusive, non-transferable
perpetual licenses to use its application software at a single site. The
Company's standard license agreements contain provisions designed to prevent
disclosure and unauthorized use of its software. License fees vary according to
a number of factors, including the services to be provided by the Company.
Multiple site licenses are available for an additional fee. In its license
agreements, the Company generally warrants that its products will function in
accordance with the specifications set forth in its product documentation. A
significant portion of the license fee payable under the Company's standard
license agreement is payable upon the delivery of the product documentation and
software to the customer, with the balance of the license fee due upon
installation. The standard license fee for most products covers the
installation of the Company's software and maintenance for the first three to
twelve months.
Installation, Maintenance, and Support. Maintenance includes certain
enhancements to the software. Customers who obtain maintenance generally retain
maintenance service from year to year. To complement customer support, the
Company and many of its customers frequently participate in user groups. These
groups exchange ideas and techniques for using the Company's products and
provide a forum for customers to make suggestions for product acquisition,
development and enhancement.
Competition. The computer application software industry is highly
competitive. In the financial applications software market, the Company
competes directly or indirectly with a number of firms, including large
diversified computer software service companies and independent suppliers of
software products. Management believes there is at least one direct competitor
for most of its software products. However, no competitor of the Company
competes with it in all software product areas.
The Company's product lines also face competition from one or more
competitors which include Fiserv, FiTech, EDS, Alltel Financial Information
Services, Inc. ("Alltel"), Computer Power, Inc. ("CPI"), Associated Software
Consultants, Inc. ("ASC") and Gallagher Financial Systems, Inc. ("GFS") in
products offered to the mortgage services industry; the Company's Imaging/COLD
product lines compete with the products of several companies, including IBM,
Optika, IIC and Computron. The Company competes in the recovery and collection
business with First Data Corporation, Rothenberg and Computer Associates among
others. Finally, the Company's products face competition in the securities
software and service sector principally from SunGard Data Systems, Inc.
("SunGard"), National Computer Systems, Inc. ("NCS"), Integrated Software
Solutions ("ISS") and numerous in-house bank and transfer agency service
centers.
Management believes that the major factors affecting customer decisions in
its market, in addition to price, are product availability, flexibility, the
comprehensiveness of offered products, and the availability and quality of
product maintenance, customer support and training. The Company's ability to
compete successfully also requires that it continue to develop and maintain
software products and respond to regulatory change and technological advances.
Management believes that it currently competes favorably in the marketplace
with respect to these criteria. See "Business -- Risk Factors (Intense
Competition)."
STRATEGIC ALLIANCES
A principal element of the Company's strategy is the creation and
maintenance of strategic alliances that maximize access to potential customers
for the Company's electronic commerce services and related products. The
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Company believes that these partnerships enable the Company to offer its
services and related products to a larger customer base than can be reached
through stand-alone marketing efforts. The Company seeks strategic alliance
partners which have maximum penetration and leading reputations for quality
with the Company's target customers. To date, the Company has entered into or
is negotiating strategic alliances with several companies, including those
listed below:
o ADP. In August 1995, the Company entered into a strategic
alliance agreement with ADP that will provide a new full
electronic commerce offering of ADP's Business Express cash
management software and the Company's Electronic Cash
Disbursement ("ECD") services on an exclusive basis to
businesses. The Company's ECD services, introduced in August
1996, feature expanded payment and information capabilities
targeted to businesses, including invoice numbers, multiple
disbursement accounts, discount and adjustment data, and
full descriptive information common to accounts payable
disbursement. Business customers will pay a monthly
subscription fee plus a per transaction fee for access to
their bank accounts and for electronic payment processing.
ADP is expected to market the system directly through banks
with the support of its 1,500 person sales force to its over
200,000 business customers. Pursuant to their agreement, the
Company and ADP will jointly share in all revenues and
expenses, including royalties paid to commercial accounting
software publishers, related to the full electronic commerce
offering. The term of the strategic alliance with ADP is
five years, except that either ADP or the Company may
terminate the alliance if the other party is acquired by a
direct competitor of the terminating party, and either ADP
or the Company may terminate the agreement upon six months'
notice, in which event the non-terminating party is granted
a perpetual, non-exclusive license to the terminating
party's software technology and retains exclusive rights to
distribution and customer agreements entered into under the
strategic alliance.
o AT&T. In April 1995, the Company entered into a strategic
alliance with AT&T through which AT&T will offer the
Company's consumer electronic payment services to targeted
segments of its consumer franchise under the AT&T CheckFree
Service brand name. Under the agreement, AT&T has agreed to
use commercially reasonable efforts to market the service to
potential customers. The AT&T CheckFree Service is currently
available through personal computers. AT&T receives a
royalty based on the recurring subscription fees paid by
consumers who sign up for the AT&T CheckFree Service. The
term of the alliance is three years with provisions for at
least three annual renewals, except that AT&T may terminate
the agreement if certain telecommunication companies acquire
a significant ownership in the Company, as defined in the
agreement.
o Alltel. Under an amended product Marketing and Licensing
Agreement, originally dated November 1995, Alltel may offer
the home banking and bill payment services of the Company to
client organizations for which it provides remote core
application processing services or for which it provides
data processing facilities management services.
o Block Financial. In October 1995, the Company entered into a
three-year agreement with Block Financial whereby the
Company granted a non-exclusive license of its CheckFree
electronic payment software to Block Financial. Block
Financial will offer the Company's consumer electronic
payment services to CompuServe/Internet subscribers.
Subscribers will be able to access these services through
Block Financial's new Conductor Online Financial Services
Network during the fourth quarter of 1996. The CheckFree
electronic payment software will provide online users with
inexpensive, easy-to-use, time saving bill payment
capabilities. Block Financial will receive a fee for each
transaction processed by the Company. The three-year
initial term of the agreement renews for one additional
two-year term and is renewable thereafter annually unless
either party gives advance notice of termination.
o Computer Services Inc. In August 1996, the Company entered
into a three year agreement under which Computer Services
Inc. will establish an on-line technical connection to the
Company, and will market the home banking and bill payment
services of the Company to its client base of approximately
two hundred financial institutions in the Midwest, USA for
which it provides core data processing
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services. Computer Services Inc. is compensated for its
marketing services based on the volume of accounts and
transactions it generates.
o CyberCash. In February 1996, the Company signed an agreement
with CyberCash that enables the Company to provide secure
Internet transaction processing technology to consumers and
businesses. The parties will integrate the RSA encryption
technology licensed to CyberCash with the Company's
transaction processing and customer care infrastructure so
that the Company's existing service offerings will be
expanded for use over the Internet. CyberCash will receive a
fee for each transaction processed by the Company using the
CheckFree Wallet. The three-year initial term of the
agreement renews for additional one-year terms unless either
party gives notice of termination at least 90 days prior to
the expiration of the term.
o EPS/MAC. In August 1996, the Company entered into a five
year agreement with EPS/MAC, which by many measures is the
largest electronic funds transfer network in the USA,
whereby EPS/MAC and the Company will establish an on-line
technical connection between them for use in delivering the
Company's home banking and bill payment service to the more
than 1,800 financial institutions for which EPS/MAC provides
EFT transaction switching and related processing services.
Under the agreement, EPS/MAC will market the Company's
services to its financial institution clients, provide them
with training regarding the Company's products and services,
provide ongoing account management services to them, and
will provide consumer customer services to their clients'
customers. Under the agreement, EPS/MAC is compensated for
its marketing services by the Company based on the account
and transaction volume it generates from its client base.
o EDS. In December 1995, the Company signed a five-year
agreement with EDS whereby the Company and EDS will jointly
market the Company's services and related products to banks,
savings banks, thrifts, credit unions, brokerage firms,
mortgage companies and other financial institutions
utilizing EDS' front-end software system. Under the terms of
the agreement, EDS received a license fee as well as the
right to elect to receive either $3 million or 118,226
shares of the Company's Common Stock. In addition, if
certain minimum performance standards are not achieved
within the term of the agreement, EDS must refund a pro rata
portion of the $3 million payment. EDS and the Company are
discussing the feasibility of future strategic alliances.
Accordingly, EDS and the Company have verbally agreed to
extend the Company's payment of $3 million or 118,226 shares
of common stock until such future alliances, if any, become
effective.
o First Commerce Technologies. In July 1996, the Company
entered into a three year agreement under which First
Commerce Technology will establish an on-line technical
connection to the Company, and will market the home banking
and bill payment services of the Company to its client base
of approximately two hundred financial institutions in the
Midwest for which it provides core data processing services.
First Commerce Technology is compensated for its marketing
services based on the volume of accounts and transactions it
generates.
o Fiserv. In November 1995, the Company entered into a
five-year agreement with Fiserv whereby the Company and
Fiserv will jointly market the Company's services and
related products to Fiserv's more than 3,000 client banks,
credit unions, and savings institutions utilizing Fiserv's
outsourced processing services and software systems for
in-house processing for financial institutions. Under the
terms of the agreement, Fiserv receives a fee based on
account and transaction volume as well as the option to
purchase up to 650,000 shares of the Company's Common Stock
at $20.00 per share if certain performance measures are
achieved within the term of the agreement. The five-year
initial term of the agreement renews for additional one-year
terms unless either party gives notice of termination at
least 90 days prior to expiration of the term.
o FiTech. In March 1995, the Company signed an agreement with
FiTech, a marketing and consulting firm for community banks,
pursuant to which its CheckFree electronic payment software
has been integrated with Goldleaf Technologies' CustomerLink
home banking software to create a new product called
CustomerLink Interactive Bill Payer ("IBP"). CustomerLink
IBP is being marketed by FiTech
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to financial institutions wanting to provide home banking
services to their customers. Under the agreement, FiTech is
compensated for its marketing services by the Company based
on account and transaction volume generated. The term of the
strategic alliance with FiTech is three years with
provisions for annual renewals.
o Five Paces. In August 1996, the Company entered into two
agreements with Five Paces; a Bill Payment Reseller
Agreement and a Service Bureau Licensing Agreement. Under
the terms of the Bill Payment Reseller Agreement, the
parties agreed to develop and maintain an integrated
connection between the Internet-based banking system
developed by Five Paces and the Company's bill payment
processing system, and Five Paces is authorized to make the
bill payment processing services of the Company available on
favorable terms to licensed users of its Internet-based
banking system. Under the terms of the Service Bureau
Licensing Agreement, the Company may, on favorable terms,
utilize the Internet-based banking system integrated with
its bill payment processing system in a service bureau
environment to provide integrated Internet-based banking and
bill payment services to client institutions.
o Florida Informanagement Services. In February 1996, the
Company entered into a three year agreement with Florida
Informanagement Services whereby Florida Informanagement
Services will establish an on-line connection to the Company
and will market and facilitate the delivery of the Company's
home banking and bill payment services to its financial
institution clients. Florida Informanagement Services
provides core data processing and EFT processing services to
approximately one hundred financial institutions in the
southeast. Under the agreement, Florida Informanagement is
compensated for its marketing services by the Company based
on the account and transaction volume it generates from its
client base.
o Home Financial Network. In July 1996, the Company entered
into a five year agreement pursuant to which HFN and the
Company will interface certain software products developed
by HFN such that they will function in concert with the home
banking and bill payment services of the Company. HFN and
the Company will each market the availability of the
integrated products and services of the Company to financial
institutions nationwide. Under the terms of the agreement,
HFN is paid a one-time, per-user licensing fee and a monthly
usage fee for each month a product is in use by a consumer.
o Internet Browser Software Companies. In order to facilitate
widespread distribution of its CheckFree Wallet, the Company
has entered into distribution agreements with Internet
browser software companies including Spyglass and Spry. Under
the agreements, Spyglass and Spry will offer the CheckFree
Wallet as part of their browser software. The agreement with
Spry is for a one-year term and is renewable annually unless
either party gives advance notice of termination. The
agreement with Spyglass can be terminated by either party on
90 days advance notice.
o Premiere. In December 1995, the Company entered into a
five-year agreement with Premiere whereby the Company granted
a non-exclusive license of its CheckFree electronic payment
software to Premiere. Premiere will offer the Company's
consumer electronic payment services to Premiere's 4.5
million cardholders through its Premiere WORLDLINK
Communications Card. Premiere will receive a fee for each
transaction processed by the Company. The five-year initial
term of the agreement renews for additional one-year terms
unless either party gives notice of termination at least 30
days prior to expiration of the term.
o Small Business Accounting Software Companies. To integrate
ECD with businesses' existing accounts payable processes and
increase distribution, the Company has entered into
agreements with numerous providers of commercial accounting
software on a royalty basis. The Company has signed
agreements with accounting software companies, including
Champion Business Systems, Inc., CYMA Systems, Inc.,
DacEasy, Inc., Data Pro Accounting Software, Inc., Macola
Incorporated, New England Business Service, Inc., Peachtree
Software, Inc., Platinum Software Corporation, and Safeguard
Business Systems, Inc. to make ECD available as a feature of
the next versions of their commercial accounting software.
The Company estimates that over one million businesses
utilize the accounting software
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programs offered by the Company's partners listed above. The
Company believes that the rollout of its ECD service in
these accounting packages will begin in the second half of
1996 and that the majority of these companies will release
ECD-enabled versions of their software by year-end 1996.
RESEARCH AND DEVELOPMENT
The Company maintains a business development group which engages in
research and development activities with a long-term perspective of planning
and developing new services and related products for the electronic commerce
and financial application software markets. The Company has established the
following guidelines for pursuing the development of new services:
o Distinctive benefits to customers
o Ability to establish a leadership position in the market served
o Sustainable technological advantages
o First to market
The Company believes that in the emerging electronic commerce market it
will be critical to rapidly develop, test and offer new services and
enhancements. To that end, the Company's goal for the time period from
conceptualization to commercial availability of new services is less than one
year. As of June 30, 1996, the research and development group consisted of 199
employees. Of these, 157 employees were software development personnel and 42
employees were business development personnel. Additionally, the Company uses
independent third party software development contractors as needed. During
fiscal 1993, 1994, 1995, and transition fiscal 1996, the Company spent 11.9%,
12.3%, 14.2%, and 19.9% of revenues, respectively, on research and development.
The Company anticipates that it will continue to commit substantial resources
to research and development activities for the foreseeable future.
TECHNOLOGY
The Company's historical approach to technology has been to utilize a
combination of hardware, networks, proprietary software and databases to solve
customer needs and to meet the varying requirements of the electronic commerce
market.
Electronic Commerce. The Company's original core technology capabilities
were developed to handle settlement services, merchant database services, and
on-line inquiry services on a traditional mainframe system with direct
bi-synchronous communications to businesses. As business telecommunication
requirements increased, the Company utilized links to an X.25 Value-Added
Network.
Today, the Company has implemented a logical, nationwide client-server
system. Consumer, business and financial institution customers all act as
clients communicating across dial-up telephone lines, private leased lines, a
private X.25 network, or the Internet to the Company's computing complex.
Within this complex, there is a wide variety of application servers seamlessly
connected via TCP/IP across switched Ethernet. The Company currently is able to
support virtually any communication method required in a secure manner.
Proprietary applications have been developed for the client-server system
on a variety of platforms with each platform selected and optimized for
specific electronic commerce needs. Applications to effect settlement services,
merchant database services, financial institution database services and
heuristic risk management services have been implemented on an IBM mainframe,
optimized for high volume batch processing. Applications to confirm payment
instructions, enhance data integrity and security, and reduce fraud have been
implemented on Digital Equipment Alpha servers, optimized for high volume,
device independent, real time data communication. To handle Internet financial
transactions, applications have been implemented on Sun Microsystems servers
designed for premium data security and integrity. Applications to effect credit
card authorizations and electronic bill delivery have been implemented on
Hewlett-Packard Unix servers, designed for efficient real-time processing and
data integrity and applications to effect
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real-time connections to banks, ATM networks, and credit card networks are
being implemented on a Tandem Himalaya server. Other special purpose
application servers are deployed to handle unique electronic commerce
requirements such as electronic payments direct to merchant institutions, VRUs
to telephone customers, and electronic mail with customers and will soon be
deployed to handle real-time connections to ATM networks.
The Company has developed proprietary databases within the client-server
system, including a financial institution file that allows accurate editing and
origination of ACH and paper transactions to financial institutions. The
Company has also developed a merchant information file consisting of over one
million companies that allows accurate editing and initiation of payments to
merchants. These databases have been constructed over the past 15 years as a
result of the Company's transaction processing experience.
Security APL employs advanced technology for its two portfolio management
services PORTVUE and PAWWS. Security APL is an IBM business partner and
utilizes its IBM RS/6000's to process the portfolio management software.
PORTVUE is primarily a service bureau offering with the data center
residing at the Company's Chicago office. This data center functions seven days
a week, twenty-four hours a day. Clients access PORTVUE by a private TCP/IP
Wide Area Network (WAN) either via dedicated circuit or via dial-up
methodologies. The Chicago data center is the communication center for more
than 70 dedicated links together with 4 concentration hub sites located in New
Jersey, New York, Boston, and San Diego. Each of these hub sites support the
concentration of local dedicated links plus dial-up access. In addition to the
dedicated private network, clients use frame relay services from LDDS, MFS,
MCI, and AT&T to access PORTVUE services. These services are also available
through AT&T Fram Relay national network with local numbers in major cities
across the U.S.
The system has been exclusively UNIX since 1991 and consists of 21 IBM
RS/6000 running AIX. In addition, there are another 8 IBM RS/6000 machines in
various client sites. The Company's investment advisory clients receive
hardcopy reporting for either internal usage or for quarterly reports.
Hardcopy, either ASCII or graphical PostScript, is produced on four Xerox
DocuPrints 90 page per minute duplexed laser printers.
The PAWWS service is distributed via the Internet. HTTP servers run on
8-way SMP IBM RS/6000 with another 8 systems dedicated to private labeled PAWWS
services or direct support functions. Data delivery is handled via HTTP servers
provided by Netscape Communications Corporation. These servers are optimized
through site specific configuration files that provide excellent performance.
Secure connections are supported via Netscape's SSL protocol on a dedicated
server. Data is processed and stored on both private Security APL database
functions together with Sybase SQL functions depending upon application needs.
Financial Application Software. Financial application suite of software
products offers a wide range of software addressing both end user access and
back room operational systems located in the customer data centers. Every
effort is taken to insure that each system is correctly platformed to optimize
the characteristics of available technology with the business requirements of
each application. This strategy utilizes large IBM mainframes as the platform
for high volume batch oriented systems, IBM's RS/6000 UNIX Servers for high
volume OLTP systems, Microsoft Windows NT for medium volume OLTP systems and
Windows for client connectivity.
The Company has implemented appropriate backup and recovery procedures to
ensure against any loss of data on any platform. Archival storage is kept on
site as well as off site in fireproof facilities. To maximize availability, the
Company has redundant computer systems to ensure that financial transaction
requests can always be honored. A diesel generator provides power to the
computing facility in the event of a power disruption.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunications failure or similar event. Although the Company is
considering moving some of its computer processing equipment to another site,
this measure will not eliminate the significant risk to the Company's
operations from a natural disaster or system failure at one of these two sites.
Any damage or failure that causes interruptions in the Company's operations
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's property and business
interruption insurance may not be
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adequate to compensate the Company for all losses that may occur. See
"Business -- Business Risks (Risk of System Failure)."
With the tremendous growth anticipated for electronic commerce, the
Company's architecture has been designed to address incremental capacity
requirements as needed. The entire infrastructure and set of product
technologies allow the Company to efficiently service and support its three
customer markets.
Although the Company's principal business is to provide electronic
commerce services rather than sell or license software products, the consumer
financial software products offered by the Company to access such services
could contain errors or "bugs" that could adversely affect the performance of
the service or damage a user's data. In addition, as the Company increases its
share of the electronic commerce services market, software reliability and
security demands will increase. As of the date hereof, the Company has not
experienced or been made aware of any errors or "bugs" in its software that
adversely affected the performance of the service or damaged a user's data.
Additionally, the Company attempts to limit its potential liability for
warranty claims through disclaimers in its software documentation and
limitation-of-liability provisions in its shrink-wrap license and customer
agreements. There can be no assurance that the measures taken by the Company
will prove effective in limiting the Company's exposure to warranty claims.
Additionally, despite the existence of various security precautions, the
Company's computer infrastructure may be also vulnerable to viruses or similar
disruptive problems caused by its customers or third parties gaining access to
the Company's processing system. See "Business -- Business Risks (Risk of
Product Defects)."
SALES, MARKETING AND DISTRIBUTION
The Company's sales, marketing and distribution efforts are designed to
maximize access to potential customers. The Company markets its services both
directly and indirectly through a direct sales and technical sales support
force of 108 employees and through select strategic alliances with companies
who are involved in the Company's target customer markets. In addition to its
direct sales force, the Company has 26 employees in marketing.
In the electronic commerce segment, the Company offers its services and
related products to financial institutions directly through its sales force and
through its strategic alliances with companies such as EDS, Fiserv, and FiTech.
The Company offers its services and related products to its customers through a
variety of distribution channels such as direct access via an 800 phone number,
the Company's World Wide Web site on the Internet, integration into certain
leading personal finance software (such as Meca's Managing Your Money, Computer
Associates' Simply Money and Intuit's Quicken), integration into Internet
access providers such as Spyglass and Spry, and through distribution alliances
with companies such as AT&T. Also, the Company currently is developing an
on-line version of its electronic payment services for indirect distribution
through commercial on-line service providers and others (such as CompuServe and
Premiere). The Company offers its services and related products to the business
market directly through its sales force, through its strategic alliance with
ADP and through the integration of the Company's services and related products
into major commercial accounting software programs. The Company presently
offers substantially all of its services and related products to the domestic
marketplace.
The Company markets its financial application software products through
the direct sales force based in Norcross, Georgia and indirect sales through
Alltel banking services. Salespersons have specific product responsibility and
receive support from technical personnel as needed. The Company generates new
customers through direct solicitations, user groups, responses to
advertisements, direct mail campaigns and strategic alliances. The Company also
participates in trade shows and sponsors industry technology seminars for
prospective customers. Existing customers are often candidates for sales of
additional products or for enhancements to products they have already
purchased.
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of the Company's strategy in each of its
customer markets. As of June 30, 1996, the Company had 745 employees dedicated
to customer care, technical support and operations.
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To meet the needs of the Company's customers most efficiently, the
customer care staff is organized into vertical teams that support each customer
market. However, these teams share common resources, training and orientation
to ensure cost efficiency and consistency of quality standards and measures.
From an accessibility standpoint, all customer care teams provide service by
phone, e-mail and facsimile.
The level and types of services provided vary by customer market. The
customer care group supports payment inquiry, customer service and technical
support and interfaces with the merchant systems group to improve posting
efficiencies. Representatives in the business customer care group are
individually assigned to business customers in order to provide high level
customer service and technical support. The retail services customer care group
provides various levels of support that depend upon the individual
institution's requirements. This includes providing direct customer care on a
private label basis as well as research and support.
To maintain its customer care standards, the Company employs extensive
internal monitoring systems and conducts ongoing customer surveys. The feedback
from these sources is used to identify areas of strength and opportunities for
improvement in customer care.
GOVERNMENT REGULATION
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. The Company, however, is
periodically audited by the Office of Thrift Supervision since it is a supplier
of products and services to financial institutions. There can be no assurance
that a federal or another state agency will not attempt to regulate providers
of electronic commerce services such as the Company which could impede the
Company's ability to do business in the regulator's jurisdiction. In addition,
through its processing agreements, the Company agrees to comply with the data,
recordkeeping, processing and other requirements of applicable federal and
state laws and regulations, Federal Reserve Bank operating letters, and the
National Automated Clearing House Association Operating Rules imposed on the
Company's processing banks. The Company may be subject to audit or examination
under any of these requirements. Violations by the Company of these
requirements could limit or further restrict the Company's access to the
payment clearance systems or the Company's ability to obtain access to such
systems from banks. Further, the Federal Reserve rules provide that the Company
can only access the Federal Reserve's ACH through a bank. If the Federal
Reserve rules were to change to further restrict access to the ACH or limit the
Company's ability to provide ACH transaction processing services, the Company's
business could be materially adversely affected. See "Business -- Business
Risks (ACH Access; Termination of MasterCard and Visa Registration)" and "--
Payment Clearance Systems."
In conducting various aspects of its business, the Company is subject to
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code, and is also subject to the electronic funds transfer
rules embodied in Regulation E, promulgated by the Federal Reserve Board. The
Federal Reserve's Regulation E implements the Electronic Fund Transfer Act,
which was enacted in 1978. Regulation E protects consumers engaging in
electronic transfers, and sets forth basic rights, liabilities and
responsibilities of consumers who use electronic money transfer services and of
financial institutions that offer these services. For the Company, Regulation E
sets forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. Such
limitations on the consumer's liability may result in liability to the Company.
Given the expansion of the electronic commerce market, it is possible that
the Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
it is possible that Congress or individual states could enact laws regulating
the electronic commerce market. If enacted, such laws, rules and regulations
could be imposed on the Company's business and industry and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Government Regulation)."
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PAYMENT CLEARANCE SYSTEMS
Payment Systems. Across the Company's various electronic commerce service
offerings, the Company utilizes all three principal payment clearance systems:
(i) the Federal Reserve's ACH for electronic funds transfers; (ii) the national
credit card systems for electronic credit card settlements; and (iii) the
conventional paper check clearing systems for settlement of payments by check
or draft. Like other users of these payment clearance systems, the Company
accesses these systems through contractual arrangements with processing banks
participating in the ACH for electronic funds transfers and with member banks
of MasterCard and Visa for credit card transactions. For access to conventional
paper check clearing systems, the Company does not need a special contractual
relationship, except for its contractual relationships with its processing bank
and its customers. Such users are subject to applicable federal and state laws
and regulations, Federal Reserve Bank operating letters, the National Automated
Clearing House Association Operating Rules and MasterCard and Visa operating
rules and regulations. There are certain risks typically faced by companies
utilizing each of these payment clearance systems, and the Company has its own
set of operating procedures and proprietary risk management systems and
practices to mitigate credit-related risks. See "Business -- Business Risks
(Risk of Loss from Returned Transactions, Merchant Fraud or Erroneous
Transmissions)," " -- Business Risks (ACH Access; Termination of MasterCard and
Visa Registration)," and " -- Business Risks (Government Regulation)."
ACH. The ACH is used by banks, corporations and governmental entities for
electronic settlement of transactions, direct deposits of payroll and
government benefits and payment of bills such as mortgages, utility payments
and loans. The Company uses the ACH to execute certain of its customers'
payment instructions. Like other users of the ACH, the Company bears credit
risk resulting from returned transactions caused by insufficient funds, stop
payment orders, closed accounts, frozen accounts, unauthorized use, disputes,
theft or fraud.
Credit Cards. To process credit card transactions, the Company has
registered with MasterCard and Visa under the same association operating rules
and regulations as other credit card processors like First USA, Inc., NaBanco,
Card Establishment Services and National Processing Company. Like all credit
card processors, the Company must bear the inherent credit risks of chargebacks
and merchant fraud. Merchant fraud includes such actions as inputting false
sales transactions or false credits. The Company monitors merchant charge
volume, average charge amount and number of transactions, as well as reviews
for unusual patterns in the transactions and chargebacks processed. To minimize
the risk of fraud, the Company tailors its credit analysis according to the
risk level associated with the industry in which the prospective merchant
client operates. The Company also bears the credit risk of a merchant becoming
insolvent when a credit card transaction has been processed by the merchant and
is subsequently returned.
Paper Drafts. The Company uses conventional check clearance methods for
paper drafts to execute certain of its customers' payment instructions using
its bank and its customers' banks. The Company bears no credit risk with paper
drafts written on a customer's checking account returned for insufficient
funds, stop payment orders, closed accounts or frozen accounts. However, the
Company may bear other risks for theft or fraud associated with paper drafts
due to unauthorized use of the Company's services. When a customer instructs
the Company to pay a bill, the Company has the ability to process the payment
either by electronic funds transfer or by paper draft, drawn on the customer's
checking account, on which the customer's pre-authorized signature is laser
imprinted. The Company manages the risk it assumes by adjusting the mix of
electronic and paper draft transactions in individual cases and overall. The
Company tends to process small dollar transactions electronically and large
dollar transactions by paper draft. Moreover, the Company is increasingly
shifting its risks associated with electronic funds transfers to merchants
through contractual arrangements. Regardless whether the Company uses paper
drafts or electronic funds transfers, the Company retains all risks associated
with transmission errors when it is unable to have erroneously transmitted
funds returned by an unintended recipient.
Other Clearance Systems. While the Company presently utilizes the three
principal payment clearance systems, the Company intends to use other clearance
systems such as ATM networks to provide balance inquiry and fund transfers
functions, and such other clearance systems that may develop in the future.
Risk Mitigation. The Company's patented bill payment processing system
determines the preferred method of payment to balance processing costs,
operational efficiencies and risk of loss. The Company manages its risks
associated with its use of the various payment clearance systems through its
risk management systems, internal controls and system security. The Company
also maintains a reserve for such risks, which reserve was $542,000 as of June
30, 1996,
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<PAGE> 21
and the Company has not incurred losses in excess of its reserve or greater
than 0.76% of its revenues in any of the past five years. As further protection
against losses due to transmission errors, the Company maintains errors and
omissions insurance. See "Business -- Risk Factors (Risk of Loss from Returned
Transactions, Merchant Fraud or Erroneous Transactions)."
PROPOSED MERGER WITH ISC
On September 15, 1996, the Company entered into a definitive agreement to
purchase ISC from Intuit in exchange for approximately 12.6 million shares of
the Company's common stock. The agreement contains certain provisions that
limit the purchase of additional common shares and the disposition of the
common shares to be obtained by Intuit. The acquisition will be accounted for
under the purchase method of accounting and is expected to include a charge in
an amount not yet determined for in-process research and development. ISC
provides transaction processing and electronic funds transfer services.
The Company will enter into a service and license agreement with Intuit,
contingent on the consummation of the acquisition of ISC, whereby the Company
will obtain a license to connect to and use certain software technology of
Intuit for a payment of $10 million on closing of the ISC acquisition and an
additional $10 million on October 1, 1997.
PROPRIETARY RIGHTS
The Company owns the following federally registered trademarks and service
marks: CHECKFREE(R), CHECKFREE and Design(R), CHECKFREE (Stylized Letters)(R),
CHECKFREE EXTRA(R), MOBILEPAY(R), ACCESS BANKING(R), ALAS(R), BFCS(R), CLAS(R),
CSS(R), CSSII(R), DASH(R), DECISION MANAGER(R), DISC and Design(R), DISC
CHECKBOOK PLUS(R), ECP(R), EPOCH(R), FASTOCK PC(R), LANPATH(R), LEASTRAC2000(R),
MICROACH(R), NETWORK BANKER(R), PEP+(R), PTT(R), RS/REACT(R), SBA(R), SUPRRB(R),
TCM THE CONTROL MACHINE(R), and WIRENET(R). Additionally, the Company has
applied to federally register the following service marks: WE PAY MORE THAN
BILLS--WE PAY ATTENTION(sm), CHECKFREE BILLFREE(sm), CHECKFREE WALLET(sm),
2001...THE NEXT GENERATION(sm), CHECKFREE CONNECT(sm), CHECKFREE E-BILL(sm),
CHECKFREE ELECTRIC MONEY(sm), CHECKFREE EASY(sm), CHECKFREE ELECTRONIC EXCHANGE
NETWORK(sm), CHECKFREE MANAGER(sm), RCM...THE NEXT GENERATION(sm),
BANKATHOME(TM), BANK STREET(TM), BPS(TM), CAPS CORPORATE AUTOMATED PAYMENTS
SYSTEM(TM), CLRS(TM), CLUB HOOCH(sm), CPIM(TM), FMS(TM), ICE HOUSE(sm),
INTEGRATED DECISION MGR.(TM), LSAMS(TM), MAX(TM), OMNI(TM), ORBS(TM), PEP
PAPERLESS ENTRY PROCESSING(TM), PAWWS(TM), PAWTRACKS(TM), PODIUM(TM),
QUICKKILL(TM), SERVANTIS RECON-PLUS(TM), SERVANTIS SYSTEMS(TM), SERVANTIS
SYSTEMS(TM), SERVANTIS SYSTEMS(sm), SERVANTIS EXPRESS(TM), SERVANTIS
INFOVUE(TM), SERVANTIS WORLD$NET(TM), SOLUTIONS YOU CAN BANK ON(TM), SSI
LOGO(TM), SSI(TM), TMS-THE MORTGAGE SERVICER(TM), TST(TM), VAULT(TM),
WIRENEXT(TM), THE SECONDARY MARKETER(TM). THE WAY MONEY MOVES(SM), and CHECKFREE
CHARITY NET(SM). The Company is awaiting further information to file
applications for the following marks: ALLIANCE, APECS, APECS PC, ARP, ARP - PC,
ARP/QMS, ARP/SMS, BANKVUE, CHECKBOOK PLUS, CPCS, EASY ACCESS TO TOTAL ELECTRONIC
BANKING, SERVANTIS IRS, IRS/SRS, LCR, RECON-PLUS FOR WINDOWS, RECON-PLUS/PC,
RPS, RPS-PC, RPS/400, RRS, RS/REACT, SERVANTIS, SERVANTIS with Design, SERVANTIS
SYSTEMS, INC., SERVANTIS FORUM, SERVANTIS QUIK, SIG FILER, SMS and SERVANTIS
WORLD$NET.
The Company regards its financial transaction services and related
products such as its software as proprietary and relies on a combination of
patent, copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements, and other intellectual property protection methods to
protect its services and related products. Although the Company believes its
consumer financial software to be proprietary, it does not depend on its
software to compete, but rather on its services to which the software provides
access. The Company's consumer financial software does not generate significant
revenues because the Company makes such software available to consumers at no
cost or for a nominal charge with the intention of selling related services to
such consumers.
The Company also copyrights certain of its programs and software
documentation and trademarks certain product names. Management believes that
these actions provide appropriate legal protection for the Company's
intellectual property rights in its software products. Furthermore, management
believes that the competitive position for some of the Company's products
depends primarily on the technical competence and creative ability of its
personnel
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<PAGE> 22
and that its business is not materially dependent on copyright protection or
trademarks. See "Business -- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
The Company's United States Letters Patent No. 5,383,113, issued on
January 17, 1995, relates to its system and method for electronically providing
services including payment of bills and financial analysis. Using the system
described in the patent, the Company can pay any bill from any checking account
at any financial institution in the United States on the consumer's behalf by
selecting a preferred means of payment from various options such as a paper
draft drawn on the consumer's account, electronic funds transfer from the
consumer's account, or checks drawn on a trust account maintained for the
benefit of the Company's customers. While the Company believes that the
ownership of the patent is a significant factor in its business, its success
does not depend only on the ownership of the patent or future patents, but also
on the innovative skills, technical competence, quality of service and
marketing abilities of its personnel. The Company believes its patent provides
a measure of security against competition, and the Company intends to enforce
its patent against infringement by third parties. If the Company's patent is
found to be invalid, to the extent it has or would in the future serve as a
barrier to entry in this marketplace, there may be increased competition in the
market. See "Business -- Competition," "-- Business Risks (Intense
Competition)" and "-- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
Existing intellectual property laws afford only limited protection, and it
may be possible for unauthorized third parties to copy the Company's services
and related products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can be no assurance that the
Company's competitors will not independently develop services and related
products that are substantially equivalent or superior to those of the Company.
EMPLOYEES
As of June 30, 1996, the Company employed 1,200 full-time employees,
including 199 in research and development (including software development), 745
in customer care, technical support and operations, 134 in sales, marketing and
sales support, and 122 in administration, financial control, corporate services
and human resources. The Company is not a party to any collective bargaining
agreement and is not aware of any efforts to unionize its employees. The
Company believes its relations with its employees are good. The Company
believes its future success and growth will depend in large measure upon its
ability to attract and retain qualified technical, management, marketing,
business development and sales personnel.
BUSINESS RISKS
The Company desires to take advantage of the new "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Reform Act only became law in late December 1995 and, except for the Conference
Report, no official interpretations of the Reform Act's provisions have been
published. Many of the following important factors discussed below have been
discussed in the Company's prior filings with the Securities and Exchange
Commission.
In addition to the other information in this report, readers should
carefully consider that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
for the transition year ended June 30, 1996, and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf
of, the Company.
Emerging Electronic Commerce Market; Security and Privacy Concerns. The
electronic commerce market is a relatively new and growing service industry. If
the electronic commerce market fails to grow or grows more slowly than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and ATM
industries, the Company and other organizations serving the electronic commerce
market need to educate users that
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<PAGE> 23
electronic transactions use encryption technology and other electronic security
measures that make electronic transactions more secure than paper-based
transactions. While the Company believes that it is utilizing proven
applications designed for premium data security and integrity to process
electronic transactions, there can be no assurance that the Company's use of
such applications will be sufficient to address the changing market conditions
or the security and privacy concerns of existing and potential customers. See
"Business -- General" and "-- Services and Related Products."
Additionally, the Company's growth and acceptance in the electronic
commerce market is dependent on its continued growth in its target markets. See
"Business -- Services and Related Products." Although demand for the Company's
services and related products continues to grow, there can be no assurance that
the Company will be successful in each of its target markets. Accordingly, the
Company's inability to grow in any one of these markets could have a material
adverse effect on the Company's business, operating results and financial
condition.
Integration of Servantis and Security APL. On February 21, 1996, the
Company acquired Servantis for approximately $165.1 million, consisting of the
issuance of 5.7 million shares of the Company's Common Stock valued at $20.00
per share (approximately 16% of the Company's total shares outstanding
following the Servantis Acquisition) and $42.5 million in cash to repay
Servantis' long-term debt, in addition to the assumption of $38.3 million in
liabilities. In addition, on May 9, 1996, the Company acquired Security APL
for approximately $53.3 million, consisting of the issuance of 2.8 million
shares of the Company's Common Stock valued at $18.50 per share (approximately
7% of the Company's total shares outstanding following the Security APL
Acquisition), and the assumption of $5.5 million of liabilities. The successful
and timely integration of Checkfree, Servantis, and Security APL is critical to
the future financial performance of the Company. The Company currently
estimates that the complete integration of the three companies could take
several quarters to accomplish. The combination of the three companies will
require, among other things, integration of the companies' respective service
and product offerings and coordination of their sales and marketing and
research and development efforts. While Checkfree, Servantis, and Security APL
have focused on markets which utilize financial transaction processing,
record-keeping and information delivery, Checkfree has to date acted
principally as a provider of services, whereas Servantis and Security APL have
focused on the development and support of software systems and services used by
financial institutions. In addition, Servantis had greater revenues than
Checkfree for the twelve months ended December 31, 1995, and the absorption of
a larger company may present a more substantial integration challenge than the
acquisition of a smaller company. There can be no assurance that present and
potential customers of the Company will continue their recent buying patterns
without regard to the Acquisitions, and any significant delay or reduction in
orders could have an adverse effect on the Company's near-term business and
results of operations. The diversion of the attention of management created by,
and any difficulties encountered in, the integration process could have an
adverse impact on the revenues and operating results of the Company. In
addition, the process of combining the three organizations could have an
adverse effect on any or all of the companies' businesses. The difficulty of
combining the three companies may be increased by the need to integrate the
personnel of and the geographic distance between the three companies. Changes
brought about by the Acquisitions may result in the loss of key employees of
any or all companies. There can be no assurance that the Company will retain
the employees it wants to retain or that the Company will realize any of the
other anticipated benefits of the Acquisitions.
In addition, for transition fiscal 1996, the Company wrote-off $119.4
million of the purchase price for Servantis and Security APL as in process
research and development. In addition, as part of the allocation of the
purchase price, the Company reduced the deferred revenues on the balance sheets
of Servantis at the date of the Servantis Acquisition due to the fact that the
anticipated profits included in deferred revenues are reflected in the purchase
price of the Servantis Acquisition. As a result, the Company did not recognize
revenues or profits of approximately $12.7 million with respect to such
reduction in deferred revenues in transition fiscal 1996. The write-off of
in-process research and development costs, and the nonrecognition of revenues
or profits on certain deferred revenues had a material adverse impact on the
Company's financial results in 1996. In addition, with the proposed acquisition
of ISC the Company expects a substantial in process research and development
write off in fiscal 1997.
Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. In the financial institutions market, the
Company's competitors include Visa Interactive and ISC. A number of banks have
developed, and others in the future may develop, home banking services
in-house. Additionally, Intuit and Microsoft have each individually announced
their own alliances with financial institutions to offer on-line home banking
and financial services to consumers. In the
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<PAGE> 24
business market, the Company competes with other credit card and ACH
processors. The Federal Reserve's ACH is the national payment clearance system
through which any bank can effect debit or credit transactions to any
authorized consumer checking account. There are numerous competitors in the
business market for credit card processing, including First USA, Inc., NaBanco
and Card Establishment Services (divisions of First Data Corporation), and
National Processing Company (a division of National City Bank). The Company
also faces competition in ACH processing from numerous banks. The financial
application software segment also faces significant competition. Portfolio
accounting software providers include Advent software, PORTIA a division of
Thomson Financial and Shew Data a Sun Guard Company. The primary portfolio
competition is Shaw Data. In products offered to the mortgage services
industry, the Company competes with Fiserv, FiTech, EDS, Alltel, CPI, ASC and
GFS. The Company's Imaging/COLD product lines compete with the products of
several companies, including International Business Machines Corporation
("IBM"), Optika ("Optika"), Image Integration Corporation ("IIC") and Computron
Software, Inc. ("Computron"). The Company competes in the recovery and
collection business with First Data Corporation, Rothenberg Systems
International ("Rothenberg") and Computer Associates International, Inc.
("Computer Associates") among others. Finally, the Company's products face
competition in the securities software and service sector principally from
SunGard, NCS, ISS and numerous in-house bank and transfer agency service
centers.
The Company expects competition to increase from both established and
emerging companies and that such increased competition will result in price
reductions and may result in a reduction of the Company's market share, either
or both of which could materially adversely affect the Company's business,
operating results and financial condition. The Company announced a new series
of services and pricing options in September 1995 in an attempt to appeal to
various segments of the Company's markets. One such option is to offer a bill
payment service at a lower cost in order to target new users and users who are
only interested in the electronic bill payment aspect of the Company's
services. Moreover, the Company's current and potential competitors, many of
whom have significantly greater financial, technical, marketing and other
resources than the Company, may respond more quickly than the Company to new or
emerging technologies or could expand to compete directly against the Company
in any or all of its target markets. Accordingly, it is possible that current
or potential competitors could rapidly acquire significant market share.
Acquisitions and consolidations are taking place in the transaction processing
industry such as the merger between First Data Corp. and First Financial
Management Corp. and the acquisition of Litle and Company by First USA, Inc.
While the Company believes competition will increase as a result of these
mergers and acquisitions, the Company also believes it is well positioned to
meet such competition. There can be no assurance, however, that the Company
will be able to compete against current or future competitors successfully or
that competitive pressures faced by the Company will not have a material
adverse effect on its business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- General," and "-- Competition."
Today, the Company is the leading provider of electronic payment services
to users of personal finance software. The Company believes that as
consumer-based on-line interactive and telecommunications services continue to
grow, retail-marketed personal financial software will become a less important
channel for the Company in acquiring new customers. The Company's strategy is
to focus increasingly on its own distribution alliances and direct marketing,
including key strategic alliances in the on-line interactive and
telecommunications industries. There can be no assurance that the Company's
strategy will be successful.
Management of Growth. The Company is currently experiencing a period of
rapid growth which has placed, and could continue to place, a significant
strain on its resources. This strain is increased by the Acquisitions. The
Company's key employees have not had experience in managing companies larger
than the Company. The Company's ability to manage growth successfully will
require the Company to continue to improve its operational, management and
financial systems and controls as well as expand its work force. A significant
increase in the Company's customer base would necessitate the hiring of a
significant number of additional customer care and technical support personnel
as well as computer software developers and technicians, qualified candidates
for which, at the present time, are in short supply. In addition, the expansion
and adaptation of the Company's computer infrastructure will require
substantial operational, management and financial resources. Although the
Company believes that its current computer infrastructure is adequate to meet
the needs of its customers in the foreseeable future, there can be no assurance
that the Company will be able to expand and adapt its computer infrastructure
to meet additional demand on a timely basis, at a commercially reasonable cost,
or at all. If the Company's management is unable to manage growth effectively,
hire needed personnel, expand and adapt its computer infrastructure or improve
its operational, management and financial
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<PAGE> 25
systems and controls, the Company's business, operating results and financial
condition could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Acquisition-Related Risks. In September 1996, the Company signed a
definitive agreement to acquire ISC for 12.6 million shares of common stock.
The acquisition is expected to close in December 1996 and will be accounted for
as a purchase. While the appraisal for ISC is not yet complete, the Company
expects a substantial in process research and development write-off at the
acquisition date. In addition, ISC had been incurring operating losses and
operating losses are anticipated in 1997. The Company expects it will take 12
to 18 months to integrate ISC's bill payment and home banking operations into
the Company's operations. There can be no assurance the Company's integration
plan will be completed in the expected time frame or that the Company will
realize the operational efficiencies projected as a result of the acquisition.
In the future, the Company may pursue additional acquisitions of
complementary service or product lines, technologies or businesses. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, operating
results and financial condition. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. There can be no
assurance that some or all of these risks will not apply to the Acquisitions.
From time to time, the Company evaluates potential acquisitions of businesses,
services, products or technologies. Other than the ISC acquisition, the Company
has no present commitments or agreements with respect to any material
acquisition of other businesses, services, products or technologies. In the
event that such an acquisition were to occur, however, there can be no
assurance that the Company's business, operating results and financial
condition would not be materially adversely affected.
Dependence on Strategic Alliances. A principal element of the Company's
strategy is the creation and maintenance of strategic alliances that maximize
access to potential customers for the Company's electronic commerce services
and related products. The Company believes that these alliances enable the
Company to offer its services and related products to a larger customer base
than could be reached through stand-alone marketing efforts. As of the date of
this report, the Company has entered into strategic alliances with several
companies, including AT&T, ADP, Block Financial, CyberCash, EDS, Fiserv,
FiTech, Premiere, Spyglass and Spry. While the Company believes it has
established strong strategic alliances with these partners, the Company's
success depends both on the ultimate success of these partners, as well as on
the ability of its partners to successfully market the Company's services and
related products. Failure of one or more of the Company's key strategic
partners to successfully develop and sustain a market for the Company's
services and related products could have a material adverse effect on the
Company's overall performance. Additionally, failure of the Company's
strategic partners to generate new customers would likely lead to increased and
more costly direct marketing expenditures by the Company as well as a need to
develop new strategic alliances with other parties. Moreover, the Company has
traditionally relied on its strategic partners as the cornerstone of its
marketing efforts to consumers and financial institutions and, consequently,
the Company has only limited experience in the direct marketing of its services
in two of its existing markets. See "Business -- Strategic Alliances."
Although the Company views its alliances as a key factor in its overall
business strategy and in the development and commercialization of its services,
software and related products, there can be no assurance that its strategic
partners view their alliances with the Company as significant for their own
businesses or that they will not reassess their commitment to the Company at
any time in the future. The Company's strategic alliance agreements generally
do not establish minimum performance requirements for the strategic partners
but instead rely on the voluntary efforts of the partners in pursuing joint
goals. The ability of the Company's strategic partners to incorporate the
Company's services and related products into successful commercial ventures
will depend, in part, on the Company's ability to continue to successfully
enhance its existing services and products and develop new services and
products. The Company's inability to meet such requirements would delay the
ongoing development of services and products and could result in its strategic
partners seeking alternative providers of financial transaction services,
software and related products, which would have a material adverse impact on
the Company. See "Business -- Strategic Alliances."
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<PAGE> 26
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly results of operations may fluctuate significantly as a result of a
number of factors, including changes in the Company's pricing policies or those
of its competitors, relative rates of acquisition of new customers, delays in
the introduction of new or enhanced services, software, and related products by
the Company or by its competitors or market acceptance of such services and
products, other changes in operating expenses, personnel changes and general
economic conditions. In addition, the Company's growth in new consumer
customers is impacted by certain seasonal factors such as holiday-based
personal computer sales. These seasonal factors may impact operating results by
concentrating customer acquisition and set-up costs, which may not be
immediately offset by revenue increases primarily due to introductory service
price discounts. Additionally, on-line interactive service customers generally
tend to be more active users during the non-summer seasons, potentially causing
revenue fluctuations during the summer months. Servantis' quarterly operating
results have historically been highly seasonal, with sales and earnings
generally stronger in the quarters ended December 31 and June 30 of each year
and generally weaker in the quarters ended September 30 and March 31 of each
year. The seasonality is due, in part, to calendar year-end buying patterns of
Servantis' financial institution customers and Servantis' sales compensation
structure, which is based on fiscal year (June 30) sales performance. Servantis
has historically operated with little or no backlog and has no long-term
contracts, and, at present, approximately half of its revenues in each quarter
result from software licenses issued in that quarter. Moreover, the Company's
intention to aggressively promote the acceptance of its electronic commerce
services and rapidly expand its customer base may adversely impact the
Company's short-term profitability. These seasonal factors will impact the
Company's operating results. Fluctuations in operating results could result in
volatility in the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risk of Product Defects. The software products offered by the Company
could contain errors or "bugs" that could adversely affect the performance of
the Company's software or services or damage a user's data. In addition, as the
Company increases its share of the electronic commerce services market,
software reliability and security demands will increase. Additionally, the
Company attempts to limit its potential liability for warranty claims through
disclaimers in its software documentation and limitation-of-liability
provisions in its license and customer agreements. There can be no assurance
that the measures taken by the Company will prove effective in limiting the
Company's exposure to warranty claims. Additionally, despite the existence of
various security precautions, the Company's computer infrastructure may be also
vulnerable to viruses or similar disruptive problems caused by its customers or
third parties gaining access to the Company's processing system. See "Business
- -- Technology."
Rapid Technological Change; Risk of Delays. The Company's success is
highly dependent on its ability to develop new and enhanced software, services
and related products that meet changing customer requirements. The market for
the Company's software, services and related products is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services and
products. There can be no assurance that the Company can successfully identify
new service opportunities and develop and bring new and enhanced software,
services and related products to market in a timely manner, that such software,
services, products or technologies will develop or will be commercially
successful, that the Company will benefit from such developments or that
services, products or technologies developed by others will not render the
Company's software, services and related products noncompetitive or obsolete.
If the Company is unable, for technological or other reasons, to develop and
introduce new services and products in a timely manner in response to changing
market conditions or customer requirements, or if new or enhanced software,
services and related products do not achieve a significant degree of market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business -- General," "-- Services
and Related Products," and "-- Research and Development."
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes all three principal financial payment
clearance systems: the Federal Reserve's ACH for electronic fund transfers; the
national credit card systems (e.g., American Express, Discover, MasterCard and
Visa) for electronic credit card settlements; and conventional paper check and
draft clearing systems for settlement of payments by check or drafts. In its
use of these established payment clearance systems, the Company generally bears
the same credit risks normally
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<PAGE> 27
assumed by other users of these systems arising from returned transactions
caused by insufficient funds, stop payment orders, closed accounts, frozen
accounts, unauthorized use, disputes, theft or fraud. In addition, the Company
also assumes the risk of merchant fraud and transmission errors when it is
unable to have erroneously transmitted funds returned by an unintended
recipient. Merchant fraud includes such actions as inputting false sales
transactions or false credits. The Company manages all of these risks through
its risk management systems, internal controls and system security. The Company
also maintains a reserve for such credit risks and has not historically
incurred losses in excess of its reserve nor greater than 0.76% of its revenues
in any of the past five years. Past reserving experience cannot predict the
adequacy of reserves in the future. The Company believes that its risk
management and reserving practices are adequate. However, there can be no
assurance that the Company's risk management practices or reserves will be
sufficient to protect the Company from returned transactions, merchant fraud or
erroneous transmissions which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Payment Clearance Systems."
Risk of System Failure. The Company's operations are dependent on its
ability to protect its computer equipment against damage from fire, earthquake,
power loss, telecommunications failure or similar event. All of the Company's
computer equipment, including its processing operations, is located at its
facilities in Columbus, Ohio, Norcross, Georgia, Chicago, Illinois and Austin,
Texas. A disproportionate amount of the Company's computer equipment, including
its primary processing operations, is located at its headquarters facility in
Columbus, Ohio. Although the Company is considering moving some of its computer
processing equipment to another site, this measure will not eliminate the
significant risk to the Company's operations from a natural disaster or system
failure at one of these two sites. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business --
Technology."
Limited Protection of Proprietary Technology; Risk of Third Party
Infringement Claims. The Company regards its financial transaction services and
related products such as its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party nondisclosure agreements, and other intellectual property
protection methods to protect its services and related products.
The Company has been granted a patent for certain features of its
electronic bill payment processing system. See "Business -- Proprietary
Rights." While the Company believes that the ownership of the patent is a
significant factor in its business, its success does not depend only on the
ownership of the patent or future patents, but also on the innovative skills,
technical competence, quality of service and marketing abilities of its
personnel. The Company believes its patent provides a measure of security
against competition, and the Company intends to enforce its patent against
infringement by third parties. If the Company's patent is found to be invalid,
to the extent it has or would in the future serve as a barrier to entry in this
marketplace, there may be increased competition in the market. See "Business --
Competition" and "-- Business Risks (Intense Competition)."
Existing intellectual property laws afford only limited protection, and it
may be possible for unauthorized third parties to copy the Company's services
and related products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can be no assurance that the
Company's competitors will not independently develop services and related
products that are substantially equivalent or superior to those of the Company.
Dependence on Key Personnel; Lack of Employment Agreements. The Company's
success depends to a significant degree upon the continued contributions of its
key management, marketing, service and related product development and
operational personnel, including its Chairman, President, and Chief Executive
Officer, Peter J. Kight, and its President of Business Services, Mark A.
Johnson. The Company's operations could be affected adversely if, for any
reason, either Mr. Kight or Mr. Johnson ceased to be active in the Company's
management. The Company maintains proprietary nondisclosure and noncompete
agreements with all of its key employees. The Company does not have employment
agreements with several of its executive officers, including Mr. Kight and Mr.
Johnson. The Company maintains key person life insurance policies on Mr. Kight.
The success of the Company depends to a large extent upon its ability to retain
and continue to attract highly skilled personnel. Competition for employees in
the electronic commerce industry is intense, and there can be no assurance that
the Company will be able to attract and retain enough qualified employees. If
the business of the Company grows, it may become increasingly difficult to
hire,
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<PAGE> 28
train and assimilate the new employees needed. The Company's inability to
retain and attract key employees could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Employees."
ACH Access; Termination of MasterCard and Visa Registration. The Federal
Reserve rules provide that the Company can only access the Federal Reserve's
ACH through a bank. If the Federal Reserve rules were to change to further
restrict access to the ACH or limit the Company's ability to provide ACH
transaction processing services, the Company's business could be materially
adversely affected. To process credit card transactions for merchants and
businesses, the Company must register with MasterCard and Visa as an
independent service organization through processing banks. MasterCard and Visa
permit the Company, as a registered service provider, to provide MasterCard and
Visa transaction processing services through processing banks that are members
of MasterCard or Visa. The Company's registrations with MasterCard and Visa are
renewed annually. There can be no assurance that the Company's registrations
with MasterCard and Visa will be renewed or that the current rules of
MasterCard and Visa permitting independent service providers to market
transaction processing services will remain in effect or that the terms thereof
will not be modified in the future. The non-renewal of either registration or
any changes in MasterCard or Visa rules that would prevent the registration of
the Company or limit its ability to provide MasterCard and Visa transaction
processing services would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Government Regulation" and "-- Payment Clearance Systems."
Customer Attrition. In the consumer market, the Company had an average
annual customer attrition rate of 19% for the twelve months ended June 30,
1996. Such attrition rate is approximately 20% higher than the Company's
historical customer attrition experiences. The higher attrition rate is due
primarily to the competition from ISC for bill payment processing for Quicken.
Most of the customer attrition occurs within the first few months of a new
customer's commencement of use of the services while longer-term customers have
significantly lower attrition rates. Nonetheless, there can be no assurance
that the Company will not experience higher customer attrition rates in the
future. Increased levels of attrition could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Services and Related Products."
Limited Prior Market; Volatility of Stock Price. Prior to September 28,
1995, there was no public market for the Company's Common Stock. Although the
Company is listed on the Nasdaq National Market, there can be no assurance that
an active or liquid trading market in the Company's Common Stock will continue.
The market price of the Company's Common Stock is subject to significant
fluctuations in response to variations in quarterly operating results, the
failure of the Company to achieve operating results consistent with securities
analysts' projections of the Company's performance, and other factors. The
stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental stage companies. Such fluctuations and
volatility have often been unrelated or disproportionate to the operating
performance of such companies. Factors such as announcements of the
introduction of new or enhanced services or related products by the Company or
its competitors, announcements of joint development efforts or corporate
partnerships in the electronic commerce market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to the Company or its competitors may have a significant impact
on the market price of the Company's Common Stock.
Control by Principal Stockholders. At June 30, 1996, the directors,
executive officers and principal stockholders of the Company and their
affiliates collectively owned approximately 40% of the outstanding the
Company's Common Stock. As a result, these stockholders will be able to
exercise significant influence over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying
or preventing a change in control of the Company.
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price.
At June 30, 1996, the Company had 41,517,264 shares of the Company's Common
Stock outstanding. Of these shares, 13,968,960 shares are held by nonaffiliates
of the Company and are freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The holders of the remaining 27,598,304 shares are entitled to resell
them only pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder such as an exemption provided
by Rule 144, Rule 145, or Rule 701 under the Securities Act. Additionally, as
of June 30, 1996, the Company had outstanding options to purchase 2,908,218
shares of the Company's Common
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<PAGE> 29
Stock at a weighted average exercise price of $4.58, of which options for
1,433,781 shares of the Company's Common Stock were exercisable as of June 30,
1996 at a weighted average exercise price of $1.16.
Additionally, the 5,692,734 shares of the Company's Common Stock issued by
the Company to the shareholders of Servantis on February 21, 1996 in connection
with the Servantis Acquisition are available for resale, subject in certain
cases to the quarterly volume limitations of Rules 144 and 145 under the
Securities Act.
Further, the 2,805,652 shares of the Company's Common Stock issued by the
Company to the shareholders of Security APL on May 9, 1996 in connection with
the Security APL Acquisition will be available for resale, subject in certain
cases to the quarterly volume limitations of Rules 144 and 145 under the
Securities Act. In connection with the Security APL Acquisition, the
shareholders of Security APL entered into a Registration Rights Agreement with
the Company. The Registration Rights Agreement provides that shareholders of
Security APL will receive three demand registration rights, the first being
exercisable after September 1, 1996. The subsequent demand registration rights
will be available no earlier than 180 days after the effectiveness of a
previous registration period. The shares of the Company's Common Stock received
in the Security APL Acquisition will no longer be registrable after May 9,
1998. During each registration period, the Security APL shareholders who hold
in the aggregate more than 50% of the then registrable shares will be able to
demand registration of up to 25% of the original number of shares received in
the Security APL Acquisition as long as the aggregate price to the public, net
any underwriting discounts and commissions, of the registered shares will
exceed $5,000,000. In addition to demand registration rights, if at any time or
from time to time on or before January 9, 1998, the Company shall determine to
register any of its shares, Security APL shareholders will have the opportunity
to include their shares in such registration and in any underwriting involved
with the registration. These "piggy-back" registration rights are subject to
certain limitations, including the right of the Company to exclude shares from
an underwritten offering if the managing underwriter determines that market
conditions require such limitation.
Sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could adversely affect the market price of
the Company's Common Stock.
Anti-Takeover Provisions; Certain Provisions of Delaware Law; Certificate
of Incorporation and By-Laws. Certain provisions of Delaware law the Company's
Certificate of Incorporation and By-Laws 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, control of the Company. The Company's Certificate
of Incorporation provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. Such classification of
the Board of Directors expands the time required to change the composition of a
majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. Certain provisions of Delaware law and the
Company's Certificate of Incorporation allow the Company to issue preferred
stock with rights senior to those of the Company's Common Stock without any
further vote or action by the stockholders. The issuance of the Company's
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of the Company's Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Company's Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Company's Common Stock.
Government Regulation. Management believes that the Company is not
required to be licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services.
There can be no assurance that a federal or state agency will not attempt to
regulate providers of electronic commerce services such as the Company which
could impede the Company's ability to do business in the regulator's
jurisdiction. In addition, through its processing agreements, the Company
agrees to comply with the data, recordkeeping, processing and other
requirements of applicable federal and state laws and regulations, Federal
Reserve Bank operating letters and the National Automated Clearing House
Association Operating Rules imposed on the Company's processing banks. In
conducting various aspects of its business, the Company is subject to various
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code, and is also subject to the electronic funds transfer
rules embodied in Regulation E, promulgated by the Federal Reserve Board. Given
the expansion of the electronic commerce market, it is possible that the
Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
it is possible that Congress or individual
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<PAGE> 30
states could enact laws regulating the electronic commerce market. If
enacted, such laws, rules and regulations could be imposed on the Company's
business and industry and could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Government Regulation."
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and funds from
operations will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements both for the short-term and through at
least December 31, 1997. The Company may need to raise additional funds through
public or private debt or equity financings in order to take advantage of
unanticipated opportunities, including more rapid expansion or acquisitions of
complementary businesses or technologies, or to develop new or enhanced
services and related products or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new or enhanced services and
related products or otherwise respond to unanticipated competitive pressures
and the Company's business, operating results and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on CompuServe. The Company has an agreement with CompuServe to
collect monthly subscription fees from CompuServe's approximately four million
on-line interactive subscribers. The agreement renews automatically for three
year terms unless either party gives notice of intent not to renew at least 60
days before the end of the term. The Company and CompuServe renewed a three
year agreement in June 1995. The June 1995 renewal permits CompuServe to enter
into an agreement with another payment processor during the three year renewal
term, provided that CompuServe has given the Company reasonable opportunity to
bid on retaining CompuServe's payment collection business and pays the Company
a termination fee if the Company's services are not retained. Recently, the
Company substantially reduced its prices to CompuServe based on an increased
volume of transactions attributable to its business. During fiscal 1993, 1994
and 1995, the Company derived approximately 10%, 11% and 13%, respectively, of
its revenues from CompuServe. Such CompuServe revenues were less than 10% of
total revenues for transition fiscal 1996. Although the Company believes its
relationship with CompuServe is positive, there can be no assurance that
CompuServe will continue its business relationship with the Company upon
expiration or early termination of the agreement, that CompuServe will maintain
its number of subscribers at historical levels, or that the Company will
realize revenues from CompuServe at the levels it has in the past. Loss of the
relationship with CompuServe or a reduction of revenues from CompuServe will
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Services and Related Products" and Note
16 to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company leases approximately 107,000 square feet of office space and
12,500 square feet of warehouse space in Columbus, Ohio. The Company owns
approximately eight acres of real property adjacent to the Company's
headquarters. The Company owns a 51,000 square foot conference center in
Norcross, Georgia which includes lodging, training and fitness facilities for
the Company's customers and employees. Although the Company owns the building,
it is on land which is leased through 2003. The Company also leases office
facilities in Norcross, Georgia, Owings Mills, Maryland, Austin, Texas, Jersey
City, New Jersey, Chicago, Illinois, San Diego, California and Boston,
Massachusetts with square footage of approximately 229,000, 30,000, 32,000,
17,100, 10,000, 3,000 and 2,000 respectively. The Company believes that its
facilities are adequate for current and near-term growth and that additional
space is available to provide for anticipated growth.
The Company leases its corporate offices from the Director of Development,
State of Ohio, pursuant to the terms of a capitalized lease entered into as
part of the issuance by the State of Ohio of State Economic Development Revenue
Bonds (the "Bonds") in the aggregate principal amount of $7.5 million. Pursuant
to the terms of the lease, the Company pays monthly lease payments equal to the
amount of the debt service on the Bonds. Upon full payment of the amount due on
the Bonds, the Company has a right to purchase the real property from the
Director of Development, State of Ohio, for the sum of one dollar. Under the
terms of the lease, the Company has the right to prepay all amounts owed
thereunder without any prepayment penalty. See "Item 13. Certain Relationships
and Related Transactions."
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<PAGE> 31
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 20, 1996 for
the purpose of electing a Class I Director of the Company, to serve until the
1999 Annual Meeting of Stockholders or until his successor is elected and
qualified.
Management's nominee for Class I director as listed in the proxy statement
was elected with the following vote:
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
----------------------------------------------------------------
FOR AGAINST ABSTAIN
------------------- ------------------ -----------------
<S> <C> <C> <C>
George R. Manser 31,639,967 9,282 0
</TABLE>
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<PAGE> 32
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "CKFR." The following table sets forth,
for the periods indicated, the high and low sales prices for the Company's
Common Stock, as reported on the Nasdaq National Market. Information with
respect to the Company commences on September 28, 1995, when the Company's
Common Stock was first offered to the public.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK
---------------------------------------------
CALENDAR PERIOD HIGH LOW
- ---------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Fiscal 1995:
Third Quarter (September 28 to September 30) $22.875 $19.75
Fourth Quarter $29.375 $16.00
Transitional Fiscal 1996:
First Quarter $26.375 $16.50
Second Quarter $23.50 $16.875
Fiscal 1997:
First Quarter (through September 16, 1996) $21.625 $10.75
</TABLE>
The number of record holders of the Company's Common Stock as of September
16, 1996, was 501. The closing sales price of the common stock on September 16,
1996, was $21.25.
The Company has paid no cash dividends since 1986. The Company presently
anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on
the Company's Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data for the six months ended June 30,
1996 and each of the years in the three year period ended December 31, 1995 and
as of June 30, 1996 and as of December 31, 1994 and 1995 have been derived from
the Company's financial statements included elsewhere in this Form 10-K which
have been audited by Deloitte & Touche LLP, independent certified public
accountants, whose report thereon is also included elsewhere in this Form 10-K.
The selected consolidated financial data for the years ended December 31, 1991
and 1992 and as of December 31, 1991, 1992, and 1993 have been derived from
audited financial statements of the Company which are not included in this Form
10-K. The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
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<PAGE> 33
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- ----------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and
merchant discount $16,322 $22,201 $28,986 $38,282 $49,330 $ 33,305
License fees -- -- -- -- -- 10,970
Maintenance fees -- -- -- -- -- 1,978
Other 9,334 -- 1,906 984 -- 4,787
------- ------- ------- ------- ------ ---------
Total revenues 25,656 22,201 30,892 39,266 49,330 51,040
Expenses:
Cost of processing, servicing and support 14,800 14,772 19,516 25,787 32,293 40,352
Research and development 2,960 2,418 3,678 4,826 7,009 10,177
Sales and marketing 3,566 3,466 3,730 4,553 7,405 17,513
General and administrative 1,697 1,725 2,466 2,717 4,288 8,806
In process research and development -- -- -- -- -- 122,358
------- ------- ------- ------- ------ ---------
Total expenses 23,023 22,381 29,390 37,883 50,995 199,206
------- ------- ------- ------- ------ ---------
Income (loss) from operations 2,633 (180) 1,502 1,383 (1,665) (148,166)
Interest:
Income 493 171 165 298 2,135 1,659
Expense (331) (230) (279) (795) (645) (325)
------- ------- ------- ------- ------ ---------
Income (loss) before income taxes 2,795 (239) 1,388 886 (175) (146,832)
Income tax expense (benefit) 1,407 (159) 368 400 40 (8,629)
------- ------- ------- ------- ------ ---------
Income (loss) before extraordinary item 1,388 (80) 1,020 486 (215) (138,203)
Extraordinary item 1,094 -- -- -- -- (364)
------- ------- ------- ------- ------ ---------
Net income (loss) $ 2,482 $ (80) $ 1,020 $ 486 $ (215) $(138,567)
------- ------- ------- ------- ------ ---------
Income (loss) per common and equivalent
share before extraordinary item $ 0.05 -- $ 0.04 $ 0.02 $(0.01) $ (3.69)
Net income (loss) per common and equivalent
share $ 0.09 -- $ 0.04 $ 0.02 $(0.01) $ (3.70)
Weighted-average common and equivalent
shares outstanding 27,153 27,127 26,886 27,103 28,219 37,420
BALANCE SHEET DATA:
Working capital $ 2,884 $ 304 $ 623 $11,399 $81,792 $ 45,496
Total assets 9,820 8,059 17,669 30,512 115,642 196,230
Long-term obligations, less current portion 1,900 1,275 8,968 8,213 7,282 8,324
Total Stockholders' equity 2,985 1,915 2,985 16,372 99,325 137,675
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company was founded in 1981 to provide electronic collection services
to businesses. This expertise was expanded in the late 1980s through the
introduction of electronic bill payment services for consumers. As a result of
two significant acquisitions in 1996, the company now operates in two business
segments -- Electronic Commerce and Financial Application Software. The
Company's electronic transaction processing services, software and related
products are targeted to financial institutions and businesses and their
customers.
Electronic Commerce. Electronic Commerce services offered to financial
institutions include electronic bill payment, electronic home banking,
investment portfolio management services and investment trading and reporting
services. The Company generates revenues based on the number of customers using
the services, transaction fees and
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<PAGE> 34
implementation fees. Services are provided under contracts with the financial
institutions, which typically have three to five year terms and generally
provide for minimum fees if certain transaction volumes are not met.
On May 9, 1996, the Company acquired, Security APL, Inc. ("Security APL")
for $53 million plus the assumption of approximately $5.5 million of
liabilities through the issuance of 2.8 million shares of common stock.
Security APL is a full-service provider of fully integrated, customized
portfolio software services, including performance measurement and trade and
reporting systems for institutional money managers. Security APL's operations
are included in the consolidated results of operations from the date of the
acquisition.
For businesses, the Company provides automatic payment collection services
to companies in the online interactive services, Internet access, cellular,
paging, direct marketing, health and fitness and various other service
industries. The Company generates revenues from transaction fees, credit card
discount fees and implementation fees. The related credit card interchange
costs are included in processing and servicing expenses. Services are provided
under contracts typically of three year terms and generally provide for minimum
fees if certain transaction volumes are not met.
The Company also offers its bill payment and portfolio management services
directly to consumers. Generally, these services are offered through strategic
partner alliances, whereby the Company pays customer acquisition fees or
royalties for new customers generated by partners.
Processing and servicing revenues include revenue from transaction
processing, electronic funds transfer and monthly service fees. The Company
derives merchant discount revenue from businesses, who pay a negotiated
discount rate to the Company for credit card transactions. The merchant
discount rate for businesses is established when the Company initiates the
processing relationship with the merchant and negotiates a discount rate which
is set at a percentage of the dollar amount of each credit card transaction.
The Company collects the majority of its monthly processing and servicing
fees and merchant discount revenues from customers electronically by deducting
such fees from their accounts. The capacity to collect service and other
revenues electronically enhances the Company's cash flow compared to other
service companies, which typically experience longer payouts on their accounts
receivables. Generally, the Company realizes greater operational efficiencies
and margins as electronic payments to merchants increase, displacing
paper-based transactions. In June 1996, the Company processed 37% of all
payments to merchants electronically, a 4% increase over June 1995.
The Company intends to aggressively promote the acceptance of its
electronic commerce services and rapidly expand its customer base. To achieve
these objectives, the Company intends to accelerate investment in new services
and related products, pursue aggressive pricing policies, including offering a
new lower cost standard bill payment service for users who are interested only
in bill payments, and increase marketing expenses. Specifically, the Company
announced a new series of services and pricing options in September 1995 in an
attempt to appeal to various segments of the Company's markets. One such option
is to offer a bill payment service at a lower cost in order to target new users
and users who are interested only in the electronic bill payment aspect of the
Company's services. Although these initiatives may adversely impact the
Company's short-term profitability, the Company expects that these initiatives
will allow it to maintain and enhance its leading position in the rapidly
growing electronic commerce market.
Financial Application Software. Financial Application Software includes
end-to-end software products for Automated Clearing House ("ACH") processing,
account reconciliation, wire transfers, mortgage loan origination and
servicing, lease accounting and debt recovery. The Company generates revenues
by granting software licenses, through on-going maintenance contracts and
through consulting fees.
The Company started operating in the financial application software
business segment with the acquisition of Servantis Systems Holdings, Inc.
("Servantis") on February 21, 1996. Servantis was acquired for $165.1 million
plus the assumption of liabilities of approximately $38.3 million through the
issuance of 5.7 million of shares of common stock valued at $20.00 per share,
$42.5 million paid to retire Servantis debt and the assumption of stock
options.
Financial application software products are generally granted as perpetual
licenses. Revenue from software license agreements is recognized upon delivery
of the software if there are no significant post-delivery obligations. The
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<PAGE> 35
revenue related to significant post-delivery obligations is deferred and
recognized using the percentage-of-completion method. Maintenance fee revenue
is recognized ratably over the term of the related contractual support period,
generally 12 months.
RESULTS OF OPERATIONS
On April 19, 1996, the Company elected to change its fiscal year end from
December 31 to June 30. To assist in the analysis of the results of operations
for the six months ended June 30, 1996, results from the unaudited period for
the six months ended June 30, 1995 are also provided.
The following table sets forth percentages of revenue represented by
certain consolidated statements of operations data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Expenses:
Cost of processing, servicing and support 63.2 65.7 65.5 65.5 79.1
Research and development 11.9 12.3 14.2 13.1 19.9
Sales and marketing 12.1 11.6 15.0 13.4 34.3
General and administrative 8.0 6.9 8.7 8.3 17.3
In process research and development 0.0 0.0 0.0 0.0 239.7
------ ------ ------ ------ ------
Total expenses 95.2 96.5 103.4 100.3 390.3
------ ------ ------ ------ ------
Income (loss) from operations 4.8 3.5 (3.4) (0.3) (290.3)
Interest:
Income 0.5 0.8 4.3 2.3 3.3
Expense (0.8) (2.0) (1.3) (1.4) (0.6)
------ ------ ------ ------ ------
Income (loss) before income taxes 4.5 2.3 (0.4) 0.6 (287.7)
Income tax expense (benefit) 1.2 1.1 0.1 0.3 (16.9)
------ ------ ------ ------ ------
Income (loss) before extraordinary item 3.3% 1.2% (0.4)% 0.3% (270.8)%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues. Processing servicing and merchant discount revenues increased by
41.2% from $23.6 million for the six months ended June 30, 1995 to $33.3
million for the six months ended June 30, 1996. The increase was due primarily
to $5.7 million of processing and servicing revenues recognized from the
acquisitions of Servantis, Security APL and Interactive Solutions Corporation,
a 20% increase in the number of bill payment and home banking consumers (prior
to consumers acquired from Servantis) and a 17% increase in the number of
transactions processed. In June 1995, the Company reduced its per transaction
prices to a major business customer based on an increased volume of
transactions attributable to such customer as part of the Company's on-going
monitoring of its pricing structure in each of the markets in which it
competes. In addition, license fees, maintenance fees, and other revenue all
increased as a result of the business acquisitions.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses consist primarily of data processing costs, customer care and
technical support, and third party transaction fees, which consist principally
of credit card interchange fees, ACH transaction fees and the amortization of
software costs. Processing, servicing and support expenses, as a percentage of
revenues, were 65.5%, and 79.1% for the six months ended June 30, 1995 and 1996
respectively. Processing, servicing and support costs increased as a percentage
of revenue primarily due to a purchased profits adjustment related to the
Servantis acquisition. The estimated profits from deferred revenue at the
Servantis acquisition date are charged against the revenue when earned. This
charge to revenue was approximately $12.7 million for the six months ended June
30, 1996. Without this purchased profit charge, processing, servicing and
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<PAGE> 36
support costs would have been 63.3% of revenue for the six months ended June
30, 1996. The Company anticipates additional purchased profit charges of
approximately $8.0 million in the year ending June 30, 1997.
Research and Development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel. Research and development expenses were $3.1
million and $10.2 million, or 13.1% and 19.9% of revenue during the six months
ended June 30, 1995 and June 30, 1996, respectively. The increase was due to
$2.7 million of research and development incurred by the acquired companies,
plus development efforts on new and existing services and related products,
including Electronic Cash Disbursement for businesses, expanded home banking
offerings, greater capability payment processing systems and bill presentment.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales employees, public relations and advertising
costs, customer acquisition fees and royalties paid to distribution partners.
Sales and marketing costs were $3.2 million and $17.5 million, or 13.4% and
34.3% of revenue for the six months ended June 30, 1995 and 1996, respectively.
The significant increase as a percentage of revenue is due to $6.5 million for
a direct consumer marketing campaign, which has been discontinued, and $7.7
million of increased sales and marketing expenses incurred by the acquired
companies.
General and Administrative. General and administrative expenses consist
primarily of salaries for administrative, executive, financial control and
human resource employees. General and administrative expenses were $2.0 million
and $8.8 million, or 8.3% and 17.3% of revenue for the six months ended June
30, 1995 and 1996, respectively. The increase was due to $3.9 million of
increased general and administrative expenses related to the acquired
companies, increased expenses related to being a public company (such as legal
fees and investor relations) and additional management, financial control and
human resources employees.
In Process Research and Development. The Company incurred $122.4 million
of in-process research and development costs for the six months ended June 30,
1996, in conjunction with the acquisitions of Servantis, Security APL and ISC.
The amounts to be allocated to in-process research and development for each of
the acquisitions were based on independent appraisals.
Interest. Interest income increased from $535,000 for the six months ended
June 30, 1995 to $1.7 million for the six months ended June 30, 1996. The
increase was due to the income from the investment of proceeds of the initial
public offering in September 1995.
Interest expense of $330,000 for the six months ended June 30, 1995 was
comparable to the interest expense of $324,00 for the six months ended June 30,
1996.
Income Taxes. The effective income tax rate (credit) was 45.1% and (5.9%)
for the six months ended June 30, 1995 and 1996, respectively. For the six
months ended June 30, 1995, the effective tax rate was more than the statutory
rate of 34% due to state and local taxes and non-deductible intangible asset
amortization. For the six months ended June 30, 1996, the effective tax benefit
was less than the statutory rate due primarily to non-deductible in-process
research and development and intangible asset amortization.
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
Revenues. Processing, servicing and merchant discount revenues increased
32.1% from $29.0 million in 1993 to $38.3 million in 1994, and 28.9% to $49.3
million in 1995. The increase was primarily attributable to 71% and 20%
increases in the number of consumers in 1994 and 1995 which resulted in
increased revenues of $3.3 million and $6.6 million, respectively, and 27.2%,
or $1.5 million, and 36.3%, or $2.6 million, increases in revenues from
merchant discounts in 1994 and 1995, respectively, as well as a significant
increase in the use of on-line services for which the Company collects user
subscription fees. The number of transactions processed for financial
institutions and businesses and their customers increased from 38.4 million in
1993, to 51.8 million in 1994, to 63.6 million in 1995. In June 1995, the
Company reduced its per transaction prices to a major business customer based
on an increased volume of transactions attributable to such customer as part of
the Company's on-going monitoring of its pricing structure in each of the
markets in which it competes.
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<PAGE> 37
Other revenues include reimbursement of services and related product
development expenses from strategic alliance partners. Other revenues decreased
48.4% from $1.9 million in 1993 to $1.0 million in 1994 due to the termination
of a joint development project with a strategic partner. There were no revenues
in this category in 1995.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses, as a percentage of revenues, were 63.2%, 65.7%, and 65.5% in
1993, 1994 and 1995, respectively. Excluding other revenues, processing,
servicing and support costs were 67.3%, 67.4% and 65.5% of revenues in 1993,
1994 and 1995, respectively. From 1993 to 1994, processing, servicing and
support costs increased as a percentage of revenue due to the mix of credit
card versus ACH transactions and the depreciation related to an enhancement of
the Company's data processing capabilities. The decrease in processing,
servicing and support costs as a percentage of revenue from 1994 to 1995 was
due primarily to more efficient customer care operations, resulting in slower
growth in the number of customer care employees compared to growth in revenue,
and the increase in electronic payments to merchants.
Research and Development. Research and development expenses were $3.7
million, $4.8 million and $7.0 million, or 11.9%, 12.3% and 14.2% of revenue
during 1993, 1994 and 1995, respectively. The increases in 1994 and 1995 were
due to continued development efforts on new and existing services and related
products, including Electronic Cash Disbursement, expanded home banking
offerings, greater capability payment processing systems and an Electronic
Exchange Network.
Sales and Marketing. Sales and marketing costs were $3.7 million, $4.6
million and $7.4 million, or 12.1%, 11.6% and 15.0% of revenue in 1993, 1994
and 1995, respectively. As a percentage of revenue, sales and marketing
expenses decreased in 1994 due to increased leverage from distribution
partners. In 1995, sales and marketing expenses increased as a percentage of
revenue due to increases in the sales staff in anticipation of new services and
opportunities in addition to increased public relations activities related to
new services and related products.
General and Administrative. General and administrative expenses were $2.5
million, $2.7 million and $4.3 million, or 8.0%, 6.9% and 8.7% of revenue in
1993, 1994 and 1995, respectively. In 1994, general and administrative costs
increased $251,000, but decreased significantly as a percentage of revenue due
to the significant increase in revenues. In addition, the Company had
previously leased land and a building for its former corporate offices. In June
1994, the lessor sold the building and relieved the Company of all its
liabilities related to the lease. This resulted in a gain of approximately
$223,000 for previously accrued lease liabilities. In 1995, general and
administrative expenses increased as a percentage of revenue due to the hiring
of additional operating, administrative and financial control employees to
manage current and expected future growth.
Interest. Interest income increased from $165,000 in 1993, to $298,000 in
1994 due to higher average cash balances and the income received from the
proceeds of the private placement of the Company's common stock in December
1994. Interest income increased to $2.1 million in 1995 due to the income from
the private placement in December 1994 and due to the income from the proceeds
of the initial public offering in September 1995.
Interest expense increased from $279,000 in 1993 to $795,000 in 1994 due
to the impact of a full year's financing costs incurred for the new corporate
offices compared to only three months in 1993, offset by the impact of the
redemption and conversion of $1.0 million of convertible subordinated
debentures outstanding in September 1994. Interest decreased to $645,000 in
1995 due to the redemption and conversion of the subordinated debentures in
1994, offset by increased interest related to new capital lease obligations in
1994 and 1995.
Income taxes. The effective income tax rate was 26.5% and 45.1% in
1993 and 1994, respectively. The 1993 effective tax rate was less than the
statutory federal rate of 34%, due to the benefit of reducing the valuation
allowance for deferred tax assets. In 1994, the effective tax rate was more
than the statutory federal tax rate of 34% due primarily to state and local
taxes and non-deductible intangible asset amortization. In 1995, the Company
recognized a $40,000 tax expense, while incurring a pre-tax loss of $175,000,
primarily due to state and local taxes and non-deductible intangible asset
amortization.
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<PAGE> 38
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through cash flows
generated from operations, the sale of equity and debt securities, and capital
lease financing. The Company's operating activities provided cash of $2.7
million and $2.4 million for the years ended December 31, 1994 and 1995,
respectively, and used cash of $6.6 million for the six months ended June 30,
1996.
The Company invested in property additions, primarily computer related
equipment, of $1.0 million, $3.4 million and $7.1 million for the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively. In addition, the Company invested $54.1 million in investments
in 1995, offset by maturities of $37.7 million, with the proceeds from a
private placement of the Company's common stock in December 1994, and the
proceeds from the initial public offering in September 1995. For the six months
ended June 30, 1996, the Company invested $39.4 million, net of cash acquired,
for the acquisition of Servantis and Security APL. These investments were
partially funded through $10.6 million of maturities and sales of investments.
In 1994, the Company repaid $500,000 of convertible subordinated
debentures and notes payable. The Company paid capital lease obligations of
$711,000 in 1994 and $1.0 million in 1995. In addition, in September 1995, the
Company issued 4,975,310 shares of the Company's common stock in the initial
public offering for an aggregate $82.7 million. For the six months ended June
30, 1996, the Company borrowed $1.1 million under an unsecured loan, received
$871,000 from the exercise of stock options and paid principal obligations
under capital leases of $571,000.
The Company's cash and cash equivalents and short term investments were
$39.1 million at June 30, 1996, a decrease of $45.8 million from December 31,
1995. As of June 30, 1996 and 1995, the Company's ratio of current assets to
current liabilities was 2.0 to 1.0 and 10.4 to 1.0, respectively, and working
capital was $45.5 million and $81.8 million, respectively. The significant
decrease in the current ratio and working capital was due to the acquisition of
Servantis and Security APL.
In August 1996, the Company signed a definitive agreement to sell certain
software for $20 million. The sale is expected to close in September. In
September 1996, the Company signed a definitive agreement to purchase Intuit
Services Corporation for 12.6 million shares of Company common stock. The
Company also signed a Service and License Agreement with Intuit that requires a
$10 million payment upon the closing of the ISC acquisition, and an additional
payout of $10 million on October 1, 1997. The Company expects to incur a
yet-to-be-determined in-process research and development charge in the quarter
the ISC acquisition closes. Certain stockholders have an option to sell up to
280,565 shares of common stock to the Company at $19 per share. Such option
expires no later than September 30, 1996.
The Company believes that the cash equivalents and investments will be
sufficient to meet the Company's presently anticipated working capital and
capital expenditure requirements through at least December 31, 1997. To the
extent that the Company needs additional capital resources, the Company
believes that it will have access to both bank financing and capital leasing
for additional facilities and equipment.
INFLATION.
The Company believes the effects of inflation have not had a significant
impact on the Company's results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, services and related products, prices, and other factors discussed in
the Company's prior filings with the Securities and Exchange Commission.
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<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, together with
reports thereon from Deloitte & Touche LLP are set forth on pages F-1 through
F-20 hereof (see Item 14 of this Annual Report for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and corporate officers of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Peter J. Kight 40 President, Chief Executive Officer and Chairman of the Board
Mark A. Johnson 43 President of Business Services, and Director
Howard S. Baulch 43 Executive Vice President, Systems, Support and Development
Mark D. Phelan 42 Executive Vice President, Corporate Services
James S. Douglass 34 Executive Vice President, Finance and Chief Financial Officer
Kenneth J. Benvenuto 37 Executive Vice President, Retail Services
James M. Garrett(3) 38 Executive Vice President, Sales and Marketing
Lynn D. Busing 44 Executive Vice President, Corporate Banking
Claude A. Thomas 54 Executive Vice President, Business Development
Jay N. Whipple, III 39 Executive Vice President, Portfolio Services
Geoffrey D. Gill 30 Vice President, Finance
John M. Stanton 36 Vice President, Treasurer and Assistant Secretary
Curtis A. Loveland 49 Secretary
William P. Boardman 55 Director
George R. Manser(1)(2) 65 Director
Eugene F. Quinn(1)(2) 42 Director
Jeffrey M. Wilkins(1) 52 Director
</TABLE>
____________
(1) Member of the Audit Committee.
(2) Member of Stock Option and Compensation Committee.
(3) Resigned in July 1996.
Directors of the Company are elected at the annual stockholder's meeting
for staggered three-year terms and serve until their successors are duly
elected and qualified. Executive officers of the Company are elected annually
by the Board of Directors and serve until their successors are duly elected and
qualified. There are no family relationships among directors and executive
officers of the Company.
Peter J. Kight is the founder of the Company and has served as Chairman,
President, and Chief Executive Officer since 1981. He has also served as
president of Servantis Systems Holdings, Inc. ("Servantis") since February
1996. Mr. Kight is a Director of Metatec Corporation, a publicly-held company
which distributes information utilizing CD ROM technology.
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<PAGE> 40
Mark A. Johnson has served as the President of Business Services of the
Company since 1996. He has been a Director of the Company since 1983. Mr.
Johnson served as Treasurer from 1993 to 1996, as Executive Vice President of
the Company from 1993 to 1996, as Senior Vice President of the Company from
1991 to 1993, and as a Vice President from 1982 to 1991.
Howard S. Baulch has served as Executive Vice President of Systems,
Support and Development from 1994 to present. From 1992 to July 1994, Mr.
Baulch served as Director of Systems Architecture for Mead Data Central. He
also served as Director of Quality Assurance for Mead Data Central from 1990 to
1992.
Mark D. Phelan has served as Executive Vice President of the Company in
various capacities from 1992 to present. From 1982 to 1992, Mr. Phelan served as
a Sales Vice President of AT&T Corporation, a worldwide telecommunications
company.
James S. Douglass has served as Executive Vice President of Finance and
Chief Financial Officer of the Company since September 1996. From 1994 to 1996,
Mr. Douglass was Vice President-Corporate Controller and Chief Accounting
Officer for Medaphis Corporation. From 1988 to 1994, Mr. Douglass served in
various capacities with KPMG Peat Marwick LLP, most recently as senior manager.
Kenneth J. Benvenuto has served as Executive Vice President of the Company
since March 1996. From 1994 to 1996, he was employed by Servantis as the
Treasury Products Division President. From 1993 to 1994, Mr. Benvenuto served as
Vice President of Best Programs, Inc., an accounting software firm. From 1986 to
1993, he was an Executive Vice President of Mitchell Humphrey & Company, a
client/server-based financial management software firm.
James M. Garrett has served as Executive Vice President of Sales and
Marketing of the Company since March 1996. From 1995 to 1996, he was employed
by Servantis, most recently as Executive Vice President of Marketing and
Business Development. From 1991 to 1995, Mr. Garrett served as President of
Group Eagle Consulting. While President of Group Eagle Consulting, Mr. Garrett
also served as Senior Vice President, Marketing and Sales for Cadtel Systems,
Inc. from 1991 to 1992, and as Director of Sales for Scientific Atlanta Inc.
from 1992 to 1994. Mr. Garrett resigned from the Company in July 1996.
Lynn D. Busing has served as Executive Vice President of Corporate Banking
of the Company since March 1996. From 1994 to 1996, he was employed by
Servantis most recently as Senior Vice President of the Corporate Banking
Group. From 1987 to 1993, Mr. Busing served as Vice President, U.S. Software
and Services of Digital Equipment Corporation.
Claude A. Thomas has served as Executive Vice President of Business
Development of the Company since March 1996. From 1993 to 1995, Mr. Thomas
served as Senior Vice President, Division Chief Executive Officer and Chief
Operating Officer of First Financial Management Corporation. From 1986 to 1993,
he served as Vice President, Financial Industry of Digital Equipment
Corporation.
Jay N. Whipple, III has served as Executive Vice President of Portfolio
Services of the Company since May 1996. Mr. Whipple was founder of Security
APL, Inc. and served as it's President, Chief Executive officer and Chairman of
the Board from 1978 to 1996.
Geoffrey D. Gill has served as Vice President of Finance of the Company
since April 1996. From 1994 to 1996, he was employed by Servantis as Vice
President of Finance. From 1988 to 1994, Mr. Gill served in various capacities
with Coopers & Lybrand L.L.P., most recently as audit manager.
John M. Stanton has served as Vice President and Treasurer of the Company
since March 1996. He served as Corporate Controller of the Company from 1994 to
1996, and as Chief Accounting Officer from 1995 to 1996. From 1982 to 1994, Mr.
Stanton served in various capacities with KPMG Peat Marwick LLP, most recently
as a Senior Manager.
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<PAGE> 41
Curtis A. Loveland has served as Secretary of the Company since 1983. Mr.
Loveland has been associated with the law firm of Porter, Wright, Morris &
Arthur since 1973 and a partner since 1979.
William P. Boardman has served as a Director of the Company since July
1996. Mr. Boardman has been a Senior Executive Vice President with Bank One
Corp. since 1984.
George R. Manser has served as a Director of the Company since 1983. Since
July 1994, Mr. Manser has served as Chairman of Uniglobe Travel (Capital
Cities) Inc., which franchises travel agencies in certain areas of the U.S.
From 1985 to 1994, he served as Chairman of North American National
Corporation, a life insurance holding company. Mr. Manser is a Director of
Cardinal Health Inc., a publicly-held wholesale drug distributor, State Auto
Financial Corporation, a publicly-held insurance company, AmeriLink
Corporation, a publicly-held cabling services company, and Hallmark Financial
Services, Inc., a publicly-held insurance services company. He is also an
Advisory Director to the Corporate Finance Department of J.C. Bradford & Co., a
NASD broker-dealer.
Eugene F. Quinn has served as a Director of the Company since 1994. Since
October 1994, Mr. Quinn has served as General Manager, Tribune Interactive
Services of Tribune Company, a publicly-held diversified media company. From
August 1991 to October 1994, he served as General Manager, Chicago Online of
Chicago Tribune Company. Mr. Quinn served as Associate Managing Editor of
Chicago Tribune Company from January 1984 to August 1991. Mr. Quinn is a
director of Open Market, Inc., a publicly held Internet software solutions
company.
Jeffrey M. Wilkins has served as a Director of the Company since 1990.
Since August 1989, Mr. Wilkins has served as Chairman and Chief Executive
Officer of Metatec Corporation, a publicly-held company which distributes
information utilizing CD ROM technology.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: a Stock Option and
Compensation Committee and an Audit Committee. The Stock Option and
Compensation Committee has the authority to (i) administer the Company's stock
option plans, including the selection of optionees and the timing of option
grants; and (ii) review and monitor key employee compensation policies and
administer the Company's management compensation plans. The members of the
Stock Option and Compensation Committee are Messrs. Manser and Quinn.
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and
non-audit assignments and related fees, the accounting principles used by the
Company in financial reporting, internal financial auditing procedures and the
adequacy of the Company's internal control procedures. Messrs. Manser, Quinn,
and Wilkins serve as members of the Audit Committee.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will receive a $500
retainer for each fiscal quarter, $500 for each Board meeting attended and $250
for each committee meeting attended, plus out-of-pocket expenses incurred in
connection with attendance at such meetings. Additionally, in the past,
non-employee directors also received stock options granted under the existing
stock option plans upon their election to the Board of Directors. Such options
have ranged from the right to acquire from 15,000 to 26,307 shares of the
Company's Common Stock. The exercise price for such options ranges from $0.57
to $14.25 per share. Such options vest 20% a year over a five year period and
terminate 10 years after grant.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who are beneficial owners of more
than ten percent of the Company's Common Stock ("reporting persons") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Reporting persons are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
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<PAGE> 42
forms filed by them. Based on its review of the copies of Section 16(a) forms
received by it, the Company believes that all filing requirements applicable to
its reporting persons were complied with during Transitional Fiscal 1996.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during the period from July 1, 1995 through June 30, 1996 to the Company's
Chief Executive Officer and each of the Company's other executive officers
whose annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- --------------
AWARDS
--------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) (#) ($)(2)
- -------------------------------------- --------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
PETER J. KIGHT 1996 250,000 33,000 1,000 0
President, Chief Executive Officer, 1995 248,173 33,000 0 0
and Chairman of the Board 1994 154,615 79,333 0 0
MARK A. JOHNSON 1996 161,538 13,500 1,000 1,820
President of Business Services 1995 154,711 38,000 0 1,698
1994 138,077 20,000 0 1,365
MARK D. PHELAN 1996 155,000 23,300 0 899
Executive Vice President of 1995 154,904 47,800 0 1,763
Corporate Services 1994 149,615 29,800 0 1,831
HOWARD S. BAULCH(3) 1996 129,904 11,813 0 2,781
Executive Vice President of Systems, 1995 124,904 35,000 0 2,541
Support and Development 1994 51,231 12,500 263,070 0
JAMES M. GARRETT(4) 1996 51,162 108,750 25,000 0
Executive Vice President of
Sales and Marketing
</TABLE>
- ----------------------
(1) Reference to 1996 is for the period from July 1, 1995 to June, 30,
1996, while reference to 1995 and 1994 is for the period from January
1 to December 31 for those respective years.
(2) Includes matching contribution to the Company's 401(k) Plan.
(3) Mr. Baulch was employed by the Company effective July 28, 1994.
(4) Mr. Garrett was employed by the Company effective February 21, 1996
and resigned in July 1996.
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<PAGE> 43
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to the Named Executive Officers under the Company's 1995 Stock
Option Plan:
<TABLE>
<CAPTION>
Individual Grants (1)
- -------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (D) (e)
% of Total Options
Number of Securities Granted to
Underlying Options Employees in Fiscal Exercise Price
NAME GRANTED (#) YEAR ($/SH) EXPIRATION DATE
---- ----------- ---- ------ ---------------
<S> <C> <C> <C> <C>
Peter J. Kight 1,000 0.2% 19.38 04/19/06
Mark A. Johnson 1,000 0.2% 19.38 04/19/06
Mark D. Phelan 0 - - -
Howard S. Baulch 0 - - -
James M. Garrett 25,000 5.0% 21.88 02/21/06
</TABLE>
(1) This table covers the period from July 1, 1995 to June 30, 1996.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain information regarding the number and
value of stock options held by the Company's Named Executive Officers at June
30, 1996.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(1)
------------------------------ -------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ------------ ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Kight -0- -0- 315,684 211,456 5,986,947 3,991,298
Mark A. Johnson -0- -0- 72,812 49,542 1,386,705 924,482
Mark D. Phelan 105,355 1,960,393 300,089 -0- 5,715,195 -0-
Howard S. Baulch -0- -0- -0- 210,456 -0- 4,008,135
James M. Garrett -0- -0- 1,974 26,316 36,233 24,155
</TABLE>
______________
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year
end (19.875 on June 28, 1996). An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price of the
option.
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<PAGE> 44
The following Compensation Committee Report and Performance Graph shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any of the Company's filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Stock Option and Compensation Committee has the authority and
responsibility to determine and administer the Company's officer compensation
policies and to establish the salaries of executive officers, the formula for
bonus awards to executive officers, and the grant of stock options to executive
officers and other key employees under the Company's 1995 Stock Option Plan.
The Stock Option and Compensation Committee consists solely of independent
directors of the Company who are not eligible to receive any stock options
under the 1995 Stock Option Plan, except pursuant to any formulas provided in
the plans. In general, the philosophy of the Stock Option and Compensation
Committee is to attract and retain qualified executives, reward current and
past individual performance, provide short-term and long-term incentives for
superior future performance, and relate total compensation to individual
performance and performance of the Company.
The determination of executive officer base salaries for Transition Fiscal
1996, including increases to base salaries, was based primarily on subjective
factors, such as the Stock Option and Compensation Committee's perception of
individual performance and the executive officer's contribution to the overall
performance of the Company, and not on specific criteria. No specific weight
was given to any of these factors because each of these factors was considered
significant and the relevance of each varies depending upon an officer's
responsibilities. These factors were also taken into account when the Stock
Option and Compensation Committee established Peter J. Kight's salary at
$250,000 for transition fiscal 1996.
The purposes of the Company's 1995 Stock Option Plan is to provide
long-term incentives to key employees and motivate key employees to improve the
performance of the Company's Common Stock. Stock option awards are considered
annually by the Stock Option and Compensation Committee. The value of the stock
options awarded is entirely dependent upon the Company's stock performance over
a period of time.
The number of shares of the Company's Common Stock subject to the options
granted during transition fiscal 1996 was determined based on a subjective
evaluation of the past performance of the individual, the total compensation
being paid to the individual, the individual's scope of responsibility, and the
anticipated value of the individual's contribution to the Company's future
performance. No specific weight was given to any of these factors. Although
information as to the options awarded to each executive officer during previous
years was reviewed by the Stock Option and Compensation Committee, the Stock
Option and Compensation Committee did not consider the total amount of options
held by an officer in determining the size of an option awarded for transition
fiscal 1996.
Each stock option awarded during transition fiscal 1996 had an exercise
price equal to the fair market value of the underlying Common Stock of the
Company on the date of the grant. The options granted during transition fiscal
1996 vest and become exercisable at the rate of 20% per year if the option
holder remains employed at the time of vesting and terminate ten (10) years
from the date of grant. All options granted during transition fiscal 1996 to
employees are subject to certain forfeiture restrictions.
The Budget Reconciliation Act of 1993 amended the Code to add Section
162(m) which bars a deduction to any publicly held corporation for compensation
paid to a "covered employee" in excess of $1,000,000 per year. The Compensation
Committee does not believe that this law will impact the Company in the near
term because the current level of compensation for each of the Company's
executive officers is well below the $1,000,000 salary limitation.
STOCK OPTION AND COMPENSATION COMMITTEE
George R. Manser
Eugene F. Quinn
(For transition fiscal 1996)
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<PAGE> 45
PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE NASDAQ STOCK MARKET - US INDEX
AND THE S&P COMPUTER SOFTWARE & SERVICES INDEX
The following Performance Graph compares the performance of the Company
with that of the Nasdaq Stock Market - US Index and the S&P Computer Software &
Services Index, which is a published industry index. The comparison of the
cumulative total return to stockholders for each of the periods assumes that
$100 was invested on September 27, 1995 (the effective date the Company's
Common Stock was registered under the Securities Exchange Act of 1934, as
amended), in the Common Stock of the Company, and in the Nasdaq Stock Market -
US Index and the S&P Computer Software & Services Index and that all dividends
were reinvested.
CheckFree Corporation S&P NASDAQ
--------------------- --- ------
9/95 100 100 100
12/95 107.5 103.7257 100.9016
6/96 99.375 132.0183 113.65
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<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information as of September 16, 1996
regarding beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to own beneficially 5% or more of the Company's
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
the Named Executive Officers, excluding Mr. Garrett who resigned in July 1996;
(iv) all current directors and executive officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)(2)
------------------------------------------------------
STOCKHOLDER NUMBER PERCENT
- ------------------------------------------------------------ ----------------------- -------------------------
<S> <C> <C>
Peter J. Kight (3) 6,620,607 15.7%
Mark A. Johnson 1,573,802 3.8%
Mark D. Phelan 474,140 1.1%
Howard S. Baulch 107,228 *
William P. Boardman - *
George R. Manser 26,307 *
Eugene F. Quinn 5,261 *
Jeffrey M. Wilkins 52,614 *
All directors and executive officers as a group 11,164,935 26.2%
(15 persons)(3)
Nationwide Mutual Life 3,705,341 8.9%
Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Tribune Company 2,686,155 6.5%
435 North Michigan Avenue
Chicago, Illinois 60611
</TABLE>
- ----------------------
* Represents beneficial ownership of less than 1% of the Company's
outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those shares.
(2) Includes shares purchasable within 60 days after September 16, 1996
pursuant to the exercise of options covering 420,912 shares for Mr.
Kight, 72,812 shares for Mr. Johnson, 300,089 shares for Mr. Phelan,
52,614 shares for Mr. Baulch, 0 shares for Mr. Boardman, 26,307 shares
for Mr. Manser, 5,261 shares for Mr. Quinn, 52,614 shares for Mr.
Wilkins, and 961,488 shares for all directors and executive officers as
a group.
(3) Includes 1,800 shares held by the Peter J. Kight and Teresa J. Kight
1995 Children's Trust. Mr. Kight disclaims ownership of such shares in
which he has no pecuniary interest.
-46-
<PAGE> 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Manser and Quinn, neither of whom are employees of the
Company, are members of the Stock Option and Compensation Committee. Since
1994, Mr. Kight has served as a member of Metatec Corporation's Board of
Directors, of which Mr. Wilkins is Chairman and Chief Executive Officer.
TRANSACTIONS BETWEEN EXECUTIVE OFFICERS AND THE COMPANY
On December 16, 1992, Mark A. Johnson, President of Business Services of
the Company, and Mark D. Phelan, Executive Vice President of the Company, along
with certain other non-executive officers of the Company, purchased shares of
Common Stock from two stockholders of the Company. In order to pay for those
shares, Mr. Johnson, Mr. Phelan and certain other non-executive officers of the
Company entered into agreements with the Company pursuant to which the Company
loaned an aggregate of $501,447 to such officers of which none remains
outstanding as of June 30, 1996. Mr. Johnson and Mr. Phelan borrowed $100,272
and $100,293, respectively, and Mr. Johnson and Mr. Phelan pledged to the
Company the Common Stock acquired with the proceeds of the loans. These loans
were evidenced by promissory notes due December 31, 1997, bearing interest at a
rate of 6.15% per annum, payable annually. In addition to the restrictions
imposed by the pledge, the transfer of the shares by each of these officers is
also restricted by agreements which give the Company an option to purchase such
officer's shares if that officer's employment with the Company is terminated.
The entire principal amount of each note is due on December 31, 1997, except
that, if the officer's employment with the Company is terminated, the entire
unpaid principal and unpaid accrued interest becomes due and payable within 60
days after such termination. In December 1995, Mr. Johnson repaid all
obligations under his promissory note. In June 1996, the Company agreed to
forgive all principal and interest payable under Mr. Phelan's promissory note.
Jay N. Whipple III, the Company's Executive Vice President of Portfolio
Services is a minority owner and Vice President of Jay N. Whipple Inc., a
consulting firm that provides services to the Company. Under the current
arrangement with Jay N. Whipple Inc., the Company pays Jay N. Whipple, Inc.
$8,500 per month for consulting services.
VOTING AGREEMENTS
Mr. Kight, Mr. Johnson, Greylock Limited Partnership ("Greylock"),
Highland Capital Partners Limited Partnership ("Highland"), and Tribune Company
("Tribune") entered into a voting agreement, dated December 2, 1994, pursuant
to which Mr. Kight, Mr. Johnson, Greylock and Highland agreed to vote all of
their shares of the Company's Common Stock in favor of the election to the
Company's Board of Directors of Eugene F. Quinn or such other nominee of
Tribune who is reasonably acceptable to Mr. Kight, Mr. Johnson, Greylock and
Highland. Additionally, Mr. Kight and Mr. Johnson agreed to vote, and Greylock
and Highland agreed to cause their nominees to the Company's Board of Directors
to vote, in their capacity as directors, in favor of the election of Tribune's
nominee to the Audit Committee of the Company's Board of Directors.
Additionally, Tribune agreed to vote all of its shares of the Company's Common
Stock in favor of the election to the Company's Board of Directors of (i) Mr.
Kight, (ii) Mr. Johnson, (iii) Mr. William S. Kaiser or such other nominee of
Greylock as shall be reasonably acceptable to Tribune, and (iv) Mr. Paul A.
Maeder or such other nominee of Highland as shall be reasonably acceptable to
Tribune. Mr. Kaiser, Class III Director, resigned from the Board of Directors
effective March 21, 1996. Mr. Maeder, Class I Director, resigned from the Board
of Directors effective April 17, 1996. Messrs. Kaiser and Maeder are general
partners of venture capital investment partnerships that purchased shares of
the Company in 1992 and either have distributed their shares to their
respective limited partners. This voting agreement was terminated on April 19,
1996.
In addition, Mr. Kight, Mr. Johnson and Tribune entered into a voting
agreement, dated April 19, 1996, pursuant to which Mr. Kight and Mr. Johnson
agreed to vote all of their shares of the Company's Common Stock in favor of
the election to the Company's Board of Directors of Mr. Quinn or such other
nominee of Tribune who is reasonably acceptable to Mr. Kight and Mr. Johnson.
Additionally, Mr. Kight and Mr. Johnson agreed to vote, in their capacity as
directors, in favor of the election of Tribune's nominee to the Audit Committee
of the Company's Board of Directors. Under this agreement, Mr. Quinn currently
represents Tribune on the Company's Board of Directors and on
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<PAGE> 48
the Audit Committee. Additionally, Tribune agreed to vote all of its shares of
the Company's Common Stock in favor of the election to the Company's Board of
Directors of Mr. Kight and Mr. Johnson. This voting agreement terminates on the
earlier of the date Tribune holds less than 50% of the shares of the Company's
Common Stock acquired from the Company in December 1994 pursuant to the terms
of a certain stock purchase agreement, dated as of December 2, 1994, between
Tribune and the Company (the "Tribune Agreement"), and from Mr. Kight in
January 1995 and any shares subsequently acquired by Tribune pursuant to the
exercise of the anti-dilution rights granted in the Tribune Agreement and
September 28, 2000.
MR. KIGHT'S GUARANTY
In 1993, the State of Ohio issued State Economic Development Revenue Bonds
in the aggregate principal amount of $7,515,000 pursuant to a certain trust
agreement between the Treasurer of Ohio and The Provident Bank, as trustee
("Provident"). The proceeds of the bonds were applied to the purchase of real
property which is now currently being leased by the Company from the Director
of Development, State of Ohio for its corporate offices in Columbus, Ohio. Mr.
Kight guaranteed the obligations evidenced by the bonds in order to induce
their issuance by the State of Ohio pursuant to a guaranty agreement, dated
August 1, 1993, made with Provident (the "Guaranty Agreement"). Under the
Guaranty Agreement, Mr. Kight's liability is limited to an amount equal to the
product of his percentage beneficial ownership of the Company multiplied by the
outstanding principal of the bonds; provided, however, that Mr. Kight's
liability may not exceed $2,200,000. The Company has agreed to indemnify and
reimburse Mr. Kight for any amount paid by him under the Guaranty Agreement.
Additionally, under the Guaranty Agreement, with certain limited exceptions,
the Director of Development's consent is required for Mr. Kight to sell or
otherwise dispose of his equity interest in the Company.
MISCELLANEOUS
Curtis A. Loveland, the Company's Secretary, is a partner in the law firm
of Porter, Wright, Morris & Arthur, which firm serves as general counsel to the
Company.
Tribune owns a 13% interest in Peapod, L.P. ("Peapod"). Peapod is a
business customer of the Company, which generated revenue of $56,953 in
transition fiscal 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements are included in
this Annual Report on Form 10-K:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1996 and as of
December 31, 1994 and 1995.
Consolidated Statements of Operations for the six months
ended June 30, 1996 and for each of the three years in the
period ended December 31, 1995.
Consolidated Statements of Stockholders' Equity for the six
months ended June 30, 1996 and for each of the three years in
the period ended December 31, 1995.
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and for the each of the three years in
the period ended December 31, 1995.
Notes to the Consolidated Financial Statements.
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<PAGE> 49
(2) The following financial statement schedule is included in this Annual
Report on Form 10-K and should be read in conjunction with the Consolidated
Financial Statements contained in the Annual Report.
Schedule II -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included
in the financial statements or the notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
2(a) Agreement and Plan of Merger, dated as of January
15, 1996, among the Company, Checkfree Acquisition
Corporation, and Servantis Systems Holdings, Inc.
(Reference is made to Exhibit 2 to the Current
Report on Form 8-K, dated January 15, 1996, filed
with the Securities and Exchange Commission on
January 16, 1996, and incorporated herein by
reference.)
2(b) Agreement and Plan of Merger, dated as of March 21,
1996, among the Company, ISC Acquisition
Corporation, and Security APL, Inc. (Reference is
made to Exhibit 2 to the Current Report on Form
8-K, dated March 21, 1996, as amended, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(c) Amendment to Agreement and Plan of Merger, dated as
of April 30, 1996, among the Company, ISC
Acquisition Corporation, and Security APL, Inc.
(Reference is made to Exhibit 2(c) to the Form 10-Q
for the quarter ended March 31, 1996, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(d) Agreement and Plan of Merger, dated as of September
15, 1996, among the Company, Checkfree Acquisition
Corporation II, Intuit Inc. and Intuit Services
Corporation. (Reference is made to Exhibit 2 to the
Current Report on Form 8-K, dated September 15,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the
Company. (Reference is made to Exhibit 3(a) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
3(b) Amended and Restated By-Laws of the Company.
(Reference is made to Exhibit 3(b) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII
-49-
<PAGE> 50
of the Company's Amended and Restated By-Laws
(contained in the Company's Amended and Restated
By-Laws filed as Exhibit 3(b) hereto).
10(a) Checkfree Corporation 1995 Stock Option Plan.
(Reference is made to Exhibit 10(a) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(b) Checkfree Corporation Amended and Restated 1993
Stock Option Plan. (Reference is made to Exhibit
10(b) to Registration Statement on Form S-1, as
amended (Registration No. 33- 95738), filed with
the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(c) Checkfree Corporation Second Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 10(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(d) Checkfree Corporation Second Amended and Restated
1983 Incentive Stock Option Plan. (Reference is
made to Exhibit 10(d) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(e) Form of Indemnification Agreement. (Reference is
made to Exhibit 10(a) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(f) Schedule identifying material details of
Indemnification Agreements substantially identical
to Exhibit 10(e). (Reference is made to Exhibit
10(f) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(g) Voting Agreement, dated November 30, 1994, among
Peter J. Kight, Greylock Limited Partnership, and
Highland Capital Partners Limited Partnership.
(Reference is made to Exhibit 10(g) to Registration
Statement on Form S-1, as amended (Registration No.
33- 95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(h) Voting Agreement, dated December 2, 1994, among
Peter J. Kight, Mark A. Johnson, Greylock Limited
Partnership, Highland Capital Partners Limited
Partnership and Tribune Company. (Reference is made
to Exhibit 10(h) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(i) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Peter J.
Kight and the Company. (Reference is made to
Exhibit 10(i) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(j) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Mark A.
Johnson and the Company. (Reference is made to
Exhibit 10(j) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
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<PAGE> 51
10(k) Stock Purchase Agreement, dated December 2, 1994,
between the Company and Tribune Company. (Reference
is made to Exhibit 10(k) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(l) Stock Transfer Restriction Agreement, dated
December 2, 1994, among Peter J. Kight, Mark A.
Johnson, and Tribune Company. (Reference is made to
Exhibit 10(l) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(m) Investment Agreement, dated November 9, 1983, among
the Company (formerly, Aegis Systems, Inc.), The
Midland Mutual Life Insurance Company, The Columbus
Mutual Life Insurance Company, Grange Mutual
Casualty Company, and North American National Corp.
(Reference is made to Exhibit 10(m) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(n) Stock Purchase Agreement, dated March 17, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(n) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(o) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and The
Midland Mutual Life Insurance Company. (Reference
is made to Exhibit 10(o) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(p) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Columbus
Mutual Life Insurance Company. (Reference is made
to Exhibit 10(p) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(q) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Grange
Mutual Casualty Company. (Reference is made to
Exhibit 10(q) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(s) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Pan
Western Life Insurance Company. (Reference is made
to Exhibit 10(s) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(t) Subscription Agreement, dated December 31, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(t) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(u) Investment Agreement, dated September 20, 1989,
among the Company, Columbus Life Insurance Company,
Grange Mutual Casualty Company, and North American
National Corporation. (Reference is made to Exhibit
10(u) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-51-
<PAGE> 52
10(v) Amending Agreement, dated November 30, 1994, and
letter agreement, dated September 24, 1992, between
the Company and Mark D. Phelan. (Reference is made
to Exhibit 10(v) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(w) Joint Development and Marketing Agreement, dated
August 2, 1995, between the Company and ADP, Inc.
(Reference is made to Exhibit 10(w) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(x) Bill Payment and Remote Banking Services Agreement,
dated March 25, 1993, between the Company and
MasterCard International Incorporated. (Reference
is made to Exhibit 10(x) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(y) Amendment to Bill Payment and Remote Banking
Services Agreement, dated December 1, 1994, between
the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(y)
to Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(z) Agreement and Release, dated October 16, 1995,
between the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(z)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.)**
10(aa) Electronic Bill Payment Services Marketing
Agreement, dated April 26, 1995, between the
Company and AT&T Corporation. (Reference is made to
Exhibit 10(z) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(bb) Amendment One to Electronic Bill Payment Services
Marketing Agreement, dated November 1, 1995,
between the Company and AT&T Corporation.
(Reference is made to Exhibit 10(bb) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(cc) Marketing and License Agreement, dated August 14,
1995, among the Company, Virtual Open Network
Environment, and Spyglass, Inc. (Reference is made
to Exhibit 10(aa) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(dd) Automatic Payment Collection Agreement, dated July
28, 1993, between the Company and CompuServe,
Incorporated (with addenda). (Reference is made to
Exhibit 10(bb) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(ee) Automatic Payment Collection Agreement, dated
August 22, 1994, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(cc) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-52-
<PAGE> 53
10(ff) Data Capture Credit Card Terminal Processing
Agreement, dated August 22, 1994, between the
Company and Spry, Inc. (Reference is made to
Exhibit 10(dd) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(gg) Reproduction and Distribution Agreement, dated July
27, 1995, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(ee) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(hh) Letter of Intent, dated July 10, 1995, between the
Company and CyberCash, Inc. (Reference is made to
Exhibit 10(ff) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(ii) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech,
Inc. (Reference is made to Exhibit 10(gg) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(jj) Amendment to Bill Payment and Remote Banking
Services Agreement, dated July 1, 1995, between the
Company and FiTech, Inc. (Reference is made to
Exhibit 10(hh) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(kk) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ll) Merchant Processing Agreement, dated March 13,
1995, between the Company and Society National
Bank. (Reference is made to Exhibit 10(jj) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(mm) Cooperative Marketing Agreement, dated March 14,
1991, between the Company and Intuit Corporation
(including addendum and notice). (Reference is made
to Exhibit 10(kk) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(nn) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark D.
Phelan. (Reference is made to Exhibit 10(ll) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(oo) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark D. Phelan.
(Reference is made to Exhibit 10(mm) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-53-
<PAGE> 54
10(pp) Promissory Note, dated December 16, 1992, of Mark
D. Phelan. (Reference is made to Exhibit 10(nn) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(qq) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark A.
Johnson. (Reference is made to Exhibit 10(oo) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(rr) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark A. Johnson.
(Reference is made to Exhibit 10(pp) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ss) Promissory Note, dated December 16, 1992, of Mark
A. Johnson. (Reference is made to Exhibit 10(qq)
to Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(tt) Lease, dated August 1, 1993, between the Company
and The Director of Development of the State of
Ohio. (Reference is made to Exhibit 10(rr) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(uu) Guaranty Agreement, dated August 1, 1993, between
the Company and The Provident Bank. (Reference is
made to Exhibit 10(ss) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(vv) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ww) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(xx) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company
as mortgagor and Society National Bank as
mortgagee. (Reference is made to Exhibit 10(vv) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(yy) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(zz) Commercial Note Variable Rate, dated January 3,
1995, of the Company. (Reference is made to Exhibit
10(xx) to Registration Statement on Form S-1, as
amended (Registration
-54-
<PAGE> 55
No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(aaa) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference
is made to Exhibit 10(yy) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(bbb) Agreement, dated August 29, 1995, between the
Company and Nationwide Mutual Insurance Company.
(Reference is made to Exhibit 10(zz) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ccc) Agreement, dated September 8, 1995, among the
Company, The Midland Life Insurance Company, The
Columbus Life Insurance Company, Grange Mutual
Casualty Company, and Pan Western Life Insurance
Company. (Reference is made to Exhibit 10(aaa) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ddd) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(eee) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by
reference.)**
10(fff) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by
reference.)**
10(ggg) License Agreement, December 29, 1995, between the
Company and Premiere Communications, Inc.
(Reference is made to Exhibit 10(ggg) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(hhh) Payment Services, Software Development and
Marketing Agreement, dated as of February 27, 1996,
between the Company and CyberCash. (Reference is
made to Exhibit 10(a) to the Form 10-Q for the
quarter ended March 31, 1996, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.) **
10(iii) Termination of Voting Agreement, dated as of April
19, 1996, among Peter J. Kight, Mark A. Johnson,
Greylock Limited Partnership, Highland Capital
Partners Limited Partnership and Tribune Company.
(Reference is made to Exhibit 10(b) to the Form
10-Q for the quarter ended March 31, 1996, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(jjj) Voting Agreement, dated as of April 19, 1996, among
Peter J. Kight, Mark A. Johnson, and Tribune
Company. (Reference is made to Exhibit 10(c) to the
Form 10-Q for the quarter ended March 31, 1996,
filed with the Securities and Exchange Commission,
and incorporated herein by reference.)
-55-
<PAGE> 56
10(kkk) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(lll) Executive Employment Agreement between the Company
and Robert E. Bowers. (Reference is made to Exhibit
10(e) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(mmm) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(nnn) Executive Employment Agreement between the Company
and James M. Garrett. (Reference is made to Exhibit
10(g) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ooo) Executive Employment Agreement between the Company
and James Robert Lewis, III. (Reference is made to
Exhibit 10(h) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(ppp) Executive Employment Agreement between the Company
and Jay N. Whipple, III. (Reference is made to
Exhibit 10(i) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(qqq) * Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Powers of Attorney.
27 * Financial Data Schedule.
- -----------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K
since March 31, 1996:
Current Report on Form 8-K, dated April 19, 1996,
filed with the Securities and Exchange Commission on
April 23, 1996 (Item 8).
Current Report on Form 8-K, dated May 9, 1996, filed
with the Securities and Exchange Commission on May
20, 1996 (Items 2 and 7).
Current Report on Form 8-K/A No. 1, dated May 9,
1996, filed with the Securities and Exchange
Commission on July 22, 1996 (Items 2 and 7).
Current Report on Form 8-K dated July 2, 1996, filed
with the Securities and Exchange Commission on July
8, 1996 (Items 5).
-56-
<PAGE> 57
(C) EXHIBITS
The exhibits to this report begin on page __.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent
auditors' report thereon are set forth on pages F-21 through F-22 hereof.
-57-
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHECKFREE CORPORATION
Date: September 26, 1996 By: /s/ MARK A. JOHNSON
---------------------------
Mark A. Johnson, President
of Corporate Services
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on the 26th day of September, 1996.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*PETER J. KIGHT Chairman of the Board, President, and Chief Executive Officer
- ------------------------------- (Principal Executive Officer)
Peter J. Kight
/s/ Mark A. Johnson President of Corporate Services and Director
- -------------------------------
Mark A. Johnson
*John M. Stanton Vice President and Treasurer
- ------------------------------- (Principal Accounting Officer)
John M. Stanton
*James S. Douglass Vice President - Finance and Chief Financial Officer
- ------------------------------- (Principal Financial Officer)
James S. Douglass
*William P. Boardman Director
- -------------------------------
William P. Boardman
*George R. Manser Director
- -------------------------------
George R. Manser
*Eugene F. Quinn Director
- -------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- -------------------------------
Jeffrey M. Wilkins
</TABLE>
*By: /s/ CURTIS A. LOVELAND
-------------------------------
Curtis A. Loveland, Attorney-in-Fact
-58-
<PAGE> 59
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Checkfree Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Checkfree
Corporation and its subsidiaries as of December 31, 1994 and 1995 and June 30,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 and for the six months ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Checkfree Corporation and its
subsidiaries at December 31, 1994 and 1995 and June 30, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 in conformity
with generally accepted accounting principles.
Columbus, Ohio
August 22, 1996, except for Note 17 as to which
the date is September 15, 1996
DELOITTE & TOUCHE LLP
F - 1
<PAGE> 61
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
ASSETS 1994 1995 1996
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,208,725 $ 63,839,854 $ 20,987,355
Investments 11,819,937 21,012,141 18,089,029
Accounts receivable 1,862,496 3,389,084 29,516,548
Assets held for sale 20,000,000
Prepaid expenses and other 1,079,612 1,915,969 2,205,800
Refundable income taxes 144,119
Deferred income taxes 112,123 165,543
--------------- --------------- ---------------
Total current assets 17,082,893 90,466,710 90,798,732
PROPERTY AND EQUIPMENT - Net 12,156,280 13,559,180 36,567,141
OTHER ASSETS:
Capitalized software, net 493,054 285,554 34,407,680
Intangible assets, net 27,507,677
Investments 7,498,835 2,898,065
Other noncurrent assets 779,833 3,831,649 4,050,249
--------------- --------------- ---------------
Total other assets 1,272,887 11,616,038 68,863,671
--------------- --------------- ---------------
TOTAL $ 30,512,060 $ 115,641,928 $ 196,229,544
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 483,052 $ 706,459 $ 5,434,468
Accrued liabilities 2,994,545 5,632,852 14,876,861
Customer deposits 217,951 192,456 575,595
Current portion of long-term obligations 1,081,611 1,161,192 1,112,184
Deferred revenue 754,154 982,171 15,438,798
Income taxes payable 153,032 45,608
Deferred income taxes 7,819,505
-------------- --------------- ---------------
Total current liabilities 5,684,345 8,675,130 45,303,019
ACCRUED RENT AND OTHER 65,637 50,755 195,169
DEFERRED INCOME TAXES 176,663 308,711 4,732,324
LONG-TERM OBLIGATIONS - Less current portion:
Obligations under capital leases 8,007,079 7,157,465 7,136,817
Stockholder's note 50,000 50,000 50,000
Notes payable to banks 156,250 75,000 1,137,500
--------------- --------------- ---------------
Total long-term obligations 8,213,329 7,282,465 8,324,317
COMMITMENTS (Notes 11, 12 and 13)
STOCKHOLDERS' EQUITY:
Preferred stock - 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding - -
Common stock - 150,000,000 authorized shares, $.01 par value;
issued 27,619,193 shares, 32,864,765 shares and 42,274,800 shares 276,192 328,648 422,748
Additional paid-in capital 17,210,032 100,133,800 276,823,109
Less:
Treasury stock - at cost, 757,536 shares (629,481) (629,481) (629,481)
Stockholders' notes receivable (325,932) (133,793)
accumulated deficit (158,725) (374,307) (138,941,661)
-------------- --------------- ---------------
Total stockholders' equity 16,372,086 99,324,867 137,674,715
-------------- ---------------- ---------------
TOTAL $ 30,512,060 $ 115,641,928 $ 196,229,544
============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 62
CHECKFREE CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
1993 1994 1995
<S> <C> <C> <C> <C>
REVENUES:
Processing and servicing $ 23,337,061 $ 31,097,631 $ 39,535,737 $ 27,141,624
Merchant discount 5,648,539 7,184,729 9,794,280 6,162,914
License fees -- -- -- 10,970,034
Maintenance fees -- -- -- 1,978,287
Other 1,906,675 984,275 -- 4,787,003
------------- ------------- ------------- --------------
Total revenues 30,892,275 39,266,635 49,330,017 51,039,862
------------- ------------- -------------- -------------
EXPENSES:
Cost of processing, servicing and support 19,516,041 25,787,164 32,292,787 40,351,784
Research and development 3,677,898 4,825,910 7,008,625 10,177,164
Sales and marketing 3,730,311 4,553,073 7,405,341 17,512,910
General and administrative 2,466,395 2,717,175 4,288,696 8,805,891
In process research and development -- -- -- 122,357,586
------------- ----------- ------------ -------------
Total expenses 29,390,645 37,883,322 50,995,449 199,205,335
------------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS 1,501,630 1,383,313 (1,665,432) (148,165,473)
OTHER:
Interest income 165,235 298,186 2,135,085 1,658,749
Interest expense (278,835) (795,204) (644,837) (324,726)
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,388,030 886,295 (175,184) (146,831,450)
INCOME TAX EXPENSE (BENEFIT) 368,000 400,000 40,000 (8,628,615)
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,020,030 486,295 (215,184) (138,202,835)
EXTRAORDINARY ITEM, EXTINGUISHMENT
OF DEBT, NET OF TAX -- -- -- (364,374)
------------- ------------- ------------- ------------
NET INCOME (LOSS) $ 1,020,030 $ 486,295 $ (215,184) $(138,567,209)
============= ============= ============== =============
PER SHARE AMOUNTS:
Income (loss) before extraordinary item $ 0.04 $ 0.02 $ (0.01) $ (3.69)
Extraordinary item (0.01)
------------- ------------- ------------- -------------
Net income (loss) $ 0.04 $ 0.02 $ (0.01) $ (3.70)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 26,886,254 27,103,287 28,218,521 37,419,580
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE> 63
CHECKFREE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF COMMON ADDITIONAL NUMBER OF TREASURY STOCKHOLDERS'
SHARES OF STOCK AT PAID-IN SHARES OF STOCK AT NOTES
COMMON STOCK PAR CAPITAL TREASURY STOCK COST RECEIVABLE
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 24,021,579 $240,216 $ 4,344,979 (606,666) $(504,113) $(501,447)
Net income -- -- -- -- -- --
Treasury stock acquired -- -- -- (60,348) (50,147) 50,147
Repayment of loans to stockholders -- -- -- -- -- 50,147
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1993 24,021,579 240,216 4,344,979 (667,014) (554,260) (401,153)
Net income -- -- -- -- -- --
Stock options exercised 52,614 526 29,474 -- -- --
Treasury stock acquired -- -- -- (90,522) (75,221) 75,221
Conversion of subordinated debentures 1,127,439 11,274 738,726 -- -- --
Sale of common stock 2,417,561 24,176 12,096,853 -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1994 27,619,193 276,192 17,210,032 (757,536) (629,481) (325,932)
Net loss -- -- -- -- -- --
Stock options exercised 270,262 2,703 172,082 -- -- --
Tax benefit associated with exercise of stock
options -- -- 57,586 -- -- --
Sale of common stock, net of expenses related
to public offering 4,975,310 49,753 82,694,100 -- -- --
Repayment of loans to stockholders -- -- -- -- -- 192,139
Cash payments in lieu of fractional shares -- -- -- -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1995 32,864,765 328,648 100,133,800 (757,536) (629,481) (133,793)
Net loss -- -- -- -- -- --
Stock options exercised 874,195 8,742 862,088 -- -- --
Tax benefit associated with exercise of stock
options -- -- 1,100,141 -- -- --
Issuance of common stock and stock options 8,535,840 85,358 174,727,080 -- -- --
pursuant to acquisitions
Repayment of loans to stockholders -- -- -- -- -- 133,793
Cash payments in lieu of fractional shares -- -- -- -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, JUNE 30, 1996 42,274,800 $422,748 $276,823,109 (757,536) $(629,481) $ --
========== ======== ============ ======== ========= =========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
<S> <C> <C>
BALANCE, DECEMBER 31, 1992 $ (1,665,050) $ 1,914,585
Net income 1,020,030 1,020,030
Treasury stock acquired -- --
Repayment of loans to stockholders -- 50,147
------------- -------------
BALANCE, DECEMBER 31, 1993 (645,020) 2,984,762
Net income 486,295 486,295
Stock options exercised -- 30,000
Treasury stock acquired -- --
Conversion of subordinated debentures -- 750,000
Sale of common stock -- 12,121,029
------------- -------------
BALANCE, DECEMBER 31, 1994 (158,725) 16,372,086
Net loss (215,184) (215,184)
Stock options exercised -- 174,785
Tax benefit associated with exercise of stock
options -- 57,586
Sale of common stock, net of expenses related
to public offering -- 82,743,853
Repayment of loans to stockholders -- 192,139
Cash payments in lieu of fractional shares (398) (398)
------------- -------------
BALANCE, DECEMBER 31, 1995 (374,307) 99,324,867
Net loss (138,567,209) (138,567,209)
Stock options exercised -- 870,830
Tax benefit associated with exercise of stock
options -- 1,100,141
Issuance of common stock and stock options -- 174,812,438
pursuant to acquisitions
Repayment of loans to stockholders -- 133,793
Cash payments in lieu of fractional shares (145) (145)
------------- -------------
BALANCE, JUNE 30, 1996 $(138,941,661) $ 137,674,715
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 64
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION> Six Months Ended
Year Ended December 31, June 30,
------------------------------------------ 1996
1993 1994 1995
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,020,030 $ 486,295 $ (215,184) $(138,567,209)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item, extinguishment of debt, net of tax -- -- -- 364,374
Write-off of in process research and development -- -- -- 122,357,586
Depreciation and amortization 1,376,533 1,921,665 2,484,677 6,997,102
Deferred income taxes -- 64,540 78,628 (8,653,323)
Loss on disposal of property and equipment -- 33,996 12,650 99,819
Accretion of investment discount - net -- -- (337,221) --
Change in certain assets and liabilities:
Accounts receivable (2,364,264) 543,052 (1,499,502) (1,109,875)
Prepaid expenses and other (443,183) (269,276) (915,259) 820,701
Refundable income taxes 159,473 -- (144,119) --
Accounts payable 141,325 723 223,407 2,605,707
Accrued liabilities 562,810 (87,607) 2,623,425 3,428,406
Customer deposits 82,430 (113,237) (25,495) 272,647
Deferred revenue 493,354 153,093 228,017 4,585,841
Income taxes payable 232,441 (79,409) (153,032) 152,903
----------- ------------ ------------ -------------
Net cash provided by (used in) operating activities 1,260,949 2,653,835 2,360,992 (6,645,321)
----------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,351,254) (1,042,892) (3,431,016) (7,089,391)
Proceeds from the sale of property and equipment 19,719 23,548 270 29,016
Capitalization of software development costs -- -- -- (1,312,327)
Purchase of businesses, net of cash acquired -- -- -- (39,404,209)
Purchase of investments -- (11,819,937) (54,078,818) --
Proceeds from maturities and sales of investments -- -- 37,725,000 10,644,945
Purchase of trademark license -- -- (3,000,000) --
----------- ------------ ------------ -------------
Net cash used in investing activities (1,331,535) (12,839,281) (22,784,564) (37,131,966)
----------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock -- 12,121,029 82,743,853 --
Redemption of subordinated debentures (400,000) (250,000) -- --
Repayment of notes payable and other debt extinguishment (458,340) (250,000) (75,000) (608,874)
Proceeds from notes payable -- -- 225,000 1,100,000
Repayment of stockholders' notes -- -- (225,000) --
Principal payments under capital lease obligations (176,412) (711,435) (1,038,264) (570,816)
Proceeds from stock options exercised including related income
tax benefits -- 30,000 232,371 870,830
Cash payments in lieu of fractional shares -- -- (398) (145)
Payments received on stockholder notes receivables 50,147 -- 192,139 133,793
----------- ------------ ------------ -------------
Net cash provided by (used in) financing activities (984,605) 10,939,594 82,054,701 924,788
----------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,055,191) 754,148 61,631,129 (42,852,499)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,509,768 1,454,577 2,208,725 63,839,854
----------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,454,577 $ 2,208,725 $ 63,839,854 $ 20,987,355
=========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 65
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Checkfree Corporation (the Company) was organized in 1981
and is a leading provider of transaction processing services, software and
related products to financial institutions and businesses and their
customers throughout the United States. See Note 16 for a description of
the Company's business segments.
PRINCIPLES OF CONSOLIDATION AND CHANGE IN FISCAL YEAR - The accompanying
consolidated financial statements include the results of operations of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Effective January 1, 1996, the Company changed its fiscal year-end from
December 31 to June 30. The following presents unaudited summarized
consolidated financial information for the six months ended June 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Total revenues $ 23,581,343
Loss from operations (67,792)
Income taxes 61,592
Net income 75,288
Net income per share Nil
</TABLE>
PROCESSING AGREEMENTS - The Company has agreements with transaction
processors to provide origination and settlement services for the Company.
Under the agreements, the Company must fund service fees and returned
transactions when presented. These agreements expire at various times
through June 1999.
TRANSACTION PROCESSING - In connection with the timing of the Company's
financial transactions processing, the Company is exposed to credit risk
in the event of nonperformance by other parties, such as returns and
chargebacks. The Company utilizes credit analysis and other controls to
manage its credit risk exposure. The Company also maintains a reserve for
future returns and chargebacks.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments (primarily United States government agency obligations and
commercial paper) purchased with maturities of one month or less to be
cash equivalents. Substantially all cash and cash equivalents are on
deposit with seven financial institutions.
INVESTMENTS - The Company's investments consist primarily of United States
government or government agency obligations and certificates of deposit.
The Company classifies these investments as
F-6
<PAGE> 66
available-for-sale securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Such investments are carried at amortized cost,
which approximates market value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line and
accelerated methods over the estimated useful lives as follows: land
improvements, building and building improvements, 15 to 30 years; computer
equipment, software, and furniture, 3 to 5 years. Equipment under capital
leases is amortized using the straight-line method over the terms of the
leases. Leasehold improvements are amortized over the lesser of the
estimated useful lives or remaining lease terms.
CAPITALIZED SOFTWARE COSTS - Software development costs incurred prior to
the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the technological feasibility of
the subject software product has been established are capitalized in
accordance with Statement of Financial Accounting Standards No. 86.
Capital software development costs are amortized on a product-by-product
basis using either the straight-line method over the estimated economic
life of the product or the ratio of current year gross product revenue to
current and anticipated future gross product revenue, whichever is
greater. Unamortized software development costs in excess of estimated
future net revenues from a particular product are written down to
estimated net realizable value.
Amortization of software costs totaled $265,763, $267,624, $207,500 and
$2,520,802 for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996, respectively.
INTANGIBLE ASSETS - The cost of identified intangible assets are generally
amortized on a straight-line basis over periods from 6-15 years. Goodwill
is amortized on a straight-line basis over 10 years. At each balance sheet
date, a determination is made by management to ascertain whether the
intangible assets have been impaired based on several criteria, including,
but not limited to, sales trends, undiscounted operating cash flows, and
other operating factors.
CAPITAL STOCK - On April 21, 1995, the Company's stockholders increased
the authorized number of shares of $.01 par value Common Stock to
25,000,000 and on August 8, 1995 increased the number of authorized shares
of $.01 par value Common Stock to 150,000,000. In addition, on August 8,
1995, the Company's stockholders authorized the Board of Directors to
issue up to 15,000,000 shares of $.01 par value preferred stock in one or
more series and to establish such relative voting, dividend, redemption,
liquidation, conversion and other powers, preferences, rights,
qualifications, limitations and restrictions as the Board may determine
without further stockholder approval. No preferred shares have been
issued.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expenses were $494,110, $613,158, $1,757,601 and $7,159,234
for the years ended December 31, 1993, 1994 and 1995, and the six months
ended June 30, 1996, respectively.
NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE - Net income (loss) per
common and equivalent share is based on the weighted average number of
shares and dilutive common stock equivalents (stock options) outstanding
during the periods presented. All share and per share information has been
retroactively adjusted for the five-for-one stock split on May 1, 1995 and
the 5.2614-for-one split on the effective date of the initial public
offering (September 28, 1995). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common shares and stock
options issued during the twelve months immediately preceding the initial
public offering were treated as if they had been
F-7
<PAGE> 67
outstanding for all periods, using the treasury stock method. The assumed
conversion of the convertible debentures had an insignificant impact on
net income (loss) per common and equivalent share.
RECLASSIFICATIONS - Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1996 presentation.
REVENUE RECOGNITION:
PROCESSING AND SERVICING - Processing and servicing revenues include
revenues from transaction processing, electronic funds transfer and
monthly service fees on consumer funds transfer services. The Company
recognizes revenue when the services are performed.
As part of processing certain types of transactions, the Company earns
revenue from the time money is collected from its customers until the time
payment is made to the applicable merchants. These revenues are included
in processing and servicing and totalled $130,300, $740,290, $1,622,963
and $1,019,288 for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996, respectively.
MERCHANT DISCOUNT - Merchant discount revenues are recognized when the
services are performed. Interchange fees incurred in the settlement of
merchant credit card transactions are included in processing and servicing
expenses.
LICENSE FEES - Revenue from software license agreements is recognized upon
delivery of the software if there are no significant postdelivery
obligations. The revenue related to significant postdelivery obligations
is deferred and recognized using the percentage-of-completion method.
MAINTENANCE FEES - Maintenance fee revenue is recognized ratably over the
term of the related contractual support period, generally 12 months.
EXPENSE CLASSIFICATION:
PROCESSING, SERVICING AND SUPPORT- Processing, servicing and support costs
consist primarily of data processing costs, customer care and technical
support, and third party transaction fees, which consist primarily of
credit card interchange fees, ACH transaction fees and the amortization of
software costs.
RESEARCH AND DEVELOPMENT - Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel.
SALES AND MARKETING - Sales and marketing expenses consist primarily of
salaries and commissions of sales employees, public relations and
advertising costs, customer acquisition fees and royalties paid to
distribution partners.
GENERAL AND ADMINISTRATIVE - General and administrative expenses consist
primarily of salaries for administrative, executive, financial control,
and human resource employees.
F-8
<PAGE> 68
2. ACQUISITIONS
On February 21, 1996, the Company acquired Servantis Systems Holdings,
Inc. (Servantis) for $165.1 million, including 5.7 million shares of
common stock, valued at $20.00 per share, the issuance of stock options
valued at $8.2 million and the retirement of certain debt of $42.5
million, and the assumption of liabilities of approximately $38.3 million.
The acquisition was treated as a purchase for accounting purposes, and,
accordingly, the assets and liabilities were recorded based on their fair
values at the date of the acquisition. Of the total purchase price, $90.6
million was allocated to in-process research and development, which was
charged to operations at the time of the acquisition. Servantis'
operations are included in the consolidated results of operations from the
date of the acquisition.
On May 9, 1996, the Company acquired Security APL, Inc. (Security APL) for
$53 million, including 2.8 million shares of common stock, valued at
$18.50 per share, and the assumption of liabilities of approximately $5.5
million. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based
on their fair values at the date of the acquisition. Of the total purchase
price, $28.8 million was allocated to in-process research and development,
which was charged to operations at the time of the acquisition. Security
APL's operations are included in the consolidated results of operations
from the date of the acquisition.
In March 1996, the Company acquired Interactive Solutions Corp. ("IS")
for $3.0 million, including 85,000 shares of common stock valued at $21.25
per share. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based
on their fair values at the date of the acquisition. Of the total purchase
price, $3.0 million was allocated to in-process research and development,
which was charged to operations at the time of the acquisition. IS's
operations are included in the consolidated results of operations from the
date of acquisition.
Consistent with the Company's policy for internally developed software,
the Company determined the amounts to be allocated to in-process research
and development based on whether technological feasibility had been
achieved and whether there was any alternative future use for the
technology. As of the date of the acquisitions, the Company concluded that
the in-process research and development had no alternative future use
after taking into consideration the potential for usage of the software in
different products, resale of the software and internal usage.
The unaudited pro forma results of operations of the Company for the year
ended December 31, 1995 and the six months ended June 30, 1996, assuming
all of the above acquisitions occurred at the beginning of each period are
as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
(In thousands, except per share data)
<S> <C> <C>
Total revenues $ 110,974 $ 59,384
Loss before extraordinary item (16,333) (25,564)
Net loss (16,698) (25,929)
Net loss per share (0.45) (0.63)
</TABLE>
This information is presented to facilitate meaningful comparisons to
on-going operations and to other companies. The unaudited pro forma
amounts above do not include a charge for in-process research and
development of $122.4 million arising from the acquisitions. The unaudited
pro forma information is not necessarily indicative of the actual results
of operations had the transactions occurred at the beginning of
F-9
<PAGE> 69
the periods presented, nor should it be used to project the Company's
results of operations for any future periods.
3. INVESTMENTS
The carrying amounts, which approximate market value, of investments in
debt securities are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
U.S. Government and
Government Agency
Obligations $ 11,819,937 $ 28,510,976 $ 20,762,950
Certificates of Deposit - - 224,144
------------ -------------- --------------
Total $ 11,819,937 $ 28,510,976 $ 20,987,094
============ ============== ==============
</TABLE>
Gross unrealized gains and losses at each date were insignificant. In
addition, sales of securities and related realized gains/losses, based on
the specific identification cost method, were insignificant for each of
the periods.
Contractual maturities of debt securities at June 30, 1996 are shown
below. Expected maturities will differ from contractual maturities because
debt issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
<S> <C>
Due in one year or less $ 18,089,029
Due after one year through five years 2,898,065
--------------
Total $ 20,987,094
==============
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Trade accounts receivable $ 1,703,912 $ 2,684,989 $14,858,364
Unbilled trade accounts receivable -- -- 16,203,055
Other receivables 185,319 736,756 734,851
----------- ----------- -----------
Total 1,889,231 3,421,745 31,796,270
Less allowance for doubtful accounts 26,735 32,661 2,279,722
----------- ----------- -----------
Total $ 1,862,496 $ 3,389,084 $29,516,548
=========== =========== ===========
</TABLE>
5. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes," which requires an asset and liability approach
F-10
<PAGE> 70
to financial accounting and reporting for income taxes. In accordance with
SFAS No. 109, deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Income tax expense (benefit) is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Current:
Federal $ 305,800 $ 250,929 $ (123,406) $ --
State and local 62,200 84,531 84,778 24,708
----------- ----------- ------------ ------------
Total current 368,000 335,460 (38,628) 24,708
Deferred Federal and state taxes -- 64,540 78,628 (8,653,323)
----------- ----------- ------------ ------------
Total income tax expense (benefit) $ 368,000 $ 400,000 $ 40,000 $(8,628,615)
=========== =========== =========== ===========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 34 percent to income before income
taxes as a result of the following:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit) $ 471,930 $ 301,340 $ (59,563) $(49,922,693)
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets (256,000) -- -- --
Non-deductible in-process
research and development of
acquired businesses -- -- -- 41,601,579
Nondeductible intangible
amortization 64,767 64,767 64,767 218,918
State and local taxes, net of
Federal income tax benefit 41,052 55,790 55,953 (626,334)
Other accruals 36,636 (36,636)
Other - net 9,615 14,739 (21,157) 99,915
------------ ------------ ------------ ------------
Total income tax expense (benefit) $ 368,000 $ 400,000 $ 40,000 $ (8,628,615)
============ ============ ============ ============
</TABLE>
F-11
<PAGE> 71
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994, 1995 and June 30, 1996 are:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,295,934
Allowance for bad debts and returns $ 120,553 $ 178,215 1,254,497
Accrued compensation and related items 91,186 113,180 1,001,332
State income tax accrued 20,264 15,132 89,328
Deferred revenue 120,000
Valuation allowance -- -- (6,000,000)
------------ ------------ -----------
Total deferred tax assets 232,003 426,527 5,641,091
------------ ------------ -----------
Deferred tax liabilities:
Assets held for sale -- -- (8,000,000)
Property and equipment (169,935) (308,711) (1,434,982)
Capitalized software (6,726) (5,953,098)
Intangible assets -- -- (640,176)
Deferred revenue -- -- (1,936,171)
Prepaid expenses (119,882) (260,984) (169,711)
Other, net -- -- (58,782)
------------ ------------ -----------
Total deferred tax liabilities (296,543) (569,695) (18,192,920)
------------ ------------ -----------
Net deferred tax liability $ (64,540) $ (143,168) $(12,551,829)
============ ============ ============
</TABLE>
At June 30, 1996, the Company has approximately $25,000,000 of net
operating loss carryforwards available, expiring in 2009 to 2011,
including approximately $16,000,000 related to a purchased subsidiary
which can only be used to offset income earned by the subsidiary up to
specified annual amounts. The valuation allowance reduces deferred tax
assets to the amount the Company believes more likely than not will be
realized. Any future realization of tax benefits for which the valuation
allowance has been recorded would result in a reduction of intangible
assets, based on unamortized recorded balances as of June 30, 1996.
6. INTANGIBLE ASSETS
The components of intangible assets at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Workforce $ 7,195,200
Tradenames 4,164,444
Customer base 3,459,111
Goodwill 13,647,058
---------------
Total 28,465,813
Less accumulated amortization 958,136
---------------
Intangible assets, net $ 27,507,677
==============
</TABLE>
F-12
<PAGE> 72
7. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Land and land improvements $ 3,145,746 $ 3,145,746 $ 3,145,746
Building and building improvements 4,391,824 4,626,902 13,531,873
Computer equipment and software
licenses 7,389,731 9,915,370 22,655,049
Furniture and equipment 1,780,963 2,350,893 7,055,892
--------- --------- ---------
Total 16,708,264 20,038,911 46,388,560
Less accumulated depreciation and
amortization 4,551,984 6,479,731 9,821,419
--------- --------- ---------
Property - net $12,156,280 $13,559,180 $36,567,141
=========== =========== ===========
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Processing fees $ 818,547 $ 2,061,753 $ 3,662,257
Salaries and related costs 630,466 903,946 5,467,592
Acquisition fees 515,528 463,162 388,861
Property tax 287,854 304,509 545,535
Reserve for returns and chargebacks 274,649 390,163 542,387
Other 467,501 1,509,319 4,270,229
------- --------- ---------
Total $ 2,994,545 $ 5,632,852 $14,876,861
=========== =========== ===========
</TABLE>
9. LONG-TERM DEBT AND NOTES PAYABLE
CONVERTIBLE SUBORDINATED DEBENTURES - In September 1989, the Company
issued $1,000,000 of convertible subordinated debentures bearing interest
at 10% payable quarterly. The debentures were convertible at the option of
the holders at any time, subject to prior redemption provisions, into
1,503,235 shares of common stock at $.67 per share. In 1994, the Company
called the debentures which resulted in $750,000 of debentures being
converted into 1,127,439 common shares. The remaining $250,000 of
debentures were redeemed and the Company paid a premium of $75,000 which
was expensed.
STOCKHOLDERS' AND BANK NOTES PAYABLE - The Company has unsecured loans
payable to certain stockholders totalling $275,000, $50,000 and $50,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively, of which
$50,000 is due in December 1998. These loans bear interest based on the
prime rate as defined in the notes (total of 9.5% at December 31, 1994 and
1995 and 9.25% at June 30, 1996). Interest expense on the notes was
$19,517, $20,334, $5,379 and $1,938 for the years ended December 31, 1993,
1994 and 1995 and for the six months ended June 30, 1996, respectively. In
January 1995, $225,000 was refinanced with a bank into a 36 month
unsecured term loan payable in monthly installments of $6,250 at the prime
rate, due in February 1998.
F-13
<PAGE> 73
In March 1996, the Company executed an unsecured note payable with a bank
for $1.1 million. The principal amount is due in March 1998, with interest
payable quarterly based on the LIBOR rate (total of 6.2% at June 30,
1996).
The estimated fair value of the Company's notes payable approximates their
carrying amounts based on currently available debt with similar interest
rates and remaining maturities.
During the six months ended June 30, 1996, the Company retired certain
debt in connection with a business acquisition, resulting in an
extraordinary loss of $364,374, net of income taxes of $204,961.
10. OBLIGATIONS UNDER CAPITAL LEASES
During 1993, the Company entered into a 20 year lease with the Department
of Development of the State of Ohio for land and an office building located
in Columbus, Ohio. The Company has the option to purchase the land and
building for $1 at the termination of the lease and thus, the Company has
recorded the transaction as a capital lease. The lease payments are secured
by a $751,500 standby letter of credit agreement with a bank and are
partially guaranteed by an officer and principal stockholder of the
Company. The standby letter of credit is collateralized by a savings
account totalling $463,871 at June 30, 1996 and certain real estate
adjacent to the leased property. The lease contains certain covenants, the
most restrictive of which require the Company to maintain certain debt to
equity ratios and tangible net worth and working capital levels.
The Company also leases certain computer equipment, furniture and
telephone equipment under capital leases. The Company is required to pay
certain taxes, insurance and other expenses related to the leased
property.
The following is a summary of property under capital leases included in
the accompanying balance sheets:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Land $ 3,145,746 $ 3,145,746 $ 3,145,746
Building 4,369,254 4,369,254 4,369,254
Computer equipment 2,441,327 2,703,308 3,204,468
--------- --------- ---------
Total 9,956,327 10,218,308 10,719,468
Less accumulated amortization 832,194 1,901,055 2,425,823
--------- --------- ---------
Property held under capital leases $ 9,124,133 $ 8,317,253 $ 8,293,645
=========== =========== ===========
</TABLE>
F-14
<PAGE> 74
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30:
<S> <C>
1997 $ 1,591,446
1998 1,192,198
1999 1,046,396
2000 973,167
2001 837,645
Thereafter 7,055,149
---------
Total future minimum lease payments 12,696,001
Less amount representing interest 4,522,000
---------
Net future minimum lease payments $ 8,174,001
===============
</TABLE>
11. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that
the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the
leases. Total expense under all operating lease agreements for the years
ended December 31, 1993, 1994 and 1995 and for the six months ended June
30, 1996 was $1,030,330, $671,528, $664,948 and $1,935,880, respectively.
Minimum future rental payments under these leases are as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30:
<S> <C>
1997 $ 5,374,511
1998 4,614,244
1999 4,129,695
2000 3,315,176
2001 2,937,793
Thereafter 11,704,720
----------
Total $ 32,076,139
===============
</TABLE>
12. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS - The Company has three defined contribution 401(k)
retirement plans covering substantially all of its employees. Under the
plans, eligible employees may contribute a portion of their salary until
retirement and the Company, at its discretion, may match a portion of the
employee's contribution. Total expense under these plans amounted to,
$58,013, $70,880, $96,913 and $366,670 for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1996,
respectively.
GROUP MEDICAL PLAN - The Company has a group medical self-insurance plan
covering certain of its employees. The Company has employed an
administrator to manage this plan. Under terms of this plan, both the
Company and eligible employees are required to make contributions to this
plan. The administrator reviews all claims filed and authorizes the
payment of benefits. The Company has stop-loss insurance coverage on all
individual claims exceeding $35,000. Total expense under this plan
amounted to $290,000, $397,000, $626,000 and $369,000 for the years ended
December 31, 1993, 1994 and 1995
F-15
<PAGE> 75
and for the six months ended June 30, 1996, respectively. The Company
expenses amounts as claims are incurred and recognizes a liability for
incurred but not reported claims. At December 31, 1994 and 1995 and June
30, 1996, the Company has accrued $100,000, $120,000 and $120,000,
respectively, as a liability for costs incurred under this plan.
13. COMMON STOCK
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan
(the "1993 Plan"). The options granted under the 1995 and 1993 Plans may
be either incentive stock options or non-statutory stock options. The
terms of the options granted under the 1995 and 1993 Plans are at the sole
discretion of a committee of members of the Company's Board of Directors,
not to exceed ten years. Generally, options vest at 20% per year from the
date of grant. The 1995 Plan provides that the Company may grant options
for not more than 2,630,700 shares of common stock to certain key
employees, officers and directors. Options granted under the 1995 and 1993
Plans are exercisable according to the terms of each option, however, in
the event of a change in control or merger as defined, the options shall
become immediately exercisable. At June 30, 1996, 1,691,171 additional
shares are available for grant in the aggregate for all Plans.
Previously, the Company had adopted the 1983 Incentive Stock Option Plan
and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983
Plans"), which provided that the Board of Directors may grant options for
shares of common stock to certain employees and directors. Under the terms
of the 1983 Plans, options are exercisable over a period up to ten years
from the grant date. In the event the Company is sold, options outstanding
under the 1983 Plans must be repurchased at a price calculated as if the
options had been fully exercised.
All options granted under the 1983 Plans, the 1993 Plan and the 1995 Plan
were granted at exercise prices not less than the fair market value of the
underlying common stock at the date of grant. In the event that shares
purchased through the exercise of incentive stock options are sold within
one year of exercise, the Company is entitled to a tax deduction. The tax
benefit of the deduction is not reflected in the consolidated statements
of operations but is reflected as an increase in additional paid-in
capital.
The following summarizes the stock option activity from January 1, 1993 to
June 30, 1996:
<TABLE>
<CAPTION>
Number
of Shares Price
<S> <C> <C>
Balance at December 31, 1992 1,939,773 $.57 - $.83
Granted 1,249,793 $.83 - $.91
Cancelled (341,360) $.57 - .83
---------
Balance at December 31, 1993 2,848,206 $.57 - $.91
Granted 927,322 $.83 - $3.04
Exercised (52,614) $.57
Cancelled (648,178) $.57 - $.91
---------
Balance at December 31, 1994 3,074,736 $.57 - $3.04
=========
</TABLE>
F-16
<PAGE> 76
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
------------------------------- ---------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 3,074,736 $ 0.82 2,901,782 $ 1.19
Granted 160,746 7.12 459,289 21.79
Exercised (270,262) 0.65 (874,195) 0.99
Cancelled (63,438) 0.73 (22,020) 1.06
Issued in conjunction with
Servantis Acquisition 443,362 1.52
--------- ---------
Outstanding at end of period 2,901,782 $ 1.19 2,908,218 $ 4.58
========= =========
Weighted average fair value of options
granted during the year $ 2.92 $ 8.45
======== ========
</TABLE>
The following table summarizes information about options outstanding at
June 30, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
<C> <C> <C> <C> <C> <C>
$0.57 - $1.00 2,066,754 4.9 $ 0.84 1,273,146 $ 0.83
$1.00 - $4.00 341,652 8.4 2.14 144,846 1.76
$18.00 - $22.00 239,023 9.6 20.64 -- --
$22.00 - $25.00 260,789 9.8 22.77 15,789 22.63
--------- --------
2,908,218 $ 4.58 1,433,781 $ 1.16
========= =========
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended December
31, 1995 and the six months ended June 30, 1996, respectively: dividend
yield of 0%; expected volatility of 40 percent; risk-free interest rates
of 5.25% to 6.68%; and expected lives of 3-5 years.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of FASB Statement No. 123, the Company's net loss and loss per
share, net of related income tax effects, would have been as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
<S> <C> <C>
Net loss $ 244,759 $ 138,797,202
Net loss per share $ 0.01 $ 3.71
</TABLE>
The pro forma amounts are not representative of the effects on reported
net income (loss) for future years.
F-17
<PAGE> 77
In accordance with the terms of a joint marketing agreement, a strategic
partner has warrants to purchase up to 650,000 shares of common stock at
$20 per share should the partner attain certain customer acquisition
targets.
Under the terms of a joint marketing and trademark licensing agreement, a
strategic partner was paid $3,000,000 which has been capitalized and will
be amortized over the life of the agreement. Additionally, the strategic
partner has the option on August 31, 1996 to accept 118,226 shares of
common stock in lieu of a $3,000,000 cash payment then due. In addition,
if certain minimum performance standards are not achieved within the term
of the agreement, the strategic partner must refund a pro rata portion of
the August 31, 1996 payment.
Certain stockholders have an option to sell up to 280,565 shares of common
stock to the Company at $19 per share. Such option expires no later than
September 30, 1996.
14. STOCKHOLDERS' NOTES RECEIVABLE
In late December 1992, the Company agreed to loan $501,447 to certain
officers of the Company for the purchase of 603,456 shares of common stock
of the Company from certain stockholders of the Company under a loan and
stock restriction agreement. The stock was pledged as security for the
notes which bore interest at 6.15% payable annually. The notes have been
recorded as contra-equity in the consolidated balance sheets.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------------- --------------
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Interest paid $ 274,718 $838,153 $645,443 $ 321,477
========== ======== ======== ==========
Income taxes paid $ 25,200 $414,869 $211,150 $ 468,077
========== ======== ======== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $7,823,539 $1,594,492 $261,981 $ 501,160
========== ========== ======== ==========
Loans to stockholders repaid with
common stock $ 50,147 $75,221
========== =======
Conversion of subordinated debentures $ 750,000
==========
Computer equipment received
in exchange for accounts receivable $ 395,000
==========
Tax benefit associated with the
exercise of stock options $1,100,141
==========
Purchase price of business acquisitions $265,238,845
Less: Issuance of common stock and
stock options pursuant to
acquisitions (174,812,438)
Liabilities assumed (44,064,523)
Cash acquired in acquisitions (6,957,675)
-------------
Net cash paid $39,404,209
=============
</TABLE>
F-18
<PAGE> 78
16. BUSINESS SEGMENTS
Prior to 1996, the Company operated in one segment - Electronic Commerce.
With the acquisition of Servantis in February 1996, the Company now also
operates in the Financial Application Software Segment. The net revenues
of each segment are principally domestic, and no single customer accounted
for 10% or more of consolidated revenues for the six months ended June 30,
1996. Approximately 10%, 11% and 13% of the Company's revenues for the
years ended December 31, 1993, 1994 and 1995, respectively, were from a
single customer. Approximately 11% and 25% of the Company's current
receivables - trade and other at December 31, 1994 and 1995, respectively,
were from a single customer.
A further description of each business segment follows:
ELECTRONIC COMMERCE - Electronic commerce includes electronic home
banking, electronic bill payment, automatic accounts receivable
collection, electronic accounts payable processing, investment portfolio
management services and investment trading and reporting services. These
services are primarily directed to financial institutions and businesses
and their customers.
FINANCIAL APPLICATION SOFTWARE - Financial application software includes
end-to-end software products for ACH processing, account reconciliation,
wire transfer, mortgage loan origination and servicing, lease accounting
and debt recovery. These products and services are primarily directed to
financial institutions and large corporations.
The following sets forth certain financial information attributable to the
Company's business segments for the six months ended June 30, 1996:
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Electronic commerce $ 32,768,717
Financial application software 18,271,145
----------
Total $ 51,039,862
===============
Operating income (loss):
Electronic commerce, net of charge for acquired
in-process research and development of $106,049,586 $ (120,788,727)
Financial application software, net of charge for acquired
in-process research and development of $16,308,000 (24,940,486)
Corporate (24,674,777)
----------
Total $ (148,165,473)
================
Identifiable assets:
Electronic commerce $ 54,523,799
Financial application software 96,843,884
Corporate 46,990,119
----------
Total $ 198,357,802
================
</TABLE>
F-19
<PAGE> 79
<TABLE>
<CAPTION>
<S> <C>
Capital expenditures:
Electronic commerce $ 5,688,439
Financial application software 1,087,303
Corporate 664,809
------------------
Total $ 7,440,551
==================
Depreciation and amortization:
Electronic commerce $ 2,330,064
Financial application software 4,345,200
Corporate 321,838
------------------
Total $ 6,997,102
==================
</TABLE>
17. SUBSEQUENT EVENTS
In August 1996, the Company signed a definitive agreement to sell certain
software for $20,000,000. The sale is expected to close in September 1996.
No gain or loss will be recognized on the sale.
On September 15, 1996, the Company entered into a definitive agreement to
purchase Intuit Services Corporation (ISC), a wholly-owned subsidiary of
Intuit, Inc., in exchange for approximately 12.6 million shares of the
Company's common stock. The agreement contains certain provisions that
limit the purchase of additional common shares and the disposition of the
common shares to be obtained by Intuit, Inc. The acquisition will be
accounted for under the purchase method of accounting and is expected to
include a charge in an amount not yet determined for in-process research
and development. ISC provides transaction processing and electronic funds
transfer services.
The Company also intends to enter into a service and license agreement
with Intuit, Inc., contingent on the consummation of the acquisition of
ISC, whereby the Company will obtain a license to connect to and use
certain software technology of Intuit Inc. for a payment of $10 million
on closing of the ISC acquisition and an additional $10 million on
October 1, 1997.
* * * * * *
F-20
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Checkfree Corporation and Subsidiaries:
We have audited the consolidated financial statements of Checkfree Corporation
and subsidiaries as of December 31, 1995 and 1994 and June 30, 1996, and for
each of the three years in the period ended December 31, 1995 and for the six
months ended June 30, 1996, and have issued our report thereon dated August 22,
1996, except for Note 17 as to which the date is September 15, 1996; such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Checkfree Corporation
and subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 22, 1996
F-21
<PAGE> 81
SCHEDULE II
CHECKFREE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
BALANCE AS OF AMOUNT ASSUMED CHARGES TO CHARGES TO BALANCE
BEGINNING IN BUSINESS COSTS AND OTHER AS OF END
OF PERIOD COMBINATION EXPENSES DEDUCTIONS DEDUCTIONS OF PERIOD
------------- -------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
1993 $ 35,919 $ -- $ 13,320 $-- $ 3,708 $ 45,531
1994 45,531 -- 11,769 -- 30,565 26,735
1995 26,735 -- 18,068 -- 12,142 32,661
1996 32,661 1,861,039 915,472 -- 529,450 2,279,722
RESERVE FOR RETURNS
AND CHARGEBACKS
1993 $134,507 $ -- $ 84,110 $-- $118,617 $ 100,000
1994 100,000 -- 299,389 -- 124,740 274,649
1995 274,649 -- 370,229 -- 254,715 390,163
1996 390,163 -- 250,655 -- 98,431 542,387
</TABLE>
F-22
<PAGE> 1
INSERT C
Exhibit 23(b)
-------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Historical
Consolidated Financial Data of ISC" and "Experts" and to the use of our report
dated October 22, 1996, with respect to the financial statements of Intuit
Services Corporation included in the Registration Statement (Form S-4) and
related Prospectus of Checkfree Corporation.
Ernst & Young LLP
Palo Alto, California
October 29, 1996
<PAGE> 1
Exhibit 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Checkfree Corporation on Form S-4 of our reorts dated August 22, 1996, except
for Note 17 as to which the date is September 15, 1996, appearing in the
Transition Report on Form 10-K of Checkfree Corporation for the six months
ended June 30, 1996, and to the reference to us under the headings "Selected
Historical Consolidated Financial Data of Checkfree" and "Experts" in the
Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Columbus, Ohio
October 30, 1996
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF ALEX. BROWN & SONS INCORPORATED
We hereby consent to the references to our firm under the captions "THE
MERGER - Background of the Merger", "THE MERGER - Opinion of Checkfree Financial
Advisor" in the Prospectus/Proxy Statement/Information Statement, each included
in the Registration Statement on Form S-4 relating to the proposed merger of
Checkfree Acquisition Corporation II with and into Intuit Services Corporation,
a wholly owned subsidiary of Intuit Inc., and to the inclusion of our opinion
letter as Appendix B to the Prospectus/Proxy Statement/Information Statement. In
giving this consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of "experts" as used in the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
ALEX. BROWN & SONS INCORPORATED
October 30, 1996 By: /s/ ALEX. BROWN & SONS
-----------------------
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
-----------------
Each of the undersigned officers and directors of Checkfree
Corporation, a Delaware corporation (the "Company"), hereby appoints Peter J.
Kight, Mark A. Johnson, and Curtis A. Loveland, as his true and lawful
attorneys-in-fact, or any of them, with power to act without the others, as his
true and lawful attorney-in-fact, in his name and on his behalf, and in any and
all capacities stated below, to sign and to cause to be filed with the
Securities and Exchange Commission the Company's Registration Statement on Form
S-4 (the "Registration Statement") to register under the Securities Act of
1933, as amended, a maximum of 12,600,000 authorized and unissued shares of
common stock, $.01 par value (the "Common Stock"), of the Company (as such
number of shares may be adjusted from time to time for stock dividends, stock
splits, or similar transactions affecting the Common Stock of the Company
generally), in connection with the Agreement and Plan of Merger, dated
September 15, 1996, among the Company, Checkfree Acquisition Corporation II,
Intuit Inc., and Intuit Services Corporation, and any and all amendments,
including post-effective amendments, to the Registration Statement, hereby
granting unto such attorneys-in-fact, and to each of them, individually, full
power and authority to do and perform in the name and on behalf of each of the
undersigned, in any and all such capacities, every act and thing whatsoever
necessary to be done in and about the premises as fully as the undersigned
could or might do in person, hereby granting to each such attorney-in-fact full
power of substitutuion and revocation, and hereby ratifying all that any such
attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of
October, 1996.
Signature: Title:
/s/ Peter J. Kight Chairman of the Board of Directors,
- ----------------------------------- President and Chief Executive Officer
Peter J. Kight
/s/ Mark A. Johnson Director and President -
- ----------------------------------- Business Services
Mark A. Johnson
/s/ James S. Douglass Executive Vice President -
- ----------------------------------- Finance and Chief Financial Officer
James S. Douglass
/s/ John M. Stanton Vice President and Treasurer
- -----------------------------------
John M. Stanton
/s/ William P. Boardman Director
- -----------------------------------
William P. Boardman
/s/ George R. Manser Director
- -----------------------------------
George R. Manser
/s/ Eugene F. Quinn Director
- -----------------------------------
Eugene F. Quinn
/s/ Jeffrey M. Wilkins Director
- -----------------------------------
Jeffrey M. Wilkins
<PAGE> 1
EXHIBIT 99(a)
COMMON STOCK
PROXY - CHECKFREE CORPORATION
The undersigned stockholder of Checkfree Corporation (the "Company") hereby
appoints Peter J. Kight and Mark A. Johnson, or either one of them, as attorneys
and proxies with full power of substitution to vote all shares of common stock
of the Company which the undersigned is entitled to vote at the Special Meeting
of Stockholders of the Company to be held on __________, ____________ __, 1996,
and at any adjournment or adjournments thereof as follows:
1. To approve the issuance of common stock, $.01 par value, of the Company
(the "Checkfree Common Stock") pursuant to the Agreement and Plan of
Merger, dated as of September 15, 1996 (the "Merger Agreement"). Pursuant
to the Merger Agreement, Checkfree Acquisition Corporation II, a Delaware
corporation ("Acquisition") and a wholly owned subsidiary of the Company,
would be merged with and into Intuit Services Corporation, a Delaware
corporation ("ISC"), and the sole stockholder of ISC would receive up to
12,600,000 shares of Checkfree Common Stock, as may be adjusted in
accordance with the terms of the Merger Agreement, in exchange for its
shares of common stock of ISC, as more fully described in the accompanying
Prospectus/Proxy Statement/Information Statement.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
2. To approve the amendment of the Company's 1995 Stock Option Plan (the
"Plan") to increase the number of shares of Checkfree Common Stock issuable
upon the exercise of stock options under the Plan from 2,630,700 shares to
5,000,000 shares.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. To approve the Company's Associate Stock Purchase Plan which authorizes the
sale of up to 1,000,000 shares of Checkfree Common Stock to eligible
employees.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
4. In their discretion to vote upon such other matters as may properly come
before the meeting.
(Continued and to be signed on other side.)
(Continued from other side.)
THIS PROXY, WHEN EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, 3 AND 4.
The undersigned hereby acknowledges receipt of the Notice of the Special
Meeting of Stockholders, dated ____________ __, 1996 and the Proxy Statement
furnished therewith. Any proxy heretofore given to vote said shares hereby is
revoked.
PLEASE SIGN AND DATE THIS PROXY BELOW AND RETURN IN THE ENCLOSED ENVELOPE.
Dated: , 1996
----------------------------------
-------------------------------------------------
(Signature)
-------------------------------------------------
(Signature)
Signature(s) must agree with the name(s) printed
on this Proxy. If shares are registered in two
names, both stockholders should sign this Proxy.
When signing as attorney, executor,
administrator, trustee or guardian, please give
your full title.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
