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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended June 30, 1997
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.)
4411 EAST JONES BRIDGE ROAD
NORCROSS, GEORGIA 30092
(Address of principal executive offices,
including zip code)
(770) 441-3387
(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. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $579,069,107 on September 12,
1997.
There were 54,686,159 shares of the Registrant's Common Stock outstanding
on September 12, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
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PART I
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Item 1. Business 3
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27
Item 6. Selected Financial Data 27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations 29
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
Signatures 44
Consolidated Financial Statements F-1
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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"), prior to its
acquisition of Security APL, Inc. on May 9, 1996 (the "Security APL
Acquisition"), and prior to its acquisition of Intuit Services Corporation on
January 27, 1997 (the "ISC Acquisition") (the Servantis Acquisition, the
Security APL Acquisition, and the ISC 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, "ISC" is generally used to indicate Intuit Services Corporation prior
to its acquisition by CheckFree, and the term the "Company" is used to indicate
the combined company following the Acquisitions.
CheckFree Corporation (the "Company") is a leading provider of
electronic commerce services, institutional portfolio management services, and
financial application software for financial institutions and businesses and
their customers. The Company services approximately 1.8 million consumers, 1,000
businesses, and 850 financial institutions (including the 500 largest banks in
the United States). The Company has also signed agreements with over 276
financial institutions to provide electronic home banking services for the
customers of those financial institutions.
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."
The business of the Company is pursued through three independent but
inter-related divisions: Electronic Commerce, Institutional Investment Services,
and Software. All three divisions market their services and products to
financial institutions, the investment industry, and to their customers, both
consumer and business. The Company's current business has been developed through
expansion of its core electronic commerce business and the acquisition of
companies operating businesses similar to, or complementary with, that business.
EVOLUTION OF CURRENT BUSINESS
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has nine 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 Services Corporation, a Delaware 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) 441-3387. The Company's Internet address is http://www.checkfree.com.
5B CAPABILITY
Prior to the Acquisitions, the Company operated its business in one
business segment, electronic bill payment. Through the Acquisitions the Company
obtained the customer relationships, technology, skilled personnel, and other
resources required to fulfill its strategy of diversifying its offerings in
electronic commerce to embrace each of the 5Bs: electronic bill payment, bill
presentment, banking, brokerage, and business payments ("5Bs"). These
acquisitions also helped to enable the Company to extend the application of its
expertise and relationships in electronic commerce to two related areas,
institutional investment services and software.
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THE SERVANTIS ACQUISITION
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. Founded in 1971, Servantis was a leading
provider of electronic commerce and financial applications software and services
for businesses and financial institutions. Servantis designed, marketed,
licensed, and supported software products for electronic corporate banking, home
banking, financial lending, regulatory compliance, and document imaging. In
addition, Servantis offered software consulting and remote processing services.
The Company accounted for the Servantis Acquisition using the purchase method of
accounting.
THE SECURITY APL ACQUISITION
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. Security APL was a leading vendor of
portfolio management and software services for institutional investment
managers. Security APL had been developing and providing advanced investment
analysis systems since it was founded in 1978. Security APL's clients included
money management firms, bank trust departments, insurance companies, and
brokerage houses. Security APL had added an additional investment information
service by establishing a world-wide web site offering individuals some of the
same tools professional money managers employed to make investment decisions, to
enter trades, and to monitor the status of their investments. The Company
accounted for the Security APL Acquisition using the purchase method of
accounting.
THE ISC ACQUISITION
On January 27, 1997, CheckFree acquired ISC for approximately $199.0
million, consisting of the issuance of 12.6 million shares of the Company's
Common Stock and $20.0 million payable in two equal cash payments to the seller,
Intuit Inc. ("Intuit"). 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. ISC's principal
business was 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 supported BankNow, an Intuit home banking service provided
through America Online, and banking, bill payment, and stock quote services
accessible through Microsoft Money. The Company accounted for the ISC
Acquisition using the purchase method of accounting.
INTEGRATION OF ACQUISITIONS
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 and relationships developed 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 industry. Security APL's
experience as a vendor of portfolio management and software services to
institutional investment managers and consumers permits the Company to continue
to enhance these service offerings to institutional investment managers and for
consumers through the Company's financial institution distribution channels.
ISC's base of financial institution banking customers expanded the Company's
home banking and bill payment offering, and made the Company's services more
readily available to a wider base of financial institutions and their customers.
The integration of each of the Acquisitions with the original core business 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.
POST-ACQUISITIONS STRATEGY
The Acquisitions support CheckFree's attainment of its overall goal 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 Company has designed its services and
products to take advantage of opportunities
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it perceives in light of current trends and the Company's fundamental strategy.
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, Security APL's
institutional investment services capabilities, and ISC's bill payment and home
banking capabilities, the Company intends to continue to enhance and expand its
range of financial institution 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.
Offer Services to Consumers and Businesses Through Financial
Institutions. The Company believes that the public will most readily adopt
electronic methods for financial transactions when they are offered with the
imprimatur of a trusted financial institution. The Company, therefore, except
for prototype or legacy offerings, does not seek to serve consumers or
businesses except through financial institutions or investment houses. The
Company believes that this strategy enhances user confidence in the underlying
technology and encourages financial institutions to promote use of the Company's
services.
Expand Sales Efforts Through Multiple Distribution Channels. The
Company maximizes its distribution efforts through a direct sales force which
targets the largest financial institutions and other customers, and through
distribution alliances with market-leading companies to achieve deeper market
penetration. Additionally, by making its services available to users of personal
financial management software, such as Quicken, and of business management
software, such as QuickBooks, the Company expands public access to, and
awareness of, its services. Similarly, the Company offers web-based products to
both bank and non-bank financial institutions for their own and for their
customers' use.
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 bases of the acquired companies
substantially increase the Company's offerings to financial institutions, which
the Company expects will enhance its opportunity to expand its electronic
commerce services through them to businesses and ultimately to the end 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 is enhancing its ability to provide
first and second-tier support of its services through advanced communications
technologies which enable the Company to efficiently respond to end-user
inquiries. 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
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. The Company believes
that increasing public awareness and acceptance of electronically-effected
transactions create an expanding market for its services. Electronic commerce
offers the potential to complete financial transactions more quickly, with
greater accuracy, and at a lower cost than traditional paper-based methods.
OPPORTUNITIES
The Company considers activities traditionally conducted on paper or in
person as offering it opportunities to sell its services. The Company believes
that the greater the volume of such activities, and the higher chance for error,
or the imposition of inconvenience, the greater will be the Company's
opportunity.
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Continued Use of Paper Checks. A substantial portion of financial
transactions in the U.S. are still executed by paper check. According to the
Bank for International Settlement, in 1995, approximately 77.4% of the total
U.S. dollar volume of payments was made using checks with a total dollar volume
over $73 trillion. 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.
Paper Billing. Many financial transactions are initiated by the
rendering of a paper bill or invoice which is delivered to the payer by U.S.
mail. It is estimated that 15 billion paper bills are produced each year, and
that the cost of submitting a printed bill, including printing, postage, and
advertisements, ranges between $0.65 and $1.25. Additional costs inherent in the
system include delays, opportunity for losses in the mail, misplaced bills,
printing errors, and accessibility limited to a single physical mail-drop.
Conventional Banking. Many financial transactions are currently
conducted in person at bank branches. For many bank customers, conducting
banking requires a physical visit to a branch in order to check balances,
transfer sums from one account to another, inquire on the status of an item, to
make deposits, or to obtain assistance in reconciling accounts. Banks incur
substantial expenses in providing personnel and physical plants to service these
requirements. Bank customers incur transportation costs and personal
inconvenience and delay by traveling to a branch location to complete these
transactions.
Conventional Brokerage. Traditional investment brokerage houses render
statements of account to customers on paper conveyed to their clients through
the U.S. mail. For active account-holders, or in rapidly-changing markets, by
the time the paper statement is received and reviewed, the information may be
seriously out-of-date. Tax lot accounting, and comparison to historical balances
is often unavailable through the paper statement. There are considerable costs
involved in preparing and mailing paper statements, and in providing personnel
at the brokerage to respond to inquiries regarding the status of accounts.
Business Payments. In addition to the costs and inconvenience borne by
consumers in receiving and paying paper bills, businesses often receive multiple
invoices from the same vendor comprising periodic statements. Issues such as
discounts for prompt payment, returns, allowances, disputed charges, and other
adjustments, as well as reconciliation to the business's own records, increase
the costs of payment. It is estimated that businesses issue 28 billion checks
annually.
TRENDS
Notwithstanding the current predominant usage of conventional methods
of conducting financial transactions, there are a number of current trends that
are driving increasing acceptance of electronic commerce in the U.S.:
- 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 1996, it is estimated that $8.3 billion worth
of electronic transactions were processed in the U.S. and a
Piper Jaffray study estimates that electronic transactions
will grow to $21.2 billion by 2001.
- Continuing Penetration of Personal Computers and Modems into
U.S. Households. According to Dataquest, more than a third of
U.S. households will have personal computers by the end of
1997, and virtually all home PCs are sold with internal
modems.
- Rapid Growth in On-line Interactive Services, Particularly in
the Internet. The number of Internet users, according to
International Data Corporation, was 34.6 million as of 1996,
and is projected to reach 163 million by 2000. By January
1997, 161.1 million Internet hosts were available to serve
them, according to Network Wizards. Booz, Allen & Hamilton
notes that while it took cable
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television 25 years to reach ten million households, and took
nine years for VCRs to reach the same penetration, the
Internet achieved that milestone in only four years. According
to Forrester, ten million U.S. households subscribed to
on-line interactive services as of 1997 and America On-line,
prior to its acquisition of CompuServe's customers, claimed
approximately 6.44 million of them.
- Growth in Small Business Use of Personal Computers. According
to a recent survey by McKinsey & Company/BAI, there are over
5.5 million small businesses in the United States. These small
businesses, which have less than $10 million in annual
revenues, represent over 95% of all the businesses in the
United States along with 40% of the United States gross
national product. The small business owner represents an
attractive market for electronic commerce since 85% of all
small businesses own one or more PCs, and 79% of those PCs are
equipped with modems. In addition, over 45% of those
businesses have Internet access today, and 1.6 million of
these small business use either Quicken or QuickBooks to do
their bookkeeping.
- 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, and by investing in cost-saving software.
These services, the Company believes, will enable financial
institutions to reduce costs, generate fee-based income and
strengthen their customer relationships. In terms of
transaction costs, Booz, Allen & Hamilton cites the following
relative costs of banking transactions: Branch--$1.07;
Telephone--$0.54; ATM--$0.27; PC Banking--$0.02;
Internet--$0.01.
THE COMPANY'S RESPONSE
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions, 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.
PRODUCTS, SERVICES, AND COMPETITION
ELECTRONIC COMMERCE SERVICES
The Company has adopted a "5B" response to the electronic commerce
market, comprising Bill Payment, Bill Presentment, Banking, Brokerage, and
Business Payment services. 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.
(1) Bill Payment. The Company's origins were in offering electronic
bill payment to consumers. In keeping with the Company's strategy of offering
electronic commerce alternatives through financial institutions, the Company
accommodates several alternative means for consumers to pay bills. The Company
designs and develops
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private label services for financial institutions, which in turn offer
electronic payment as one component of home banking services available to their
customers. Interfaces with personal financial management software, such as
Quicken, Managing Your Money and Microsoft Money are available to users of most
versions. Under the ISC Acquisition agreement, the Company is the exclusive
provider of bill payment and home banking services for all versions of Quicken
released through October 1997, including Quicken version eight. Since subsequent
releases will no longer support only the current proprietary protocol, the
Company will then compete for upgraded Quicken customers with other bill payment
and home banking service providers which, like the Company, can accommodate the
Open Financial Exchange protocol now being developed by the Company, Microsoft,
and Intuit.
The Company also offers, on a prototype basis, bill payment services in
conjunction with bill presentment through the Internet to consumers whose
financial institutions are not yet able to offer such services. The Company does
not intend to develop or market business or personal financial management
software, or PFMs, but instead to position itself as the provider of the bill
payment services required to effectuate the transactions initiated through a
wide variety of means. The Company believes that its services offer significant
benefits to financial institutions, including lower transaction processing
costs, additional fee income, potential new customers, and attractive additional
services to offer existing customers. By providing access to its services
through widely-sold PFMs, through proprietary financial institution software,
and through the Internet, the Company intends to encourage the greatest use of
its services.
Revenues are generated through contracts that the Company signs with
individual financial institutions. The Company typically negotiates with the
institution an implementation fee, a monthly 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-to-five year terms and generally provide for minimum fees if certain
transaction volumes are not met. The Company utilizes direct sales and
distribution alliances to market to financial institutions and has the ability
to customize services for each institution.
The Company has contracts with more than 276 financial institutions
through which electronic payment services are provided to customers of the
financial institutions. Some of the financial institutions served by the Company
include: Bank of America, Bank One, Chase Manhattan, KeyCorp, NationsBank, Wells
Fargo, Charles Schwab, and Merrill Lynch.
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, but a cornerstone of the Company's offering is that it can facilitate
payment to anyone. 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 July 5, 1997, the
Company had approximately 1.8 million consumers using bill payment and/or home
banking services.
(2) Bill Presentment. In March 1997, the Company announced the market
release of its electronic bill presentment and payment product, CheckFree
E-Bill. Offered originally as a world-wide web based service, it permits billing
companies to deliver full-color electronic bills to their customers personal
computers, together with detailed information and the electronic equivalent of
promotional inserts. The recipients can use the service to electronically make
payment. Pursuant to its strategy of offering services through financial
institutions, the Company is marketing the service to banks to be incorporated
into their electronic banking and bill payment services. As of September 15,
1997, the Company had entered into agreements with sixteen billing companies to
provide bill presentment services. The Company enters into a variety of
arrangements with banks and billing companies to provide such services and, in
some cases, will share revenue derived from billing companies with banks. The
Company believes that billing companies can achieve net savings in the range of
30% to 60% by utilizing the Company's bill presentment service.
(3) Banking. The Company supports home electronic banking services for
financial institutions and their customers. Using a variety of PFMs, institution
proprietary software, and other front ends, customers can access their accounts
through personal computers, the Internet, or telephone-based voice recognition
unit (VRU) systems, to effect a wide variety of banking transactions. Among
these are balance inquiries, fund transfers, customer service, customer billing,
and marketing. The service facilitates on-line reconciliation to PC-based
account registers, matching cleared
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items with previously-entered transactions. 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
monthly 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-to-five-year terms and generally
provide for minimum fees if certain transaction volumes are not met. The Company
utilizes direct sales and distribution alliances to market to financial
institutions and has the ability to customize services for each institution.
The Company believes that banks that offer electronic banking increase
customer retention, have a superior marketing channel, and experience fewer
time-consuming customer service problems.
(4) Brokerage. The Company provides customized solutions for financial
service providers either for internal use, or to support offerings to their
customers. The Company's services provide fully integrated, on-line trading,
portfolio accounting, quotes, news services, research, and fundamental data. The
Company believes the service offers significant benefits to financial
institutions, including lower costs, additional fee income, potential new
customers, and attractive additional services to offer to existing customers.
A web-based product enables financial institutions to add to their own
web sites services which include 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.
It also provides a seamless connection to electronic brokerage via various order
entry screens. The system also allows for integration of third party information
(e.g,. research reports, financial news, fundamental data, etc.). These products
and services permit banks to offer many of the services required for them to
compete effectively with non-bank financial institutions.
(5) Business Payments. The Company facilitates electronic payments for
businesses through its offerings of business bill payment and banking, ACH
processing, and automatic accounts receivable processing services. As it does
for consumers, the Company enables businesses to make payments to anyone. The
Company's Electronic Cash Disbursement (ECD) system accommodates the special
requirements of businesses which can obtain the service through their financial
institution. The Company employs a direct sales force to market the ECD service
to banks, and, under an agreement with ADP, provides the service to their
customers. The Company's ACH processing offering affords financial institutions
the opportunity to outsource their ACH processing which has traditionally been
handled in-house. The Company's service provides a more cost efficient solution
to financial institutions and allows the institutions to focus on their higher
profitability core competencies. 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 sold all of the assets and contracts related to the
automatic accounts receivable collection business, except for health and fitness
and certain other industries, to First USA, Inc. on March 26, 1997. The sale
allows the Company to concentrate on the development and sale of electronic bill
payment and on-line banking capabilities for businesses.
Competition. Portions of the electronic commerce market are becoming
increasingly competitive. The Company faces significant competition in all of
its customer markets. A number of banks have developed, and others may in the
future develop, home banking services in-house. A number of relatively small
companies, such as Travelers Express (a division of Viad), compete with the
Company in electronic bill payment. In the business market, the Company competes
with 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. The Company also faces competition in ACH processing
from numerous banks. Microsoft Corporation and First Data Corporation have
announced the formation of a joint venture, MSFDC which they intend to compete
aggressively with the Company in the area of bill payment and bill presentment.
MSFDC has announced its intention to have a market-ready offering by early 1998.
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In the brokerage segment, the Company's primary competitor is Shaw
Data, and the Company competes for business bill payment customers with ACI and
Deluxe Data, which provide ACH processing.
Because the electronic commerce industry is expected to grow
substantially in the coming years, the Company anticipates strong competition,
but it believes that the increased attention and credibility such competition
will bring to the industry may broaden the market and increase the percentage of
financial transactions which are effected by electronic means.
INVESTMENT SERVICES
Generally. The Company offers portfolio accounting and performance
measurement to investment advisors, brokerage firms, banks, and insurance
companies. 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. The full-range of portfolio management system solutions, include
data conversion, personnel training, trading system, graphical client reporting,
performance measurement, technical network support, interface setup, and DTC
processing.
Competition. Competition for portfolio services includes two main
segments. The Company competes with providers of portfolio accounting software,
including Advent Software, PORTIA (a division of Thomson Financial), and Shaw
Data (a SunGard Company). The Company also competes with service bureau
providers such as Shaw Data and FMC Service Bureau.
SOFTWARE
Generally. 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. The
Company's 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, imaging
technologies, item processing, regulatory compliance, and others.
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 loan servicing Mortgage lenders
TMO Mortgage originations Mortgage lenders
ACCESS/INFOVUE Corporate remote banking software Businesses and financial institutions
RECON-PLUS Corporate account reconciliation Businesses and financial institutions
ARP/SMS Financial account reconciliation 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
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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+.
Other products of the Company, the InfoVue ACH and MicroACH Systems,
allow financial institutions to provide their corporate customers more direct
access to the ACH network. The Company licenses this software to financial
institutions who then distribute it to their corporate customers. The financial
institution's corporate customer's component automatically initiates and
electronically sends ACH transactions, allowing such customer greater
flexibility in cash flow management and funds transfer. The bank's component
collects transactions from InfoVue ACH or MicroACH and then uploads these
transactions to a host ACH system, such as PEP+. Both operate on a PC platform
and together have 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+ systems.
The Company entered the wire transfer business in 1990 with WireNet, a
PC/LAN-based wire transfer system. The Company now offers 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 centerpieces of this product line are the
Company's ACCESS and InfoVue products, which provide an electronic link and
graphical user interface through which a bank's corporate customers can receive
bank account information and can initiate banking transactions. ACCESS operates
on the bank's premises 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.
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.
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
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in 1995 to replace and augment the existing ARP package, is a fully integrated
on-line and real time system that enables banks to immediately processes their
customer transactions to produce accurate, timely reconciliations while
streamlining back-office processes. ARP/SMS also groups accounts across banks
within bank holding companies and allows banks to streamline their operations by
reconciling their intra-bank 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") offers 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 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.
Other. The Company also offers software products and services in the
following areas: document management, lease accounting, check processing, safe
box accounting, and compliance with certain IRS regulations.
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
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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. Nonetheless, no competitor of the Company competes
with it in all software product areas.
The Company's product lines also face competition from competitors
which include TSAI, 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, IIC, and
Computron, and its RECON-Plus product competes with Chesapeake and Driscoll.
Competitors for mortgage- related products include CPI (an Alltel Company).
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)."
DISTRIBUTION ALLIANCES
A principal element of the Company's strategy is the creation and
maintenance of distribution alliances that maximize access to potential
customers for the Company's electronic commerce services and related products.
The 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 distribution 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 distribution alliances with several companies, including Automatic
Data Processing, Inc. ("ADP"), AT&T Corporation ("AT&T"), Alltel, EDS, Fiserv,
Inc. ("Fiserv"), FiTech, Inc. ("FiTech"), Five Paces, Inc. ("Five Paces"), and
Home Financial Network. The Company also has arrangements with Optika in
connection with its imaging offerings, and with MicroBank for RECON-Plus for
Windows.
RESEARCH AND DEVELOPMENT
The Company maintains a research and development group with a
long-term perspective of planning and developing new services and related
products for the electronic commerce, financial application software, and
investment services markets. The Company has established the following
guidelines for pursuing the development of new services:
- Distinctive benefits to customers
- Ability to establish a leadership position in the market
served
- Sustainable technological advantages
- 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, 1997, the research and development group consisted of
approximately 375 employees. Additionally, the Company uses independent third
party software development contractors as needed. During fiscal 1994, 1995,
transition fiscal 1996, and fiscal 1997,
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the Company spent 12.3%, 14.2%, 19.9%, and 18.6% 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, a frame relay 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 across a private X.25 network.
To handle financial transactions across the Internet, applications have been
implemented on Sun Microsystems servers designed for premium data security and
integrity. Applications to effect electronic bill presentment have been
implemented on Hewlett-Packard Unix servers, designed for efficient real-time
processing and data integrity and applications to effect real-time connections
to banks, ATM networks, and credit card networks have been 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 real-time connections to ATM networks.
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. Diesel generators provide power to the computing
facilities 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 has contracted
for the emergency provision of an alternate site to aid in disaster recovery,
this measure will not eliminate the significant risk to the Company's operations
from a natural disaster or system failure. 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 -- Business
Risks (Risk of System Failure)."
With the 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. The Company attempts to limit
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<PAGE> 15
its potential liability for warranty claims through disclaimers in its software
documentation and limitation of liability provisions in its shrinkwrap 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)."
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.
Platform Integration: The Genesis Project. The Company intends to
integrate the existing data processing sites and platforms currently being
operated at Columbus, Ohio, Aurora, Illinois, and Austin, Texas, into a central
processing site at the Company's headquarters in Norcross, Georgia, and has
designated this integration the Genesis Project. The integration requires the
acquisition of, and investment in, extensive hardware and in operating and
system software, as well as extensive communications links and systems. The
Genesis Project requires substantial engineering and development of proprietary
software. Redundancy, anomaly monitoring, and off-site backup and recovery
systems are planned as a part of the project. Communications, in addition to the
technology described above, will be aided by the installation of a SONET network
provided through BellSouth.
Significant numbers of high-level employees have and will be hired to
facilitate the accomplishment of the project, and to manage the integrated site.
Management intends to operate the existing sites without substantial disruption
until the central site is completed and tested, and only then will a staged
migration be effected. The integrated site is scheduled to begin accepting
operations processing by September 1998, and the expected cost expended during
the fiscal year ending June 30, 1998 is approximately $15 million. As of
September 15, 1997, the project had met its interim deadlines and targets and
management expects the project to be completed on time and within budget.
Nonetheless, because of the magnitude of the project, and an aggressive
schedule, no assurance can be given that the project will be completed on time
or successfully. See "Business -- Business Risks (Rapid Technological Change;
Risk of Delays)."
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 targeted for the appropriate
platform to optimize the characteristics of available technology with the
business requirements of each application and its market. This strategy utilizes
large IBM mainframes as the platform for high volume batch oriented systems,
IBM's RS/6000 UNIX Servers and Hewlett-Packard UNIX Servers for high volume OLTP
systems, Microsoft Windows NT for medium volume OLTP systems and Windows for
client connectivity.
Investment Services. Investment Services employs advanced technology
for its portfolio management services and utilizes IBM RS/6000's to process the
portfolio management software. Services are provided primarily as 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
can obtain access across 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 four
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 services. These services
are also available through AT&T Frame Relay national network with local numbers
in major cities across the U.S.
The system has been exclusively UNIX since 1991 and consists of 26 IBM
RS/6000 running AIX. In addition, there are another 11 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.
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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 over 100 employees and, to achieve deeper market penetration, through select
distribution alliances with companies who are involved in the Company's target
customer markets. In addition to its direct sales force, the Company has an
extensive marketing department.
In the electronic commerce segment, the Company offers its services
and related products to the nations largest financial institutions directly
through its sales force, and markets to smaller institutions through its
strategic alliances with companies such as EDS, Fiserv, FiTech, Alltel, and Gold
Leaf. The Company offers its services and related products to the business
market directly through its sales force, through an arrangement with ADP, and
through the integration of the Company's services and related products into
major commercial accounting software programs. The Company currently offers
substantially all of its services and related products only to the domestic
marketplace.
Additionally, the Company's distribution of its home banking and
electronic consumer and business bill payment services is widened though
inclusion or access through front ends, such as Quicken, QuickBooks, Managing
Your Money, and Microsoft Money.
The Company markets its financial application software products
through its direct sales force 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.
The Company markets its investment services through its direct sales
force. The Company generates new customers through direct solicitation user
groups and responses to advertisements. The Company also participates in trade
shows and sponsors industry seminars for distribution alliances.
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. 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 Company has provided, through
advanced communications technology, a virtual call center enabling incoming
calls to be transparently routed to various physical support sites as volume
demands dictate. An important driver of profit margins for the Company is the
percentage of transactions completed through electronic means. Experience has
shown that the demand on customer care resources reduces substantially as the
percentage of electronic remittances grows. The Company has long been a leader
in electronic remittance, and its merchant systems group continually establishes
and maintains electronic links directly to the internal systems of payees.
The level and types of services provided vary by customer market. The
customer care group, consisting of more than 350 employees, 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 and to aid in adjusting resources to a level
commensurate with efficient response.
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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 the Comptroller of the Currency since it is a supplier
of products and services to financial institutions. 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. A number of
states have legislation regulating or licensing check sellers or money
transmitters, and the Company has, from time to time, received demands that it
register under such legislation, but as of September 15, 1997, the Company has
not been required to obtain a license or to submit to jurisdiction. Management
does not believe that any state or federal legislation of this type currently
affects the Company. 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" 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)."
PAYMENT CLEARANCE SYSTEMS
Payment Systems. Across the Company's various electronic commerce
service offerings, the Company utilizes the Federal Reserve's ACH for electronic
funds transfers, and 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. 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, and the National Automated
Clearing House Association Operating Rules. 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)," and " -- Business
Risks (Government Regulation)."
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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.
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. Nonetheless, 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. 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 primarily
utilizes the two 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 $1,224,028 as of June
30, 1997, and the Company has not incurred losses in excess of 0.76% of its
revenues in any of the past five years. As further protection against losses due
to transmission errors, the Company maintains errors and omissions insurance.
See "Business -- Risk Factors (Risk of Loss from Returned Transactions, Merchant
Fraud or Erroneous Transactions)."
PROPRIETARY RIGHTS
The Company owns the following federally registered trademarks and
service marks: ACCESS BANKING(R), ALAS(R), BFCS(R), BANK STREET(R),
CHECKFREE(R), CHECKFREE and Design(R), CHECKFREE (Stylized Letters)(R),
CHECKFREE EASY(R), CHECKFREE EXTRA(R), CHECKFREE MANAGER(R), DISC CHECKBOOK
PLUS(R), CHECKFREE WALLET(R), CLAS(R), CLRS(R), CLUB HOOCH(R), CPIM(R), CSS(R),
CSSII(R), DASH(R), DECISION MANAGER(R), DISC and Design(R), DISC CHECKBOOK
PLUS(R), DISC WORLD$NET(R), ECP(R), EPOCH(R), FMS(R), FASTOCK PC(R), INTEGRATED
DECISION MGR.(R), LSAMS(R), LANPATH(R), LEASTRAC2000(R), MAX(R), MICROACH(R),
MOBILEPAY(R), NETWORK BANKER(R), ORBS(R), PAWWS(R), PAWTRACKS(R), PEP+(R), PEP
PAPERLESS ENTRY PROCESSING(R), PTT(R), PODIUM(R), QUICKKILL(R), RS/REACT(R),
SBA(R), SERVANTIS SYSTEMS(R), SERVANTIS SYSTEMS(R), SERVANTIS SYSTEMS(R),
SUPRRB(R), TCM THE CONTROL MACHINE(R), TMS-THE MORTGAGE SERVICER(R), TRS(R),
TST(R), VAULT(R), WIRENET(R), and WORLD$NET(R). Additionally, the Company has
applied to federally register the following service marks: CHARITY NET(SM),
CHECKFREE BILL(SM), CHECKFREE CONNECT(SM), CHECKFREE E-BILL(SM), CHECKFREE
ELECTRIC MONEY(SM), CHECKFREE FREES YOU FROM CHECKS(SM), ECX(SM), RCM 2001...THE
NEXT GENERATION(SM), and THE WAY MONEY MOVES and Design(SM), CAPS CORPORATE
AUTOMATED PAYMENTS SYSTEM(TM), OMNI(TM), SSI(TM), SSI LOGO and Design(TM), THE
SECONDARY MARKETER(TM), and WIRENEXT(TM). The Company is awaiting further
information to file applications for the following marks: ALLIANCE, APECS, APECS
PLUS, ARP, ARP - PC, ARP/QMS, ARP/SMS, BPS, BANKVUE, CHECKBOOK PLUS, CPCS, EASY
ACCESS TO TOTAL ELECTRONIC BANKING, SERVANTIS IRS, IRS/SRS, LCR, CHECKFREE
RECON-PLUS FOR WINDOWS, RECON-PLUS, RPS, RPS-PC, RPS/400, RRS, RS/REACT,
SERVANTIS, SERVANTIS with Design, SERVANTIS SYSTEMS, INC., SERVANTIS FORUM,
SERVANTIS QUIK, SIG FILER, SMS, and SERVANTIS WORLD$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
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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 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 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. Incorporating 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 described
above. See "Business -- Payment Clearance Systems." The Company's patent expires
on January 17, 2012. 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. As the technology used by the Company evolves, however, its dependence
upon the patented technology continues to decrease.
EMPLOYEES
As of June 30, 1997, the Company employed 1,444 full-time employees,
including 373 in systems and development (including software development), 351
in customer care, and 128 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 "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 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 fiscal year ended
June 30, 1997, 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 must 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
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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.
Adverse publicity raising concerns about the safety or privacy of electronic
transactions, or widely reported breaches of the Company's or another providers
security have the potential to undermine consumer confidence in the technology
and thereby have a materially adverse effect on the Company's business. 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.
Because the Company's strategy is focused on relationships with
financial institutions, mergers, acquisitions, and personnel changes within key
financial institutions have the potential to adversely affect the Company's
business. Moreover, an important source of growth in demand for the Company's
services is generated by financial institutions marketing to their customer
base. Were these financial institutions to abandon or to curtail their marketing
efforts, a material adverse effect on the Company's business, operating results,
and financial condition would likely result.
Integration of Servantis, Security APL, and ISC. 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, 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). Finally, on January 27, 1997, the Company acquired
ISC for approximately $199.0 million, consisting of the issuance of 12.6 million
shares of the Company's Common Stock and $20.0 million payable in cash to
Intuit. In addition, in fiscal 1997, the Company wrote-off $140.0 million of the
purchase price for ISC as in process research and development, which had a
material adverse impact on the Company's results in 1997.
Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. A number of banks have developed, and others in the
future may develop, home banking services in-house. Additionally, Microsoft has
individually, and as part of a joint venture with First Data, announced its own
alliances with financial institutions to offer on-line home banking and
financial services as well as bill presentment and bill payment services to
consumers. In the business market, the Company competes with other 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. The Company also faces competition in ACH processing
from numerous banks. The financial application software segment also faces
significant competition.
The Company's product lines also face competition from competitors
which include TSAI, Fiserv, FiTech, EDS, 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, IIC, and Computron, and its RECON-Plus product
competes with Chesapeake and Driscoll. Competitors for mortgage-related products
include CPI (an Alltell Company). Competition for portfolio services includes
two main segments. The Company competes with providers of portfolio accounting
software, including Advent Software, PORTIA (a division of Thomson Financial),
and Shaw Data (a SunGard Company) . The Company also competes with service
bureau providers such as Shaw Data and FMC Service Bureau. In the brokerage
segment the Company's primary competitor is Shaw Data, and the Company competes
for business bill payment customers with ACI and Deluxe Data, which provide ACH
processing.
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. Moreover, the Company's current and
potential competitors, many of whom have significantly greater financial,
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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. There can be no assurance 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 "-- Products, Services, 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, and as financial institutions offer their own proprietary or licensed
front-ends, retail-marketed personal financial software will become a less
important channel for the Company in acquiring new customers.
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. 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 to 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 and administrative
infrastructure will require substantial operational, management, and financial
resources. Although the Company believes that its current 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
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."
Acquisition-Related Risks. 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. From time to time, the
Company evaluates potential acquisitions of businesses, services, products, or
technologies. 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.
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. Software
sales have historically displayed seasonal variation, 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
financial institution customers and software sales compensation structure, which
is based on fiscal year (June 30) sales performance. Moreover, the Company's
intention to aggressively promote
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the acceptance of its electronic commerce services and rapidly expand its
customer base may adversely impact the Company's short-term profitability. These
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."
Erosion of Maintenance Base; License Revenue. The profitability of the
Software segment of the Company's business depends, to a substantial degree,
upon users of products electing to continue to periodically renew contracts for
maintenance. In the event that a substantial number of these customers were to
decline to renew these contracts, because use of the software product has been
abandoned, or for any other reason, the Company's revenues and profits would be
adversely affected. Sales of software licenses are dependent upon customer
demand for the product, which is affected by pricing decisions, the competition
of similar products, and reputation of the products for performance. Most of the
Company's software products are sold within the financial services industry, and
poor performance by one product has the potential to undermine the Company's
reputation and affect future sales of other products. A substantial decrease in
software license revenue would have a material adverse effect upon the Company's
business, operating results, and financial condition.
Proportion of Electronic Remittances. The Company's future financial
performance will be materially affected by the percentage of bill payments which
can be cleared electronically. As compared with making payment by paper check or
by draft, electronic payments: (i) cost much less to complete; (ii) give rise to
far fewer errors, which are costly to resolve; (iii) generate far fewer customer
inquiries and therefore consume far fewer customer care resources. Accordingly,
the Company's inability to continue to decrease the percentage of remittances
effected by paper documents will result in flat or decreased margins, and a
reversal of the current trend toward a smaller proportion of paper-based
payments would have a material adverse effect upon the Company's business,
operating results, and financial condition.
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.
The Company's program to integrate its various processing sites and
platforms into a central site carries with it the risk of delays and performance
failures that have the potential to substantially interfere with the Company's
ability to provide acceptable service levels to its customers. Although
management believes that it has taken all reasonable
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steps to plan and monitor this integration, there can be no assurance that its
efforts will be successful or timely, and a failure to provide adequate service
levels could result in a material adverse effect upon the Company's business,
operating results, and financial condition. See "Business -- General," "--
Products, Services, and Competition," and "-- Research and Development."
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes the Federal Reserve's ACH for electronic
fund transfers 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. Nonetheless, 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, Aurora,
Illinois, Downers' Grove, Illinois, and Austin, Texas. A disproportionate amount
of the Company's computer equipment, including its primary processing
operations, is located in Columbus, Ohio. Although the Company is planing to
move most of its computer processing equipment to its headquarters site in
Norcross, Georgia, this measure will not eliminate the significant risk to the
Company's operations from a natural disaster or system failure. As a
precautionary measure, the Company has entered into disaster recovery agreements
for the processing systems at all sites, and conducts business resumption tests
on a scheduled basis. 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 on the ownership of the
patent or future patents, but on the innovative skills, technical competence,
quality of service and marketing abilities of its personnel. The Company
believes its patent provides some 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. 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,
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including its Chairman, President, and Chief Executive Officer, Peter J. Kight,
its Chief Operating Officer, Peter F. Sinisgalli, its Vice Chairman for
Corporate Development and Marketing, Mark A. Johnson, and its Chief Technology
Officer, Ravi Ganesan. The Company's operations could be affected adversely if,
for any reason, any of these officers 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 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."
ACH Access. 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 -- Government Regulation" and "-- Payment Clearance Systems."
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 September 12, 1997, the
directors, executive officers, and principal stockholders of the Company and
their affiliates collectively owned approximately 44.9% 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 September 12, 1997, the Company had 54,689,156 shares of the Company's
Common Stock outstanding. Of these shares, 30,679,158 shares are held by
nonaffiliates of the Company. The holders of the remaining 24,010,001 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 of 1933, as amended (the "Securities Act"). Additionally, as of June 30,
1997, the Company had outstanding options to purchase 4,441,461 shares of the
Company's Common Stock at a weighted average exercise price of $9.59, of which
options for 1,218,341 shares of the Company's Common Stock were exercisable as
of June 30, 1997 at a weighted average exercise price of $1.17.
The Company issued 5,692,734, 2,805,652, and 12,600,000 shares of the
Company's Common Stock in connection with the Servantis Acquisition, the
Security APL Acquisition, and ISC Acquisition, respectively. A portion of these
shares have been sold by the respective stockholders and the remainder are
available for resale subject to Rule 144 and Rule 145 under the Securities Act
or certain registration rights agreements.
Sales of substantial amounts of these shares in the public market or
the prospect of such sales could adversely affect the market price of the
Company's Common Stock.
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Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation, By-Laws, and Stockholder Rights Plan. Certain
provisions of Delaware law the Company's Certificate of Incorporation, By-Laws,
and Stockholder Rights Plan 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, the Company's Certificate
of Incorporation, and the Stockholder Rights Plan 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 under the Stockholder Rights Plan 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. See Note 14 to Notes to the
Consolidated Financial Statements.
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."
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, 1998. The Company has a $20 million line of credit available
for unanticipated needs. However, 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."
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<PAGE> 26
ITEM 2. PROPERTIES.
The Company leases office facilities in Norcross, Georgia, Columbus,
Ohio, Aurora, Illinois, Downers' Grove, Illinois, Owings Mills, Maryland,
Austin, Texas, Jersey City, New Jersey, Chicago, Illinois, San Diego,
California, Boston, Massachusetts, Houston, Texas, and Ashburn, Virginia with
square footage of approximately 229,000, 107,000, 51,000, 14,000, 30,000,
32,000, 17,100, 10,000, 3,000, 2,000, 1,000, and 3,000, respectively. The
Company owns approximately eight acres of real property adjacent to the
Company's facility in Columbus, Ohio. 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 June 30, 2021.
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 Columbus, Ohio facility 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 significant prepayment penalty. See "Item 13. Certain
Relationships and Related Transactions."
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.
None.
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<PAGE> 27
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>
CALENDAR PERIOD COMPANY COMMON STOCK
- ---------------------------------------------- ----------------------------
<S> <C> <C>
Fiscal 1995: HIGH LOW
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 $25.00 $14.125
Third Quarter $17.375 $11.125
Fourth Quarter $19.625 $ 9.50
Fiscal 1998:
First Quarter (through September 12, 1997) $20.375 $16.50
</TABLE>
The number of record holders of the Company's Common Stock, as of
September 12, 1997, was 530. The closing sales price of the common stock on
September 12, 1997, was $18.875.
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. Presently, the Company's line of credit
restricts the payment of dividends on the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data for the year ended June 30,
1997, the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994 and as of June 30, 1997 and 1996 have been derived from the Company's
financial statements included elsewhere in this Form 10-K which have been
audited by Deloitte and 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, 1992 and 1993 and
as of December 31, 1992, 1993, 1994 and 1995 have been derived from audited
financial statements of the Company which are not included in this Form 10-K. To
assist the reader in the analysis of results of operations for the year ended
June 30, 1997, unaudited results of operations from the twelve months ended June
30, 1996 are also provided. The selected consolidated financial data set forth
below should be read in conjunction with Managements 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.
-27-
<PAGE> 28
<TABLE>
<CAPTION>
(Amounts and shares shown in thousands, except per share amounts)
Twelve
Six Months Months Year
Year Ended December 31, Ended Ended Ended
--------------------------------------------- June 30, June 30, June 30,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS: (unaudited)
Revenues:
Processing, servicing and merchant discount $ 22,201 $ 28,986 $ 38,282 $ 49,330 $ 33,305 $ 59,053 $ 104,522
License fees -- -- -- -- 10,970 10,970 33,087
Maintenance fees -- -- -- -- 1,978 1,978 22,567
Other -- 1,906 984 -- 4,787 4,788 16,268
-------- -------- -------- --------- --------- --------- ---------
Total revenues 22,201 30,892 39,266 49,330 51,040 76,789 176,444
Expenses:
Cost of processing, servicing and support 13,873 18,387 24,212 30,258 35,439 51,236 102,721
Research and development 2,360 3,605 4,724 6,877 9,907 13,765 32,869
Sales and marketing 3,394 3,640 4,427 7,242 17,167 21,349 32,670
General and administrative 1,657 2,381 2,598 4,134 7,338 9,598 18,707
Depreciation and amortization 1,097 1,377 1,922 2,484 6,997 8,246 24,919
Exclusivity amortization and other -- -- -- -- -- -- 5,957
In process research and development -- -- -- -- 122,358 122,358 140,000
-------- -------- -------- --------- --------- --------- ---------
Total Expenses 22,381 29,390 37,883 50,995 199,206 226,552 357,843
Gain on sale of assets -- -- -- -- -- -- 6,250
-------- -------- -------- --------- --------- --------- ---------
Income (loss) from operations (180) 1,502 1,383 (1,665) (148,166) (149,763) (175,149)
Interest:
Income 171 165 298 2,135 1,659 3,104 2,153
Expense (230) (279) (795) (645) (325) 484 (834)
-------- -------- -------- --------- --------- --------- ---------
Income (loss) before income taxes (239) 1,388 886 (175) (146,832) (147,143) (173,830)
Income tax expense (benefit) (159) 368 400 40 (8,629) (8,650) (12,017)
-------- -------- -------- --------- --------- --------- ---------
Income (loss) before extraordinary item (80) 1,020 486 (215) (138,203) (138,493) (161,813)
Extraordinary item -- -- -- -- (364) (364) --
-------- -------- -------- --------- --------- --------- ---------
Net income (loss) $ (80) $ 1,020 $ 486 $ (215) $(138,567) $(138,857) $(161,813)
======== ======== ======== ========= ========= ========= =========
Income (loss) per common and equivalent share
before extraordinary item -- $ 0.04 $ 0.02 $ (0.01) $ (3.69) $ (4.14) $ (3.44)
Net income (loss) per common and equivalent
share -- $ 0.04 $ 0.02 $ (0.01) $ (3.70) $ (4.15) $ (3.44)
Weighted-average common and equivalent
shares outstanding 27,127 26,886 27,103 28,219 37,420 33,435 46,988
BALANCE SHEET DATA:
Working capital $ 304 $ 623 $ 11,399 $ 81,792 $ 45,496 $ 45,496 $ 20,002
Total assets 8,059 17,669 30,512 115,642 196,230 196,230 223,836
Long-term obligations, less current portion 1,275 8,968 8,213 7,282 8,324 8,324 8,401
Total stockholder's equity 1,915 2,985 16,372 99,325 137,675 137,675 148,643
</TABLE>
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<PAGE> 29
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 significant acquisitions in 1996 and 1997, the Company now operates in three
business segments -- Electronic Commerce, Software, and Institutional Investment
Services. The Company's electronic transaction processing services, software,
and related products are targeted to financial institutions, businesses,
institutional investment portfolio managers, and their customers.
Electronic Commerce. Electronic Commerce services offered to financial
institutions and their customers include electronic bill payment, electronic
home banking, and business payments. The Company generates bill payment and home
banking revenues through contracts with financial institutions which typically
include an implementation fee, a base fee per customer account on services
provided by the Company, plus a variable per transaction fee which decreases
based on the volume of transactions. Contracts typically have three-to-five year
terms and generally provide for minimum fees if certain transaction volumes are
not met.
For businesses, the Company provides business payment processing
services, including business electronic bill payment, ACH processing, and
automatic payment collection services to companies in the health and fitness and
various other service industries. The Company generates revenues from
transaction fees and implementation fees. The Company also generated revenues
from credit card discount fees, until March 1997, when the automatic accounts
receivable collection business was sold, generating a gain on the sale of
$6,250,000. The sale allows the Company to concentrate on the development and
sale of electronic bill payment and on-line banking capabilities for business.
On January 27, 1997, the Company acquired ISC for a total of $199.0
million, including 12.6 million shares of the Company's Common Stock valued at
$177.2 million and the present value of cash payments due to Intuit under the
Services and License Agreement of $19.6 million. In addition to strengthening
the Company's leading share of the bill payment and home banking market, under
the merger agreement, the Company is the exclusive provider of bill payment and
home-banking services for Intuit's personal financial software product, Quicken,
until October 1, 1997.
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions, 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 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, businesses, and their customers.
Software. The Company started operating in the Software segment with
the Servantis Acquisition. Servantis was acquired for $165.1 primarily through
the issuance of 5.7 million shares of the Company's Common Stock valued at
$20.00 per share and $42.5 million paid to retire Servantis' long-term debt.
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.
-29-
<PAGE> 30
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. 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.
Management believes that the major factors affecting customer decisions
in this 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 continues to develop and maintain
software products and respond to regulatory change and technological advances.
Institutional Investment Services. On May 9, 1996, the Company entered
this business segment with the Security APL Acquisition for $53 million through
the issuance of 2.8 million shares of the Company's Common Stock. The Company
offers portfolio accounting and performance measurement to investment advisors,
brokerage firms, banks, and insurance companies. 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. The full range of portfolio management
systems solutions include data conversion, personnel training, trading systems,
graphical client reporting, performance measurement, technical network support,
interface setup, and DTC processing.
The Company generates revenues based on the number of portfolios
managed, transaction fees, and implementation fees. Services are provided under
contracts with institutional investors through contracts with terms of
three-to-five years which generally provide for minimum fees if certain
transaction volumes are not met.
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:
-30-
<PAGE> 31
<TABLE>
<CAPTION>
Six Twelve
Year Ended Months Transition Months Year
December 31, Ended Period Ended Ended
--------------- June 30, June 30, June 30, June 30,
1994 1995 1995 1996 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 61.7 61.3 61.2 69.4 66.7 58.2
Research and development 12.0 13.9 12.8 19.4 17.9 18.6
Sales and marketing 11.3 14.7 13.1 33.6 27.8 18.5
General and administrative 6.6 8.4 8.0 14.4 12.5 10.6
Depreciation and amortization 4.9 5.0 5.3 13.7 10.7 14.1
Exclusivity amortization and other -- -- -- -- -- 3.4
In process research and development -- -- -- 239.7 159.3 79.3
----- ----- ----- ----- ----- -----
Total expenses 96.5 103.4 100.3 390.3 295.0 202.8
Gain on sale of business -- -- -- -- -- 3.5
----- ----- ----- ----- ----- -----
Income (loss) from operations 3.5 (3.4) (0.3) (290.3) (195.0) (99.3)
Interest:
Income 0.8 4.3 2.3 3.3 4.0 1.2
Expense (2.0) (1.3) (1.4) (0.6) (0.6) (0.4)
----- ----- ----- ----- ----- -----
Income (loss) before income taxes 2.3 (0.4) 0.6 (287.7) (191.6) (98.5)
Income tax expense (benefit) 1.1 0.1 0.3 (16.9) (11.3) (6.8)
----- ----- ----- ----- ----- -----
Income (loss) before extraordinary item 1.2% (0.4)% 0.3% (270.8)% (180.4)% (91.7)%
===== ===== ===== ===== ===== =====
</TABLE>
TWELVE MONTHS ENDED JUNE 30, 1996 AND 1997
Revenues. Total revenue increased by $99.6 million, or 129.8%, from
$76.8 million to $176.4 million for the twelve months ended June 30, 1996 and
1997, respectively. Estimated purchased profits in deferred revenues at the
Servantis Acquisition date in February 1996 have been eliminated as a purchase
accounting adjustment reducing revenues by approximately $12.7 million for the
twelve months ended June 30, 1996 and by approximately $7.8 million for the
twelve months ended June 30, 1997. Without the impact of these purchase
accounting adjustments, total revenues would have increased by $94.8 million, or
105.9%, from $89.5 million to $184.3 million for the twelve months ended June
30, 1996 and 1997, respectively.
Processing, servicing, and merchant discount revenue increased by
76.8% from $59.1 million to $104.5 million for the twelve months ended June 30,
1996 and 1997, respectively. The increase of $45.4 million was due to several
key factors including: (i) the purchase of ISC in January 1997 which added $18.1
million of new revenue in 1997; (ii) Security APL contributed twelve full months
of revenue in 1997 totaling $23.8 million versus $3.0 million during two months
in 1996 for an increase of $20.8 million; and (iii) an increase in processing
and servicing revenue from internal growth in the core electronic processing
business of 51% on a full year pro forma basis.
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<PAGE> 32
License fee revenue excluding purchased profits adjustments of $3.0
million and $1.3 million in 1996 and 1997, respectively, increased by $20.4
million from $14.0 million in 1996 to $34.4 million in 1997. Software sales from
the Servantis Acquisition of only four months during the twelve months ended
June 30, 1996, took place in the seasonally high fourth quarter of the fiscal
year. Results from the twelve months ended June 30, 1997 represent growth of 27%
versus the same period in 1996 on a full year pro forma basis.
Maintenance fee revenue, excluding purchased profits adjustments of
$7.6 million in 1996 and $5.4 million in 1997, increased by $18.5 million from
$9.5 million to $28.0 million during the twelve months ended June 30, 1996 and
1997, respectively. Considering only four months of Servantis operations
included in 1996 revenue, maintenance has stabilized on a year over year basis.
The increase is the net result of the following: (i) an average price increase
of 7%; (ii) customer retention on renewal maintenance in the high 80% range; and
(iii) added first year maintenance on new software sales.
Other revenue, excluding purchased profits adjustments of $2.2 million
in 1996 and $1.1 million in 1997, increased by $10.4 million from $6.9 million
to $17.3 million for the twelve months ended June 30, 1996 and 1997,
respectively. The increase was due primarily to the Servantis Acquisition.
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. The cost of processing, servicing, and support was $51.2 million
and $102.7 million, or 66.7% and 58.2% of revenue for the twelve months ended
June 30, 1996 and 1997, respectively. Adjusting service only revenues (all
revenue except license fees) for purchased profits charges of $9.7 million in
1996 and $6.5 million in 1997, the resulting processing, servicing, and support
costs as a percentage of adjusted service revenue were 67.8% and 68.5% for the
twelve months ended June 30, 1996 and 1997, respectively. Processing, servicing,
and support costs increased as a percentage of service revenue due primarily to
two factors: (i) a decrease of approximately 15% in the average revenue per
customer for the Company's home banking and bill payment services (excluding ISC
operations) as a result of the Company changing from a retail to a wholesale
distribution model late in calendar year 1995; and (ii) higher processing costs
in the ISC operations versus those achieved in the core electronic processing
operations.
The Company realizes greater operational efficiency in the remittance
and customer care operations as electronic payment to merchants displace
paper-based transactions. In June 1997, the Company processed 45% of payments
electronically in the core processing business, an increase from 37% in June
1996. Electronic transactions for ISC operations have increased from 2% at the
date of acquisition to 10% by June 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 $13.8
million and $32.9 million, or 17.9% and 18.6% of revenue during the twelve
months ended June 30, 1996 and 1997, respectively. Excluding purchased profits
adjustments, research and development expenses were 15.4% and 17.8% of adjusted
revenue for the twelve months ended June 30, 1996 and 1997, respectively. The
increase as a percentage of revenue for the twelve month period was due to
increased product and business development for new and existing services and
related products, including electronic bill presentment and expanded business
and home banking and bill payment offerings, such as web-based bill payment.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales associates, public relations and advertising
costs, customer acquisition fees, and royalties paid to distribution partners.
Sales and marketing costs were $21.3 million and $32.7 million, or 27.8% and
18.5% of revenue for the twelve months ended June 30, 1996 and 1997,
respectively. Excluding purchased profits, sales and marketing expenses were
23.9% and 17.7% of adjusted revenue for the twelve months ended June 30, 1996
and 1997, respectively. The 1996 costs exceeded 1997 due primarily to a direct
consumer marketing campaign in the amount of $6.5 million. Excluding such cost,
net sales and marketing for 1996 would have increased from 15.5% in 1996 to
16.6% in 1997 primarily due to sales and marketing efforts to financial
institutions in the Company's electronic commerce business.
General and Administrative. General and administrative expenses
consist principally of salaries for administrative, executive, finance, and
human resource employees. General and administrative expenses were $9.6
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<PAGE> 33
million and $18.7 million, or 12.5% and 10.6% of revenue for the twelve months
ended June 30, 1996 and 1997, respectively. Excluding purchased profits, general
and administrative expenses were 10.7% and 10.2% of adjusted revenue for the
twelve months ended June 30, 1996 and 1997, respectively. The improved
productivity is due to increasing revenues and efficiencies gained in
administrative functions upon combining the various entities.
Depreciation and Amortization. Depreciation and amortization expenses
increased by $16.7 million from $8.2 million to $24.9 million for the twelve
months ended June 30, 1996 to 1997, respectively. Amortization of intangible
assets resulting from the purchases of Servantis and Security APL in 1996 and
ISC in 1997 have increased from $3.1 million in the twelve months ended June 30,
1996 to $17.7 million for the same period in 1997 representing $14.6 million of
the increase. The remaining $2.1 million increase is the result of depreciable
assets added as a result of the acquisitions and capital expenditures necessary
to support growth in the business.
Exclusivity Amortization and Other. Exclusivity amortization primarily
includes amortization for the value assigned to the exclusivity arrangement with
Intuit that is amortized ratably over the contractual exclusivity term, which
expires October 1, 1997.
In Process Research and Development. In process research and
development was $122.4 million and $140.0 million for the twelve months ended
June 30, 1996 and 1997, respectively. The 1996 costs related to the purchases of
Servantis, Security APL, and Interactive Solutions Corporation and the 1997 cost
relates to the purchase of ISC. The amounts allocated to in process research and
development for each of the acquisitions were based on independent appraisals
and were expensed at the time of the related acquisition.
Gain on Sale of Assets. On March 26, 1997, the Company sold certain
assets and certain contracts and licensed certain proprietary software for
processing automatic accounts receivable through credit cards or the Automated
Clearing House. The gain on the sale was $6.25 million.
Interest. Interest income decreased from $3.1 million for the twelve
month period ended June 30, 1996 to $2.2 million for the twelve month period
ended June 30, 1997 due to lower average cash, cash equivalent and investment
balances in 1997 compared to 1996. Such cash was used to fund acquisitions late
in 1996 and 1997 as well as to fund operations in 1997.
Interest expense increased from $484,254 for the twelve month period
ended June 30, 1996 to $834,247 for the twelve month period ended June 30, 1997.
The increase is primarily the result of higher average outstanding notes payable
and capital lease obligations in 1997 versus 1996.
Income Taxes. The effective income tax benefit was 6.6% for the twelve
months ended June 30, 1996 and 6.9% for the twelve months ended June 30, 1997.
For both periods, the difference from the statutory rate of 35% was due to
non-deductible in process research and development charges and non-deductible
intangible amortization offset by state and local tax benefits.
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues. Processing, servicing, and merchant discount revenues
increased $9.7 million, or 41.2%, from $23.6 million for the six month period in
1995 to $33.3 million for the same period in 1996. The increase was due
primarily to $5.7 million of processing and servicing revenue 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 customer based on 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, as a percentage of servicing revenues (all revenues except
license fees) were 61.2% and 88.4% for the six months ended June 30, 1995 and
1996, respectively. Excluding purchased profits of $12.7 million in 1996,
processing, servicing, and support costs
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<PAGE> 34
would have been 67.2% of servicing revenue for the six months ended June 30,
1996 versus 61.2% in 1995. Processing, servicing, and supports costs increased
as a percentage of servicing due primarily to two pricing changes: (i) in June
1995, the Company reduced its per transaction pricing to a major business
services customer based on increased volume of transactions attributable to such
customer as part of the Company's monitoring of its pricing structure; and (ii)
in September 1995, the Company changed from a retail to a wholesale distribution
model which resulted in decrease of approximately 15% in the average revenue per
customer for the home banking and bill payment services (excluding ISC).
Research and Development. Research and development expenses were $3.0
million and $9.9 million, or 12.8% and 19.4% of revenue during the six months
ended June 30, 1995 and 1996, respectively. The increase of $6.9 million 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 business, expanded home banking
offerings, greater capability payment processing systems, and bill presentment.
Sales and Marketing. Sales and marketing costs were $3.1 million and
$17.2 million, or 13.1% and 33.6% of revenue for the six months ended June 30,
1995 and 1996, respectively. The significant increase of $14.1 million is due to
a $6.5 million direct consumer marketing campaign and $7.7 million of increased
sales and marketing expenses incurred by the acquired companies during the six
months period in 1996.
General and Administrative. General and administrative expenses were
$1.9 million and $7.3 million, or 8.0% and 14.4% of revenue for the six months
ended June 30, 1995 and 1996, respectively. This increase of $5.4 million was
due to $3.9 million of increased general and administrative expenses related to
the acquired companies, increased expenses related to becoming and being a
public company (such as legal fees and investor relations), and additional
management, finance, and human resource associates.
Depreciation and Amortization. Depreciation and amortization expenses
were $1.2 million and $7.0 million, or 5.3% and 13.7% of revenue for the six
months ended June 30, 1995 and 1996, respectively. The increase of $5.8 million
was due primarily to $5.5 million of increased depreciation and amortization
expenses related to the acquired companies and the resulting increase in
depreciation from $7.1 million of property additions (primarily computer
related) for the six months ended June 30, 1996 to support continued product
development and the growth of the Company.
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 Interactive Solutions Corporation. The amounts allocated to in process
research and development for each acquisition were based on independent
appraisals.
Interest. Interest income increased from $0.5 million 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 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 $324,000 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 federal rate of 35% 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, 1994, AND 1995
Revenues. Processing, servicing, and merchant discount revenues
increased by $11.0 million, or 28.9%, from $38.3 million in 1994 to $49.3
million in 1995. The increase was due primarily to a 20% increase in the number
of consumer subscribers which resulted in $6.6 million of added revenue and a
36.3% or $2.6 million increase in merchant
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<PAGE> 35
discounts. In June 1995, the Company reduced it per transaction prices to a
major business customer based on increased transaction volume attributable to
that customer as part of the Company's on-going monitoring of its pricing
structure in each of the markets in which it competes.
Other revenues during this time period include reimbursement of
services and related product development expenses from distribution partners Due
to the termination of a joint development project with a distribution partner in
1994, other revenue decreased from $1.0 million in 1994 to $0 in 1995.
Cost of Processing, Servicing, and Support. Processing, servicing, and
support expenses as a percent of revenue were 61.7% and 61.3% in 1994 and 1995,
respectively. Excluding other revenues, processing, servicing, and support costs
were 63.2% in 1994 and 61.4% in 1995. The 1.8% decrease in costs as a percentage
of net revenue was due primarily to more efficient customer care operations
resulting in slower growth in the number of customer care associates compared to
growth in revenue and an increase in lower cost electronic payments to
merchants.
Research and Development. Research and development expenses were $4.7
million in 1994 and $6.9 million in 1995 or 12.0% and 13.9% of revenue,
respectively. The increase of $2.2 million was due to developmental 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 increased by $2.8
million, or 64%, from 1994 to 1995 and as a percentage of revenue they increased
from 11.3% to 14.7%, respectively. The increase was due to increased sales
staffing levels in anticipation of new services and business opportunities in
addition to increased public relations activities related to new products and
services.
General and Administrative. General and administrative expenses were
$2.6 million, or 6.6% of revenue in 1994, and $4.1 million, or 8.4% of revenue
in 1995. 1994 expenses were positively impacted by a one time gain of $223,000
related to real estate lease. Without this gain, general and administrative
costs would have increased from $2.8 million, or 7.2% of revenue in 1994, to
$4.1 million or 8.4% of revenue in 1995. This increase was due to the hiring of
additional operating, administrative, and finance associates to manage current
and expected future growth.
Depreciation and Amortization. As a percent of revenue, depreciation
and amortization remained consistent from 4.9% in 1994 to 5.0% in 1995. The
increase was due primarily to property additions in 1994 and 1995 to support
increased research and development activities and increasing staffing levels.
Interest. Interest income increased from $298,000 in 1994 to $2.1
million in 1995 due to income from the private placement of the Company's Common
Stock in December of 1994 and income from the proceeds of the initial public
offering in September 1995.
Interest expense decreased from $795,000 to $645,000 due to the
redemption and conversion of $1.0 million of convertible subordinated debentures
outstanding in September 1994 offset by increased interest related to new
capital lease obligations in 1994 and 1995.
Income Taxes. Income tax expense was $400,000 in 1994. The effective
rate of 45.1% in 1994 was greater than the statutory federal rate of 35% 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 also due primarily to state and local taxes
and non-deductible intangible asset amortization.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth a summary of cash flow activity and
should be read in conjunction with comments regarding the Company's liquidity
and capital resources:
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<PAGE> 36
<TABLE>
<CAPTION>
SUMMARY OF CASH FLOWS
-------------------------------------------------------
(IN THOUSANDS)
-------------------------------------------------------
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash provided by (used in)
operating activities $ 2,654 $ 2,361 $ (6,645) $ (7,832)
Cash flow from investing
activities (12,839) (22,785) (37,132) 24,912
Cash flow from financing
activities 10,939 82,055 925 (5,982)
-------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents $ 754 $ 61,631 $(42,852) $ 11,098
======== ======== ======== ========
</TABLE>
The Company has historically funded its business primarily through
cash flows generated from operations, the sale of equity and debt securities and
capital lease financing. During the six month period ending June 30, 1996 and
the year ended June 30, 1997 several acquisitions and dispositions have taken
place that have had a significant impact on cash flow.
During the year ended December 31, 1994, the Company received proceeds
of $12.1 million from a private placement of its Common Stock and $11.8 million
of these funds were invested in short term U.S. government securities. Cash
provided from operations of $2.7 million was used to invest in property
additions of $1.0 million and to pay capital lease obligations of $0.7 million.
The Company redeemed $250,000 of subordinated debentures and paid $250,000
toward outstanding notes payable. Cash and cash equivalents increased by $0.8
million for the period.
For the year ended December 31, 1995, the Company received proceeds of
$82.7 from the issuance of 4,975,310 shares of its Common Stock in the initial
public offering. An additional $2.3 million of cash was generated from operating
activities and $0.4 million was received from the combination of stock options
exercised and payments on stockholder notes receivable, $16.4 million of funds
were invested in a net increase in short term U.S. Government securities, $3.4
million was invested in property additions, $3.0 million was invested in a
trademark license, and $1.0 million was applied to principal payments on capital
lease obligations. Cash and cash equivalents increased by $61.6 million for the
period.
During the six month period ended June 30, 1996, the Company used $6.6
million in operating activities. The Company invested $39.4 million, net of cash
acquired, for the acquisitions of Servantis and Security APL. These acquisitions
were partially funded through $10.6 million of maturities and sales of
investments, $7.1 million of funds were invested in property additions, $1.3
million on capitalization of software development costs, $0.6 million on the
repayment of notes payable, and $0.6 million was applied to principal payments
on capital lease obligations. The Company borrowed $1.1 million under an
unsecured loan and received $0.9 million from the exercise of stock options.
Cash and cash equivalents decreased by $42.9 million for the period.
For the year ended June 30, 1997, the Company used $7.8 million in
operating activities. The sale of certain businesses generated proceeds of $28.9
million while $0.6 million was received from stock options exercised during the
year. The Company invested $11.4 million, net of cash acquired, for the
acquisition of ISC and an additional payment of $10.0 million is due on October
1, 1997. Certain stockholders exercised options to sell back to the Company
276,469 shares of Common Stock at a price of $19 per share. The Company received
proceeds of $16.5 million on net
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<PAGE> 37
maturities and sales of investments, $9.8 million was invested in property and
software additions, while $0.6 million was received on the sale of property and
equipment. Principal payments on capital leased totaled $1.1 million, $50,000
was applied to the repayment of stockholder notes payable and an additional
$68,750 was expended on repayment of outstanding notes payable balances. Cash
and cash equivalents increased by $11.1 million for the year. The Company also
has available a $20 million working capital line of credit which was executed in
May 1997. No funds have been drawn against the line at June 30, 1997.
In August 1997, the Company sold a software product line for cash of
$33.5 million. See Note 17 to Notes to the Consolidated Financial Statements.
The Company believes that the proceeds of this sale combined with cash
equivalents and investments on hand at June 30, 1997 will be sufficient to meet
the Company's presently anticipated working capital and capital expenditure
requirements through at least June 1998.
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
This annual report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability and its operating and growth
strategy. Investors are cautioned that all forward-looking statements involve
risks and uncertainties including, without limitation, the factors set forth
under the caption "Business -- Business Risks" in this report and other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included in this annual report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of as of June 30, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended June 30, 1997, the six months ended
June 30, 1996, and the years ended December 31, 1995 and 1994, and the notes to
the financial statements, together with the independent auditors' report thereon
appear in the Company's Annual Report and are incorporated herein by reference.
The Company's Financial Statement Schedule and Independent Auditors'
Report on Financial Statement Schedule are included in response to Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement (the "Proxy
Statement") relating to the Company's 1997 Annual Meeting of Stockholders to be
held on October 30, 1997, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE BOARD OF DIRECTORS" and "EXECUTIVE COMPENSATION" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS" and "OWNERSHIP
OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in the Proxy Statement and is incorporated
herein by reference.
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<PAGE> 39
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 appearing in the
Company's Annual Report are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1997 and 1996.
Consolidated Statements of Operations for the year ended June
30, 1997, the six months ended June 30, 1996, and for each of
the two years in the period ended December 31, 1995.
Consolidated Statements of Stockholders' Equity for the year
ended June 30, 1997, 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 year ended June
30, 1997, the six months ended June 30, 1996, and for the each
of the two years in the period ended December 31, 1995.
Notes to the Consolidated Financial Statements.
(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.)
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<PAGE> 40
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 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 1995 Stock
Option Plan.
10(c) 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(d) 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(e) 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(f) 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(g) * Schedule identifying material details of
Indemnification Agreements substantially identical
to Exhibit 10(f).
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<PAGE> 41
10(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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(q) 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.)
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<PAGE> 42
10(r) 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(s) 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(t) 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(u) 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(v) 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(w) 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(x) 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(y) 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(z) * Executive Employment Agreement between the Company
and Peter J. Kight.
10(aa) 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(bb) 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(cc) 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.)
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<PAGE> 43
10(dd) 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
Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ee) * Loan and Security Agreement, dated as of May 13,
1997, among KeyBank National Association, the
Company, CheckFree Software Solutions, Inc.,
CheckFree Services Corporation, Security APL, Inc.,
Servantis Systems, Inc., and Servantis Services, Inc.
10(ff) * CheckFree Corporation Incentive Compensation Plan.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Power 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, 1997:
(i) Current Report on Form 8-K, dated July 1, 1997, filed
with the Securities and Exchange Commission on July
3, 1997 (Items 5 and 7).
(ii) Current Report on Form 8-K, dated July 17, 1997,
filed with the Securities and Exchange Commission on
July 18, 1997 (Items 5 and 7).
(iii) Current Report on Form 8-K, dated August 30, 1997,
filed with the Securities and Exchange Commission on
September 5, 1997 (Items 2 and 7).
(c) EXHIBITS
The exhibits to this report follow the Consolidated Financial
Statements.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors'
report thereon are included on the pages following the Notes to the Consolidated
Financial Statements.
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<PAGE> 44
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 25, 1997 By: /s/ James S. Douglass
-------------------------------
James S. Douglass, Executive Vice President -
Finance and Chief Financial Officer
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 25th day of September, 1997.
Signature Title
*Peter J. Kight Chairman of the Board, President,
- -------------------------------- and Chief Executive Officer
Peter J. Kight (Principal Executive Officer)
*Mark A. Johnson Vice Chairman - Corporate Development
- -------------------------------- Director
Mark A. Johnson
/s/ James S. Douglass Executive Vice President - Finance and
- -------------------------------- Chief Financial Officer
James S. Douglass (Principal Financial Officer)
*Gary A. Luoma, Jr. Vice President and Chief Accounting
- -------------------------------- Officer
Gary A. Luoma, Jr. (Principal Accounting Officer)
*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
*By: /s/ Curtis A. Loveland
--------------------------------------
Curtis A. Loveland, Attorney-in-Fact
-44-
<PAGE> 45
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
Independent Auditor's Report On Financial Statement Schedule.......................... F-22
Schedule II -- Valuation and Qualifying Accounts...................................... F-23
</TABLE>
F-1
<PAGE> 46
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 June 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1997, the six months ended June 30, 1996, and the years
ended December 31, 1995 and 1994. 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 June 30, 1997 and 1996 and the results of their operations and
their cash flows for the year ended June 30, 1997, the six months ended June 30,
1996, and the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 8, 1997, except for Note 17 as to which
the date is September 25, 1997
F-2
<PAGE> 47
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 32,085,872 $ 20,987,355
Investments............................................................. 4,430,558 18,089,029
Accounts receivable..................................................... 44,506,852 29,516,548
Assets held for sale.................................................... -- 20,000,000
Prepaid expenses and other.............................................. 2,197,477 2,205,800
Deferred income taxes................................................... 3,002,341 --
------------- -------------
Total current assets............................................. 86,223,100 90,798,732
PROPERTY AND EQUIPMENT -- Net............................................. 44,027,188 36,567,141
OTHER ASSETS:
Capitalized software, net............................................... 26,644,084 34,407,680
Intangible assets, net.................................................. 56,895,587 27,507,677
Investments............................................................. 14,770 2,898,065
Deferred income taxes................................................... 3,063,250 --
Other noncurrent assets................................................. 6,968,287 4,050,249
------------- -------------
Total other assets............................................... 93,585,978 68,863,671
------------- -------------
$ 223,836,266 $ 196,229,544
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 7,050,860 $ 5,434,468
Accrued liabilities..................................................... 31,055,726 14,876,861
Customer deposits....................................................... 434,399 575,595
Current portion of long-term obligations................................ 953,220 1,112,184
Deferred revenue........................................................ 26,497,863 15,438,798
Income taxes payable.................................................... 228,709 45,608
Deferred income taxes................................................... -- 7,819,505
------------- -------------
Total current liabilities........................................ 66,220,777 45,303,019
ACCRUED RENT AND OTHER.................................................... 570,189 195,169
DEFERRED INCOME TAXES..................................................... -- 4,732,324
LONG-TERM OBLIGATIONS -- Less current portion:
Obligations under capital leases........................................ 7,301,027 7,136,817
Stockholder's note...................................................... -- 50,000
Notes payable to banks.................................................. 1,100,000 1,137,500
------------- -------------
Total long-term obligations...................................... 8,401,027 8,324,317
COMMITMENTS (Notes 10, 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
55,546,321 shares, 42,274,800 shares.................................. 555,464 422,748
Additional paid-in capital.............................................. 454,850,522 276,823,109
Less:
Treasury stock -- at cost, 1,041,552 shares, 757,536 shares........... (6,007,391) (629,481)
Accumulated deficit................................................... (300,754,322) (138,941,661)
------------- -------------
Total stockholders' equity....................................... 148,644,273 137,674,715
------------- -------------
$ 223,836,266 $ 196,229,544
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 48
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -------------------------
1997 1996 1995 1994
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Processing and servicing.............. $ 94,527,853 $ 27,141,624 $39,535,737 $31,097,631
Merchant discount..................... 9,994,189 6,162,914 9,794,280 7,184,729
License fees.......................... 33,087,369 10,970,034 -- --
Maintenance fees...................... 22,567,001 1,978,287 -- --
Other................................. 16,268,292 4,787,003 -- 984,275
------------- ------------- ----------- -----------
Total revenues................ 176,444,704 51,039,862 49,330,017 39,266,635
EXPENSES:
Cost of processing, servicing and
support............................ 102,721,210 35,438,504 30,257,787 24,212,164
Research and development.............. 32,869,249 9,907,312 6,876,625 4,723,910
Sales and marketing................... 32,669,930 17,167,157 7,242,341 4,427,408
General and administrative............ 18,706,944 7,337,675 4,134,019 2,598,175
Depreciation and amortization......... 24,918,903 6,997,101 2,484,677 1,921,665
Exclusivity amortization and other.... 5,957,300 -- -- --
In process research and development... 140,000,000 122,357,586 -- --
------------- ------------- ----------- -----------
Total expenses................ 357,843,536 199,205,335 50,995,449 37,883,322
Gain on sale of assets.................. 6,250,000 -- -- --
------------- ------------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS........... (175,148,832) (148,165,473) (1,665,432) 1,383,313
OTHER:
Interest income....................... 2,153,418 1,658,749 2,135,085 298,186
Interest expense...................... (834,247) (324,726) (644,837) (795,204)
------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... (173,829,661) (146,831,450) (175,184) 886,295
INCOME TAX EXPENSE (BENEFIT)............ (12,017,000) (8,628,615) 40,000 400,000
------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. (161,812,661) (138,202,835) (215,184) 486,295
EXTRAORDINARY ITEM, EXTINGUISHMENT OF
DEBT -- Net of tax.................... -- (364,374) -- --
------------- ------------- ----------- -----------
NET INCOME (LOSS)....................... $(161,812,661) $(138,567,209) $ (215,184) $ 486,295
============ ============ ========== ==========
PER SHARE AMOUNTS:
Income (loss) before extraordinary
item............................... $ (3.44) $ (3.69) $ (0.01) $ 0.02
Extraordinary item.................... -- (0.01) -- --
------------- ------------- ----------- -----------
Net income (loss)............. $ (3.44) $ (3.70) $ (0.01) $ 0.02
============ ============ ========== ==========
WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING.................... 46,988,225 37,419,580 28,218,521 27,103,287
============ ============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 49
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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, 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
pursuant to acquisitions................. 8,535,840 85,358 174,727,080 -- -- --
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) --
Net loss................................... -- -- -- -- -- --
Stock options exercised.................... 636,309 6,364 591,063 -- -- --
Tax benefit associated with exercise of
stock options............................ -- -- 886,503 -- -- --
Issuance of common stock and stock options
pursuant to acquisitions................. 12,635,212 126,352 176,549,847 -- -- --
Treasury stock acquired.................... -- -- -- (284,016) (5,377,910) --
------------ -------- ------------ -------------- ----------- -------------
BALANCE -- June 30, 1997..................... 55,546,321 $555,464 $454,850,522 (1,041,552) $(6,007,391) $ --
============== ========= ============= ============= ============ ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
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
pursuant to acquisitions................. -- 174,812,438
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
Net loss................................... (161,812,661) (161,812,661)
Stock options exercised.................... -- 597,427
Tax benefit associated with exercise of
stock options............................ -- 886,503
Issuance of common stock and stock options
pursuant to acquisitions................. -- 176,676,199
Treasury stock acquired.................... -- (5,377,910)
------------- -------------
BALANCE -- June 30, 1997..................... $(300,754,322) $ 148,644,273
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 50
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, ---------------------------
1997 1996 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $(161,812,661) $(138,567,209) $ (215,184) $ 486,295
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...... 140,000,000 122,357,586 -- --
Write-off of capitalized software..................... 3,618,570 -- -- --
Exclusivity amortization.............................. 4,937,500 -- -- --
Depreciation and amortization......................... 24,918,903 6,997,102 2,484,677 1,921,665
Deferred income taxes................................. (13,101,264) (8,653,323) 78,628 64,540
Gain on sale of assets................................ (6,250,000) -- -- --
Loss on disposal of property and equipment............ 640,540 99,819 12,650 33,996
Accretion of investment discount -- net............... -- -- (337,221) --
Change in certain assets and liabilities (net of
acquisitions):
Accounts receivable................................. (10,951,954) (1,109,875) (1,499,502) 543,052
Prepaid expenses and other.......................... (2,975,501) 820,701 (915,259) (269,276)
Refundable income taxes............................. -- -- (144,119) --
Accounts payable.................................... 1,248,697 2,605,707 223,407 723
Accrued liabilities................................. 3,837,001 3,428,406 2,623,425 (87,607)
Customer deposits................................... 366,195 272,647 (25,495) (113,237)
Deferred revenue.................................... 7,509,066 4,585,841 228,017 153,093
Income taxes payable................................ 183,101 152,903 (153,032) (79,409)
------------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities..................................... (7,831,807) (6,645,321) 2,360,992 2,653,835
------------- ------------- ------------ ------------
INVESTING ACTIVITIES:
Property additions...................................... (9,754,858) (7,089,391) (3,431,016) (1,042,892)
Proceeds from the sale of property and equipment........ 588,509 29,016 270 23,548
Proceeds from the sale of assets........................ 28,900,000 -- --
Capitalization of software development costs............ -- (1,312,327) -- --
Purchase of businesses, net of cash acquired............ (11,363,140) (39,404,209) -- --
Purchase of investments................................. (3,000,000) -- (54,078,818) (11,819,937)
Proceeds from maturities and sales of investments....... 19,541,766 10,644,945 37,725,000 --
Purchase of trademark license........................... -- -- (3,000,000) --
------------- ------------- ------------ ------------
Net cash provided by (used in) investing
activities..................................... 24,912,277 (37,131,966) (22,784,564) (12,839,281)
------------- ------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock...................... -- -- 82,743,853 12,121,029
Repayment of notes payable and other debt
extinguishment........................................ (68,750) (608,874) (75,000) (250,000)
Proceeds from notes payable............................. -- 1,100,000 225,000 --
Principal payments under capital lease obligations...... (1,076,356) (570,816) (1,038,264) (711,435)
Proceeds from stock options exercised................... 591,063 870,830 232,371 30,000
Purchase of treasury stock.............................. (5,377,910) -- -- --
Receipts (payments) on stockholder notes................ (50,000) 133,648 (33,259) --
------------- ------------- ------------ ------------
Net cash provided by (used in) financing
activities..................................... (5,981,953) 924,788 82,054,701 10,939,594
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 11,098,517 (42,852,499) 61,631,129 754,148
CASH AND CASH EQUIVALENTS:
Beginning of period..................................... 20,987,355 63,839,854 2,208,725 1,454,577
------------- ------------- ------------ ------------
End of period........................................... $ 32,085,872 $ 20,987,355 $ 63,839,854 $ 2,208,725
============== ============== ============= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 51
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996 AND FOR THE YEAR ENDED
JUNE 30, 1997, THE SIX MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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 and disclosure of contingent 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>
<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 available-for-sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") 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
F-7
<PAGE> 52
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
SFAS 86. Capital software development costs are amortized on a
product-by-product basis using either the estimated economic life of the product
on a straight-line method 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 $7,687,390, $2,520,802, $207,500 and
$267,624 for the year ended June 30, 1997, the six months ended June 30, 1996,
and the years ended December 31, 1995 and 1994, respectively.
Intangible Assets. The cost of identified intangible assets are generally
amortized on a straight-line basis over periods from 8 months-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 $2,110,489, $7,159,234, $1,757,601 and $613,158 for
the year ended June 30, 1997, the six months ended June 30, 1996, and the years
ended December 31, 1995 and 1994, 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 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
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. In February 1997, Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" was issued. The
Statement is not effective until periods ending after December 15, 1997.
However, had the Company adopted the Statement in the current year, basic and
dilutive loss per share, as defined in the Statement, would be the same as the
loss per share currently reported in the accompanying financial statements.
Recent Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 129, "Disclosure of Information about Capital Structure", which is
effective for periods ending after December 15, 1997. The Statement establishes
F-8
<PAGE> 53
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
standards for disclosing information about an entity's capital structure. The
adoption of SFAS 129 is not expected to have a material impact on the Company's
disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
is effective for periods beginning after December 15, 1997. The Statement
requires businesses to disclose comprehensive income and its components in their
general-purpose financial statements, with reclassification of comparative
(earlier period) financial statements. The adoption of SFAS 130 is not expected
to have a material impact on the Company's disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for periods beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The adoption of SFAS 131 is
not expected to have a material impact on the Company's disclosures.
Reclassifications. Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1997 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
interest 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 totaled $3,227,904, $1,019,288,
$1,622,963 and $740,290 for the year ended June 30, 1997, the six months
ended June 30, 1996 and the years ended December 31, 1995 and 1994,
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.
F-9
<PAGE> 54
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- General and Administrative. General and administrative expenses consist
primarily of salaries for administrative, executive, finance, and human
resource employees.
2. ACQUISITIONS AND DISPOSITIONS
On January 27, 1997, the Company acquired Intuit Services Corporation
("ISC") for a total of $199.0 million, including 12.6 million shares of common
stock valued at $177.2 million, the present value of cash payments due to
Intuit, Inc. under the Services and License Agreement of $19.6 million and
acquisition costs of $2.2 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, $28.9 million was allocated to goodwill. In addition, $140.0 million was
allocated to in-process research and development, which was charged to
operations at the time of the acquisition. $7.9 million was allocated to an
exclusivity agreement with Intuit, Inc. and is being amortized on a
straight-line basis over the contractual life of eight months. Further, $3.5
million was allocated to other identifiable intangible assets and $20.3 million
allocated to tangible assets. ISC's operations are included in the consolidated
results of operations from the date of the acquisition.
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. 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, $11.2 million was allocated to
goodwill, $46.5 million to other identifiable intangible assets and $55.2
million to tangible assets. In addition, $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. 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, $10.9
million was allocated to goodwill, $9.0 million to other identifiable intangible
assets and $9.8 million to tangible assets. Additionally, $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.
F-10
<PAGE> 55
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma results of operations of the Company for the year
ended June 30, 1997, the six months ended June 30, 1996 and the twelve months
ended June 30, 1996, assuming the acquisitions occurred at the beginning of each
period are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED 12 MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1996
------------- ---------------- ---------------
<S> <C> <C> <C>
Total revenues............................. $ 194,354 $ 69,607 $ 131,815
Loss before extraordinary item............. (28,567) (34,290) (43,872)
Net loss................................... (28,567) (34,655) (44,236)
Net loss per share......................... (0.53) (0.65) (0.81)
Weighted average shares outstanding........ 54,272 53,630 54,529
</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 and $140.0 million arising from the Servantis, Security APL and IS
acquisitions in 1996 and the ISC acquisition in 1997, respectively. The
unaudited pro forma information is not necessarily indicative of the actual
results of operations had the transactions occurred at the beginning of the
periods presented, nor should it be used to project the Company's results of
operations for any future periods.
On March 26, 1997, the Company sold certain assets and certain contracts
and licensed certain proprietary software for processing automatic accounts
receivable through credit cards or the Automated Clearing House resulting in a
net gain on the sale of $6,250,000.
3. INVESTMENTS
The carrying amounts, which approximate market value, of investments in
debt securities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
---------- -----------
<S> <C> <C>
U.S. Government and Government Agency Obligations............ $4,445,328 $20,762,950
Certificates of Deposit...................................... -- 224,144
---------- -----------
Total.............................................. $4,445,328 $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, 1997 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>
<S> <C>
Due in one year or less.................................................. $4,430,558
Due after one year through five years.................................... 14,770
----------
Total.......................................................... $4,445,328
=========
</TABLE>
F-11
<PAGE> 56
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Trade accounts receivable................................... $22,049,201 $14,858,364
Unbilled trade accounts receivable.......................... 20,957,992 16,203,055
Other receivables........................................... 5,716,724 734,851
----------- -----------
48,723,917 31,796,270
Less allowance for doubtful accounts........................ 4,217,065 2,279,722
----------- -----------
Total............................................. $44,506,852 $29,516,548
========== ==========
</TABLE>
5. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. In accordance with SFAS
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>
YEAR ENDED
YEAR ENDED SIX MONTHS ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------
1997 1996 1995 1994
------------ ---------------- --------- --------
<S> <C> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $(123,406) $250,929
State and local................... 1,084,264 24,708 84,778 84,531
------------ ---------------- --------- --------
Total current............. 1,084,264 24,708 (38,628) 335,460
Deferred Federal and state taxes.... (13,101,264) (8,653,323) 78,628 64,540
------------ ---------------- --------- --------
Total income tax expense
(benefit)............... $(12,017,000) $ (8,628,615) $ 40,000 $400,000
=========== ============= ========= ========
</TABLE>
F-12
<PAGE> 57
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 35 percent to income before income taxes as
a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED SIX MONTHS ENDED DECEMBER 31,
JUNE 30, JUNE 30, -------------------
1997 1996 1995 1994
------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit).......................... $(60,843,807) $(49,922,693) $(59,563) $301,340
Non-deductible in-process research
and development of acquired
businesses......................... 49,000,000 41,601,579 -- --
Nondeductible intangible
amortization....................... 838,651 218,918 64,767 64,767
State and local taxes, net of Federal
income tax benefit................. (552,903) (626,334) 55,953 55,790
Other -- net......................... (458,941) 99,915 (21,157) (21,897)
------------ ---------------- -------- --------
Total income tax expense
(benefit)................ $(12,017,000) $ (8,628,615) $ 40,000 $400,000
=========== ============= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1997 and June 30, 1996 are:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 9,149,769 $ 9,295,934
Intangible assets........................................ 5,117,698 --
Allowance for bad debts and returns...................... 1,812,560 1,254,497
Accrued compensation and related items................... 338,807 1,001,332
State income tax accrued................................. -- 89,328
Reserve accruals......................................... 910,974 --
Property and equipment................................... 55,238 --
Valuation allowance...................................... (6,000,000) (6,000,000)
----------- ------------
Total deferred tax assets........................ 11,385,046 5,641,091
Deferred tax liabilities:
Assets held for sale..................................... -- (8,000,000)
Property and equipment................................... -- (1,434,982)
Capitalized software..................................... (5,259,455) (5,953,098)
Intangible assets........................................ -- (640,176)
Deferred revenue......................................... -- (1,936,171)
Prepaid expenses......................................... (60,000) (169,711)
Other, net............................................... -- (58,782)
----------- ------------
Total deferred tax liabilities................... (5,319,455) (18,192,920)
----------- ------------
Net deferred tax asset (liability)............... $ 6,065,591 $(12,551,829)
========== ===========
</TABLE>
At June 30, 1997, the Company has approximately $24,000,000 of net
operating loss carryforwards available, expiring in 2009 to 2011, including
approximately $9,000,000 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, 1997.
F-13
<PAGE> 58
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and land improvements.................................. $ 3,145,746 $ 3,145,746
Building and building improvements.......................... 14,441,906 13,531,873
Computer equipment and software licenses.................... 41,263,964 22,655,049
Furniture and equipment..................................... 7,107,480 7,055,892
----------- -----------
Total............................................. 65,959,096 46,388,560
Less accumulated depreciation and amortization.............. 21,931,908 9,821,419
----------- -----------
Property -- net............................................. $44,027,188 $36,567,141
========== ==========
</TABLE>
7. INTANGIBLE ASSETS
The components of intangible assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Workforce................................................... $ 8,370,477 $ 7,195,200
Tradenames.................................................. 4,150,000 4,164,444
Customer base............................................... 3,440,000 3,459,111
Goodwill.................................................... 41,125,528 13,647,058
Exclusivity................................................. 7,900,000 --
----------- -----------
Total............................................. 64,986,005 28,465,813
Less accumulated amortization............................... 8,090,418 958,136
----------- -----------
Intangible assets, net...................................... $56,895,587 $27,507,677
========== ==========
</TABLE>
8. ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Salaries and related costs.................................. $10,715,876 $ 5,467,592
Services and license agreement accrual...................... 9,886,762 --
Processing fees............................................. 2,657,887 3,662,257
Reserve for returns and chargebacks......................... 1,224,028 542,387
Other....................................................... 6,571,173 5,204,625
----------- -----------
Total............................................. $31,055,726 $14,876,861
========== ==========
</TABLE>
9. LONG-TERM DEBT AND NOTES PAYABLE
Stockholders' and Bank Notes Payable The Company had unsecured loans
payable to certain stockholders totaling $50,000 at June 30, 1996 which were due
in December 1998 but paid in full in July 1996. 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, however the note
was fully paid in December, 1996.
F-14
<PAGE> 59
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1996, the Company executed an unsecured note payable with a bank
for $1.1 million. The principal amount is due in July 1998, with interest
payable quarterly based on the LIBOR rate (total of 5.8% at June 30, 1997).
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.
In May 1997, the Company obtained a working capital line of credit which
enables the Company to borrow up to $20 million, based on the collateral of
eligible accounts receivable. The line expires in October 1999, and contains
certain restrictive covenants, including defined quarterly operating results,
minimum tangible net worth requirements, and the prohibition of dividend
payments. No funds have been drawn against the line through June 30, 1997.
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 totaling $562,046 at June 30, 1997
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>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 3,145,746 $ 3,145,746
Building.................................................... 4,525,860 4,369,254
Computer equipment.......................................... 4,318,244 3,204,468
----------- -----------
Total............................................. 11,989,850 10,719,468
Less accumulated amortization............................... 3,081,443 2,425,823
----------- -----------
Property held under capital leases.......................... $ 8,908,407 $ 8,293,645
========== ==========
</TABLE>
F-15
<PAGE> 60
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30:
1998.................................................................. $ 1,420,928
1999.................................................................. 1,358,412
2000.................................................................. 1,239,813
2001.................................................................. 1,044,945
2002.................................................................. 976,196
Thereafter............................................................ 6,288,701
-----------
Total future minimum lease payments........................... 12,328,995
Less amount representing interest..................................... 4,092,743
-----------
Net future minimum lease payments............................. $ 8,236,252
==========
</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 year ended June 30, 1997,
the six months ended June 30, 1996, and the years ended December 31, 1995 and
1994 was $5,881,575, $1,935,880, $664,948 and $671,528, respectively. Minimum
future rental payments under these leases are as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30:
1998.................................................................. $ 5,150,650
1999.................................................................. 5,117,939
2000.................................................................. 5,065,752
2001.................................................................. 4,495,355
2002.................................................................. 4,503,477
Thereafter............................................................ 7,683,209
-----------
Total......................................................... $32,016,382
==========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Retirement Plans. The Company has a defined contribution 401(k) retirement
plan covering substantially all of its employees. Under the plan 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 $1,862,310, $366,670, $96,913 and
$70,880 for the year ended June 30, 1997, the six months ended June 30, 1996,
and the years ended December 31, 1995 and 1994, 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 $100,000. Total
expense under this plan amounted to $3,458,272, $1,139,960, $626,000 and
$397,000 for the year ended June 30, 1997, the six months ended June 30, 1996,
and the years ended December 31, 1995 and 1994, respectively. The Company
expenses amounts as claims are incurred and recognizes a liability for incurred
but not reported claims. At June 30, 1997, and June 30, 1996, the Company has
accrued $378,000 and $120,000, respectively, as a liability for costs incurred
under this plan.
F-16
<PAGE> 61
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 5,000,000 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, 1997, 2,013,730
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, 1994 to
June 30, 1997:
<TABLE>
<CAPTION>
NUMBER
OF SHARES PRICE
--------- ----------
<S> <C> <C>
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>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1995
--------------------------- --------------------------- ---------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- Beginning of period.... 2,908,218 $ 4.58 2,901,782 $ 1.19 3,074,736 $ 0.82
Granted............................... 2,282,056 14.32 459,289 21.79 160,746 7.12
Exercised............................. (636,309) 1.01 (874,195) 0.99 (270,262) 0.65
Cancelled............................. (112,504) 14.88 (22,020) 1.06 (63,438) 0.73
Issued in conjunction with Servantis
Acquisition......................... -- 443,362 1.52 --
--------- --------- ---------
Outstanding -- End of period.......... 4,441,461 9.59 2,908,218 4.58 2,901,782 1.19
========= ========= =========
Weighted average fair value of options
granted during the year............. $ 6.68 $ 8.45 $ 2.92
================ ================ ================
</TABLE>
F-17
<PAGE> 62
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding at
June 30, 1997:
<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
---------------------------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.57-$ 1.00..................... 1,550,814 5.5 $ 0.83 1,047,378 $ 0.82
$ 1.00-$10.00..................... 206,649 8.3 2.76 93,474 2.00
$10.00-$15.00..................... 1,724,609 9.6 13.39 2,500 13.07
$15.00-$20.00..................... 760,300 9.3 17.39 16,900 19.08
$20.00-$25.00..................... 199,089 8.7 22.18 58,089 22.61
--------- ---------
4,441,461 $ 9.59 1,218,341 $ 1.17
======== ========
</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 June 30, 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995, respectively:
dividend yield of 0% in all periods; expected volatility of 47, 40 and 40
percent; risk-free interest rates of 6.41%, 6.68% and 5.25%; and expected lives
of 3-5 years.
Under the 1997 Associate Stock Purchase Plan, the Company is authorized to
issue up to one million shares of common stock to its full-time employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can choose, every six months, to have up to 15% of their salary over
the six month period withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the lower of its
beginning-of-period or end-of-period market price. Approximately 39 percent of
eligible employees participated in the first six month period beginning January
1, 1997. Under the Plan, the Company sold no shares in the year ended June 30,
1997; however, 53,013 shares were sold in July 1997 from salary withholding
accumulated in the year ended June 30, 1997. The weighted average fair market
value of this look-back option of $3.93 is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions for the grant
for the year ended June 30, 1997: dividend yield of 0%, expected volatility of
47 percent, risk free interest rate of 5.1% and an expected life of three
months.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option plans and employee stock purchase plan. 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 SFAS 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 12 MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ---------------- ---------------
<S> <C> <C> <C>
Pro forma net loss................... $ 164,088,799 $138,797,202 $ 244,759
Pro forma net loss per share......... $ 3.49 $ 3.71 $ 0.01
</TABLE>
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
In January 1997 the Board of Directors approved an amendment to the
Company's 401(k) plan which authorized up to 1,000,000 shares of Common Stock
for the Company's matching contribution.
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.
As of June 30, 1996, certain stockholders had an option to sell up to
280,565 shares of common stock to the Company at $19 per share which expired on
September 30, 1996. Of the eligible shares, 276,469 were sold to the Company and
were recorded as treasury stock.
F-18
<PAGE> 63
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PREFERRED STOCK
In January 1997, the Company's Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights to protect its stockholders in
the event of an unsolicited attempt to acquire the Company. On February 14,
1997, the Rights were issued to the Company's stockholders of record, with an
expiration date of 10 years. Until a person or group acquires 15% or more of the
Company's Common Stock, the Rights will automatically trade with the shares of
Common Stock. Only when a person or group has acquired 15% or more of the
Company's Common Stock, will the Rights become exercisable and separate
certificates issued. Prior to the acquisition by a person or group of beneficial
ownership of 15% or more of the Company's Common Stock, the Rights are
redeemable for $.001 per Right at the option of the Board of Directors.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED SIX MONTHS DECEMBER 31,
JUNE 30, ENDED JUNE 30, ---------------------
1997 1996 1995 1994
------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Interest paid.............................. $ 584,663 $ 321,477 $645,443 $ 838,153
============ ============ ======== =========
Income taxes paid.......................... $ 1,147,152 $ 468,077 $211,150 $ 414,869
============ ============ ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease additions.................. $ 1,914,000 $ 501,160 $261,981 $1,594,492
============ ============ ======== =========
Loans to stockholders repaid with common
stock.................................... $ 75,221
=========
Conversions of subordinated debentures..... $ 750,000
=========
Computer equipment received in exchange for
accounts receivable...................... $ 395,000
=========
Tax benefit associated with the exercise of
stock options............................ $ 886,503 $ 1,100,141 $ 57,586
============ ============ ========
Purchase price of business acquisitions.... $ 200,996,642 $ 265,238,845
Less: Issuance of common stock and stock
options pursuant to acquisitions.... (177,187,500) (174,812,438)
Liabilities assumed................. (1,618,816) (44,064,523)
Net present value of future payment
due................................. (9,609,815) --
Cash acquired in acquisitions....... (1,217,371) (6,957,675)
------------- --------------
Net cash paid.................... $ 11,363,140 $ 39,404,209
============ ============
</TABLE>
16. BUSINESS SEGMENTS
Prior to 1996, the Company operated in one segment -- Electronic Commerce.
With the acquisition of Servantis in February 1996 and Security APL in May 1996,
the Company now also operates in the Software and Institutional Investment
Services segments. The net revenues of each segment are principally domestic,
and no single customer accounted for 10% or more of consolidated revenues for
the year ended June 30, 1997 or the six months ended June 30, 1996.
Approximately 13% and 11% of the Company's revenues for the years ended December
31, 1995 and 1994, respectively, were from a single customer.
F-19
<PAGE> 64
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A further description of each business segment follows:
- Electronic Commerce. Electronic commerce includes electronic home
banking, electronic bill payment and business payments. These services are
primarily directed to financial institutions and businesses and their
customers.
- Software. Business services 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.
- Institutional Investment Services. Institutional investment services
includes investment portfolio management services and investment trading
and reporting services. These products and services are primarily directed
to institutional investment managers.
The following sets forth certain financial information attributable to the
Company's business segments for the year ended June 30, 1997 and the six months
ended June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Revenues:
Electronic Commerce................................................ $ 56,932 $ 29,783
Software........................................................... 95,737 18,271
Institutional Investment Services.................................. 23,775 2,986
------------- -------------
Total...................................................... $ 176,444 $ 51,040
========== ==========
Operating income (loss):
Electronic commerce, including charge for acquired in-process
research and development of $140,000 in 1997 and $77,250 in
1996............................................................ $(155,573) $ (92,160)
Software, including charge for acquired in-process research and
development of $16,308 in 1996.................................. (1,328) (24,675)
Institutional investment services, including charge for acquired
in-process research and development of $28,800 in 1996.......... 949 (28,629)
Corporate.......................................................... (19,197) (2,701)
------------- -------------
Total...................................................... $(175,149) (148,165)
========== ==========
Identifiable assets:
Electronic Commerce................................................ $ 59,851 $ 29,425
Software........................................................... 66,909 96,844
Institutional Investment Services.................................. 24,076 25,099
Corporate.......................................................... 73,000 44,862
------------- -------------
Total...................................................... $ 223,836 $ 196,230
========== ==========
Capital expenditures:
Electronic Commerce................................................ $ 3,182 $ 4,651
Software........................................................... 1,171 1,087
Institutional Investment Services.................................. 1,973 686
Corporate.......................................................... 3,429 665
------------- -------------
Total...................................................... $ 9,755 $ 7,089
========== ==========
</TABLE>
F-20
<PAGE> 65
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Depreciation and amortization:
Electronic Commerce................................................ $ 2,094 $ 1,698
Software........................................................... 10,501 4,345
Institutional Investment Services.................................. 4,379 632
Corporate.......................................................... 7,945 322
------------- -------------
Total...................................................... $ 24,919 $ 6,997
========== ==========
</TABLE>
17. SUBSEQUENT EVENT
On August 29, 1997 the Company sold certain software for $33,500,000. The
projected gain from the sale will enable the Company to eliminate a deferred tax
benefit valuation allowance of $6,000,000 in the first quarter of fiscal 1998.
This deferred tax benefit valuation allowance reduction will first be applied
against the balance of goodwill and any remaining amounts will be ratably
applied against remaining intangible asset balances resulting from the Servantis
acquisition.
F-21
<PAGE> 66
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 June 30, 1997 and 1996, and for the year
ended June 30, 1997 and for the six months ended June 30, 1996 and for the years
ended December 31, 1995 and 1994, and have issued our report thereon dated
August 8, 1997, except for Note 17 as to which the date is August 29, 1997; 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
Atlanta, Georgia
August 8, 1997
F-22
<PAGE> 67
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995,
THE SIX MONTHS ENDED JUNE 30, 1996, AND FISCAL YEAR
ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
BALANCE AMOUNT
AS OF ASSUMED IN CHARGES TO CHARGES TO BALANCE
BEGINNING 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
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
1997................. 2,279,722 1,000,000 9,195,754 -- 8,258,411 4,217,065
Reserve for Returns and
Chargebacks
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
1997................. 542,387 -- 1,920,377 -- 1,236,736 1,226,028
</TABLE>
F-23
<PAGE> 68
CHECKFREE CORPORATION
FORM 10-K FOR THE
YEAR ENDED
JUNE 30, 1997
EXHIBIT INDEX
<PAGE> 69
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 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 1995 Stock
Option Plan.
10(c) 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.)
<PAGE> 70
10(d) 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(e) 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(f) 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(g) * Schedule identifying material details of
Indemnification Agreements substantially identical
to Exhibit 10(f).
10(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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.)
<PAGE> 71
10(p) 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(q) 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(r) 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(s) 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(t) 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(u) 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(v) 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(w) 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(x) 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(y) 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(z) * Executive Employment Agreement between the Company
and Peter J. Kight.
10(aa) 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.)
<PAGE> 72
10(bb) 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(cc) 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(dd) 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
Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ee) * Loan and Security Agreement, dated as of May 13,
1997, among KeyBank National Association, the
Company, CheckFree Software Solutions, Inc.,
CheckFree Services Corporation, Security APL, Inc.,
Servantis Systems, Inc., and Servantis Services, Inc.
10(ff) * CheckFree Corporation Incentive Compensation Plan.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Power 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.
<PAGE> 1
EXHIBIT 10(b)
CHECKFREE CORPORATION
1995 STOCK OPTION PLAN
AS AMENDED AND RESTATED
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 Subsidiary or
Parent thereof (together 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 "non-employee directors" as defined in Rule
16b-3(b)(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.
<PAGE> 2
(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 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 CheckFree
Corporation ("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. The maximum number of shares for which Options may be
granted under the Plan during any calendar
2
<PAGE> 3
year to any one Key Associate may not exceed 500,000 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 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.
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
3
<PAGE> 4
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 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 by reason death or by the Company by reason of Disability 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 the
Optionee's termination of employment by reason of Retirement, the Options shall
be exercisable to the extent and for the period specified in subparagraph
11(d); and (iv) in the event of a Change in Control, the Options shall become
exercisable as specified in subparagraph 12(c).
(b) An Option shall be exercisable only upon delivery of a
written notice to the Company's Chief Financial Officer 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 which have been held by the
Optionee for at least six months (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 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
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(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.
11. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the
Company Group, other than by reason of death or Retirement or termination by
the Company by reason of Disability 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 to the extent the same were exercisable on the date of termination. 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.
(b) Upon termination of an Optionee's employment by death or
by the Company by reason of Disability ("Disability Related Termination"), the
Optionee or the Optionee's personal representative, or the person or persons to
whom his rights under the Options pass by will or the laws of descent or
distribution, shall have one year after the date of death or the date of the
Disability Related Termination (but not later than the expiration date of the
Stock Option Agreement) to exercise all Options held by the Optionee to the
extent the same were exercisable on the date of the Optionee's termination of
employment, except that the time elapsed from the date of death or a Disability
Related Termination to the date of exercise of such Option shall accrue toward
any vesting requirements in the Stock Option Agreement evidencing such Option
as if the Optionee had remained employed by the Company.
(c) Upon termination of an Optionee's employment For Cause,
all Options held by such Optionee shall terminate effective on the date of
termination of employment.
(d) With respect only to options granted after September 15,
1997, upon termination of an Optionee's employment by reason of Retirement, the
Optionee shall have three years after the date of Retirement (but not later
than the expiration of the Stock Option Agreement) to exercise any Option held
by Optionee at the time of Retirement to the extent the same was exercisable on
the date of the Optionee's exercise of the Option, except that the time elapsed
from the date of Retirement to the date of exercise of such Option shall accrue
toward any vesting requirements in the Stock Option Agreement evidencing such
Option as if the Optionee had remained employed by the Company; provided,
however, notwithstanding the foregoing, in the event of the Optionee's death
after Retirement, the Optionee or the Optionee's personal
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representative, or the person or persons to whom his rights under the Options
pass by will or the laws of descent or distribution, shall have one year after
the date of death (but not later than the expiration date of the Stock Option
Agreement) to exercise all Options held by the Optionee to the extent the same
were exercisable on the date of the Optionee's death and the elapsed time from
the date of death to the exercise of the Option shall not accrue toward any
vesting requirements in the Stock Option Agreement evidencing such Option;
provided further, at the time of the exercise of an Option by an Optionee
following termination of employment by reason of Retirement, the Optionee shall
represent and warrant to the Company that he has been in material compliance
with all terms and conditions of the Retirement Agreement with the Company (as
defined in Section 27(f) hereof); and provided further, that in the event that
the Optionee violates the Retirement Agreement, all of the Optionee's
unexercised Options shall immediately terminate and the Optionee shall return to
the Company the economic value of any Option which was realized or obtained
(measured at the date of exercise) by the Optionee after the violation of the
Retirement Agreement.
12. STOCK SPLITS; MERGERS; REORGANIZATIONS; CHANGE IN CONTROL.
(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 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) In the event of a Change in Control, 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.
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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
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 such 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.
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Certificates representing Shares subject to such repurchase or forfeiture may be
subject to such escrow and stock legend 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 1933 Act, or under state or other law.
22. ASSUMPTION. The Plan may be assumed by the successors and
assigns of the Company.
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 any rules promulgated under
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
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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 Group
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 Group not expressly set forth in the Plan or
the Stock Option Agreements.
27. DEFINITIONS.
As used in this Plan, the following terms have the meanings
indicated.
(a) Change In Control. "Change in Control" of the Company
shall be deemed to have occurred as of the first day that any one or more of the
following conditions shall have been satisfied:
(i) Any Person (other than a Person in control of the
Company as of the Effective Date of the Plan, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, or a
company owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of voting securities of
the Company) becomes the Beneficial Owner, directly or indirectly, of securities
of the Company representing a majority of the combined voting power of the
Company's then outstanding securities; or
(ii) The stockholders of the Company approve: (x) a plan
of complete liquidation of the Company; or (y) an agreement for the sale or
disposition of all or substantially all the Company's assets; or (z) a merger,
consolidation, or reorganization of the Company with or involving any other
corporation, other than a merger, consolidation, or reorganization that would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least a majority of
the combined voting power of the voting securities of the
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Company (or such surviving entity) outstanding immediately after such merger,
consolidation, or reorganization.
However, in no event shall a "Change in Control" be deemed to
have occurred, with respect to an Optionee, if the Optionee is part of a
purchasing group which consummates the Change in Control transaction. An
Optionee shall be deemed "part of a purchasing group" for purposes of the
preceding sentence if the Optionee is an equity participant or has been
identified as a potential equity participant in the purchasing company or group
except for: (i) passive ownership of less than three percent (3%) of the stock
of the purchasing company; or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not significant, as determined
prior to the Change in Control by a majority of the nonemployee continuing
directors.
For purposes of this definition of Change in Control,
"Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the
1934 Act, and used in Section 13(d) and 14(d) thereof, including a "group" as
defined in Section 13(d) thereof, and "Beneficial Owner" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and Regulations under
the 1934 Act.
(b) Disability. "Disability" means any injury of the body or
any disorder of the body or mind which renders the Optionee unable to perform
the material and substantial duties of his regular employment by the Company
Group at the time of the Optionee's termination of employment by the Company
Group. The Company's determination that a termination of employment was not a
Disability Related Termination may be disputed by the Optionee for purposes of
any Option held by the Optionee under this Plan upon written notice to the
Company's Chief Financial Officer within 30 days after termination of
employment. If so disputed, the Company will promptly select a physician, the
Optionee will promptly select a physician, and the physicians so selected will
select a third physician ("Independent Physician") who will make a binding
determination of Disability for purposes of this Plan. The Optionee will make
himself available for and submit to examinations by such physicians as may be
directed by the Company. Failure of the Optionee to submit to any examination
or failure of the Independent Physician to make his determination within 90
days after the date of the notice that the Optionee disputed the Company's
determination shall constitute acceptance of the Company's determination as to
Disability. If the decision of the Independent Physician upholds the Company's
determination, any outstanding Option held by the Optionee shall be exercisable
for 30 days from the date of such decision (but not later than the expiration
of the date of the Stock Option Agreement) to the extent that the Option was
exercisable on the date of the Optionee's termination of employment and
thereafter the Option shall terminate.
(c) Fair Market Value. If the Shares are publicly traded, the
term "Fair Market Value," as used in this Plan, shall mean (i) the closing
price quoted in the NASDAQ National Market System, if the Shares are so quoted,
(ii) the last quote reported by NASDAQ for small-cap issues, if the Shares are
so quoted, (iii) the mean between the bid and asked prices as reported by
NASDAQ, if the Shares are so quoted, or (iv) if the Shares are listed on a
securities exchange, the closing price
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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, Fair Market Value of the Shares 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.
(d) Key Associates. "Key Associates" means all executive,
administrative, operational and managerial employees of the Company Group who
are determined by the Board to be eligible for Options under the Plan.
(e) Parent and Subsidiary. The terms "Parent" and
"Subsidiary"shall have the respective meanings set forth in sections 424(e) and
(f) of the Code.
(f) Retirement. "Retirement" means the termination of
employment by an Optionee who has attained the age of at least 59-1/2, who has
been continuously employed by the Company Group for at least five years, and
who has entered into a written confidentiality and non-competition agreement
with the Company ("Retirement Agreement") in a form acceptable to the Board at
the time of such termination of employment.
(g) Termination of Employment For Cause. Termination of
employment "For Cause" means termination of employment for (i) the commission
of an act of dishonesty, including but not limited to misappropriation of funds
or property of the Company; (ii) the engagement in activities or conduct
injurious to the reputation of the Company; (iii) the conviction or entry of a
guilty or no contest plea to a misdemeanor involving an act of moral turpitude
or a felony; (iv) the violation of any of the terms and conditions of any
written agreement the Optionee may have from time to time with the Company
(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 (v) any refusal to comply with the written directives, policies or
regulations established from time to time by the Board.
CHECKFREE CORPORATION
By: /s/ Peter J. Kight
-------------------------------------
Peter J. Kight
President and Chief Executive Officer
Adopted: August 8, 1995
Amended and Restated: September 15, 1997
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Exhibit 10 (g)
CheckFree Corporation has entered into indemnification agreements with
the following individuals on the following dates:
Peter J. Kight April 28, 1993
Mark A. Johnson April 28, 1993
George R. Manser April 28, 1993
Jeffrey M. Wilkens April 28, 1993
Eugene F. Quinn December 2, 1994
William P. Boardman July 19, 1996
<PAGE> 1
EXHIBIT 10(z)
CHECKFREE CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 1st day of May, 1997, (the
"Agreement") between CheckFree Corporation ("CheckFree"), a Delaware
corporation, and Peter J. Kight (the "Executive").
RECITALS
A. Executive is currently employed as an executive of CheckFree
and its consolidated subsidiaries (individually the "Subsidiary" and
collectively the "Subsidiaries") (CheckFree and the Subsidiaries are
hereinafter collectively referred to as the "Company").
B. The parties desire to continue Executive's employment by
CheckFree and/or the Subsidiaries on the terms and conditions stated herein.
STATEMENT OF AGREEMENT
In consideration of the foregoing, and of Executive's continued
employment, the parties agree as follows:
1. Employment. The Company hereby employs Executive and
Executive accepts such employment upon the terms and conditions hereinafter set
forth to become effective on May 1, 1997 (the "Effective Time").
2. Duties.
(a) Executive shall be employed: (i) to serve as Chairman,
President, and Chief Executive Officer, and to serve in similar capacities for
each of the Subsidiaries, if so elected, subject to the authority and direction
of the Board of Directors of CheckFree or the Subsidiary, as the case may be;
and (ii) to perform such other duties and responsibilities similar to those
performed by Executive prior hereto and exercise such other authority, perform
such other or additional duties and responsibilities and have such other or
different title (or have no title) as the Board of Directors of CheckFree or
the Subsidiary may, from time to time, prescribe.
<PAGE> 2
(b) So long as employed under this Agreement, Executive
agrees to devote full time and efforts exclusively on behalf of the Company and
to competently, diligently and effectively discharge all duties of Executive
hereunder. Executive shall not be prohibited from engaging in such personal,
charitable, or other nonemployment activities as do not interfere with full time
employment hereunder and which do not violate the other provisions of this
Agreement. Executive further agrees to comply fully with all reasonable policies
of the Company as are from time to time in effect.
3. Compensation. As full compensation for all services rendered to the
Company pursuant to this Agreement, in whatever capacity rendered, the Company
shall pay to Executive during the term hereof a minimum base salary at the rate
of $300,000 per year (the "Basic Salary"), payable monthly or in other more
frequent installments, as determined by the Company. The Basic Salary shall
increase to $375,000 on July 1, 1997, and thereafter may be increased, but not
decreased, from time to time, by the Board of Directors. Additionally,
Executive shall receive a stock option to purchase 200,000 shares of the
Company's common stock under the Company's 1995 Stock Option Plan at a purchase
price per share of $14.75, the closing price per share of the Company's common
stock on the Nasdaq National Market on May 1, 1997, expiring on the tenth
anniversary of the Effective Time. Such option will vest 100% on May 1, 2003
subject to Executive's continued employment by the Company; provided, however,
if Executive's employment is terminated without cause pursuant to Section 6(b)
or in connection with a Change in Control (as defined below) pursuant to
Section 6(e), the option will vest 100% on the Termination Date; provided,
further, 20% of the option shares will vest and become exercisable for each
fiscal year from 1998 through 2002 for which the Company's net income is 80% or
more of the Company's budgeted net income for that fiscal year, or the
Company's net loss is 120% or less of the Company's budgeted net loss for that
fiscal year, as the case may be, such earlier vesting and exercisability to be
effective upon the date of the Company's public announcement of its net income
or net loss for each such fiscal year. Furthermore, Executive will be entitled
to receive incentive compensation pursuant to the terms of plans adopted by the
Board of Directors from time to time.
4. Business Expenses. The Company shall promptly pay directly, or
reimburse Executive for, all business expenses to the extent such expenses are
paid or incurred by Executive during the term of employment in accordance with
Company policy in effect from time to time and to the extent such expenses are
reasonable and necessary to the conduct by Executive of the Company's business
and properly substantiated.
5. Fringe Benefits. During the term of this Agreement and Executive's
employment hereunder, the Company shall provide to Executive such insurance,
vacation, sick leave and other like benefits as are provided from time to time.
6. Term; Termination.
(a) The Company shall employ the Executive, and the Executive
accepts such employment, for an initial term commencing on the date of this
Agreement and ending on June 30, 2002. Thereafter, this Agreement shall be
extended automatically on each July 1 for an additional twelve-month period.
Executive's employment may be terminated at any time as provided in this
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Section 6. For purposes of this Section 6, "Termination Date" shall mean the
date on which any notice period required under this Section 6 expires or, if no
notice period is specified in this Section 6, the effective date of the
termination referenced in the notice.
(b) The Company may terminate Executive's employment without cause
upon giving 30 days' advance written notice to Executive. If Executive's
employment is terminated without cause under this Section 6(b), the Company will
pay Executive the earned but unpaid portion of Executive's Basic Salary through
the Termination Date, and will continue to pay Executive his Basic Salary and
any incentive compensation under and consistent with plans adopted by the
Company prior to the Termination Date until the later of June 30, 2002 or the
second anniversary of the Termination Date (the "Severance Period"), and the
Company will provide executive level outplacement services by a firm selected
and contracted by the Company for up to six months following the Termination
Date (the "Outplacement Services"); provided, however, if Executive accepts
other employment during the Severance Period, the Company shall pay Executive's
Basic Salary and any incentive compensation until the first to occur of the
expiration of the Severance Period or the commencement of the other employment.
(c) The Company may terminate Executive's employment upon a
determination by the Company that "good cause" exists for Executive's
termination and the Company serves written notice of such termination upon
Executive. As used in this Agreement, the term "good cause" shall refer only to
any one or more of the following grounds:
(i) commission of a material and substantive act of dishonesty,
including, but not limited to, misappropriation of funds or any
property of the Company;
(ii) engagement in activities or conduct clearly injurious to
the best interests or reputation of the Company which in fact result in
material and substantial injury to the Company;
(iii) refusal to perform his assigned duties and
responsibilities after receipt by Executive of written detailed notice
and reasonable opportunity to cure;
(iv) gross insubordination by Executive, which shall consist
only of a willful refusal to comply with a lawful written directive to
Executive issued pursuant to a duly authorized resolution adopted by
the Company;
(v) the clear violation of any of the material terms and
conditions of this Agreement or any written agreement or agreements
Executive may from time to time have with the Company (following
30-days' written notice from the Company specifying the violation and
Executive's failure to cure such violation within such 30-day period);
(vi) Executive's substantial dependence, as determined by the
Board of Directors of the Company, on alcohol or any narcotic drug or
other controlled or illegal
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substance which materially and substantially prevents Executive from
performing his duties hereunder; or
(vii) the final and unappealable conviction of Executive of a
crime which is a felony or a misdemeanor involving an act of moral
turpitude, or a misdemeanor committed in connection with his employment
by the Company, which causes the Company a substantial detriment.
In the event of a termination under this Section 6(c), the Company will pay
Executive the earned but unpaid portion of Executive's Basic Salary through the
Termination Date. If any determination of substantial dependence under Section
6(c)(vi) is disputed by the Executive, the parties hereto agree to abide by the
decision of a panel of three physicians appointed in the manner as specified in
Section 6(d) of this Agreement.
(d) Executive's employment shall terminate upon the death or
permanent disability of Executive. For purposes hereof, "permanent disability,"
shall mean the inability of the Executive, as determined by the Board of
Directors of CheckFree, by reason of physical or mental illness to perform the
duties required of him under this Agreement for more than 180 days in any one
year period. Successive periods of disability, illness or incapacity will be
considered separate periods unless the later period of disability, illness or
incapacity is due to the same or related cause and commences less than 180 days
from the ending of the previous period of disability. Upon a determination by
the Board of Directors of CheckFree that Executive's employment shall be
terminated under this Section 6(d), the Board of Directors shall give Executive
30 days' prior written notice of the termination. If a determination of the
Board of Directors under this Section 6(d) is disputed by Executive, the parties
agree to abide by the decision of a panel of three physicians. CheckFree will
select a physician, Executive will select a physician and the physicians
selected by CheckFree and Executive will select a third physician. Executive
agrees to make himself available for and submit to examinations by such
physicians as may be directed by the Company. Failure to submit to any
examination shall constitute a breach of a material part of this Agreement.
(e) If a "Change in Control" shall have occurred, Executive shall be
entitled to the benefits described below if his employment is terminated
following a Change in Control for other than good cause as specified in Section
6(c), or Executive terminates his employment upon making a good faith
determination that, following the Change in Control, Executive's employment
status or employment responsibilities have been materially and adversely
affected thereby:
(i) Executive shall be entitled to the unpaid portion of his
Basic Salary plus credit for any vacation accrued but not taken and the
amount of any unpaid but earned incentive compensation or any other
benefit to which he is entitled under this Agreement through the date
of the termination as a result of a Change in Control, plus the greater
of two times Executive's "Average Annual Compensation" or an amount
equal to Executive's Basic Salary and incentive compensation at the
100% targeted level from the Termination Date until June 30, 2002. For
this purpose "Average Annual Compensation" shall mean the average
annual compensation from the Company includible in Executive's gross
income for
4
<PAGE> 5
the period consisting of Executive's most recent five taxable years
ending before the date on which the Change in Control occurs,
exclusive of income attributable to the exercise of stock options.
(ii) At Executive's option, the amount payable under Section
6(e)(i) shall be paid to him in one lump sum within 30 days after
termination of employment following a Change in Control or in 24 equal
consecutive monthly payments commencing on the first day of the month
after termination of employment following a Change in Control.
(iii) The Company shall maintain for Executive's benefit until
the earlier of (y) 24 months after termination of employment following
a Change in Control, or (z) Executive's commencement of full-time
employment with a new employer, all life insurance, medical, health and
accident, and disability plans or programs in which Executive shall
have been entitled to participate prior to termination of employment
following a Change in Control, provided Executive's continued
participation is permitted under the general terms of such plans and
programs after the Change in Control. In the event Executive's
participation in any such plan or program is not permitted, the Company
will provide directly the benefits to which Executive would be entitled
under such plans and programs.
(iv) All outstanding stock options issued to Executive shall
become 100% vested and exercisable in accordance with such governing
stock option agreements and plans.
(f) Executive's benefits under Section 6(e) above shall be payable
to him as severance pay in consideration of his past service and of his
continued services from the date hereof. Executive shall have no duty to
mitigate his damages by seeking other employment, and the Company shall not be
entitled to set off against amounts payable hereunder any compensation which
Executive may receive from future employment.
(g) For purposes of Section 6(e), a "Change in Control" of the
Company shall be deemed to have occurred as of the first day that any one or
more of the following conditions shall have been satisfied:
(i) Any Person (other than a Person in control of the Company as
of the Effective Date, or other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or a
company owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of voting
securities of the Company) becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing a majority of the
combined voting power of the Company's then outstanding securities;
(ii) The stockholders of the Company approve: (x) a plan of
complete liquidation of the Company; or (y) an agreement for the sale
or disposition of all or substantially all the Company's assets; or (z)
a merger, consolidation, or reorganization of the Company with or
involving any other corporation, other than a merger, consolidation,
5
<PAGE> 6
or reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least a majority of the
combined voting power of the voting securities of the Company (or such
surviving entity) outstanding immediately after such merger,
consolidation, or reorganization; or
(iii) during any period of two consecutive years during the term
of this Agreement, individuals who at the beginning of such period
constitute the Board of Directors of CheckFree cease for any reason to
constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has
been approved in advance by directors representing at least two-thirds
of the directors then in office who were directors at the beginning of
the period.
However, in no event shall a "Change in Control" be deemed to have
occurred, with respect to Executive, if Executive is part of a purchasing group
which consummates the Change in Control transaction. Executive shall be deemed
"part of a purchasing group" for purposes of the preceding sentence if
Executive is an equity participant or has been identified as a potential equity
participant in the purchasing company or group except for: (i) passive
ownership of less than three percent (3%) of the stock of the purchasing
company; or (ii) ownership of equity participation in the purchasing company or
group which is otherwise not significant, as determined prior to the Change in
Control by a majority of the nonemployee continuing directors.
For purposes of this definition of Change in Control, "Person" shall
have the meaning ascribed to such term in Section 3(a)(9) of the 1934 Act, and
used in Section 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) thereof, and "Beneficial Owner" shall have the meaning ascribed
to such term in Rule 13d-3 of the General Rules and Regulations under the 1934
Act.
(h) Upon any termination or expiration of this Agreement or any
cessation of Executive's employment hereunder, the Company shall have no further
obligations under this Agreement and no further payments shall be payable by the
Company to Executive, except as provided in Sections 6(b), 6(c) and 6(e) above
and except as required under any benefit plans or arrangements maintained by the
Company and applicable to Executive at the time of such termination, expiration
or cessation of Executive's employment, including, without limitation thereto,
salary, incentive compensation, sick leave, and vacation pay.
(i) After June 30, 2002, if the payments and benefits provided under
this Agreement to Executive, either alone or with other payments and benefits,
would constitute "excess parachute payments" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended ("Code"), then the payments and other
benefits under this Agreement shall be reduced to the extent necessary so that
no portion thereof shall be subject to the excise tax imposed by Section 4999 of
the Code. Either the Company or Executive may request a determination as to
whether the payments or benefits would constitute an excess parachute payment
and, if requested, such determination shall be made by independent tax counsel
selected by the Company and approved by Executive. At
6
<PAGE> 7
Executive's election and to the extent not otherwise paid, Executive may
determine the amount of cash and/or elements of non-cash fringe benefits to
reduce so that such payments and benefits will not constitute excess parachute
payments.
7. Non-Competition.
(a) Executive hereby acknowledges that, during and solely as a
result of his employment by the Company, he has received and shall continue to
receive unique training and experience with respect to the design, operation and
marketing of electronic commerce software, systems and processing, financial
software products, systems, and services, and other related matters, and access
to confidential information and business and professional contacts. In
consideration of the special and unique opportunities afforded to Executive by
the Company as a result of Executive's employment, as outlined in the previous
sentence, and in consideration of the Company's other promises contained in this
Agreement, Executive hereby agrees that he will not during the term of this
Agreement, any extension hereof, and for a period of one year after termination
of employment with the Company, whether voluntary or involuntary or with or
without cause:
(i) engage or participate, directly or indirectly, either as
principal, agent, employee, employer, consultant, stockholder, or in
any other individual or representative capacity whatsoever, in the
operation, management or ownership of any business, firm, corporation,
association, or other entity engaged in the design, operation or
marketing of electronic commerce software, systems and processing,
financial software products, systems, and services, or any other
business engaged in by the Company at any time during the one-year
period prior to the Termination Date, within the United States and any
other country in which the Company conducts substantial business at
such time or during such period; and,
(ii) directly or indirectly, for himself or in conjunction with
or on behalf of any other individual or entity, solicit, divert, take
away or endeavor to take away from the Company any customer, account or
employee of the Company at any time during the term of this Agreement,
as of the date of Executive's termination of employment with the
Company, or during the one-year period prior to the dates thereof.
(b) The period of time during which Executive is subject to the
prohibitions contained in this Section 7 shall be extended by any length of time
during which Executive is in violation of such prohibitions.
(c) The restrictions of this Section 7 shall not be violated by the
ownership by Executive of no more than 2% of the outstanding securities of any
company whose stock is traded on a national securities exchange or is quoted in
the Automated Quotation System of the National Association of Securities Dealers
(NASDAQ).
7
<PAGE> 8
8. Confidential Information; Assignment of Inventions.
(a) As used herein, the term "Confidential Information" includes,
but is not limited to, all information and materials belonging to, used by, or
in the possession of the Company (i) which have been disclosed or made known to,
or have come into the possession of Executive as a consequence of or through
Executive's relationship with the Company prior to or after the date hereof,
(ii) which are related to the Company's customers, potential customers,
suppliers, distributors, alliance partners, business strategies or policies,
financial or sales results, sales and management techniques, marketing plans,
research or development, reports, records, software, systems, source or object
code, software documentation or instruction or user manuals, and (iii) which
have not generally been made available to the public (not including customers)
by the Company pursuant to a specific authorization in the ordinary course of
business by the Company of the release of such information to the public or
otherwise published and released by the Company to the general public.
Notwithstanding the foregoing, Executive may release Confidential Information,
in each case only with prior notice to the Company, if (1) required by law, (2)
necessary to establish a lawful claim or defense against the Company, (3)
necessary to establish a lawful claim or defense against a person or entity
other than the Company, but only with the permission, which shall not be
unreasonably withheld, of the Company, or (4) necessary to respond to process or
appropriate governmental inquiry.
(b) Executive agrees:
(i) that Executive will promptly disclose and grant and does
hereby grant to the Company his entire right, title and interest in and
to all customer lists, discoveries, developments, designs,
improvements, inventions, formulae, software, documentation, processes,
techniques, know-how, patents, trade secrets and trademarks, copyrights
and all other data conceived, developed or acquired by him during the
period of Executive's employment with the Company, both prior to and
after the execution of this Agreement, whether or not patentable or
registrable under copyright or similar statutes, made or conceived or
reduced to practice or learned by Executive, either alone or jointly
with others, that result from or are conceived during the performance
of tasks assigned to Executive by the Company or result from use of
property, equipment, or premises owned, leased or contracted for by the
Company ("Inventions"). Executive agrees to execute and deliver, from
time to time, such documents as may be necessary or convenient to
effectuate the transfer of such Confidential Information to the Company
and shall cooperate with and assist the Company in every proper way (at
the expense of the Company) in obtaining and from time to time
enforcing patents, copyrights, trade secrets, other proprietary rights
and protections relating to Inventions in any and all countries;
(ii) that Executive will during the term of this Agreement and
thereafter safeguard all Confidential Information and, except as
specifically permitted below, Executive will never disclose or use for
any purpose or benefit (other than for the purpose or benefit of the
Company) any Confidential Information;
8
<PAGE> 9
(iii) that, except in connection with the ordinary course of the
Company's business, Executive will not, either during the term of this
Agreement or thereafter directly or indirectly, disclose, disseminate
or otherwise make known or provide any Confidential Information,
whether in original form or in duplicated or copied form or extracts
therefrom, and whether orally or in writing, to any individual,
partnership, company or other entity, unless the Company has given its
prior written consent thereto;
(iv) that, except in connection with the ordinary course of the
Company's business, Executive will not, either during the term of this
Agreement or thereafter, remove any Confidential Information from the
premises of the Company either in original form or in duplicated or
copied form or extracts therefrom; and that upon any termination of
Executive's employment by the Company, Executive will immediately
surrender to the Company, without request, all Confidential
Information, whether in original or duplicated or copied form or
extracts therefrom.
9. No Conflicts. Executive represents that the performance by
Executive of all the terms of this Agreement, as a former or continuing
employee of the Company, does not and will not breach any agreement as to which
Executive or the Company is or was a party and which requires Executive to keep
any information in confidence or in trust. Executive has not entered into, and
will not enter into, any agreement either written or oral in conflict herewith.
10. Reasonableness of Restrictions. It is understood by and between
the parties hereto that Executive's covenants set forth in Sections 7, 8 and 9
are essential elements of this Agreement, and that, but for the agreement of
Executive to comply with such covenants, the Company would not have agreed to
enter into this Agreement. Executive acknowledges that the restrictions
contained in this Agreement are reasonable but should any provisions of this
Agreement be determined to be invalid, illegal or otherwise unenforceable to
its full extent, or if any such restriction is found by a court of competent
jurisdiction to be unreasonable under applicable law, then the restriction
shall be enforced to the maximum extent permitted by law, and the parties
hereto hereby consent and agree that such scope of protection, time or
geographic area (or any one of them, as the case may be) shall be modified
accordingly in any proceeding brought to enforce such restriction. Executive
acknowledges that the validity, legality and enforceability of the other
provisions of this Agreement shall not be affected thereby, and that the
existence of any claim or cause of action of Executive against the Company,
whether predicated on this Agreement, or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants.
11. Remedies; Venue; Process.
(a) Executive hereby acknowledges and agrees that the Confidential
Information disclosed to Executive prior to and during the term of this
Agreement is of a special, unique and extraordinary character, and that any
breach of this Agreement will cause the Company irreparable injury and damage,
and consequently the Company shall be entitled, in addition to all other
remedies available to it, to injunctive and equitable relief to prevent or cease
a breach of Sections 7, 8 or 9 of this Agreement without further proof of harm
and entitlement; that the terms of this
9
<PAGE> 10
Agreement, if enforced by the Company, will not unduly impair Executive's
ability to earn a living or pursue his vocation; and further, that the Company
may withhold compensation and benefits if Executive fails to comply with this
Agreement, without restricting the Company from other legal and equitable
remedies. The parties agree that the prevailing party shall be entitled to all
costs and expenses (including reasonable legal fees and expenses) which it
incurs in successfully enforcing this Agreement and in prosecuting or defending
any litigation (including appellate proceedings) arising out of this Agreement.
(b) The parties agree that jurisdiction and venue in any action
brought pursuant to this Agreement to enforce its terms or otherwise with
respect to the relationships between the parties shall properly lie in the
Superior Court of Fulton County, Georgia, or in the United States District Court
for the Northern District of Georgia. Such jurisdiction and venue is exclusive,
except that the Company may bring suit in any jurisdiction and venue where
jurisdiction and venue would otherwise be proper if Executive has breached
Sections 7, 8 or 9 of this Agreement. The parties agree that they will not
object that any action commenced in the foregoing jurisdictions is commenced in
a forum non conveniens. The parties further agree that the mailing by certified
or registered mail, return receipt requested, of any process required by any
such court shall constitute valid and lawful service of process against them,
without the necessity for service by any other means provided by statute or rule
of court.
12. Withholding. The Company may withhold from any payments to be made
hereunder such amounts as it may be required to withhold under applicable
federal, state or other law, and transmit such withheld amounts to the
appropriate taxing authority.
13. Indemnity.
(a) Subject only to the exclusions set forth in Section 13(b)
hereof, the Company hereby agrees to hold harmless and indemnify Executive
against any and all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by Executive in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (excluding an action by
or in the right of the Company) to which Executive is, was or at any time
becomes a party, or is threatened to be made a party, by reason of the fact that
Executive is, was or at any time becomes a director, officer, employee or agent
of the Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
(b) No indemnity pursuant to Section 13(a) hereof shall be paid by
the Company:
(i) except to the extent the aggregate losses to be indemnified
hereunder exceed the amount of such losses for which Executive is
indemnified pursuant to any directors and officers liability insurance
purchased and maintained by the Company;
10
<PAGE> 11
(ii) in respect to remuneration paid to Executive if it shall
be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(iii) on account of any suit in which judgment is rendered
against Executive for an accounting of profits made from the purchase
or sale by Executive of securities of the Company 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 Executive's breach of any provision of this
Agreement;
(v) on account of Executive's act or omission being finally
adjudged to have been not in good faith or involving intentional
misconduct, a knowing violation of law, or grossly negligent conduct;
or
(vii) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
(c) All agreements and obligations of the Company contained herein
shall continue during the period Executive is a director, officer, employee or
agent of the Company (or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) and shall continue thereafter so long as
Executive shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Executive was an officer or director of the Company
or serving in any other capacity referred to herein; provided, however, that
following the Termination Date, the Company shall have no further obligation
under this Section 13 in the event of a breach by Executive of any of his
continuing obligations under Sections 7 or 8 of this Agreement.
(d) Promptly after receipt by Executive of notice of the
commencement of any action, suit or proceeding, Executive will, if a claim in
respect thereof is to be made against the Company under this Section 13, notify
the Company of the commencement thereof; but the omission so to notify the
Company will not relieve it from any liability which it may have to Executive
otherwise than under this Section 13. With respect to any such action, suit or
proceeding as to which Executive notifies the Company under this Section 13(d):
(i) The Company will be entitled to participate therein at its
own expense.
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party
similarly notified will be entitled to assume the defense thereof, with
counsel selected by the Company. After notice from the Company to
Executive of its election so to assume the defense thereof, the Company
will not be liable to Executive under this Section 13 for any legal or
other expenses subsequently incurred by Executive in connection with
the defense thereof other than reasonable costs of investigation or as
otherwise provided below. Executive shall have the right to employ his
11
<PAGE> 12
counsel in such action, suit or proceeding but the fees and expenses
of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at the expense of
Executive, unless (A) the employment of counsel by Executive has been
authorized by the Company, or (B) the Company shall not in fact have
employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of counsel shall be at the expense
of the Company. The Company shall not be entitled to assume the
defense of any action, suit or proceeding brought by or on behalf of
the Company.
(iii) The Company shall not be liable to indemnify Executive
under this Agreement for any amounts paid in settlement of any action
or claim effected without its written consent. The Company shall not
settle in any manner which would impose any penalty or limitation on
Executive without Executive's written consent. Neither the Company nor
Executive will unreasonably withhold their consent to any proposed
settlement.
(e) Executive agrees that Executive will reimburse the Company for
all reasonable expenses paid by the Company in defending any civil or criminal
action, suit or proceeding against Executive in the event and only to the extent
that it shall be ultimately determined that Executive is not entitled to be
indemnified by the Company for such expenses under the provisions of Section 145
of the Delaware General Corporation Law (the "Delaware Statute"), the Company's
By-laws, this Agreement or otherwise.
14. Assignment. This Agreement is personal to Executive and Executive
may not assign or delegate any of his rights or obligations hereunder. Subject
to the foregoing, this Agreement shall be binding upon and inure to the benefit
of the respective parties hereto, their heirs, executors, administrators,
successors and assigns.
15. Waiver. The waiver by either party hereto of any breach or
violation of any provision of this Agreement by the other party shall not
operate as or be construed to be a waiver of any subsequent breach by such
waiving party.
16. Notices. Any and all notices required or permitted to be given
under this Agreement will be sufficient and deemed effective three (3) days
following deposit in the United States mail if furnished in writing and sent by
certified mail to Executive at:
Peter J. Kight
9300 Chandler Bluff
Alpharetta, Georgia 30022
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and to the Company at:
CheckFree Corporation
4411 East Jones Bridge Road
Norcross, Georgia 30092
Attention: General Counsel
with a copy to:
Curtis A. Loveland, Esq.
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
17. Governing Law. This Agreement shall be interpreted, construed and
governed according to the laws of the State of Georgia applicable to contracts
made and to be wholly performed within such state, except that the provisions
of Section 13 hereof shall be interpreted, construed and governed according to
the Delaware Statute.
18. Amendment. This Agreement may be amended in any and every respect
by agreement in writing executed by both parties hereto.
19. Section Headings. Section headings contained in this Agreement are
for convenience only and shall not be considered in construing any provision
hereof.
20. Entire Agreement. This Agreement terminates, cancels and
supersedes all previous employment or other agreements relating to the
employment of Executive with the Company or any predecessor, written or oral,
and this Agreement contains the entire understanding of the parties with
respect to the subject matter of this Agreement. This Agreement was fully
reviewed and negotiated on behalf of each party and shall not be construed
against the interest of either party as the drafter of this Agreement.
EXECUTIVE ACKNOWLEDGES THAT, BEFORE SIGNING THIS AGREEMENT, HE HAS READ THE
ENTIRE AGREEMENT AND HAS THIS DAY RECEIVED A COPY HEREOF.
21. Severability. The invalidity or unenforceability of any one or more
provisions of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement or parts thereof.
22. Survival. Sections 6 through 14 of this Agreement and this Section
22 shall survive any termination or expiration of this Agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
EXECUTIVE:
/s/ Peter J. Kight
---------------------------------
Peter J. Kight
CHECKFREE CORPORATION
By: /s/ Peter F. Sinisgalli
-----------------------------
Its: Chief Operating Officer
----------------------------
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<PAGE> 1
LOAN AND SECURITY AGREEMENT
by and between
KeyBank National Association
as Lender,
and
CheckFree Corporation,
CheckFree Software Solutions, Inc.,
CheckFree Services Corporation,
Security APL, Inc.,
Servantis Systems, Inc.
and
Servantis Services, Inc.
Collectively as Co-Borrowers,
dated
as of
May 13, 1997
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
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Section Title Page
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<S> <C>
SECTION 1. DEFINITIONS...........................................................................................2
1.1 Defined Terms.................................................................................................2
1.2 Other Definitional Provisions................................................................................19
SECTION 2. AMOUNT AND TERMS OF REVOLVING LOANS..................................................................21
2.1 Revolving Loans Commitment...................................................................................21
2.2 Revolving Loans Note.........................................................................................21
2.4 Procedure for Borrowing......................................................................................22
2.4 Disbursement of Revolving Loans..............................................................................22
2.5 Conditions to Disbursement...................................................................................23
2.6 Termination Date of Revolving Loans Commitment...............................................................23
2.7 Commitment Fee...............................................................................................23
2.8 Interest Rates; Duration of Interest Periods; Computation....................................................23
2.9 Payments.....................................................................................................25
2.10 Use of Proceeds.............................................................................................25
2.11 Account Information.........................................................................................25
2.12 Collection of Accounts......................................................................................26
2.13 Lender's Rights.............................................................................................27
2.14 Funding Losses..............................................................................................27
2.15 Increased Costs, Illegality, Etc............................................................................27
SECTION 3. CONDITIONS PRECEDENT.................................................................................28
3.1 Conditions to Closing........................................................................................28
3.2 Conditions to Continuation of Commitment.....................................................................30
3.3 Conditions to Revolving Loans................................................................................30
SECTION 4. COLLATERAL; SECURITY AGREEMENT.......................................................................32
4.1 Security Interest............................................................................................32
4.2 Continuing Rights............................................................................................32
4.3 No Obligation to Marshal Liens...............................................................................32
4.4 Lender May Discharge Liens, Etc..............................................................................33
4.5 Financing Statements.........................................................................................33
4.6 Collateral Duties............................................................................................34
4.7 Attorney-in-Fact.............................................................................................34
4.8 Security Interest Absolute...................................................................................34
</TABLE>
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<TABLE>
<S> <C>
SECTION 5. REPRESENTATIONS AND WARRANTIES.......................................................................35
5.1 Financial Statements.........................................................................................35
5.2 Corporate Existence..........................................................................................35
5.3 Corporate Power; Authorization; Enforceable Obligations......................................................36
5.4 No Legal Bar.................................................................................................36
5.5 No Violation of Laws.........................................................................................37
5.6 No Material Litigation.......................................................................................37
5.7 Federal Regulations..........................................................................................37
5.8 Investment Company Act.......................................................................................37
5.9 Holding Company Act..........................................................................................37
5.10 Solvency and Dispositions...................................................................................38
5.11 [Intentionally Deleted].....................................................................................38
5.12 Environmental...............................................................................................38
5.13 ERISA.......................................................................................................38
5.14 Taxes.......................................................................................................38
5.15 Disclosure..................................................................................................39
5.16 Location Information........................................................................................39
5.17 Collateral Information......................................................................................39
5.18 Existing Liens..............................................................................................39
5.19 Perfection and Priority.....................................................................................39
5.20 Schedules...................................................................................................40
SECTION 6. AFFIRMATIVE COVENANTS................................................................................40
6.1 Financial Statements; Reports; Borrowing Base Certificate....................................................40
6.2 Certificates; Other Information..............................................................................41
6.3 Payment of Obligations.......................................................................................41
6.4 Maintenance of Existence.....................................................................................42
6.5 Maintenance of Property; Insurance...........................................................................42
6.6 Inspection of Property; Books and Records; Discussions.......................................................42
6.7 Notices......................................................................................................43
6.8 Payment of Fees..............................................................................................44
6.9 Compliance...................................................................................................44
6.10 Further Assurances..........................................................................................44
6.11 Payment and Performance.....................................................................................44
SECTION 7. NEGATIVE COVENANTS...................................................................................45
7.1 Limitation on Indebtedness...................................................................................45
7.2 Limitation on Liens..........................................................................................45
7.3 Limitation on Contingent Obligations.........................................................................45
7.4 Limitation on Fundamental Changes............................................................................45
7.5 Limitation on Acquisitions...................................................................................45
</TABLE>
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<TABLE>
<S> <C>
7.6 Limitation on Loans..........................................................................................46
7.7 Limitation on Sale and Leasebacks............................................................................46
7.8 Limitation on Distributions..................................................................................46
7.9 Limitation on Redemptions....................................................................................46
7.10 Current Ratio...............................................................................................46
7.11 Tangible Net Worth..........................................................................................47
7.12 Funded Debt to Net Worth Ratio..............................................................................47
7.13 Net Losses..................................................................................................47
SECTION 8. EVENTS OF DEFAULT AND REMEDIES.......................................................................47
8.1 Events of Default............................................................................................47
8.2 Action Upon Default..........................................................................................50
8.3 Direct Payment to Lender.....................................................................................51
8.4 Discharge Liens, Etc.........................................................................................51
8.5 Exercise of Power of Attorney................................................................................52
8.6 Further Lender Rights........................................................................................52
8.7 Proceeds.....................................................................................................53
8.8 Application to Obligations...................................................................................53
8.9 Cumulative Rights............................................................................................54
SECTION 9. MISCELLANEOUS........................................................................................54
9.1 Amendments and Waivers.......................................................................................54
9.2 Notices......................................................................................................55
9.3 No Waiver; Cumulative Remedies...............................................................................56
9.4 Survival of Representations and Warranties...................................................................56
9.5 Payment of Expenses and Taxes................................................................................57
9.6 Successors and Assigns.......................................................................................57
9.7 Setoff.......................................................................................................58
9.8 Counterparts; Effective Date.................................................................................58
9.9 Governing Law................................................................................................59
9.10 Entire Agreement and Headings...............................................................................59
9.11 Extensions and Renewals.....................................................................................59
9.12 Right to Defend.............................................................................................59
9.13 No Obligation to Third Parties..............................................................................59
9.14 No Joint Venture............................................................................................60
9.15 Waiver of Right to Trial by Jury............................................................................60
9.16 Consent to Jurisdiction.....................................................................................60
9.17 Warrant of Attorney.........................................................................................61
9.18 Joint and Several Obligations...............................................................................61
</TABLE>
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<PAGE> 5
EXHIBITS
- --------
Exhibit A - Form of Revolving Loans Cognovit Promissory Note
Exhibit B - Subjects of Opinion
Exhibit C - Form of Borrowing Base Certificate
SCHEDULES
- ---------
Schedule 5.12 - Environmental Matters
Schedule 5.15 - Disclosure
Schedule 5.16 - Location Information
Schedule 5.17 - Collateral Information
Schedule 5.18 - Existing Liens
Schedule 5.19 - Requisite Filing Offices
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<PAGE> 6
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made and
entered into as of the 13th day of May, 1997, by and among CheckFree
Corporation, a Delaware corporation, CheckFree Software Solutions, Inc., a
Georgia corporation, CheckFree Services Corporation, a Delaware corporation,
Security APL, Inc., an Illinois corporation, Servantis Systems, Inc., a Georgia
corporation, and Servantis Services, Inc., a Georgia corporation, collectively
as co-borrowers (collectively, the "Borrowers"), and KeyBank National
Association, a national banking association, as lender (the "Lender").
BACKGROUND INFORMATION
----------------------
A. CheckFree Software Solutions, Inc., CheckFree Services Corporation,
Security APL, Inc., Servantis Systems, Inc., and Servantis Services, Inc. are
all wholly-owned subsidiaries of CheckFree Corporation. For purposes of this
Agreement, CheckFree Corporation may be referred to herein as "CheckFree", the
remaining co-borrowers may be referred to herein collectively as the
"Subsidiaries", and CheckFree and the Subsidiaries may collectively be referred
to herein as the "Borrowers".
B. The Borrowers have requested that the Lender extend credit
financing to the Borrowers in the aggregate principal amount of up to Twenty
Million Dollars ($20,000,000), in the form of a revolving loan credit facility,
for the purpose of providing any one or more of the Borrowers with additional
working capital funds.
C. The Lender has agreed to provide the foregoing credit financing to
the Borrowers pursuant generally to the terms of the commitment letter dated as
of April 1, 1997, and executed by and between CheckFree and the Lender, and
specifically upon all of the terms and conditions hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound hereby, agree as follows:
SECTION 1. DEFINITIONS
-----------
1.1 DEFINED TERMS. In addition to the other terms defined herein, as
used in this Agreement:
ACCOUNT COLLECTION NOTICE has the meaning set forth in Section 2.13
hereof.
ACCOUNTS means, as to the Borrowers, all (a) accounts, accounts
receivable, and
<PAGE> 7
all rights of any or all of the Borrowers to payment for goods or products sold
or leased or for services rendered, whether or not earned by performance and
whether or not evidenced by an instrument, chattel paper, or a general
intangible; all amounts owing to any or all of the Borrowers arising out of or
under its instruments, documents, contract rights, chattel paper and general
intangibles and all other debts, obligations, and amounts of whatever nature and
in whatever form owing to such Borrowers; (b) rights to payment of interest or
finance charges, costs of collection and enforcement, attorneys' fees and other
amounts with respect to any and all of the foregoing; (c) rights of an unpaid
seller (including rescission, replevin, reclamation and stoppage of delivery in
transit or for service) for unpaid goods; (d) rights in any goods or products
represented by any and all of the foregoing, including returned, rejected,
rerouted or repossessed goods; (e) sureties' and indemnification obligations,
security, letters of credit, guaranties or collateral for any and all of the
foregoing, including without limitation rights at law and in equity with respect
thereto; and (f) proceeds of any letters of credit supporting payment of any and
all of the foregoing on which any of the Borrowers is named as a beneficiary.
AFFILIATE means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with another Person.
For purposes of this definition, "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
ANNUAL FINANCIALS means, as to the Borrowers for any fiscal year: (a)
a consolidated balance sheet, income statement and statement of cash flows
(together with a statement of shareholders' equity if not contained in the
foregoing) of the Borrowers, each together with supporting notes to the extent
required by GAAP or accompanying the accountant's certification described below,
fairly presenting the consolidated financial condition of the Borrowers, at the
close of and the results of operations during such period, which statements
shall be audited and certified without qualification by Deloitte and Touche,
LLP, or such other independent certified public accountants of nationally
recognized standing reasonably acceptable to the Lender; and (b) the Officer's
Certificate specified under Section 6.2(b) hereof.
ASSETS means, as to the Borrowers on a particular date, the aggregate
amount of all assets of the Borrowers which would be classified as assets on a
consolidated balance sheet of the Borrowers as of such date, prepared in
accordance with GAAP.
BANKRUPTCY CODE has the meaning set forth in Section 5.10 hereof.
BORROWING means a borrowing hereunder consisting of any Revolving
Loan(s) made to any of the Borrowers by the Lender. A Borrowing is a "Prime
Borrowing" if such Revolving Loan is made as a Prime Loan, and a "LIBOR
Borrowing" if such Revolving Loan is made as a LIBOR Loan. All Borrowings shall
be made in Dollars.
BORROWING BASE means, as of any date of determination, an amount equal
to the lesser of (a) 80% of the unpaid face amount of the then Eligible Accounts
Receivable, or
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<PAGE> 8
(b) Twenty Million Dollars ($20,000,000).
BORROWING BASE CERTIFICATE means a certificate setting forth the
calculation of the Borrowing Base for the immediately preceding month, in the
form of EXHIBIT "C" attached hereto, appropriately completed and executed by a
Responsible Officer of CheckFree and delivered to the Lender.
BORROWING DATE means any Business Day specified in a Notice of
Borrowing transmitted by CheckFree to the Lender pursuant to Section 2.3 hereof
as a date on which the Borrowers request the Lender to make a Revolving Loan(s)
hereunder.
BUSINESS DAY means a day other than a Saturday, Sunday or other day on
which the Lender is authorized or required by law to close. Periods of days
referred to in this Agreement shall be counted in calendar days unless Business
Days are expressly prescribed.
CAPITAL EXPENDITURES means, as to the Borrowers for any period, the
aggregate amount of all expenditures for fixed assets or improvements, or
replacements thereof, which would be classified as capital expenditures in the
consolidated financial statements of the Borrowers for such period prepared in
accordance with GAAP, and including without limitation the direct or indirect
acquisition of such assets by way of increased product or service charges,
offset items or otherwise, and Capital Lease Obligations.
CAPITAL LEASE means, at the time any determination thereof is to be
made, any lease of property, real or personal, which would be capitalized on a
balance sheet of the lessee in accordance with GAAP.
CAPITAL LEASE OBLIGATION means, at the time any determination thereof
is to be made, the amount of the liability in respect of a Capital Lease which
would be capitalized on a balance sheet of the lessee in accordance with GAAP.
CAPITAL STOCK means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) in
or of such Person's capital stock, including each class of common stock and
preferred stock of such Person, and any and all rights (other than debt
securities convertible into capital stock), warrants or options exchangeable for
or convertible into such capital stock.
CHANGE OF CONTROL means, with respect to CheckFree, any transaction
which results in more than forty percent (40%) of any of a class of voting
securities of CheckFree being owned, directly or indirectly, by any Person, and,
with respect to any of the Subsidiaries, any transaction which results in less
than one hundred percent (100%) of any of a class of voting securities of any of
the Subsidiaries being owned, directly or indirectly, by any Person other than
CheckFree.
CLOSING DATE means the date on which this Agreement, the Note and the
other
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<PAGE> 9
Loan Documents are appropriately executed and delivered to the Lender, and the
initial transactions contemplated hereby and thereby are consummated.
CODE means the Uniform Commercial Code, as enacted in the State of
Ohio, Section 1301.01 ET SEQ. of the Revised Code of Ohio, as amended from time
to time.
COLLATERAL means the following property of the Borrowers: (a) all of
the Borrowers' Accounts; (b) all of the Borrowers' books, records, and files of
whatever type or nature, whether or not written, stored electronically or
electromagnetically or in any other form, relating to any of the Accounts, and
all proceeds thereof, including whether such books, records, or files constitute
Accounts or intangible assets of the Borrowers; (c) all of the products and
proceeds of all of the foregoing of every kind and nature (whether such products
or proceeds are in the form of insurance proceeds, Accounts, contract rights,
intangible assets, instruments, documents, deposit accounts, or cash); and (d)
all of the foregoing, whether now owned or existing or hereafter acquired or
arising, and in which any of the Borrowers now has or hereafter acquires any
rights or interests of any kind.
COMMITMENT FEE means the fee due from the Borrowers to the Lender
throughout the Commitment Period, in an aggregate amount computed at the rate of
one-fifth (1/5) of one percent (.20%) per annum on the amount of the Revolving
Loans Commitment, which is payable by the Borrowers to the Lender annually in
advance, with the first and second payments thereof each in the amount of
$40,000 due on the Closing Date, and on the first anniversary date thereof,
respectively, and the third payment thereof due on the second anniversary date
of the Closing Date in an amount prorated for the period from such date through
the last day of the Commitment Period. The Commitment Fee payments made by
Borrowers to Lender hereunder shall not be refundable under any circumstances.
COMMITMENT PERIOD means the period from and including the first
Borrowing Date through and including October 30, 1999; or such earlier date as
the Revolving Loans Commitment shall terminate as provided herein.
CONTINGENT OBLIGATION means, as to the Borrowers, any reimbursement
obligation of any of such Borrowers in respect of undrawn drafts drawn under
letters of credit and any obligation of any of such Borrowers guaranteeing or in
effect guaranteeing any Indebtedness, leases, dividends or other obligations
primarily to pay money ("Primary Obligations") of any other Person (the "Primary
Obligor") in any manner, whether directly or indirectly, including any
obligation of such Person, whether or not contingent, (a) to purchase any such
Primary Obligations or any property constituting direct or indirect security
therefor; (b) to advance or supply funds (i) for the purchase or payment of any
such Primary Obligation, or (ii) to maintain working capital or equity capital
of the Primary Obligor or otherwise to maintain the net worth or solvency of the
Primary Obligor; (c) to purchase property, securities or services primarily for
the purpose of assuring the obligee under any such Primary Obligation of the
ability of the Primary Obligor to make payment of such Primary Obligation; or
(d) otherwise to insure, indemnify or hold harmless the Obligee under such
Primary Obligation against any loss in
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<PAGE> 10
respect thereof; however, the term "Contingent Obligation" shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business.
CONTRACTUAL OBLIGATION means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its property is bound.
CURRENT ASSETS means, as to the Borrowers on a particular date, the
aggregate amount of all Assets of the Borrowers which would be classified as
current assets on a consolidated balance sheet of the Borrowers as of such date
prepared in accordance with GAAP.
CURRENT LIABILITIES means, as to the Borrowers on a particular date,
the aggregate amount of all Liabilities of the Borrowers which would be
classified as current liabilities on a balance sheet of the Borrowers as of such
date prepared in accordance with GAAP.
DEFAULT means the occurrence of any event or the existence of any
condition that with notice, the passage of time, or the satisfaction of any
other condition, or any or all of the foregoing, would become an Event of
Default.
DEFAULT RATE means, with respect to any Revolving Loans, the sum of
(a) the rate(s) per annum of interest payable with respect to such Revolving
Loans pursuant to this Agreement, as of any date of determination, and (b) three
percent (3.0%) per annum.
DOLLARS AND "$" means dollars in lawful currency of the United States
of America.
ELIGIBLE ACCOUNTS RECEIVABLE means all of the Borrowers' Accounts,
except that each of the following Accounts shall not in any event constitute
Eligible Accounts Receivable: (i) Accounts which do not consist of ordinary
trade accounts receivable owned by any of the Borrowers, payable in cash in
Dollars and arising out of the final sale of Inventory or provision of services
in the ordinary course of each of the Borrowers' business as presently conducted
by it; (ii) Accounts with respect to which the services covered thereby have not
been rendered or the goods covered thereby have not been delivered to the
account debtor or its designee, or with respect to which any of the Borrowers
has failed to issue an original invoice or statement at the agreed-upon purchase
price to the account debtor within 30 days after rendering such services or
delivering such goods to or for the benefit of the account debtor; (iii)
Accounts with respect to which more than 90 days have elapsed since the due date
of the original invoice applicable thereto; (iv) Accounts with respect to which
the account debtor is an Affiliate, or shareholder, officer or employee, of any
of the Borrowers; (v) Accounts with respect to which the account debtor is the
United States of America or any department, agency or instrumentality thereof,
except for those Accounts as to which any of the Borrowers has assigned its
right to payment thereof to the Lender, and the assignment has been
acknowledged, pursuant to the Assignment of Claims Act of 1940, as amended (31
U.S.C. Section 3727); (vi) Accounts with respect to which the account debtor is
not a resident of the United States or Canada, unless the account debtor has
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<PAGE> 11
supplied any of the Borrowers with an irrevocable, clean letter of credit issued
or confirmed by a United States financial institution, or credit insurance, all
in form and substance satisfactory to the Lender, and, if so requested, which
letter of credit has been assigned and delivered to the Lender, in pledge for
negotiation and presentment; (vii) Accounts with respect to which the Lender
does not have a valid and prior, fully perfected Lien or which are not free of
all Liens or other claims of all other Persons (except Permitted Liens); (viii)
Accounts with respect to which the account debtor is the subject of a bankruptcy
or similar insolvency proceeding (provided that CheckFree may request the Lender
in its sole and absolute discretion to approve Accounts that are post-petition
obligations of the account debtor) or an agreement among creditors to compose
its debt, or which is insolvent, has failed or suspended or gone out of
business; (ix) Accounts with respect to which 50% or more of the account
debtor's Indebtedness to such Borrower remains unpaid for more than 90 days from
the date of the invoices evidencing such Indebtedness, or is otherwise
ineligible; (x) Accounts with respect to which the account debtor's obligation
to pay the Accounts is conditional upon the account debtor's approval (but
subject to non-conforming goods); (xi) Accounts to the extent that the account
debtor's Indebtedness to the Borrower (whether evidenced by such accounts or
otherwise) exceeds an amount which is greater than 20% of the face amount (less
maximum discounts, credits and allowances which may be taken by or granted to
account debtors in connection therewith) of the then outstanding Eligible
Accounts Receivable; (xii) Accounts which represent a prepayment or progress
payment or a partial payment under an installment contract; (xiii) Accounts
which are evidenced by a promissory note or other instrument; (xiv) Accounts
with terms or conditions which prohibit or restrict assignment or collection
rights; (xv) Accounts which constitute claims related to Taxes; (xvi) Accounts
(A) which are subject to setoff, credit, allowance or adjustment by the account
debtor (except discounts allowed for prompt payment and other rebates in the
ordinary course of any of the Borrowers' businesses as presently conducted or
for non-conforming goods), or (B) with respect to which the account debtor is
entitled to rebate or unused credits (except discounts allowed for prompt
payment and other rebates in the ordinary course of any of the Borrowers'
businesses as presently conducted) for the goods or services from which the
accounts arose, provided that in either or both of such events (A) or (B) the
net amount owed by such account debtor to any of the Borrowers in respect of
such account(s), as determined by the Lender in its sole and absolute discretion
exercised in Good Faith may, subject to the criteria set forth in this
definition, be an Eligible Account Receivable; (xvii) Accounts which arose from
the sale of goods or the performance and services to an employee, officer or
director of any of the Borrowers; (xiii) Accounts which constitute security
deposits or advance billings; (xix) Accounts with respect to which the account
debtor is located in New Jersey, unless any of the appropriate Borrower(s) has
filed, or is exempt from filing, a Notice of Business Activities Report with the
New Jersey Division of Taxation for the then current year; (xx) Accounts with
respect to which the account debtor is located in Minnesota, unless any of the
appropriate Borrower(s) has filed, or is exempt from filing, a Notice of
Business Activities Report with the Commissioner of Revenue of the State of
Minnesota for the then current year; (xxi) Accounts with respect to which the
account debtor is located in Indiana, unless any of the appropriate Borrower(s)
has filed, or is exempt from filing, a Business Activity Report with the Indiana
Department of State Revenue for the then current year; (xxii) Accounts with
respect to which the account debtor is located in West Virginia, unless any of
the appropriate Borrower(s) has filed, or is exempt from
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<PAGE> 12
filing, a Business Activity Report with the Tax Commissioner of the State of
West Virginia for the then current year, provided that the Lender, in its sole
and absolute discretion, may from time to time approve as eligible Accounts
referred to in clauses (xix) through (xxii) hereof that are otherwise eligible;
(xxiii) contra accounts; and (xxiv) Accounts for which the prospect of payment
or performance by the account debtor is or will be impaired in the Good Faith
determination of the Lender. Notwithstanding anything contained herein to the
contrary, "Eligible Accounts Receivable" shall include Accounts which shall not
have been billed by any of the Borrowers, specifically including the full amount
of the Accounts evidenced by an agreement by any of the Borrowers which
represents services which have not yet been fully rendered or payment for which
has not yet been fully billed.
EMPLOYER PLAN has the meaning set forth in Section 3(37) of ERISA.
ENVIRONMENTAL ACTIVITY means any actual or threatened storage,
holding, existence, release, emission, discharge, generation, processing,
abatement, removal, disposition, handling, transportation or disposal by any
Person of any Hazardous Substance from, under, into or on any site of the
Borrowers' principal or other places of business, or otherwise relating to such
properties or any use of such properties which is regulated by or for which
standards of conduct or liability are imposed by any Environmental Requirements.
ENVIRONMENTAL LAW means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1802 ET SEQ., the
Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ., the Federal Water
Pollution Control Act, 33 U.S.C. Section 1251 ET SEQ., the Clean Air Act, 42
U.S.C. Section 7401 ET SEQ., Ohio Revised Code Chapters 3704, 3734, 3737, 3745,
3751, 6109 and 6111, and any and all other federal, state, county, municipal,
local or other statutes, laws, ordinances or regulations which may relate to or
deal with human health or the environment, all as may be from time to time
amended.
ENVIRONMENTAL REQUIREMENTS means all present laws (including
Environmental Laws), authorizations, judgments, decrees, concessions, grants,
orders, franchises, agreements and other restrictions and requirements (whether
or not arising under statutes or regulations) relating to any Hazardous
Substances or Environmental Activity.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all regulations thereunder.
EVENT(S) OF DEFAULT means any of the events or conditions set forth in
Section 8 hereof, provided that all requirements for the giving of notice, the
lapse of time, or the satisfaction of any other condition, or all of the
foregoing, if applicable, have been satisfied.
EXISTING INDEBTEDNESS means, as to the Borrowers, the aggregate amount
of Indebtedness of the Borrowers outstanding as of the date of any such
determination.
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<PAGE> 13
FACILITY FEE means the fee due from the Borrowers to the Lender on or
prior to the Closing Date in the amount of Twenty Thousand Dollars ($20,000),
which shall not be refundable under any circumstances.
FUNDED DEBT means, collectively, as to the Borrowers at any time, (a)
the aggregate amount of the Revolving Loans then outstanding, and (b) all other
outstanding Indebtedness of the Borrowers which is evidenced by a promissory
note(s).
GAAP means generally accepted accounting principles in the United
States of America as in effect at the time any determination is made or
financial statement is required hereunder as promulgated by the American
Institute of Certified Public Accountants, the Accounting Principles Board, the
Financial Accounting Standards Board or any other body existing from time to
time which is authorized to establish or interpret such principles, applied on a
consistent basis throughout any applicable period, subject to any change
required by a change in GAAP; provided however, that if any change in generally
accepted accounting principles during the term of this Agreement affects the
calculation of any financial covenant contained herein, the Lender and the
Borrowers hereby agree to amend this Agreement to the effect that each such
financial covenant is not more or less restrictive than such covenant would be
had the change in GAAP had not occurred.
GOOD FAITH means honesty in fact in the conduct or transaction
concerned, without regard to whether standards which might be deemed reasonable
by another Person have been observed, but which does not include intentionally
unreasonable conduct.
GOVERNMENTAL AUTHORITY means any nation or government, any state,
county, municipal, local or other political subdivision thereof and any other
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to such government.
HAZARDOUS SUBSTANCES means, at any time (a) any "hazardous substance"
as defined in Section 101(14) of CERCLA (42 U.S.C. Section 9601(14)) or
regulations promulgated thereunder; (b) any "solid waste," "hazardous waste," or
"infectious waste," as such terms are defined in any other Environmental Law at
such time; (c) petroleum products, asbestos, urea-formaldehyde, polychlorinated
biphenyls ("PCBs"), nuclear fuel or material, chemical waste, radioactive
material, explosives, known carcinogens, petroleum products and by-products and
other dangerous, toxic or hazardous pollutants, contaminants, chemicals,
materials or substances listed or identified in, or regulated by, any
Environmental Law; and (d) any additional substances or materials which at such
time are classified or considered to be hazardous or toxic under any
Environmental Law; however, "Hazardous Substances" shall not include ordinary
amounts of what would be Hazardous Substances in larger amounts if such
substances are used as intended in the ordinary course of business.
INDEBTEDNESS means, as to the Borrowers, any indebtedness, whether or
not contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instrument or letters of credit (or reimbursement
agreements in respect thereof) or representing
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<PAGE> 14
the balance deferred and unpaid of the purchase price of any property (including
pursuant to Capital Leases), except any such balance that constitutes an accrued
expense or a trade payable, if and to the extent any of the foregoing
indebtedness would appear as a liability upon a consolidated balance sheet of
the Borrowers prepared in accordance with GAAP, and shall also include, to the
extent not otherwise included, (a) the guarantee of items which would be
included within this definition and any joint obligation in respect of items
which would be included in this definition, and (b) any indebtedness of a third
person of the type that would be included in this definition which is secured by
a Lien on the property or assets of any of the Borrowers.
INTANGIBLE ASSETS means, as to the Borrowers on a particular date, the
aggregate amount of all assets that would be classified as intangible assets on
a consolidated balance sheet of the Borrowers prepared in accordance with GAAP,
but in any event including without limitation capitalized software costs,
unamortized debt discount and expenses, unamortized organization and
reorganization expenses, customer lists, non-competition agreements, costs in
excess of the net asset value of acquired companies, Intellectual Property,
franchises, and goodwill in the amount of any write-up in the book value of any
assets resulting from any revaluation (other than revaluations arising out of
foreign currency evaluations in accordance with GAAP) thereof after the Closing
Date.
INTELLECTUAL PROPERTY means, as to the Borrowers, any and all of the
Borrowers' patents and patent applications, trademarks, licenses and brand
names, and including without limitation all logos and designs, trade secrets,
technical information, engineering procedures, designs, know-how and processes,
software, copyrights, and other intellectual property.
INTEREST PAYMENT DATE means, (a) as to each Prime Loan, the first day
of each month, and (b) as to each LIBOR Loan, the last LIBOR Business Day of
each Interest Period with respect thereto; provided, however, that
notwithstanding anything contained herein to the contrary, the first Interest
Payment Date for any Interest Period of 180 days shall be on the 90th day
thereof, and the second Interest Payment Date for such Interest Period shall be
on the last LIBOR Business Day of such Interest Period.
INTEREST PERIOD means, with respect to each LIBOR Loan, initially, the
period commencing on the Borrowing Date of such LIBOR Loan, and ending on 30,
60, 90 or 180 days thereafter, and, for any subsequent Interest Periods, if any,
ending on 30, 60, 90, or 180 days after the expiration of the previous Interest
Period, as the Borrowers may elect pursuant to Section 2.8(d) hereof; provided
that (i) no Interest Period shall extend beyond the Commitment Period, (ii) any
Interest Period which would otherwise end on a day which is not a LIBOR Business
Day shall be extended to the next succeeding LIBOR Business Day, unless such day
falls in another calendar month, in which case such Interest Period shall end on
the next preceding LIBOR Business Day; and (iii) any Interest Period which
begins on the last LIBOR Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end of
such Interest Period) shall end on the last LIBOR Business Day of a calendar
month.
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<PAGE> 15
LIABILITIES means, as to the Borrowers on a particular date, the
aggregate amount of all liabilities of every kind and nature which would be
classified as liabilities on a consolidated balance sheet of the Borrowers as of
such date, prepared in accordance with GAAP, and including without limitation
deferred income taxes and Capital Lease Obligations, if any.
LIBOR BASE RATE means, with respect to each Interest Period pertaining
to a LIBOR Loan, the rate (rounded upward to the nearest whole multiple of
1/16th of one percent) per annum equal to the rate at which the Lender is
offered Dollar deposits in the London Interbank Market at approximately 10:00
a.m. (Columbus, Ohio, time) (or as soon thereafter as practicable) two (2) LIBOR
Business Days before the first day of such Interest Period, for delivery on the
first day of such Interest Period for the number of days comprised therein, and
in an amount comparable to the amount of the LIBOR Loan to which such Interest
Period applies.
LIBOR BUSINESS DAY means any Business Day in which commercial banks
are open for international business, including dealings in Dollar deposits and
foreign exchange transactions, in London, England, and Columbus, Ohio.
LIBOR LOAN means a Revolving Loan to be made as a LIBOR Loan pursuant
to the applicable Notice of Borrowing, as set forth in Section 2.3 hereof.
LIBOR MARGIN means two percent (2.0%) per annum.
LIBOR RATE means, with respect to each Interest Period pertaining to a
LIBOR Loan, a rate per annum determined for such Interest Period in accordance
with the following formula (rounded upward to the nearest whole multiple of
1/100th of one percent):
( LIBOR BASE RATE ) + LIBOR Margin
1.00 - LIBOR Reserve Requirement
LIBOR RESERVE REQUIREMENTS means, for any day as applied to a LIBOR
Loan, the aggregate (without duplication) of the rates (expressed as a decimal
fraction) of reserve requirements in effect on such day (including basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other Governmental Authority
having jurisdiction with respect thereto), dealing with reserve requirements
prescribed for LIBOR funding (currently referred to as "LIBOR Liabilities" in
Regulation D of such Board) maintained by the Lender.
LIEN means any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, charge, security interest, encumbrance, lien
(statutory or other), or any preference, priority or other security agreement or
any preferential arrangement of any kind or nature whatsoever (including any
conditional sale or other title retention agreement, or any lease deemed under
the Uniform Commercial Code, or comparable law of any jurisdiction, to be
intended for security), and the authorized filing by or against a Person of any
financing statement as debtor under the Uniform Commercial Code, or comparable
law of any jurisdiction.
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LOAN ACCOUNT means the non-interest bearing, demand deposit account
maintained by CheckFree and/or the Borrowers with the Lender.
LOAN DOCUMENTS means this Agreement, the Note and all other written
agreements, documents, instruments and certificates, including without
limitation mortgages, deeds of trust, security agreements, subordination
agreements, pledge agreements, powers of attorney, consents, collateral
assignments, lock box and blocked account agreements, letter agreements,
contracts, notices, leases, financing statements, and Officer's Certificates,
and all other writings, all of which must be in form and substance reasonably
satisfactory to the Lender, which are heretofore, now or hereafter executed by
or on behalf of any or all of the Borrowers and delivered to the Lender, as
appropriate, in connection with or as related to this Agreement or any of the
other Loan Documents, or the transactions arising herefrom or therefrom, and as
now in effect or as at any time hereafter amended, modified, supplemented,
restated, or otherwise changed.
MATURITY DATE means October 31, 1999, or such other earlier date as
provided herein.
NET INCOME/LOSS means, as to the Borrowers for any period, the
consolidated net income or loss of the Borrowers, as applicable, determined in
accordance with GAAP, excluding, however, any gain or loss attributable to an
extraordinary item, which would be reflected in a consolidated statement of
income or operations of the Borrowers for such period prepared in accordance
with GAAP.
NET WORTH means as to the Borrowers on a particular date, the sum of
(a) Stockholders' Equity, plus (b) the aggregate amount of all outstanding
Funded Debt.
NOTE has the meaning set forth in Section 2.2 hereof.
NOTICE OF BORROWING has the meaning set forth in Section 2.3 hereof.
OBLIGATIONS means, as to the Borrowers as of any date, all of the
obligations of payment and performance of the Revolving Loans, and all
indebtedness, debts, liabilities, covenants, duties, obligations of, and amounts
owing from, any or all of the Borrowers to the Lender of every kind and
description arising out of or in connection with the Revolving Loans, and with
all of the Loan Documents, howsoever arising, whether now in existence or
hereafter incurred or arising, absolute or contingent, joint or several, matured
or unmatured, direct or indirect and whether the Borrowers are liable to the
Lender for such indebtedness as principal, surety, endorser, customer, guarantor
or otherwise, and all interest, fees, overdrafts, charges and expenses,
including the Out-of-Pocket Expenses, relating thereto.
OFFICER'S CERTIFICATE means a written certificate signed by a
Responsible Officer of CheckFree which (a) recites, certifies and represents (i)
the date of the certificate and that all information given and statements made
are as of that date, (ii) the exact title(s) of such officer
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and the source of such officer's authority to execute and deliver the
certificate to the Lender on behalf of, (iii) that the certificate is given in
connection with this Agreement and constitutes a Loan Document, (iv) that such
officer is familiar with, and has access to, the Borrowers' businesses and
financial affairs, (v) that such officer has examined the information given or
statements made, or both, in the certificate and certifies that such information
and statements are true and correct based upon such officer's examination, and
(vi) that such Responsible Officer has examined this Agreement and, as required,
the other Loan Documents, and that no Default or Event of Default has occurred
during the period of time covered by such certificate; (b) contains an
acknowledgment by such officer that the Lender will rely upon the certificate
for purposes of making advances or extensions of credit under this Agreement,
acting upon any other request, giving or withholding of any consent, exercising
any right or privilege, or forbearing from taking of any action, under the Loan
Documents; (c) is, as to matters listed below in subitems (d)(i) and (ii), given
by a Responsible Officer of CheckFree on behalf of the Borrowers in accordance
with this Agreement for the benefit of Lender; and (d) shall further, in the
case of:
(i) the Annual Financials, (A) state, with respect to the financial
statements described in paragraph (a) of the definition of Annual Financials,
that such consolidated financial statements accurately reflect the Borrowers'
consolidated financial condition and the results of operations; and (B) set
forth, with respect to the Borrowers, the calculations required to establish
compliance by the Borrowers with the financial covenants set forth in Sections
7.10, 7.11, 7.12 and 7.13 hereof, together with an exhibit attaching the
financial statements from which such calculations were made; and
(ii) the Quarterly Financials, state that such consolidated financial
statements are accurate, complete and fairly present the Borrowers' consolidated
financial condition and results of operations for such quarter (subject to
year-end adjustments and footnoted information required under GAAP).
OUT-OF-POCKET EXPENSES means all present and future reasonable costs
and expenses of the Lender incurred relative to this Agreement, the Note, the
other Loan Documents or otherwise, or any of the transactions contemplated
thereby, or the enforcement of any or all of its rights and remedies hereunder
or otherwise, whether incurred heretofore or hereafter, which reasonable costs
and expenses shall include without limitation all costs of record searches, all
fees and expenses of the Lender's counsel in completing due diligence and
drafting and negotiating this Agreement, the Note, the other Loan Documents and
related matters, all costs and expenses incurred by the Lender in preparing and
enforcing or attempting to enforce this Agreement, opening bank accounts,
depositing checks, receiving and transferring funds, and any charges imposed on
the Lender because of "insufficient funds" of deposited checks and such Lender's
standard fee relating thereto, and all fees and taxes relative to the filing of
any documents or instruments filed by the Lender hereunder.
PBGC means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
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PERMITTED INDEBTEDNESS means, as to the Borrowers:
(a) Indebtedness owed to the Lender under the Loan Documents;
(b) Existing Indebtedness as of the Closing Date;
(c) Indebtedness giving rise to Permitted Liens;
(d) Indebtedness incurred (i) for the purchase of real or
personal property, or (ii) in the ordinary course of any and all of the
Borrowers' businesses in connection with any lease obligations of any of the
Borrowers pursuant to any lease agreements executed by such Borrower as lessee
of any real or personal property that does not exceed the aggregate amount of
$8,000,000 in any fiscal year if on a basis of other than without recourse;
(e) Indebtedness as between or among the Borrowers; and
(f) Indebtedness which serves to refund or refinance Existing
Indebtedness to the extent in each case permitted by the terms of the documents
and instruments evidencing such Indebtedness (each of such Indebtedness being so
incurred, "Refinancing Indebtedness"); provided, that such Refinancing
Indebtedness (i) is subordinated to the Obligations to at least the same extent
as such Indebtedness being refunded or refinanced, (ii) bears an interest rate
per annum which does not exceed the interest rate per annum then payable under
such Indebtedness being refunded or refinanced (calculated in accordance with
any formula set forth in the documents evidencing any such Indebtedness), (iii)
has an aggregate principal amount outstanding which does not exceed the then
outstanding aggregate amount of such Indebtedness being refunded or refinanced
plus customary transaction costs incurred in connection with such refinancing,
and (iv) has, at the time of such refunding or refinancing, a Weighted Average
Life to Maturity greater than the Weighted Average Life to Maturity of such
Indebtedness being refunded or refinanced.
PERMITTED LIENS means as to the property, personal and real, tangible
and intangible, of any Person:
(a) Liens existing on the date hereof, as more fully described
on SCHEDULE 5.19 attached hereto;
(b) Liens for Taxes or assessments and similar charges either
(i) not delinquent, or (ii) contested in Good Faith by appropriate proceedings
which have the effect of staying any action to foreclose or to obtain a judgment
to enforce such Liens and as to which such Person shall have set aside on its
books adequate reserves;
(c) Liens incurred or pledges and deposits in connection with
workers' compensation, unemployment insurance and other social security
benefits, or securing the performance of bids, tenders, leases, contracts (other
than for the repayment of borrowed
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money), statutory obligations, progress payments, surety and appeal bonds and
other obligations of a similar nature, incurred in the ordinary course of
business;
(d) Liens imposed by law, such as mechanics', carriers',
warehousemen's, materialmen's, supplier's and vendors' Liens, incurred in Good
Faith in the ordinary course of business and which are being paid in the
ordinary course or contested in Good Faith by appropriate proceedings which have
the effect of staying any action to foreclose or to obtain a judgment to enforce
such Liens;
(e) zoning restrictions, easements, covenants, reservations and
restrictions on the use of real property or minor irregularities of title
incident thereto which do not in the aggregate materially impair the use of such
property in the operation of the business(es) of such Person;
(f) Liens, other than as described in clause (k) of this
definition of Permitted Liens, existing on assets or properties at the time of
the acquisition thereof by a Person which do not materially interfere with the
use of the property subject thereto or extend to or cover any assets or property
of such Person other than the assets or property being acquired;
(g) Liens in favor of the Lender;
(h) Liens of landlords or mortgagees of landlords, arising solely
by operation of law, on fixtures and movable property located on premises leased
in the ordinary course of business, provided that the rental payments secured
thereby are not yet due;
(i) Liens of judgment creditors to the extent (i) any judgment
secured by such Lien does not give rise to a Default, and (ii) not material
alone or in the aggregate;
(j) Liens to secure Indebtedness permitted by subparagraph (d) of
the definition of Permitted Indebtedness, provided that, if not in favor of the
Lender, such Liens do not extend to any assets other than the assets being
acquired with the proceeds of such Indebtedness or being leased; and
(k) Liens granted as a result of any Refinancing Indebtedness (as
defined in subparagraph (f) of the definition of Permitted Indebtedness),
provided that in the case of any such Refinancing Indebtedness the aggregate
scope of all Liens, if any, on the property, real and personal, tangible and
intangible, of the Borrowers securing the Indebtedness being refunded or
refinanced are not increased thereby (E.G., additional types or items of
collateral have been added).
PERSON means an individual, a partnership, a limited liability
partnership, a corporation, a business trust, a limited liability company, a
joint stock company, a trust, an unincorporated association, a joint venture, a
governmental authority, or any other entity of
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whatever nature.
PLAN means any pension plan which is covered by Title IV of ERISA and
in respect of which the Borrower or a Commonly Controlled Entity is an
"Employer" as defined in Section 3(5) of ERISA or an "affiliate" of an Employer
as defined in Section 407(d)(7) of ERISA.
PRIME LOAN means a Revolving Loan to be made as a Prime Loan pursuant
to the applicable Notice of Borrowing, as set forth in Section 2.3 hereof.
PRIME RATE means the rate of interest per annum announced by the
Lender from time to time as its prime rate, with any change thereto being
effective as of the opening of business on the day of the change (or the
beginning of the day if not a Business Day). The Prime Rate is a reference rate
and does not necessarily represent the lowest or best rate actually charged by
the Lender to any customer; the Lender may make commercial loans or other loans
at rates of interest at, above or below the Prime Rate.
QUARTERLY FINANCIALS means, as to the Borrowers for any fiscal
quarter: each of (a) a consolidated balance sheet of the Borrowers as of the
last day of such quarter, and (b) a consolidated income statement of the
Borrowers for such quarter, in each case (i) unaudited and prepared in
accordance with GAAP, subject to year end adjustments and the omission of
footnotes, and (ii) certified in an Officer's Certificate.
REMITTANCES has the meaning set forth in Section 2.12 hereof.
REPORTABLE EVENT means any of the events set forth in Section 4043(b)
of ERISA.
REQUIREMENT OF LAW means as to any Person, the certificate or articles
of incorporation, bylaws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation, or determination of an
arbitrator, court or other Governmental Authority, in each case applicable to or
binding upon such Person or any of its property or to which such Person or any
of its property is subject.
RESPONSIBLE OFFICER means, as to any of the Borrowers, the chairman,
president or a vice-president of each of the Borrowers, and, with respect to
financial matters, including any Borrowing Base Certificates, the treasurer or
chief financial officer of CheckFree.
REVOLVING LOAN(S) means the total of all advances and extensions of
credit made, from time to time from and after the acceptance of this Agreement
by the Lender, as Prime Loans or LIBOR Loans, to or for the benefit of the
Borrowers pursuant to Section 2.2 hereof.
REVOLVING LOANS COMMITMENT has the meaning set forth in Section 2.1
hereof.
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SPECIAL ACCOUNT means the deposit account maintained by CheckFree with
the Lender designated as the "CheckFree Sweep Trust Account No. 651031189".
STOCKHOLDERS' EQUITY means, as to the Borrowers on a particular date,
the aggregate amount which would be classified as "stockholder's equity",
"shareholders' equity" or as a similarly-captioned item on a consolidated
balance sheet of the Borrowers as of such date prepared in accordance with GAAP.
SUBJECTS OF OPINION has the meaning set forth in Section 3.1(b)
hereof.
SUBSIDIARIES means, as to CheckFree, the Subsidiaries as defined in
recital paragraph A hereof, and as to any other Person, a corporation or any
other entity of which shares of Capital Stock (or other evidence of ownership
interests) having ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such entity are at the time owned, or the
management of which is otherwise controlled, directly, or indirectly through one
or more intermediaries, or both, by such Person.
TANGIBLE NET WORTH means, as to the Borrowers for any period, the
excess, if any, of Assets over Liabilities, as the same would be reflected in
the consolidated financial statements of the Borrowers for such period prepared
in accordance with GAAP, less the book value of all Intangible Assets.
TAXES means, as to any Person, any present or future income, stamp or
other taxes, levies, imposts, duties, charters, fees, deductions or
withholdings, of every kind and nature, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, including without
limitation net income and franchise taxes.
WEIGHTED AVERAGE LIFE TO MATURITY means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding principal amount of such Indebtedness into (b) the sum of all
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest 1/12th) which will elapse between
such date and the making of such payment.
1.2 OTHER DEFINITIONAL PROVISIONS. Unless otherwise specified,
(a) Each reference hereunder to the "Borrowers" shall mean each
of the Borrowers individually and all of the Borrowers collectively, and, with
respect to any representation, warranty or covenant hereunder, shall apply
unless otherwise specified to each of the Borrowers individually and all of the
Borrowers collectively;
(b) all capitalized terms defined in this Agreement, whether or
not in this Section 1, have the defined meanings provided herein when used
herein, or when used in
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the Note or in any other Loan Documents, or in any other certificate, instrument
or other document made or delivered pursuant hereto or thereto, unless otherwise
defined therein;
(c) as used herein, in the Note or in any other Loan Documents,
or in any other certificate, instrument or document made or delivered pursuant
hereto or thereto, accounting terms which are not, or are only partly, defined
in Section 1, if any, to the extent not fully defined, have the respective
meanings given to them under GAAP;
(d) references to the Uniform Commercial Code, or UCC, mean as
enacted in the particular jurisdiction(s) encompassed by such reference;
(e) the definition of any document or instrument includes all
schedules, attachments and exhibits thereto and all renewals, extensions,
supplements, restatements and amendments thereof;
(f) "Hereunder," "herein," "hereto," "this Agreement" and words
of similar import refer to this entire document; "including" is used by way of
illustration and not by way of limitation, unless the context clearly indicates
the contrary; the singular includes the plural and conversely, and any action
required to be taken by the Lender or any of the Borrowers is to be taken
promptly, unless the context clearly indicates the contrary;
(g) "Material," "materially," and "materially adverse," in
reference to facts, things, intangibles, opinions or conclusions, denote those
facts, things, intangibles, opinions or conclusions the presence or absence of
which directly or indirectly has, would or will have a material or a material
adverse, as the case may be, effect on the business or financial condition of
any or all of the Borrowers, or on the ability of any or all of the Borrowers to
pay and perform any of its Obligations hereunder or under any of the other Loan
Documents; and
(h) all of the terms contained herein, in the Note, and in any
other Loan Documents which are defined under the Code shall, unless the context
or definition indicates otherwise, have the meanings provided in the Code.
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SECTION 2. AMOUNT AND TERMS OF REVOLVING LOANS
-----------------------------------
2.1 REVOLVING LOANS COMMITMENT. Subject to the terms and conditions of
this Agreement, the Lender agrees to make Revolving Loans to the Borrowers from
time to time during the Commitment Period in an aggregate principal amount at
any one time outstanding (the "Revolving Loans Commitment") not to exceed the
lesser of (a) the amount of (i) the Borrowing Base, determined as of the most
recent month end, minus (ii) the aggregate principal amount, and interest due
and payable thereon, of all other Revolving Loans, or (b) Twenty Million Dollars
($20,000,000). During the Commitment Period and as long as no Default or Event
of Default then exists, the Borrowers may use the Revolving Loans Commitment by
borrowing, prepaying, in whole or in part, and reborrowing Revolving Loans, all
in accordance with the terms and conditions hereinafter set forth.
2.2 REVOLVING LOANS NOTE. The Revolving Loans made by the Lender to
the Borrowers pursuant to Section 2.1 hereof shall be evidenced by a revolving
loans cognovit promissory note in the form of EXHIBIT "A" attached hereto,
jointly and severally made by the Borrowers payable to the order of the Lender
in the original principal amount of up to Twenty Million Dollars ($20,000,000)
(the "Note"). The Note shall evidence the joint and several obligations of the
Borrowers to pay the Lender, or any subsequent holder(s) of the Note, the
aggregate unpaid principal amounts of the Revolving Loans made by the Lender and
evidenced thereby, together with interest thereon as prescribed herein. The
Lender is hereby authorized, and may at its option, but shall have no
obligation, to record the date and amount of each Revolving Loan made by the
Lender hereunder, and the date and the amount of each payment or prepayment of
principal of the Revolving Loans, on the schedules annexed to and constituting a
part of each of such Note, or on a continuation thereof which shall be attached
thereto and made a part thereof, or on its separate written or electronic
records maintained in the ordinary course of its business, and any such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded; however, the failure of the Lender to make such
recordations accurately shall not affect the joint and several obligations of
the Borrowers to repay outstanding principal, interest or any other amounts due
hereunder or under such Note in accordance with the terms hereof and thereof,
which liability shall at all times be limited to the actual amount of the
outstanding Obligations of the Borrowers evidenced by the terms of such Note.
The Note shall (a) be dated as of the date hereof, (b) be stated to mature, with
respect to the aggregate principal amount of all of the Revolving Loans
evidenced by the Revolving Note, on the Maturity Date, (c) bear interest for the
period from the date hereof on the unpaid principal amounts of each of the
Revolving Loans from time to time outstanding, at the applicable interest rates
per annum determined as provided herein. Interest on the unpaid principal
balances of each of the Revolving Loans evidenced by the Revolving Note shall
accrue and be payable as specified in Section 2.8 hereof.
2.3 PROCEDURE FOR BORROWING. The Borrowers may request quotations for
LIBOR Rates for specific Interest Periods from the Lender, which the Lender may
provide orally or in writing, together with the time period during which such
quoted rates shall remain available. The Borrowers may borrow under the
Revolving Loans Commitment during the
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Commitment Period on any Business Day or LIBOR Business Day, as applicable,
provided that CheckFree gives the Lender written notice (each, a "Notice of
Borrowing") which must be received by the Lender prior to 10:00 a.m., Columbus,
Ohio, time for a Prime Loan and 3:00 p.m., Columbus, Ohio, time for a LIBOR
Loan, (a) on the Business Day which is the requested Borrowing Date for each
Prime Loan, or any renewal thereof, and (b) at least two (2) LIBOR Business Days
prior to the requested Borrowing Date for each LIBOR Loan, or the renewal of any
subsequent Interest Period thereof, in each case, respectively, specifying (i)
whether the Revolving Loan(s) comprising such Borrowing are to be LIBOR Loan(s)
or Prime Loan(s), (ii) the requested Borrowing Date of such Borrowing, which
shall be a Business Day in the case of each Prime Loan and a LIBOR Business Day
in the case of each LIBOR Loan, (iii) the aggregate amount of such requested
Borrowing, and (iv) in the case of each new or renewed LIBOR Loan, the duration
of the initial or subsequent Interest Period applicable thereto, which duration
shall be in accordance with the provisions of Section 2.8(d) hereof. If such
Borrowing is a new or renewed LIBOR Loan having an applicable LIBOR Rate which
was quoted to the Borrowers by the Lender, such Notice of Borrowing shall
include a request by the Borrowers that such quoted rate shall be the effective
rate with respect to such Borrowing, and the Lender agrees that such quoted rate
shall be the effective rate provided that the Notice of Borrowing with respect
thereto is received within the time period during which such quoted rate was
available to the Borrowers hereunder. Each Notice of Borrowing shall be
delivered to the Lender together with a Borrowing Base Certificate,
appropriately completed and executed by CheckFree as of the date thereof.
2.4 DISBURSEMENT OF REVOLVING LOANS. Each Borrowing pursuant to the
Revolving Loans Commitment shall be in an aggregate principal amount equal to
$50,000 or any whole multiple of $10,000 in excess of $50,000; provided,
however, that if the then-existing availability under the Revolving Loan
Commitment is less than the amount of $50,000, any Borrowing with respect
thereto may be in the amount equal to such then-existing availability. Subject
to the limitations set forth, the Lender shall initiate funding of each such
requested Borrowing by depositing the amount of each such requested Borrowing
into the Loan Account on the Borrowing Date. Such funds shall then be available
for withdrawal from the Loan Account by CheckFree or any other authorized
Borrower on the requested Borrowing Date, subject to the satisfaction of the
terms and conditions hereof.
2.5 CONDITIONS TO DISBURSEMENT. Notwithstanding anything contained
herein to the contrary, the Lender shall have no obligation to fund any
requested Revolving Loan if (a) the aggregate principal amount outstanding under
all of the Revolving Loans following such Borrowing would exceed the Borrowing
Base or the Revolving Loans Commitment, (b) any of the applicable conditions
precedent set forth in Section 3 hereof have not, in the reasonable judgment of
the Lender, been fully completed and satisfied, or (c) any Default or Event of
Default has occurred and is continuing.
2.6 TERMINATION DATE OF REVOLVING LOANS COMMITMENT. Unless earlier
terminated pursuant to the terms of this Agreement, the Revolving Loans
Commitment shall terminate, without notice to any of the Borrowers, at close of
business on the final day of the
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Commitment Period. Unless previously paid, all of the Obligations of the
Borrowers arising in connection with the Revolving Loans shall be due and
payable in full on or before the Maturity Date.
2.7 COMMITMENT FEE. The Borrowers jointly and severally agree to pay
the Commitment Fee to the Lender pursuant to the terms of this Agreement
throughout the Commitment Period.
2.8 INTEREST RATES; DURATION OF INTEREST PERIODS; COMPUTATION.
(a) The unpaid principal balances of each Revolving Loan which
is a Prime Loan shall bear interest from the date thereof at a fluctuating rate
per annum equal to the Prime Rate in effect from time to time.
(b) The unpaid principal balance of each Revolving Loan which is
a LIBOR Loan shall bear interest for the period from the date thereof until the
stated maturity thereof at a rate per annum equal to the LIBOR Rate determined
by the Lender for each Interest Period therefor. Interest on each LIBOR Loan
shall be due and payable on each such Interest Payment Date for such LIBOR Loan.
(c) After maturity of all or any part of any Revolving Loans and
any other amounts due from time to time under the Loan Documents, whether at the
stated maturity, by acceleration or otherwise, all such past due amounts,
whether under the Revolving Loans or otherwise, shall bear interest at the
Default Rate.
(d) The duration of the initial Interest Period for each LIBOR
Loan shall be specified in the applicable Notice of Borrowing and shall be
either 30, 60, 90 or 180 days. In the event that the Borrowers elect to renew
any Interest Period for a LIBOR Loan, the Borrowers shall have the option to
select a duration, for each subsequent Interest Period applicable to such LIBOR
Loan of either 30, 60, 90 or 180 days by delivery by CheckFree of written notice
of such election to the Lender in a Notice of Borrowing within the applicable
time limits set forth in Section 2.3 hereof. If the Lender does not receive
notice of which duration has been selected by the Borrowers for any Interest
Period within the time limits specified in Section 2.3 hereof, the Borrowers
shall be deemed to have elected to prepay such LIBOR Loan on the last day of the
current Interest Period with respect thereto, and to have immediately reborrowed
the principal amount of such LIBOR Loan on such date as a Prime Loan.
(e) All indebtedness and fees on each Revolving Loan, and
interest in respect thereof, shall be calculated on the basis of a 360 day year
for the actual number of days elapsed. The Lender shall, as soon as practicable,
upon the request of the Borrowers, notify the Borrowers (by means of a single
notice to CheckFree) of each determination of a LIBOR Rate. Any change in the
interest rate on any Revolving Loan resulting from a change in the Prime Rate or
the LIBOR Reserve
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Requirements shall become effective as of the opening of business
on the day on which such change in the Prime Rate is announced, or such change
in the LIBOR Reserve Requirements shall become effective, as the case may be,
without notice to any of the Borrowers or any other Person; however, the Lender
shall, as soon as practicable, notify the Borrowers (by means of a single notice
to CheckFree) of the effective date and the amount of each such change, but the
failure of the Lender to give such notice shall have no effect on the
application of such change as set forth herein.
(f) Each determination of an interest rate by the Lender
pursuant to any provision of this Agreement shall be conclusive and binding upon
the Borrower in the absence of manifest error.
2.9 PAYMENTS.
(a) If not renewed in accordance with the terms hereof, if
applicable, the Borrowers shall repay in full the aggregate principal amount of
all LIBOR Loans outstanding on the last day of each Interest Period applicable
thereto, together with all accrued but unpaid interest to the date of such
repayment; provided, however, that notwithstanding the foregoing, the Borrowers
shall repay the principal amounts of all LIBOR Loans outstanding as of the
Maturity Date in full on the Maturity Date.
(b) The Borrowers may not prepay any LIBOR Loans; provided,
however, that any prepayment of any LIBOR Loans by the Borrowers hereunder shall
be specifically subject to the provisions of Section 2.14 hereof.
(c) Payment of all principal of, and accrued but unpaid interest
on, the Revolving Loans shall be made not later than 2:00 p.m. (Columbus, Ohio,
time) on the date when due, in federal or other funds immediately available in
Columbus, Ohio, to the Lender at its address as set forth herein. Whenever any
payment of principal of, or interest on, any Prime Loan or of any portion of the
Commitment Fee shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day. Payment
of principal of, or accrued but unpaid interest on, the LIBOR Loans shall be due
on the last day of the Interest Period applicable thereto which shall be a LIBOR
Business Day. If the date for any payment of principal is extended by operation
of law or otherwise, interest thereon shall be payable for such extended time
period.
(d) All payments of principal and interest with respect to the
Revolving Loans shall be made in Dollars without setoff or counterclaim, and
shall be free and clear of, and without deduction or withholding for or on
account of, any present or future Taxes, levies, imports, duties, fees,
assessments or other charges of any nature, imposed by any Governmental
Authority.
2.10 USE OF PROCEEDS. The proceeds of the Revolving Loans shall be
used by any of the Borrowers for working capital purposes and for other lawful
purposes of the businesses of any of the Borrowers.
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2.11 ACCOUNT INFORMATION. If any amount payable under or in
connection with any Account shall be or become evidenced by any document,
instrument, or chattel paper, any or all of the Borrowers shall, upon the
request of Lender, deliver such document, instrument, or chattel paper to the
Lender promptly, duly endorsed or assigned in a manner reasonably satisfactory
to the Lender. Upon the Lender's request after the occurrence of an Event of
Default hereunder, and for so long as such Event of Default is continuing, the
Borrowers shall, upon the creation of any and all of their respective Accounts,
execute and deliver to the Lender, in such form and manner as the Lender may
reasonably require, solely for the Lender's convenience in maintaining records
of the Collateral, such confirmatory schedules of Accounts, and other
appropriate reports designating, identifying and describing the Accounts as the
Lender may reasonably require. In addition, upon the Lender's request after the
occurrence of an Event of Default hereunder, and for so long as such Event of
Default is continuing, the Borrowers shall deliver to the Lender copies of
agreements with, or purchase orders from, the relevant account debtors and
customers of the Borrowers, and copies of invoices to customers, proofs of
shipment or delivery, and such other documentation and information relating to
the Accounts and other Collateral as the Lender may reasonably require. Failure
to provide the Lender with any of the foregoing shall in no way affect,
diminish, modify or otherwise limit the security interest and Lien granted
herein to the Lender.
2.12 COLLECTION OF ACCOUNTS. Until the Lender has delivered an
Account Collection Notice (as hereinafter defined) to the Borrowers (by means of
a single notice to CheckFree), each of the Borrowers shall itself enforce and
collect all amounts owing on the Accounts, for the Lender's benefit and on the
Lender's behalf, but at the Borrowers' sole cost and expense. In connection with
any Account Collection Notice, upon the request of the Lender, each of the
Borrowers shall notify each of its account debtors and customers to make payment
on its respective Account into a lock box account(s) at the Lender or at such
other financial institution approved by the Lender. In the event, however, that
any of the Borrowers should receive at its offices any checks, drafts, money
orders, or other items, cash or other media of payment ("Remittances") after the
delivery by the Lender to CheckFree of an Account Collection Notice, such
property shall be held by each of such Borrowers in trust for the Lender,
separate from such Borrower's own property and funds in the original form
received, and immediately (and, in any event, within two Business Days)
deposited by such Borrower in lock box account(s) at the Lender, duly endorsed
or assigned by such Borrower if required for the collection thereof. Upon (a)
the occurrence of an Event of Default that is continuing, and (b) the delivery
by the Lender to the Borrowers (by means of a single notice to CheckFree) of
written notice thereof, the Lender may deliver a notice to the Borrowers (by
means of a single notice to CheckFree) (an "Account Collection Notice") to
require the collection of the Accounts to be subject, in addition to the other
provisions hereof, to the Lender's current collateral monitoring and reporting
procedures.
2.13 LENDER'S RIGHTS. Subject to the terms and conditions hereinafter
set forth, including in Section 9.7 hereof, the Lender shall have the right of
banker's lien, setoff and counterclaim against all Obligations of the Borrowers
to the Lender hereunder and under the Note made for the benefit of the Lender,
whether matured or unmatured, all amounts owing to the Borrowers by the Lender,
whether or not then due and payable, and all other funds or prop-
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erty of the Borrowers on deposit with or otherwise held in the custody of the
Lender for the beneficial account of the Borrowers. Notwithstanding anything
contained herein to the contrary, the Lender shall have no right of set-off, at
common law, contractual, or otherwise, with respect to the Special Account at
any time.
2.14 FUNDING LOSSES. If the Borrowers for any reason make any payment
of principal with respect to any LIBOR Loan, on any day other than the last day
of an Interest Period applicable thereto, or the end of an applicable Interest
Period fixed pursuant to Section 2.8(d) hereof, or if the Borrowers fail to
borrow or repay any LIBOR Loan after a Notice of Borrowing has been given to the
Lender in accordance with Section 2.2 hereof, the Borrowers hereby jointly and
severally agree to reimburse the Lender within five (5) Business Days of demand
for any resulting loss or expense incurred by the Lender in connection
therewith, including any loss incurred in obtaining, liquidating or employing
deposits from third parties, including loss of margin for the period after any
such payment, provided that such Lender shall have delivered to the Borrowers
(by means of a single notice to CheckFree) a certificate as to the amount and
computation of such loss or expense and the nature and description of such loss
and expense, which certificate shall be final, conclusive and binding, absent
manifest error.
2.15 INCREASED COSTS, ILLEGALITY, ETC. In the event that the Lender
shall have determined (which determination shall be final, conclusive and
binding, absent manifest error, upon the Borrowers) (a) on any date for
determining the interest rate on any LIBOR Loan for any Interest Period, that by
reason of any changes arising after the date of this Agreement affecting the
relevant market, adequate means do not exist for ascertaining the applicable
interest rate on the basis provided for in the definition of LIBOR Rate, or (b)
at any time that the Borrowers have received notice that any of the Revolving
Loans are affected by any of the circumstances described in subsection (a) of
this Section 2.15 hereof, the Borrowers may:
(i) if the affected LIBOR Loan is yet to be made pursuant to a
Notice of Borrowing, either (1) withdraw the related Notice of Borrowing by
giving the Lender, by telephone, confirmed in writing, notice thereof on the
same date that the Borrowers were so notified by the Lender pursuant to
subsection (a) of this Section 2.15, without payment of any amounts specified in
Section 2.14 hereof, or (2) borrow such Borrowing as a Prime Loan; and
(ii) until the Lender notifies the Borrowers that the
circumstances described in subsection (a) of this Section 2.15 no longer exists,
the obligations of the Lender to make such LIBOR Loan, or any other LIBOR Loans,
shall be suspended; however, subject to the other terms and conditions of this
Agreement, the Lender's obligations to make Prime Loans shall not be suspended.
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SECTION 3. CONDITIONS PRECEDENT
--------------------
3.1 CONDITIONS TO CLOSING. The obligation of the Lender to make any
Revolving Loans to the Borrowers hereunder is subject to the full satisfaction,
in the Good Faith opinion of the Lender, of the following conditions precedent
on the Closing Date:
(a) NOTE. The Lender shall have received the Note, with such
Note conforming to the requirements hereof and duly, jointly and severally
executed and delivered by a Responsible Officer of each of the Borrowers.
(b) LEGAL OPINION OF COUNSEL. The Lender shall have received an
executed legal opinion of Porter, Wright, Morris & Arthur, counsel for
CheckFree, favorably addressing the subjects enumerated in EXHIBIT "B" attached
hereto (the "Subjects of Opinion"), addressed specifically to the Lender and
otherwise in form and substance satisfactory to the Lender and covering such
other matters incident to the transactions contemplated hereby as the Lender or
its counsel may reasonably require.
(c) PROCEEDINGS OF CHECKFREE. The Lender shall have received a
copy of the resolutions, in form and substance satisfactory to the Lender, of
the board of directors of CheckFree authorizing (i) the execution, delivery and
performance of this Agreement, the Note and the other Loan Documents, (ii) the
consummation of the transactions contemplated hereby and thereby, (iii) the
borrowings herein and therein provided for, and (iv) the execution, delivery and
performance of any other documents provided for in this Agreement, all certified
by the secretary or assistant secretary of CheckFree. Such certificate shall
state that the resolutions set forth therein have not been amended, modified,
revoked or rescinded as of the date of such certificate.
(d) INCUMBENCY CERTIFICATE. The Lender shall have received a
certificate of the secretary or assistant secretary of CheckFree as to the
incumbency and signature of the officer(s) of CheckFree executing this
Agreement, the Note and any other Loan Documents, and any certificate or other
documents to be delivered pursuant hereto or thereto, together with evidence of
the incumbency of such secretary.
(e) NO PROCEEDING OR LITIGATION; NO INJUNCTIVE RELIEF. No
action, suit or proceeding before any arbitrator or any Governmental Authority
shall have been commenced, no investigation by any Governmental Authority shall
have been commenced and no action, suit, proceeding or investigation by any
Governmental Authority shall have been threatened, against the Borrowers or
against any of the officers or directors of any of the Borrowers, seeking to
restrain, prevent or change the transactions contemplated by this Agreement, the
Note or any of the other Loan Documents, in whole or in part, or questioning the
validity or legality of the transactions contemplated by this Agreement or any
other Loan Document, or seeking damages in connection herewith or therewith.
(f) CONSENTS, LICENSES, APPROVALS, ETC. The Lender shall have
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received true copies (certified to be such by a Responsible Officer of the
Borrowers or any other appropriate party) of all necessary consents, licenses
and approvals required in accordance with applicable law as requisite to the
execution, delivery, performance, validity and enforceability of this Agreement,
the Note and any other Loan Documents, if the failure to obtain such consents,
licenses or approvals, individually or in the aggregate, would have a material
adverse effect on any of the Borrowers, or would adversely affect the validity
or enforceability of any of the foregoing documents, and all such approvals
obtained shall be in full force and effect and be reasonably satisfactory in
form and substance to the Lender.
(g) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of
Default shall have occurred and be continuing after giving effect to the making
of any Revolving Loans hereunder.
(h) FACILITY FEE AND COMMITMENT FEE. The Borrowers shall have
paid the Facility Fee in full, and that portion of the Commitment Fee due on the
Closing Date, to the Lender.
(i) DUE DILIGENCE. The Lender shall have completed all due
diligence which it deems in its Good Faith opinion to be necessary and
appropriate, and in the manner reasonably satisfactory to it, with respect to
this Agreement, the Note and the other Loan Documents, and the transactions
contemplated hereby and thereby.
(j) TERMINATION OF EXISTING LIENS. The Borrowers shall have
provided to the Lender executed UCC-3 termination statements for the financing
statements of record with respect to the Collateral (except for Permitted Liens
with respect thereto), or payoff letters acceptable to the Lender from any
holders of existing security interests in any of the Collateral which are to be
released or terminated upon receipt of payment of the Indebtedness secured
thereby.
(k) ADDITIONAL MATTERS. All corporate and other proceedings and
all other documents and legal matters in connection with the transactions
contemplated by this Agreement, the Note and the other Loan Documents shall be
reasonably satisfactory in form and substance to the Lender and its counsel.
3.2 CONDITIONS TO CONTINUATION OF COMMITMENT. The obligation of the
Lender to keep the Commitment in effect until the expiration of the Commitment
Period is subject to the full satisfaction, in the Good Faith opinion of the
Lender, of all of the following conditions precedent:
(a) NO EVENT OF DEFAULT. No Event of Default shall have occurred
and be continuing.
(b) NO MATERIAL ADVERSE CHANGE. There shall have been no
material adverse change in the financial condition or business operations of any
of the
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Borrowers, or the occurrence any event which has an adverse, material effect on
any of the Borrowers.
(c) ADDITIONAL MATTERS. All resolutions, certificates and other
documents described in Section 3.1 hereof, together with all corporate and other
proceedings and all other documents and legal matters in connection with the
transactions contemplated by this Agreement, the Note and the other Loan
Documents, shall all have been provided, and shall be in form and substance
reasonably satisfactory, to the Lender.
3.3 CONDITIONS TO REVOLVING LOANS. The obligations of the Lender to
make any Revolving Loans hereunder on any date is subject to the full
satisfaction, in the Good Faith opinion of the Lender, of the following
conditions precedent as of the Borrowing Date for such Revolving Loan:
(a) SUBSIDIARY MATTERS. The Lender shall have received the items
described in Sections 3.1(b), (c) and (d) with respect to Servantis Services,
Inc. and CheckFree Software Solutions, Inc., as well as any other Subsidiaries
identified by the Lender, all in form and substance reasonably acceptable to the
Lender; provided, however, that the legal opinions described in Section 3.1(b)
may be rendered by any counsel for such Subsidiaries which are reasonably
acceptable to the Lender. Additionally, the Lender shall have received any other
agreements, documents or instruments, including without limitation UCC-11 lien
searches, with respect to such Subsidiaries, which the Lender deems in Good
Faith to be necessary or appropriate.
(b) NOTICE OF BORROWING AND BORROWING BASE CERTIFICATE. The
Lender shall have received fully-completed and executed copies of the Notice of
Borrowing and Borrowing Base Certificate applicable to each such Revolving Loan,
in form and substance reasonably acceptable to the Lender.
(c) EXISTING CONDITIONS PRECEDENT. The conditions precedent set
forth in Sections 3.1(e), (f) and (g), and the conditions precedent set forth in
Sections 3.2, shall be satisfied, as well as any other conditions precedent set
forth in Section 3.1 and 3.2 which has been previously satisfied, but which,
because of events or circumstances which have since then occurred or arisen,
must, in the Good Faith opinion of the Lender, be again satisfied.
(d) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Borrowers in this Agreement or any other Loan Document,
and any representations and warranties made by the Borrowers which are contained
in any certificate, document or financial or other statement or Loan Document
furnished at any time under or in connection herewith or therewith, shall be
true and correct in all material respects on and as of the Borrowing Date of
such Revolving Loan, as if made on and as of such date unless specifically
stated to relate to a specific earlier date.
(e) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of
Default
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shall have occurred and be continuing on such Borrowing Date or after giving
effect to the Revolving Loan to be made on such Borrowing Date.
Each Borrowing by any of the Borrowers under this Agreement
shall constitute a representation and warranty by the Borrowers as of the date
of such borrowing that the conditions contained in the foregoing provisions of
this Section 3.3 have been fully satisfied.
SECTION 4. COLLATERAL; SECURITY AGREEMENT
------------------------------
4.1 SECURITY INTEREST.
(a) As security for the full, prompt and complete payment and
performance of all of the Obligations, each of the Borrowers hereby grants to
the Lender, and creates in favor of the Lender, a continuing security interest
and Lien in all of the Collateral. The limits on outstanding advances against
particular items or types of the Collateral are not intended, and shall not be
deemed, to limit in any way the security interest and Lien granted hereby in any
one or more of those items or types of Collateral.
(b) The security interest and Lien granted hereunder shall
extend and attach to all Collateral which is presently in existence or which may
hereafter arise, and which is owned by each of the Borrowers or in which any of
the Borrowers has any rights or interests, whether held by such Borrower or
others for its account.
(c) In no event shall prior recourse to any Collateral or other
security granted to the Lender be a prerequisite to the right of the Lender to
demand payment of any Obligations owed to the Lender. Further, it is understood
that the Lender shall not have any obligation or liability whatsoever to perform
in any respect any of the Borrowers' respective contracts or obligations
relating to the Borrowers' Accounts.
4.2 CONTINUING RIGHTS. The rights, security interest and Lien
granted hereunder to the Lender are to continue in full force and effect until
all of the Obligations are fully and finally paid and satisfied, and this
Agreement and the remaining Loan Documents are terminated.
4.3 NO OBLIGATION TO MARSHAL LIENS. To the extent that the
Obligations are now or hereafter secured by any assets or property other than by
the Collateral, or by any endorsement, assets or property of any other Person,
then the Lender shall have the right, in its sole discretion exercised in Good
Faith, to determine which rights, Liens or remedies it shall at any time pursue,
foreclose upon, relinquish, subordinate, modify or to take any other action with
respect to, without in any way modifying or affecting any of such rights, Liens,
or remedies, or any of the Lender's other rights or remedies hereunder.
4.4 LENDER MAY DISCHARGE LIENS, ETC. At its sole option, the Lender,
upon
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seven (7) days prior notice to the Borrowers (by means of a single notice to
CheckFree) (or upon contemporaneous notice if the Lender, in its sole discretion
exercised in Good Faith, determines that all or any part of the Collateral or
its interests therein may be adversely affected), may discharge Liens which at
any time are placed on or encumber all or any part of the Collateral and may pay
for the maintenance and preservation of the Collateral, except that the Lender
may not discharge any Permitted Lien unless a Default or an Event of Default has
occurred and is continuing. The Borrowers shall reimburse the Lender within five
(5) days of demand for any payment made or any expense incurred by the Lender
pursuant to the foregoing authorization, and in the event that the Borrowers
shall fail to so reimburse the Lender, such amount shall bear interest at the
Default Rate until such amount is paid, and such amount, until so paid, together
with such interest thereon, shall constitute part of the Obligations and be
secured by the Collateral. Except as otherwise specifically provided herein,
until a Default or an Event of Default shall have occurred and be continuing,
the Borrowers may have possession of its Collateral and use it in any lawful
manner not inconsistent or in conflict with the provisions of this Agreement or
the other Loan Documents. The Borrowers shall not use the Collateral in
violation of any law, statute, ordinance, rule or regulation of any Governmental
Authority.
4.5 FINANCING STATEMENTS. At the Lender's request, each of the
Borrowers shall execute one or more financing statements pursuant to the Uniform
Commercial Code and other notices appropriate under any applicable Requirements
of Law that the Lender deems desirable to evidence, perfect, or protect its
security interest in and other Liens on the Collateral in such form(s) as are
satisfactory to the Lender. Notwithstanding anything to the contrary in the
immediately preceding sentence, the Borrowers hereby authorizes the Lender from
time to time to file one or more financing statements or like notices relative
to the Lender's security interest in the Collateral with any or all of the
Borrowers' signature appearing thereon where permitted by law. The Borrowers
shall pay the costs of filing all financing statements and other notices in all
public offices where filing is deemed by the Lender to be necessary or desirable
to perfect, protect or enforce the security interest and Lien granted to the
Lender hereunder. A carbon, photographic, or other reproduction of this
Agreement or of a financing statement is sufficient as a financing statement.
The Lender is hereby authorized to give notice to any Person as may be necessary
or desirable under applicable laws to evidence, protect, perfect, or enforce the
security interest and Lien granted to the Lender in the Collateral.
4.6 COLLATERAL DUTIES. The sole duty of the Lender with respect to
the custody, safekeeping and physical preservation of the Collateral in its
possession, under the Code or under other applicable laws, shall be to deal with
it in the same manner as the Lender deals with similar property for its own
account. Neither the Lender, nor any of its directors, officers, employees or
agents, shall be liable for any failure to demand, collect or realize upon all
or any part of the Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
any or all of the Borrowers or otherwise.
4.7 ATTORNEY-IN-FACT. Each of the Borrowers hereby appoints the
Lender as its attorney-in-fact (without requiring it to act as such) to do,
after the occurrence and during the continuation of any Event of Default
hereunder, any and every act which such Borrower is obli-
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gated under this Agreement or any other Loan Document to do, including without
limitation to (a) execute in the name of such Borrower, any schedules,
assignments, financing statements, instruments, documents and statements which
such Borrower is obligated to give to the Lender, (b) exercise all rights of
such Borrower in the Collateral, and (c) make collections and execute any and
all documents and instruments and do all other things necessary to preserve and
protect the Collateral, and to protect the Lender's security interest and Lien
therein. The powers and authorities herein conferred upon the Lender may be
exercised by the Lender through any person who, at the time of the execution of
any such particular document or instrument, is an officer, employee or agent of
the Lender. The power of attorney herein conferred is granted for valuable
consideration and hence is coupled with an interest and is irrevocable so long
as all or any of the Obligations shall remain unpaid or unperformed. All persons
dealing with the Lender, or any substitute, shall be fully protected in treating
the powers and authorities conferred by this power of attorney as continuing in
full force and effect until advised by the Lender that all of the Obligations
have been fully and finally paid and performed.
4.8 SECURITY INTEREST ABSOLUTE. All of the rights of the Lender and
the pledge, security interest and Lien hereunder, and all Obligations of the
Borrowers hereunder, shall be absolute and unconditional in all respects and
shall not be released, diminished, impaired, or affected for any reason,
including without limitation the occurrence of any one or more of the following
events:
(a) any lack of validity or enforceability of any provision of
this Agreement, the Note or any of the other Loan Documents;
(b) any change in the time, manner or place of any payment or
performance of, or in any other term of, all or any of the Obligations, or under
this Agreement, the Note or any other Loan Document, or any other amendment or
waiver of or any consent to any departure from this Agreement or any of the
other Loan Documents;
(c) any neglect, delay, omission, failure or refusal of the
Lender to take or prosecute any action in connection with this Agreement, the
Note or any of the other Loan Documents, or the payment or performance of any of
the Obligations;
(d) the insolvency, bankruptcy or lack of legal power or
authority of any or all of the Borrowers; or
(e) any other circumstance which might otherwise constitute a
defense available for the discharge of any or all of the Borrowers with respect
to any Obligation, or with respect to any provision of this Agreement, the Note
or any of the other Loan Documents.
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SECTION 5. REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Lender to enter into this Agreement and to
make the Revolving Loans herein provided for the Borrower, each of the Borrowers
hereby represents and warrants, as to such Borrower only, to the Lender that:
5.1 FINANCIAL STATEMENTS. The Borrowers have heretofore furnished to
the Lender (a) existing audited consolidated financial statements of the
Borrowers dated as of June 30, 1996, and (b) existing unaudited consolidated
financial statements of the Borrowers as of December 31, 1996. Such financial
statements accurately reflect the existing consolidated financial condition of
the Borrowers as of the dates thereof for the periods reflected therein, and
since the preparation of such financial statements there has been no material
adverse change.
5.2 CORPORATE EXISTENCE. Each of the Borrowers (a) is duly
organized, validly existing and in good standing under the laws of its
respective state of incorporation, (b) has the corporate power and authority to
conduct the business in which it is currently engaged, and (c) is not required
to be qualified as a foreign corporation under the laws of any jurisdiction
where, if it is not so qualified, the failure to so qualify would have a
material adverse effect on the business of such Borrower.
5.3 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each of
the Borrowers has the corporate power and authority to make, deliver and perform
each of this Agreement, the Note and the other Loan Documents, and to borrow
hereunder, and has taken all corporate action necessary to be taken by it to
authorize the Revolving Loans on the terms and conditions of this Agreement, the
Note and the other Loan Documents, and to authorize the execution, delivery and
performance of this Agreement, the Note and any other Loan Documents to which it
is a party. Except for those already obtained, no consent, waiver or
authorization of, or filing with, any Person (including without limitation any
Governmental Authority) is required to be made or obtained by any of the
Borrowers in connection with the Revolving Loans hereunder, or the execution,
delivery, performance, validity or enforceability of this Agreement, the Note
and the other Loan Documents. This Agreement, the Note and each other Loan
Document will be duly executed and delivered on behalf of each of the Borrowers,
and this Agreement, the Note and each other Loan Document, when executed and
delivered hereunder, will constitute, a legal, valid and binding, joint and
several obligation of each of the Borrowers, enforceable against each of the
Borrowers in accordance with its terms, except for the effect of bankruptcy,
insolvency, reorganization, receivership, moratorium and other similar laws
affecting the rights and remedies or creditors generally.
5.4 NO LEGAL BAR. The execution, delivery and performance of this
Agreement, the Note and the other Loan Documents, the borrowings hereunder and
the use of the proceeds thereof, do not and will not violate any Requirement of
Law or, to the best of each of the Borrowers' knowledge after due inquiry,
Contractual Obligation of each of the Borrowers, and do not and will not result
in, or require, the creation or imposition of any Lien on any of its properties
or revenues pursuant to any Requirement of Law or, to the best of each of the
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Borrowers' knowledge after due inquiry, Contractual Obligation, other than the
security interest and Lien created in favor of the Lender for the benefit of the
Lender pursuant to the Loan Documents. Without limitation of the foregoing, if
any of the Borrowers is subject to regulation, or asserted to be subject to
regulation, by any Governmental Authority, the execution, delivery and
performance of this Agreement and any other Loan Documents to which it is a
party have been duly authorized by necessary proceedings or consents, and no
provision of this Agreement or any other Loan Document shall be impaired in
performance or enforceability by reason of any present Requirement of Law or
Governmental Authority.
5.5 NO VIOLATION OF LAWS. To the best of each of the Borrowers'
knowledge after due inquiry, each of the Borrowers and all of their respective
Subsidiaries are in compliance with all Requirements of Law, including those
covering Taxes (subject to contest as provided in the definition of Permitted
Liens), Environmental Activities, Hazardous Substances, except to the extent
that all instances of noncompliance, in the aggregate, do not have a material
adverse effect upon any of the Borrowers or any of their Subsidiaries, if any.
5.6 NO MATERIAL LITIGATION. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the best knowledge of each of the Borrowers after due inquiry, threatened by
or against any of the Borrowers or any of their respective Subsidiaries, or any
of their respective properties or revenues, (a) with respect to any of this
Agreement, the Note or any of the other Loan Documents, or any of the
transactions contemplated hereby or thereby, or (b) which could reasonably be
expected to have a material adverse effect on the business, operations, property
or financial condition of any of the Borrowers or any of their Subsidiaries, if
any.
5.7 FEDERAL REGULATIONS. None of the Borrowers is engaged, nor will
it engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" within the respective meanings of each of the quoted terms under
Regulation U (or its parallel margin regulations) of the Board of Governors of
the Federal Reserve System as now and from time to time hereafter in effect. No
part of the proceeds of any Revolving Loans hereunder will be used for
"purchasing" or "carrying" of "margin stock" as so defined or for any purpose
which violates, or which would be inconsistent with, the provisions of the
Regulations of such Board of Governors.
5.8 INVESTMENT COMPANY ACT. None of the Borrowers is an "investment
company" or a company "controlled" by an "investment company," within the
respective meanings of each of the quoted terms of
the Investment Company Act of 1940, as amended.
5.9 HOLDING COMPANY ACT. None of the Borrowers is a "holding
company" or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company," within the respective meanings of each of the quoted terms
of the Public Utility Holding Company Act of 1935, as amended.
5.10 SOLVENCY AND DISPOSITIONS. Immediately before and immediately
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<PAGE> 37
following the consummation of each of the transactions contemplated by the
execution of this Agreement and the other Loan Documents, the disbursement of
any of the Revolving Loans hereunder, and the filing of any of the financing
statements or other perfecting notices or actions in connection herewith or
therewith, none of the Borrowers (a) is or will be insolvent as defined in Title
11, U.S.C., as amended (the "Bankruptcy Code"), or, within the meaning of any
applicable state insolvency or fraudulent obligation or conveyance law
(including without limitation Ohio Revised Code Chapter 1336 and Sections
1313.56 and 1313.57), (b) is engaged or about to be engaged in a business or
transaction for which the property remaining with it is an unreasonably small
amount of capital, (c) intends to incur, and believes that it has or will incur,
debts that would be beyond its ability to pay as such debts mature, (d) has made
or incurred and intends to make or incur an obligation or transfer or conveyance
(i) without fair consideration, or (ii) in exchange for less than a reasonably
equivalent value received, or (e) has made or incurred and intends to make or
incur an obligation or conveyance or transfer (i) with intent to hinder, delay
or defraud any present or future creditor, or (ii) in contemplation of
insolvency and with a design to prefer one or more creditors to the exclusion in
whole or in part of others.
5.11 [Intentionally Deleted]
5.12 ENVIRONMENTAL. None of the Borrowers is engaged in any
Environmental Activity in violation of any Environmental Laws, and is in
compliance with all applicable Environmental Requirements, except as disclosed
on SCHEDULE 5.12 attached hereto.
5.13 ERISA. Each of the Borrowers is in compliance with all
applicable reporting and disclosure provisions of ERISA, and in compliance, to
the best of each of the Borrowers' knowledge after due inquiry, in all material
respects with all other applicable provisions of ERISA and, with respect to any
plan in which it participates, no Reportable Event has occurred.
5.14 TAXES. Each of the Borrowers has paid when due all Taxes,
except those being contested in Good Faith by such Borrower, and with respect to
which appropriate reserves have been set aside on the books and records of such
Borrower, has timely filed all required reports and returns with respect thereto
and all such reports and returns are true, correct and complete and properly
reflect the Taxes, reporting requirements and responsibilities of each.
5.15 DISCLOSURE. To the best of each of the Borrowers' knowledge
after due inquiry, none of the representations or warranties made at any
particular time by any of the Borrowers in this Agreement, the Note or any other
Loan Document, or in any other document furnished from time to time in
connection herewith (as such other documents may be supplemented from time to
time), contains any untrue statement of a material fact, or omits to state any
material fact necessary to make the statements herein or therein not misleading,
except, with respect to representations and warranties made as of the Closing
Date, as set forth on SCHEDULE 5.15 attached hereto.
5.16 LOCATION INFORMATION. SCHEDULE 5.16 attached hereto contains
the name
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<PAGE> 38
(including any other names used within the preceding five years), chief
executive office, principal place of business and all other places of business
of each of the Borrowers, and each predecessor entity of each of the Borrowers,
within the last five (5) years. Notwithstanding the foregoing, certain of the
Borrowers were acquired by CheckFree Corporation within the last five (5) years,
and, as to any of the Borrowers so acquired within such time period, the
locations listed on Schedule 5.16 for any of such Borrowers is hereby provided
to the best of the Borrowers' knowledge as to any time period prior to the
acquisition of any such Borrower to which this sentence is applicable.
5.17 COLLATERAL INFORMATION. SCHEDULE 5.17 attached hereto contains
the descriptions, locations by address and custodians of all Collateral
described in the definition of Collateral.
5.18 EXISTING LIENS. SCHEDULE 5.18 attached hereto contains a
complete list of all existing liens which are described in subsection (a) of the
definition of Permitted Liens.
5.19 PERFECTION AND PRIORITY. Upon the filings and notices specified
in SCHEDULE 5.19 hereto, the security interest and Lien of the Lender hereunder
will be perfected, and first in priority (except for existing liens which are
Permitted Liens as set forth in subparagraphs (a) and (f) of the definition
thereof), in all the Collateral which can be perfected by filing under the UCC
of the applicable jurisdictions.
5.20 SCHEDULES. To the best of each of the Borrowers' knowledge
after due inquiry, each of Schedules 1 through 5.19, inclusive, to this
Agreement contains true, complete and correct information in all material
respects.
To the extent that any representation, warranty or covenant in this
Section 5 is qualified as being to the best of each of the Borrowers' knowledge
after due inquiry, such knowledge qualification (a) shall apply only up to the
Closing Date and not on a "going forward" basis (to the extent that this
Agreement requires representations and warranties on a "going forward" basis,
such representations and warranties as to matters occurring on or after the
Closing Date shall be absolute and unqualified), and (b) shall be based upon
each of the Borrowers' investigation of its predecessor entity, if any, and all
other due diligence of the Borrowers in connection with the transactions
contemplated by this Agreement and the other Loan Documents.
SECTION 6. AFFIRMATIVE COVENANTS
---------------------
Each of the Borrowers hereby agrees that, from the date hereof and
so long as any part of the Commitment remains in effect, any part of the Note
remains outstanding and unpaid or any other amount or Obligation is owing to the
Lender hereunder, the Borrowers shall, and in the case of the covenants set
forth in Sections 6.3, 6.4, 6.5 and 6.6 hereof shall cause their Subsidiaries,
to:
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<PAGE> 39
6.1 FINANCIAL STATEMENTS; REPORTS; BORROWING BASE CERTIFICATE.
Furnish or cause to be furnished to the Lender:
(a) as soon as available, but in any event not later than 90
days after the end of each fiscal year, a copy of the Annual Financials;
(b) as soon as available, but in any event not later than 45
days after the end of each fiscal quarter, the Quarterly Financials;
with all such financial statements referenced in subparagraphs (a) and (b) to be
complete and correct in all material respects and prepared in reasonable detail
and in accordance with GAAP; and
(c) at any time any Revolving Loans are outstanding hereunder,
as soon as available monthly, but in any event not later than five (5) days
after the end of the previous month, a Borrowing Base Certificate, duly
completed and executed by a Responsible Officer of CheckFree. This Borrowing
Base Certificate shall be in addition to each Borrowing Base Certificate
submitted to the Lender together with each Notice of Borrowing.
6.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Lender:
(a) concurrently with the delivery of all of the financial
statements referred to in Section 6.1(a) hereof, (i) the appropriate Officer's
Certificate, and (ii) a letter from the Borrowers' independent certified public
accountants addressed to the Borrower, certifying such financial statements and
stating that in making the examinations necessary therefor, no knowledge was
obtained of any Default or Event of Default;
(b) concurrently with the delivery of the financial statements
referred to in Sections 6.1(b) hereof, the appropriate Officer's Certificate;
(c) no later than 30 days after the same are sent, copies of
all financial statements, reports and notices which CheckFree sends to its
stockholders as stockholders, and promptly after the same are filed, copies of
all financial statements and reports which CheckFree may make to, or file with,
and copies of all notices which CheckFree receives from, the Securities and
Exchange Commission or any public body succeeding to any or all of the functions
of the Securities and Exchange Commission;
(d) no later than 30 days after receipt thereof, copies of all
final reports submitted to the Borrowers by their independent certified public
accountants in connection with each annual, interim or special audit of the
books of each of the Borrowers, or of all of the Borrowers on a consolidated
basis, made by such accountants; and
(e) upon reasonable notice to the Borrowers (by means of a
single notice to CheckFree), such additional financial and other information as
the Lender may from
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<PAGE> 40
time to time reasonably request, including a monthly aging schedule of any or
all of the Borrowers' accounts payable and accounts receivable.
6.3 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at
or before maturity or before they become delinquent, as the case may be, all
their material Indebtedness and other material obligations of whatever kind or
nature, except for any Indebtedness or other obligations (including any
obligations for Taxes), when the amount or validity thereof is currently being
contested in Good Faith by appropriate proceedings and appropriate reserves in
conformity with GAAP with respect thereto have been provided on the books of
such Borrowers.
6.4 MAINTENANCE OF EXISTENCE. Preserve, renew and keep in full
force and effect its corporate existence, and take all reasonable action to
maintain all rights, privileges, contracts, copyrights, patents, trademarks and
franchises necessary or desirable in the normal conduct of its businesses, and
comply with all Contractual Obligations and Requirements of Law except, to the
extent that the failure to comply therewith would not, in the aggregate, have a
material adverse effect on the business, operations, property or financial
condition of the Borrowers.
6.5 MAINTENANCE OF PROPERTY; INSURANCE. Keep all property necessary
in their businesses in good working order and condition, and maintain with
financially sound and reputable insurance companies insurance on all their
property in at least such amounts and against at least such risks (but including
in any event public liability, product liability and business interruption
insurance) as are (a) carried at the date hereof, or (b) usually insured against
in the same general areas by companies engaged in the same or similar
businesses.
6.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep
proper books of record and account in which accurate, complete and correct
entries in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to their businesses and activities; and
permit representatives of the Lender to visit and inspect any of their
properties, and examine and make abstracts from any of their books and records
at any reasonable time and as often as may reasonably be requested, and to
discuss their businesses, operations, properties and financial and other
conditions with officers and employees of the Borrowers; and, if any of the
Borrowers consents (which consent shall not be unreasonably withheld), with its
independent certified public accountants, provided that after the occurrence and
during the continuance of a Default or an Event of Default, (a) the Lender shall
not need to obtain the consent of any of the Borrowers prior to having
discussions with the Borrowers' independent certified public accountants, and
(b) all of the costs and expenses of the Lender incurred in connection with any
such inspections shall be paid or reimbursed by the Borrowers.
6.7 NOTICES. Give written notice to the Lender:
(a) within two (2) days of such occurrence, of the occurrence
of any Default or Event of Default;
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(b) within two (2) days of such occurrence, of any (i) default
or event of default under any Contractual Obligation that would have a material
adverse effect on any or all of the Borrowers, or (ii) litigation, investigation
or proceeding which may exist at any time between any of the Borrowers, and any
other Person or any Governmental Authority, which, if adversely determined,
would have a material adverse effect on any or all of the Borrowers;
(c) within seven (7) days of such event, of any and all Tax
deficiencies, assessments and government and other charges, levies, claims or
other Liens imposed upon any or all of the Borrowers or upon their income and
profits, or upon any of their property, real, personal or intangible, or upon
any part thereof, including Permitted Liens hereunder, which are in excess of
the aggregate amount of $100,000;
(d) within seven (7) days of such event, of any litigation or
proceeding affecting any or all of the Borrowers, (i)(A) in which the amount
involved is $100,000 or more, and (B) which, with respect to such Borrower(s),
in the reasonable opinion of a Responsible Officer of CheckFree would, if
adversely determined, have a material adverse effect on any or all of the
Borrowers, regardless of the amount involved, or (ii) in which injunctive or
similar relief is sought, which in the reasonable opinion of a Responsible
Officer of CheckFree would, if adversely determined, have a material adverse
effect on any or all of the Borrowers;
(e) within 30 days after any of the Borrowers knows or has
reason to know thereof: of (i) the occurrence of any Reportable Event with
respect to any Plan with respect to which the PBGC has not waived the 30 day
reporting requirement, or (ii) the institution of proceedings or the taking or
expected taking of any other action by the PBGC or such Borrower or any Commonly
Controlled Entity to terminate or withdraw or partially withdraw from any Plan
under circumstances which could lead to material liability to the PBGC or, with
respect to a Multiemployer Plan, the Reorganization or Insolvency (as each such
term is defined in ERISA) of the Plan and in addition to such notice, deliver to
the Lender whichever of the following may be applicable: (A) a certificate of a
Responsible Officer of CheckFree setting forth details as to such Reportable
Event and the action that CheckFree and such Borrower (if not CheckFree) or any
Commonly Controlled Entity proposes to take with respect thereto, together with
a copy of any notice of such Reportable Event that may be required to be filed
with the PBGC, or (B) any notice delivered by the PBGC evidencing its intent to
institute such proceedings or any notice to the PBGC that such Plan is to be
terminated, as the case may be; and
(f) of a material adverse change in the business, operations,
property or financial or other condition of any or all of the Borrowers.
Each notice pursuant to this Section 6.7 shall be accompanied by a statement of
a Responsible Officer of CheckFree setting forth details of the occurrence
referred to therein and stating what action, if any, CheckFree and such Borrower
(if not CheckFree) proposes to take with respect thereto. For all purposes of
subsection (e) of this Section 6.7, the Borrowers shall be deemed to
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<PAGE> 42
have all knowledge or knowledge of all facts attributable to the administrator
of such Plan if such Plan is a Single Employer Plan.
6.8 PAYMENT OF FEES. In addition to all other fees, costs and
expenses, including without limitation Out-of-Pocket Expenses to be paid by the
Borrowers hereunder, promptly pay the Lender when due and payable all fees
required under the Loan Documents.
6.9 COMPLIANCE. Comply with all present and future Requirements of
Law, including without limitation all Environmental Requirements, unless the
noncompliance thereof would not have a material, adverse effect on any of the
Borrowers or any of their Subsidiaries.
6.10 FURTHER ASSURANCES. Promptly execute and file all such further
documents and instruments, and perform such other acts, as the Lender may
determine are reasonably necessary or advisable to maintain any security
interest and Lien granted to the Lender in connection with this Agreement, and
to maintain the priority of any such security interest and Lien hereinafter
purported to be granted pursuant to this Agreement.
6.11 PAYMENT AND PERFORMANCE. Pay and perform, when due and in full,
all of the Obligations arising under, and in accordance with, the terms of this
Agreement, the Note and the other Loan Documents.
SECTION 7. NEGATIVE COVENANTS
------------------
Each of the Borrowers hereby agrees and covenants that, from the
date hereof and so long as all or any part of the Revolving Loans Commitment
remains in effect, the Note remain outstanding and unpaid or any other amount or
Obligation is owing to the Lender hereunder, it shall not, without the prior
written consent of the Lender, directly or indirectly:
7.1 LIMITATION ON INDEBTEDNESS. Create, incur, assume or suffer to
exist any Indebtedness, except Permitted Indebtedness.
7.2 LIMITATION ON LIENS. Create, incur, assume or suffer to exist
any Lien upon any of the Collateral, or on any of its cash, cash proceeds or
marketable securities, whether now owned or hereafter acquired, except Permitted
Liens.
7.3 LIMITATION ON CONTINGENT OBLIGATIONS. Agree to or assume,
guarantee, endorse or otherwise in any way be or become responsible or liable
for, directly or indirectly, any Contingent Obligation, except for (a)
Contingent Obligations contemplated by the Loan Documents, (b) Contingent
Obligations and guarantees by any of the Borrowers of obligations in the
ordinary course of business of any of its Subsidiaries or any of the other
Borrowers, (c) Contingent Obligations which are part of the Permitted
Indebtedness, and (d) Contingent Obligations of, guarantees of the obligations
of, and loans to unaffiliated third parties incurred in the ordinary course of
business, by any of the Borrowers or their Subsidiaries, in the ordinary
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course of business up to an aggregate principal amount of $100,000 on a
consolidated basis.
7.4 LIMITATION ON FUNDAMENTAL CHANGES. Take part in any Change of
Control, or otherwise enter into any transaction of merger, consolidation,
amalgamation or reorganization, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), other than any of the Borrowers with any
other Borrowers, or convey, sell, lease, transfer or otherwise dispose of, in
one transaction or a series of transactions, all or substantially all of the
business or assets of any or all of the Borrowers, whether now owned or
hereafter acquired, other than any of the Borrowers with any other Borrowers.
7.5 LIMITATION ON ACQUISITIONS. Purchase or otherwise acquire all
or any part of the business or assets of, or any stock or other evidence of
beneficial ownership of, any Person without the prior written consent of the
Lender, if such transactions, individually or in the aggregate, involve
consideration which includes cash or cash equivalents of more than $5,000,000 in
any fiscal year which is provided by disbursements to any of the Borrowers of
Revolving Loans hereunder.
7.6 LIMITATION ON LOANS. Make or commit to make any advance, loan,
extension of credit or capital contribution to, any Person, except (a) loans and
advances to employees in the ordinary course of business in the aggregate
outstanding at any time of $500,000, and (b) loans to any of their Subsidiaries
in the aggregate outstanding amount at any time of $500,000.
7.7 LIMITATION ON SALE AND LEASEBACKS. Enter into any arrangement
with any Person providing for the leasing by any of the Borrowers of real or
personal property which has been or is to be sold or transferred by such
Borrower to such Person or to any other Person to whom funds will be or are to
be advanced by such Person on the security of such property or rental
obligations of such Borrower, except for operating leases or Capital Lease
Obligations included in Permitted Indebtedness, as well as any Permitted Liens
described in subparagraph (j) of the definition thereof which are granted in
connection with such Permitted Indebtedness.
7.8 LIMITATION ON DISTRIBUTIONS. Pay any dividends or other similar
distributions to any Person.
7.9 LIMITATION ON REDEMPTIONS. Purchase, buy back, acquire or
otherwise redeem any or all of the issued and outstanding shares of its Capital
Stock; provided, however that CheckFree may purchase, buy back, acquire or
otherwise redeem shares of its Capital Stock if, at the time immediately after
such purchase, buy back, acquisition or other redemption, CheckFree has cash and
marketable securities in an amount of not less than $15,000,000, and there were
no amounts outstanding under any Revolving Loans hereunder, including without
limitation principal, interest or any other amounts due and payable hereunder,
or under the Note or any other Loan Documents.
7.10 CURRENT RATIO. Allow the ratio of (a) Current Assets to (b)
Current
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Liabilities to fall below the ratio of 1.0 to 1.0, for the fiscal quarter ending
on June 30, 1997, or any fiscal quarter thereafter. For purposes of calculating
Current Liabilities under this Section 7.10, the aggregate amount of all
then-outstanding Revolving Loans hereunder shall be included in such
calculation.
7.11 TANGIBLE NET WORTH. Allow, at any time during the period from
the Closing Date through the fiscal quarter ending December 31, 1999, the
calculation of Tangible Net Worth to be less than the following amounts, as
calculated for the following fiscal quarters:
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Tangible Net Worth
-------------- --------------------------
<S> <C>
4th Quarter 1997 $64,000,000
1st Quarter 1998 $63,000,000
2nd Quarter 1998 $62,000,000
3rd Quarter 1998 $64,000,000
4th Quarter 1998 $68,000,000
1st Quarter 1999 $71,000,000
2nd Quarter 1999 $74,000,000
3rd Quarter 1999 $77,000,000
4th Quarter 1999 $80,000,000
</TABLE>
7.12 FUNDED DEBT TO NET WORTH RATIO. Allow, at any time, the ratio
of Funded Debt to Net Worth to exceed the ratio of 3.33 to 1.0.
7.13 NET LOSSES. Allow, at any time during the period from the
Closing Date through the fiscal quarter ending December 31, 1999, the amount of
maximum Net Losses before income taxes to exceed the following amounts, as
calculated for the following fiscal quarters:
<TABLE>
<CAPTION>
Maximum Net Loss
----------------
Fiscal Quarter Before Income Taxes
-------------- -------------------
<S> <C>
4th Quarter 1997 ($11,000,000)
1st Quarter 1998 ($11,000,000)
2nd Quarter 1998 ($7,000,000)
3rd Quarter 1998 ($3,000,000)
4th Quarter 1998 $1,000,000
1st Quarter 1999 0
2nd Quarter 1999 0
3rd Quarter 1999 0
4th Quarter 1999 0
</TABLE>
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<PAGE> 45
SECTION 8. EVENTS OF DEFAULT AND REMEDIES
------------------------------
8.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an event of default (each, an "Event of Default")
hereunder:
(a) PAYMENT DEFAULT OF OBLIGATIONS. The Borrowers shall fail to
pay when due any principal of, or interest on, the Note, or any other
Obligation, fee or amount (including without limitation reimbursement
obligations) payable hereunder, under the Note or under any other Loan Document,
within five (5) days after any such principal, interest, Obligation, fee or
amount was due and payable in accordance with the terms hereof or thereof.
(b) PERFORMANCE DEFAULT OF OBLIGATIONS. The Borrowers (i) shall
fail to deliver or cause to be delivered the information, notices or other items
specified in, or satisfy any of, their covenants hereunder, under the Note or
any other Loan Document within ten (10) days of the date due hereunder or, as
appropriate, of the request of the Lender therefor, or (ii) shall default in the
observance or performance of any covenant or agreement contained herein, in the
Note or in any other Loan Document (other than as set forth in subsection 8.1(a)
above) within ten (10) days of the date due hereunder.
(c) REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made or deemed made by any of the Borrowers herein, or in the Note or
in any of the other Loan Documents, or which is contained in any certificate,
document or financial or other statement or other Loan Document furnished at any
time under or in connection herewith or therewith, shall prove to have been
incorrect in any material respect on or as of the date made or deemed made.
(d) FAILURE TO CORRECT. Any representation, warranty or
covenant made in Sections 5, 6 and 7 hereof capable of correction by the
Borrowers shall become incorrect in any material respect and remain incorrect
for thirty (30) days after any of the Borrowers receives notice thereof from the
Lender.
(e) DEFAULT OF OTHER INDEBTEDNESS. The Borrowers shall default
in (a) any payment of principal of or interest on any Indebtedness (other than
the Note or any other Obligations described in Section 8.1(a) hereof) or in the
payment of any Contingent Obligation, the aggregate principal amount then
outstanding of which exceeds $250,000, beyond the period of grace, if any,
provided in the instrument or agreement under which such Indebtedness or
Contingent Obligation was created, or (b) the observance or performance of any
other agreement or condition relating to any such Indebtedness or Contingent
Obligation or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or beneficiaries of such
Contingent Obligation (or a trustee or Lender on behalf of such holder or
holders or beneficiary or beneficiaries) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity or such
Contingent Obligation to become payable.
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(f) BANKRUPTCY. (i) Any of the Borrowers shall commence any
case, proceeding or other action (A) under the Bankruptcy Code or any existing
or future law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or its
debts, or (B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its assets, or any
of the Borrowers shall make a general assignment for the benefit of its
creditors, or (ii) there shall be commenced against any of the Borrowers any
case, proceeding or other action of a nature referred to in subsection (i) above
which (A) results in the entry of an order for relief of any such adjudication
or appointment, and (B) remains undismissed, undischarged or unbonded for a
period of 60 days, or (iii) there shall be commenced against any of the
Borrowers any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of its assets which results in the entry of an order for any
such relief which shall not have been vacated, discharged, or stayed or bonded
pending appeal within 60 days from the entry thereof, or (iv) any of the
Borrowers shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in subsections (i),
(ii) or (iii) above, or (v) any of the Borrowers shall generally not, or shall
be unable to, or shall admit in writing its inability to, pay its debts as the
same become due and payable. Additionally, the occurrence of any of the events
described in subsections (i) through (v) hereof with respect to any of the
Borrowers' Subsidiaries shall constitute an Event of Default hereunder, if, in
the sole opinion of the Lender, such event has a material adverse effect on any
or all of the Borrowers.
(g) ERISA. Any of the Borrowers or any "affiliate" (as defined
in ERISA) shall engage in (i) any non-exempted "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of
1986, as amended) involving any Plan, (ii) any "accumulated funding deficiency"
(as defined in Section 302 of ERISA), whether or not waived, shall exist with
respect to any Plan, (iii) a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed, or a trustee shall be
appointed, to administer or to terminate, any Single Employer Plan, which
Reportable Event or institution of proceedings is, in the reasonable opinion of
any Lender, likely to result in the termination of such Plan for purposes of
Title IV of ERISA, and, in the case of a Reportable Event, the continuance of
such Reportable Event unremedied for thirty (30) days after notice of such
Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or,
in the case of institution of proceedings, the continuance of such proceedings
for thirty (30) days after commencement thereof, (iv) any Single Employer Plan
shall terminate for purposes of Title IV of ERISA, or (v) any other event or
condition shall occur or exist with respect to a Single Employer Plan and in
each case in subsections (i) through (iv) above, such event or condition,
together with all other such events or conditions, if any, could subject such
Borrower to any tax, penalty or other liabilities in the aggregate material in
relation to the business, operations, property or financial or other condition
of such Borrower.
(h) JUDGMENTS. One or more judgments or decrees shall be
entered
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<PAGE> 47
against any of the Borrowers involving a liability (not covered by insurance) in
the amount (individually or in the aggregate) of $750,000 or more, and any and
all such judgments or decrees in excess of such respective amounts shall not
have been vacated, satisfied, discharged, or stayed or bonded pending appeal
within 30 days from the entry thereof.
8.2 ACTION UPON DEFAULT. Upon the occurrence of any Event of
Default, (a) if such event is an Event of Default specified in subsection 8.1(f)
hereof, the Revolving Loans Commitment, if all or any part thereof is still
outstanding, shall automatically and immediately terminate, and the Revolving
Loans hereunder (with accrued interest thereon) and all other amounts owing
under this Agreement, the Note and any other Loan Document shall immediately
become due and payable, and (b) if such event is any other Event of Default,
then the Lender may, at its election and without further demand, diligence,
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of intent to accelerate, notice of acceleration and all other notices or
further actions of any kind, all of which are hereby expressly waived by each of
the Borrowers, for itself and its successors and assigns, and all other Persons
now or hereafter liable for the payment and/or performance of all or any part of
the Obligations, declare any of all of the Obligations to be immediately due and
payable, whereupon the Obligations shall become immediately due and payable both
as to principal and interest, at the rates set forth herein, anything contained
in this Agreement, the Note or any of the other Loan Documents to the contrary
notwithstanding. The Lender may proceed to the enforcement of this Agreement,
the Note or any of the other Loan Documents with its rights and remedies as
provided herein or therein, including without limitation any and all rights or
otherwise available to the Lender at law or in equity, against any or all of the
Borrowers or against all or any part of the Collateral, in any combination or
order as the Lender shall determine in its sole discretion.
8.3 DIRECT PAYMENT TO LENDER. The Lender shall have the right,
after accelerating the Obligations pursuant to Section 8.2 hereof, and each of
the Borrowers hereby appoints the Lender as its, and grants to the Lender a,
power of attorney for the following purpose, after acceleration of the
Obligations, to notify the parties obligated on all or any part of the
Collateral to make all payments thereunder directly to the Lender, and the
Lender may take control of all or any part of the Collateral and/or proceeds
therefrom. Upon the occurrence and during the continuance of any Event of
Default, the Borrowers hereby authorize and empower the Lender, without notice
to any of the Borrowers or any other Person, either in the Lender's name or in
the name of any of the Borrowers for the use and benefit of the Lender, to ask,
demand, receive, compromise, collect, compound and prosecute any suit or
proceedings for, and to collect, all or any part of the Collateral. The
foregoing power of attorney granted to the Lender in this Section 8.3 is coupled
with an interest and thus is irrevocable until all of the Obligations have been
fully and finally paid and performed. The Lender shall be required to account
only for such payments as are actually received by it. Whenever any of the
Borrowers shall receive any payment, it shall hold such payment in trust for the
Lender and immediately deliver the same to the Lender in the form received by
such Borrower. Each of the Borrowers authorizes the Lender, including any
officers, employees or agents thereof, after the occurrence of any Event of
Default, to endorse the name of such Borrower upon any checks or other
Collateral which are received in the payment of any Collateral, and to do all
things necessary in
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<PAGE> 48
order to reduce the same to Dollars.
8.4 DISCHARGE LIENS, ETC.. Upon the occurrence and during the
continuance of any Event of Default, the Lender may, at its option, discharge
any Taxes, Liens, or security interests or other encumbrances at any time on all
or any part of the Collateral, and may pay for the maintenance and preservation
thereof if the same is due and payable and unpaid and, if in the Lender's
opinion, the lack of such discharge would (a) cause, continue or aggravate a
Default or Event of Default, or (b) after Default, adversely affect the
disposition or value of such Collateral. The Borrowers jointly and severally
agree to reimburse the Lender on demand for any payments made or any costs or
expenses (including reasonable attorney's fees) incurred by the Lender pursuant
to the foregoing authorization, and in the event that the Borrowers shall fail
to so reimburse the Lender, such amount shall bear interest at the Default Rate
until such amount is paid and such amount, until so paid, together with such
interest thereon, shall constitute additional Obligations hereunder and be
secured by the Lender's security interest in and Lien on the Collateral.
8.5 EXERCISE OF POWER OF ATTORNEY. The Lender, by itself or through
any authorized designee or court-appointed receiver, shall have the right, but
not the obligation, to exercise any and all of the rights conferred upon the
Lender or its designee as attorney-in-fact for the Borrowers pursuant to the
provisions of Sections 4.7 and 8.3 hereof. Each of the Borrowers expressly
agrees to fully and promptly assist the Lender and/or its designee in the
performance of any such duties, to the extent and in the time period requested
by the Lender or such designee.
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<PAGE> 49
8.6 FURTHER LENDER RIGHTS.
(a) POSSESSION. Without limiting any other provisions contained
herein or in any of the other Loan Documents, should the Lender declare all or
any part of the Obligations to be forthwith due and payable as set forth in
Section 8.2 hereof, the Lender shall then have all of the rights and remedies
hereunder and under the other Loan Documents, and all of the rights and remedies
of a secured party under the laws of the State of Ohio or any other applicable
jurisdiction, including without limitation the right to take possession of all
or any of the tangible items of Collateral, and for that purpose the Lender may
require any or all of the Borrowers to make the Collateral, and including all
books and records thereof, available to the Lender at a place designated by the
Lender and reasonably convenient to such parties, and may, so far as the
Borrowers can give authority therefore, enter upon any premises on which the
Collateral or any part of records thereof may be situated, and remove the same
therefrom, without any liability under any "breach of the peace" or other
assertion or defense, all of which are hereby expressly waived by each of the
Borrowers, for itself and all other Persons now or hereafter liable for the
payment and/or performance of any or all of the Obligations, to the extent that
the same may be legally waived. The parties hereto recognize that portions of
the Collateral could be difficult to maintain in terms of preservation and
disposition, and subject to complex maintenance and management; accordingly, the
parties agree that, after the occurrence and during the continuance of any Event
of Default, the Lender is to have the widest possible attitude to preserve and
protect the Collateral and the Lender's security interest and Lien therein, and
agree further that, at the option of the Lender, the Lender shall have the
unqualified right to appointment of receivers, without notice or hearing, for
the preservation, possession, protection and disposition of all or any part of
the Collateral and the collection and protection for the Lender of any proceeds
of the use or disposition thereof, and/or to do any other thing and exercise any
other rights or remedies which the Lender may or might, with or without judicial
process, have or exercise. Without in any way limiting the foregoing, the Lender
may take possession of and retain all or any part of the Collateral whenever the
circumstances are such that the Lender is entitled to do so under applicable law
or otherwise.
(b) SALE OR OTHER DISPOSITION. After the Lender receives
possession of any tangible items of the Collateral, if any, following the
occurrence of any Event of Default hereunder, the Lender may sell, lease or
otherwise dispose of the Collateral in any matter permitted by applicable law.
If notice thereof is required by law, the Lender shall give the Borrowers
written notice of the time and place of any public sale of the Collateral or of
the time after which any private sale or other intended disposition thereof is
to made, and at such public or private sale the Lender may purchase all or any
part of the Collateral. The parties hereto agree that notice under this Section
8.6(b) shall not be unreasonable as to time if given in compliance herewith at
least ten (10) calendar days prior to sale or other disposition. To the extent
permitted by applicable law, each of the Borrowers hereby waives any rights now
or hereafter conferred by statute or otherwise which may require the Lender to
sell, lease or otherwise use any of the Collateral in mitigation of the Lender's
damages as set forth in this Section 8.6(b), or which may otherwise limit or
modify any of the Lender's rights or remedies hereunder. The Borrowers shall,
and jointly and severally agree to, pay to the Lender, on demand as part of the
Obligations
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<PAGE> 50
hereunder, any and all costs and expenses, including court costs, legal
expenses, and reasonable attorney's fees, incurred by the Lender in exercising
any or all of its rights or remedies hereunder, or in enforcing any of the
terms, conditions or provisions hereunder or under any or all of the other Loan
Documents, or in exercising any other rights or remedies otherwise available to
the Lender at law or in equity.
8.7 PROCEEDS. Any proceeds of any sale pursuant to Section 8.6
thereof shall first be applied to the payment of all of the costs and expenses
of such sale, including reasonable attorney's fees and disbursements, and then
shall be applied in accordance with the other provisions of this Agreement.
8.8 APPLICATION TO OBLIGATIONS. Except as otherwise provided
herein, all amounts received by the Lender from the Borrowers of every kind and
nature may be applied by the Lender to the Obligations in such order as the
Lender shall determine in its sole discretion. Each of the Borrowers authorizes
the Lender upon occurrence of any Event of Default (unless such Event of Default
has been waived), at any time and without notice to appropriate to the
Obligations and apply any Collateral or any deposits or monies of any of the
Borrowers in the Lender's possession, custody or control, towards the payment of
the Obligations. Each of the Borrowers hereby waives presentment, demand, notice
of acceptance, performance, default, enforcement, exoneration and reimbursement,
consents to any acceleration, extension, modification, waiver, or postponement,
or to any other indulgence, to any addition, substitution, exchange or release
of Collateral, to the addition or release of any other party or Person primarily
or secondarily liable, to the settlement, compromise or adjustment of the
Obligations, or to the application of any Collateral against the Obligations in
any order so determined by the Lender. Notwithstanding anything contained herein
to the contrary, the Lender shall have no rights of setoff or similar rights
with respect to the Special Account.
8.9 CUMULATIVE RIGHTS. All rights and remedies available to the
Lender under this Agreement or any of the other Loan Documents shall be
cumulative of and in addition to all of the rights and remedies granted to the
Lender at law, in equity, or otherwise, whether or not the Obligations are then
due and payable in full and whether or not the Lender shall have instituted suit
for collection or other action in connection with the Loan Documents. The Lender
may exercise any and all of such rights and remedies, successively or
concurrently, as the Lender may determine in its sole discretion.
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<PAGE> 51
SECTION 9. MISCELLANEOUS
-------------
9.1 AMENDMENTS AND WAIVERS. The Borrowers and the Lender may, from
time to time, enter into written amendments, supplements or modifications for
the purpose of adding any provisions to this Agreement, the Note or any other
Loan Documents, or changing in any manner the rights of the Lender or the
Borrowers hereunder or thereunder, and the Lender may execute and deliver to the
Borrowers (by means of a single notice to CheckFree) a written instrument
waiving, on such terms and conditions as the Lender may specify in such
instrument, any of the requirements of this Agreement, the Note or any other any
Loan Document, or any Default or Event of Default and its consequences. Any such
waiver and any such amendment, supplement or modification shall be binding upon
the Borrowers and the Lender, and all future holders of the Note. In the case of
any waiver, each of the Borrowers and the Lender shall be restored to their
former positions and rights hereunder and under the outstanding Note, and any
Default or Event of Default waived shall be deemed to be cured and not
continuing, but no such waiver shall extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon.
9.2 NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing or by telecopy or
telex and, unless otherwise expressly provided herein, shall be deemed to have
been duly given or made when delivered by hand, or three days after being
deposited in the mail, certified or registered mail, postage prepaid (one
Business Day in the case of express mail or overnight courier service) or, in
the case of telecopy notice, when sender's telecopy machine confirms that all
pages have been sent and received, or, in the case of telex notice, when sent,
answerback received, addressed as follows, or to such address or other address
as may be hereafter notified by the respective parties hereto and any future
holders of the Note:
<TABLE>
<S> <C>
To all of the
Borrowers: CheckFree Corporation
4411 East Jones Bridge Street
Norcross, Georgia 30092
Attention: Mr. James S. Douglas
Telephone No.: (770) 840-1217
Facsimile No.: (770) 242-7935
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C>
and to: CheckFree Corporation
8275 North High Street
Columbus, Ohio 43235
Attention: Mr. William Buckham
Telephone No.: (614) 825-3000
Facsimile No.: (614) 825-3244
With Copy to: Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
Attention: Robert J. Tannous, Esq.
Telephone No.: (614) 227-1953
Facsimile No.: (614) 227-2100
If to the Lender: KeyBank National Association
88 East Broad Street
Columbus, Ohio 43215
Attention: Mr. Donald G. Beckman
Telephone No.: (614) 460-3425
Facsimile No.: (614) 460-3469
With Copy to: Vorys, Sater, Seymour and Pease
52 East Gay Street
Columbus, Ohio 43215
Attention: John B. Weimer, Esq.
Telephone No.: (614) 464-8343
Facsimile No.: (614) 464-6350
</TABLE>
All notices sent to CheckFree hereunder at the address specified in
this Section 9.2 shall be deemed to constitute notice to each and all of the
Borrowers for all purposes, and each of the Subsidiaries agrees that it shall be
deemed to have received copies of every notice hereunder which is sent to
CheckFree as set forth herein.
9.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Lender, of any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The rights, remedies, powers and privileges herein provided
to the Lender are cumulative and not exclusive of, and may be exercised
consecutively or concurrently with, any and all other rights, remedies, powers
and privileges otherwise provided to the Lender by law or in equity.
9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made hereunder and in any document, certificate or statement
delivered pursuant
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<PAGE> 53
hereto or in connection herewith shall survive the execution and delivery of
this Agreement, the Note and the other Loan Documents.
9.5 PAYMENT OF EXPENSES AND TAXES. Each of the Borrowers hereby
jointly and severally agrees:
(a) to pay or reimburse the Lender for all of its Out-of-Pocket
Expenses incurred in connection with the development, preparation and execution
of, and any amendment, supplement or modification to, this Agreement, the Note,
each other Loan Document and any other documents prepared in connection herewith
or therewith, and the consummation of the transactions contemplated hereby and
thereby;
(b) to pay or reimburse the Lender for all of its reasonable
costs and expenses incurred in connection with the enforcement or preservation
of any rights and remedies under this Agreement, the Note, each of the other
Loan Documents and any such other documents, including the fees and
disbursements of counsel to the Lender;
(c) to pay, indemnify and hold the Lender harmless from and
against any and all recording and filing fees which may be payable or determined
to be payable in connection with the execution and delivery of, or consummation
of any of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the Note, each of the other Loan Documents and any such other
documents; and
(d) to pay, indemnify, and hold the Lender harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses and disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance, administration and enforcement of this Agreement, the Note, each of
the other Loan Documents and any such other documents relating to this Agreement
(all the foregoing, collectively, the "Indemnified Liabilities"); provided, that
the Borrowers shall have no obligation hereunder with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of the
Lender.
9.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the Borrowers and the Lender, and all future holders
of the Note and their respective successors and assigns, except that none of the
Borrowers may assign or transfer any of its rights or Obligations under this
Agreement or any of the other Loan Documents without the prior written consent
of the Lender.
9.7 SETOFF. In addition to any rights and remedies of the Lender
provided by law, upon the occurrence of an Event of Default and acceleration of
the Obligations owing in connection with this Agreement, the Lender shall have
the right, without prior notice to any of the Borrowers or any other Person, any
such notice being expressly waived by each of the Borrowers to the extent
permitted by applicable law, to setoff and apply against any
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<PAGE> 54
Indebtedness, whether matured or unmatured, of any of the Borrowers or any
Subsidiary of any of the Borrowers, if any, to the Lender, any amount held by or
owing from the Lender to or for the credit or the account of such Borrower or
any such Subsidiary of such Borrower, if any (other than accounts for payroll or
employee withholding taxes) at, or at any time after, the happening of any of
the above mentioned events, and the aforesaid right of setoff may be exercised
by such Lender against any of the Borrowers or any Subsidiary, if any, of such
Borrower, or against any trustee in bankruptcy, debtor in possession, assignee
for the benefit of creditors, receiver, custodian or execution, judgment or
attachment creditor of such Borrower or against anyone else claiming through or
against such Borrower or such trustee in bankruptcy, debtor in possession,
assignee for the benefit of creditors, receiver, custodian or execution,
judgment or attachment creditor, notwithstanding the fact that such right of
setoff shall not have been exercised by the Lender prior to the making, filing
or issuance of, or service upon the Lender, or of notice of, any such petition,
assignment for the benefit of creditors; appointment or application for the
appointment of a receiver; or issuance of execution, subpoena, order or warrant.
The Lender agrees promptly to notify the Borrowers (by means of a single notice
to CheckFree), after any such setoff and application made by the Lender,
provided that the failure to give such notice shall not affect the validity of
such setoff and application. Notwithstanding anything contained herein to the
contrary, the Lender shall have no right of set-off, at common law, contractual,
or otherwise, at any time with respect to the Special Account.
9.8 COUNTERPARTS; EFFECTIVE DATE. This Agreement may be executed by
one or more of the parties to this Agreement on any number of separate
counterparts and all of said counterparts, taken together, shall be deemed to
constitute one and the same instrument. This Agreement shall become effective
upon the receipt by the Lender of executed counterparts (or facsimile or other
electronic confirmation of the execution of counterparts) of this Agreement by
each of the parties hereto.
9.9 GOVERNING LAW. This Agreement, the Note and the other Loan
Documents, and the rights and obligations of the parties under this Agreement,
the Note and the other Loan Documents, shall be governed by, and construed and
interpreted in accordance with, the local laws of the State of Ohio, except and
only to the extent precluded by other laws of mandatory application.
9.10 ENTIRE AGREEMENT AND HEADINGS. This Agreement, the Note and the
other Loan Documents contain the entire agreement between the Borrowers and the
Lender with respect to the subject matter hereof, and supersede any and all
prior or contemporaneous understandings and agreements, oral or written, between
the Borrowers and the Lender with respect to the subject matter hereof,
including any commitment, oral or written, which the Lender previously issued.
No representation, warranty, modification, alteration or agreement shall affect
this Agreement, unless made in writing and executed with the same formalities as
this Agreement. The paragraph and section headings hereof do not form a part of
this Agreement, but are for convenience only, and shall not limit or affect in
any way the meaning of any of its provisions.
9.11 EXTENSIONS AND RENEWALS. This Agreement shall be applicable to
all
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<PAGE> 55
extensions and renewals of any or all of the Obligations and the terms and
conditions of this Agreement shall apply, IN TOTO, to all of the Obligations.
9.12 RIGHT TO DEFEND. The Lender shall have the right, at the
Borrowers' sole cost and expense, to appear in or defend any action or
proceeding in which the Lender is named or joined, or otherwise purporting to
affect the rights or duties of the parties hereunder, and/or to recover from the
Borrowers all necessary costs and expenses (including reasonable attorneys'
fees) incurred in connection therewith.
9.13 NO OBLIGATION TO THIRD PARTIES. Any term, provision or
condition of this Agreement to the contrary notwithstanding, the Lender shall
not have and by the execution and acceptance of this Agreement hereby expressly
disclaims, any obligation or responsibility for the management, conduct or
operation of the business and affairs of any and all of the Borrowers. Any term
or condition hereof permitting the Lender to disburse funds, whether from the
proceeds of the Note or otherwise, or to take or refrain from taking any action
with respect to the Borrowers, or any security for the payment of the
Obligations, shall be deemed to be solely to permit the Lender to audit and
review the management, operation and conduct of the business and affairs of the
Borrowers, and to maintain and preserve the security interest and Lien granted
by the Borrowers to the Lender for the payment and performance of the
Obligations, and may not be relied upon by any other Person. The Borrowers
hereby jointly and severally indemnify and hold the Lender harmless from and
against any and all claims, costs, expenses or liabilities incurred or suffered
by the Lender as the result of any assertion or claim of any obligation or
responsibility of the Lender for the management, operation and conduct of the
business and affairs of any or all of the Borrowers, or any liability of the
Lender for the payment or performance of any Indebtedness or Obligation of the
Borrowers, except for any claims, costs, expenses or liabilities resulting from
the gross negligence or willful misconduct of the Lender or its employees.
9.14 NO JOINT VENTURE. The Lender, by entering into this Agreement
or by any action taken pursuant hereto, shall not be deemed to be a partner or
joint venturer with any or all of the Borrowers, or any other Person, and the
Borrowers hereby jointly and severally indemnify and hold the Lender harmless
from and against any and all claims, demands, losses, damages and expenses made
or incurred, resulting from or arising out of any such construction or alleged
construction of any agreement between any or all of the Borrowers and the
Lender.
9.15 WAIVER OF RIGHT TO TRIAL BY JURY. THE LENDER AND EACH OF THE
BORROWERS HEREBY VOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT OR OTHERWISE, BETWEEN THE LENDER AND ANY OR ALL OF THE BORROWERS ARISING
OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THE BORROWERS AND THE LENDER IN CONNECTION WITH THIS
AGREEMENT, ANY OTHER LOAN AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT EXECUTED
OR DELIVERED IN CONNECTION
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<PAGE> 56
HEREWITH OR THE TRANSACTIONS RELATED HERETO. THIS PROVISION IS A MATERIAL
INDUCEMENT TO THE LENDER TO ENTER INTO THE FINANCING TRANSACTION. IT SHALL NOT
IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE LENDER'S ABILITY TO PURSUE
ITS REMEDIES INCLUDING, BUT NOT LIMITED TO, ANY CONFESSION OF JUDGMENT OR
COGNOVIT PROVISIONS CONTAINED IN THIS AGREEMENT, THE NOTE, ANY OF THE OTHER LOAN
DOCUMENTS OR ANY OTHER DOCUMENT RELATED HERETO OR THERETO.
9.16 CONSENT TO JURISDICTION. AS A SPECIFICALLY BARGAINED FOR
INDUCEMENT FOR EACH OF THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT, IT IS
EXPRESSLY AGREED BY ALL PARTIES HERETO THAT ANY ACTION, SUIT OR PROCEEDING IN
EFFECT OF OR ARISING FROM OR OUT OF THIS AGREEMENT, ITS MAKING, VALIDITY OR
PERFORMANCE, SHALL BE PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND
ASSIGNS AT COLUMBUS, OHIO. EACH OF THE PARTIES HERETO CONSENTS TO AND SUBMITS TO
THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT COLUMBUS,
OHIO, AND HAVING JURISDICTION OVER THE SUBJECT MATTER HEREOF.
9.17 WARRANT OF ATTORNEY. Each of the Borrowers hereby authorizes
any attorney at law to appear in any court of record in the State of Ohio or any
other State or Territory of the United States, after any Obligations or
Indebtedness evidenced hereby or arising hereunder, or any part thereof, becomes
due, and to waive the issuance and service of process and confess judgment
against it in favor of any beneficiary of this Agreement, or its assigns, for
the amount then due, together with costs of suit and, thereupon, to release all
errors and waive all rights of appeal and stays of execution. The foregoing
warrant of attorney shall survive any judgment, and if any judgment be vacated
for any reason, any beneficiary of this Agreement, or its assigns, nevertheless,
may thereafter use the foregoing warrant of attorney to obtain an additional
judgment or judgments against any or all of the Borrowers.
9.18 JOINT AND SEVERAL OBLIGATIONS. All of the Obligations and
Indebtedness of the Borrowers hereunder and under the Note and all of the other
Loan Documents shall be and remain joint and several for all purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
WARNING--BY SIGNING THIS PAPER, YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE, AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY
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<PAGE> 57
WITH THE AGREEMENT OR ANY OTHER CAUSE.
BORROWERS:
CHECKFREE CORPORATION, a Delaware
corporation
By: /s/ John M. Stanton
---------------------------------
Its: Vice President & Treasurer
---------------------------------
CHECKFREE SOFTWARE SOLUTIONS, INC., a
Georgia corporation
By: /s/ John M. Stanton
---------------------------------
Its: Treasurer
---------------------------------
CHECKFREE SERVICES CORPORATION, a
Delaware corporation
By: /s/ John M. Stanton
---------------------------------
Its: Treasurer
---------------------------------
SECURITY APL, INC., an Illinois corporation
By: /s/ John M. Stanton
---------------------------------
Its: Treasurer
---------------------------------
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<PAGE> 58
SERVANTIS SYSTEMS, INC., a Georgia
corporation
By: /s/ John M. Stanton
---------------------------------
Its: Treasurer
--------------------------------
SERVANTIS SERVICES, INC., a Georgia
corporation
By: /s/ John M. Stanton
---------------------------------
Its: Treasurer
--------------------------------
LENDER:
KEYBANK NATIONAL ASSOCIATION, a
national banking association
By: /s/ Donald G. Bechman
---------------------------------
Its: Vice President
--------------------------------
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<PAGE> 1
EXHIBIT 10(ff)
CHECKFREE CORPORATION
INCENTIVE COMPENSATION PLAN
ESTABLISHMENT OF PLAN
1.1 Plan Adoption. CheckFree Corporation, a Delaware Corporation
("Corporation"), hereby adopts the CheckFree Incentive Compensation Plan
("Plan"), subject to the approval of the Corporation's stockholders. The Plan
shall become effective upon the approval of the stockholders of the Corporation
(the "Effective Date") and shall remain in effect for a period of 10 years from
such approval, subject to the right of the Board of Directors to amend or
terminate the Plan.
1.2 Purpose. The purpose of the Plan is to optimize the growth and
profitability of the Corporation by providing to key executive officers
incentives that encourage, recognize, and reward exceptional levels of
corporate, business unit, or individual performance. The Plan's intent is to
use award dollars as a clear communication vehicle linking the interests of
eligible key executive officers with the interests of the Corporation by
establishing a direct link between performance and incentive payments.
DEFINITIONS
The following terms used in the Plan shall have the meanings set forth
below.
2.1 "Associate" means any full-time, active employee of the
Corporation.
2.2 "Award" means, individually or collectively, a grant under this
Plan of an opportunity to earn a cash bonus payment upon the terms and
conditions set forth in the action of the Committee granting the Award.
2.3 "Change in Control" of the Corporation shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
(a) Any Person (other than a Person in control of
the Corporation as of the Effective Date of the Plan, or other than a trustee
or other fiduciary holding securities under an employee benefit plan of the
Corporation, or a corporation owned directly or indirectly by the stockholders
of the Corporation in substantially the same proportions as their ownership of
voting securities of the Corporation) becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing a majority of the
combined voting power of the Corporation's then outstanding securities; or
<PAGE> 2
(b) The stockholders of the Corporation approve:
(i) a plan of complete liquidation of the Corporation; or (ii) an agreement for
the sale or disposition of all or substantially all the Corporation's assets;
or (iii) a merger, consolidation, or reorganization of the Corporation with or
involving any other corporation, other than a merger, consolidation, or
reorganization that would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least a majority of the combined voting power of the
voting securities of the Corporation (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization.
However, in no event shall a "Change in Control" be deemed to
have occurred, with respect to a Participant, if the Participant is part of a
purchasing group which consummates the Change in Control transaction. A
Participant shall be deemed "part of a purchasing group" for purposes of the
preceding sentence if the Participant is an equity participant or has been
identified as a potential equity participant in the purchasing company or group
(except for: (i) passive ownership of less than three percent (3%) of the stock
of the purchasing company; or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not significant, as determined
prior to the Change in Control by a majority of the nonemployee continuing
directors).
For purposes of this definition of Change in Control,
"Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and used in
Section 13(d) and 14(d) thereof, including a "group" as defined in Section
13(d) thereof, and "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
2.5 "Committee" has the meaning set forth in Section 3.1 herein.
2.6 "Corporation" means CheckFree Corporation, a Delaware corporation,
together with any parent, subsidiary or successor thereto.
2.7 "Covered Employee" means a Participant who, as of the date of an
Award is earned or paid, as applicable, is one of the group of "covered
employees," as defined in the regulations under Code Section 162(m), or any
successor statute.
2.8 "Director" means any individual who is a member of the Board of
Directors of the Corporation.
2.9 "Disability" means any injury of the body or any disorder of the
body or mind which renders the Participant unable to perform the material and
substantial duties of his regular employment by the Corporation at the time of
his termination of employment with the Corporation. The Corporation's
determination that a termination of employment was not due to Disability may
- 2 -
<PAGE> 3
be disputed by a Participant for purposes of determining any Award payable
under Section 5.4 of this Plan upon written notice to the Corporation's Chief
Financial Officer within 30 days after the Participant's termination of
employment. If so disputed, the Corporation will promptly select a physician,
the Participant will promptly select a physician, and the physicians so
selected will select a third physician ("Independent Physician") who will make
a binding determination of Disability. The Participant will make himself
available for and submit to examinations by such physicians as may be directed
by the Corporation. Failure of the Participant to submit to any examination or
failure of the Independent Physician to render his determination within 90 days
of the date of the notice that the Participant disputed the Corporation's
determination shall constitute acceptance of the Corporation's determination as
to Disability.
2.10 "Effective Date" shall have the meaning ascribed to such term in
Section 1.1 hereof.
2.11 "Officer" means any Associate elected as an officer of the
Corporation by the Board of Directors.
2.12 "Participant" means any Associate who has outstanding an Award
granted under the Plan.
2.13 "Performance-based Exception" means the performance-based
exception from the tax deductibility limitations of Code Section 162(m).
2.14 "Parent" means any corporation, partnership, joint venture or
other entity which has a majority voting interest in the Corporation.
2.15 "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Corporation has a majority voting interest.
ADMINISTRATION
3.1 The Committee. The Plan will be administered by the Stock Option
and Compensation Committee ("Committee") of the Board of Directors of the
Corporation composed of two or more "outside directors" within the meaning of
Code Section 162(m).
3.2 Authority. The Committee shall have the full power to select
Officers who shall participate in the Plan; determine the size, terms and
conditions of Awards in a manner consistent with the Plan; interpret and
construe the Plan; and adopt such rules, regulations, and procedures for the
administration of the Plan as the Committee deems necessary or advisable.
3.3 Decisions Binding. The Committee's interpretations of the Plan, and
all decisions and determinations made by the Committee, shall be conclusive and
binding on all parties, including
- 3 -
<PAGE> 4
the Corporation and any Participant or other person claiming a right to payment
with respect to an Award under the Plan.
ELIGIBILITY
4.1 Officers; Covered Officers. All persons deemed by the Committee to
be key executive Officers are eligible to be granted Awards under the Plan. Not
later than 90 days after the beginning of each fiscal year of the Corporation,
the Committee will identify those Officers, referred to herein as "Covered
Officers," whose compensation for that year is anticipated to be affected by
the Code Section 162(m) limitation on the deductibility of compensation and
assign each such Covered Officer to a separate Participant group for the
purposes of defining their Awards under the Plan.
4.2 Partial Year Participation. Persons who become key executive
Officers of the Corporation after the date of the Committee's initial grant of
Awards but prior to the end of the fiscal year, whether due to promotion,
transfer or initial commencement of employment with the Corporation, may be
granted Awards by the Committee on a partial year basis. In each such case, the
Committee shall specify the terms and conditions of such Award, including any
pro rata allocations of the performance measures to such partial year
Participants.
AWARDS
5.1 Performance Measures. For each fiscal year, the Committee shall
first establish written annual performance goals based on any one or more of
the following objective performance measures: revenues, market share, income or
loss from operations, income or loss before taxes, income or loss before
extraordinary items, income or loss before taxes and extraordinary items, net
income or loss, net income or loss per common share, cash flow, price of the
Corporation's common stock, shareholder return, return on equity, return on
investment, return on capital, economic profit, or economic value added.
Subject to the terms of the Plan, each of the performance goals may be defined
by the Committee on a corporate, affiliate, business unit or individual basis,
and may include or exclude specified extraordinary or non-recurring items and
may be measured before or after applicable taxes. Each performance goal shall
have a minimum performance standard below which no payments will be made. The
performance goals may be based on an analysis of historical performance and
growth expectations, financial results of other comparable businesses, and
progress towards achieving the Corporation's long-range strategic plan for the
business. The performance goals and determination of results shall be based
entirely on objective measures for all Covered Officers.
5.2 Grant of Performance Awards. Performance goals based on the
preestablished performance measures and the potential Awards that will be
payable upon attainment of those performance goals, expressed as a percentage
of base salary as of July 1 of each fiscal year, will be established in writing
by the Committee not later than 90 days after the commencement of the
- 4 -
<PAGE> 5
fiscal year to which the goals relate. The target incentive compensation
percentage for each selected Participant will be based on the level and
functional responsibility of his or her position, size of the business for
which the Participant is responsible, and competitive practices. Performance
goals may differ for Awards granted to any one Participant or to different
Participants. The Committee may determine that any Award shall be based on
more than one performance measure. The Committee may increase individual awards
based upon extraordinary circumstances; provided, however, the Committee may
not use any discretion to modify award results for Covered Officers except as
permitted under Code Section 162(m).
5.3 Award Agreements. The Committee may require that any Award be
evidenced by a written agreement which may contain such terms and conditions as
the Committee may require. In the event of any conflict between such Award
agreements and the Plan, however, the terms of the Plan shall control.
5.4 Payment of Awards. Unless payment is deferred as provided in
Section 5.6, Awards will be payable in cash annually after the date the
Corporation's audited financial statements have been certified by the
Corporation's auditor for the relevant fiscal year of computation; provided
that awards will be paid to Covered Officers only after the Committee has
certified in writing in the minutes of a committee meeting or otherwise that
the performance goals applicable to Covered Officers have been satisfied. No
Award will be paid to any Participant who is not employed by the Corporation on
the last day of the fiscal year to which the Award relates; provided, however,
the Participant shall be paid in accordance with Sections 6.1 and 6.2 in the
event that a Change in Control of the Corporation has occurred during the
fiscal year; provided further, in the event of a Participant's death or a
termination of a Participant's employment by the Corporation prior to the last
day of the fiscal year by reason of Disability, the Participant or his estate
shall be paid, at the same time that other Awards are paid, an amount based
upon the actual achievement of the relevant performance objectives for that
fiscal year, pro rated for the number of days that elapsed within the fiscal
year prior to such termination of employment. Awards are subject to income and
other payroll tax withholding by the Corporation.
5.5 Maximum Award. The annual Award payable to any Participant under
the Plan will not exceed $2 million.
5.6 Deferrals. The Committee may permit a Participant to defer such
Participant's receipt of payment of an Award that would otherwise be due to the
Participant. In any such case, the Committee shall, in its sole discretion,
determine the rules and procedures for such deferral.
5.7 Adjustment of Awards Upon the Occurrence of Certain Unusual or
Non-Recurring Events. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual
or non-recurring events (including, without limitation, acquisitions or
dispositions of assets or businesses) affecting the Corporation or the
financial statements of the Corporation or of changes in applicable laws,
regulations, or accounting principles, whenever the Committee determines that
such adjustments are appropriate in order to prevent
- 5 -
<PAGE> 6
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan; provided, however, the Committee may not use any
discretion to modify award results for Covered Officers except as permitted
under Code Section 162(m).
CHANGE IN CONTROL
6.1 Pro Rata Awards. In the event of a Change in Control of the
Corporation, there shall be paid out to Participants an amount based upon an
assumed achievement of the relevant performance objectives at the 100% target
level for the fiscal year, pro rated for the number of days that elapsed within
the fiscal year prior to the Change in Control.
6.2 Payment. Not later than 30 days following the effective date of
the Change in Control, the pro rata payments provided in Section 6.1 hereof
shall be paid to all Participants of the Plan who are employed by the
Corporation on the day immediately preceding the day when the Change in Control
becomes effective, and following such payment, the Corporation or any successor
thereto shall have no further obligations under this Plan.
6.3 Pooling of Interests Accounting. Notwithstanding any other
provision of the Plan to the contrary, in the event that the consummation of a
Change in Control is contingent on using pooling of interests accounting
methodology, the Board may take any action reasonably necessary to preserve the
use of pooling of interests accounting.
MISCELLANEOUS
7.1 Guidelines. From time to time the Committee may adopt
written guidelines for implementation and administration of the Plan.
7.2 No Right to Awards. No Officer or other person shall have the right
to be selected to receive an Award under the Plan or, if so selected, to be
selected to receive a future Award.
7.3 Non-Funded Plan. The Corporation will not be required to establish
any special or separate fund or make any other segregation of assets to assure
the payment of any award under the Plan, and all Participants shall be general
creditors with respect to any Awards payable to them.
7.4 Non-Transferability of Awards. No Award granted under the Plan may
be sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution.
7.5 Expenses of Plan. The costs and expenses of administering the Plan
will be borne by the Corporation.
- 6 -
<PAGE> 7
7.6 Limitation on Rights Conferred. Nothing in the Plan, in any Award,
or in any action taken under the Plan shall confer on any Participant the right
to become or continue to be an employee of the Corporation or interfere in any
way with the right of the Corporation to terminate such Participant's
employment at any time.
7.7 Governing Law. The validity, construction and effect of the Plan,
any rules and regulations under the Plan, and any awards made under the Plan
shall be determined in accordance with the laws of the state of Delaware
without giving effect to principles of conflicts of laws, and any applicable
federal law.
7.8 Successors. All obligations under the Plan shall be binding upon
and inure to the benefit of any successor of the Corporation, whether such
successor is the result of a direct or indirect purchase of all or
substantially all of the business and assets of the Corporation or a merger,
consolidation, or reorganization, or otherwise.
7.9 Severability. In the event that any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
EFFECTIVE DATE; AMENDMENT; TERMINATION
8.1 Effective Date. The Plan will become effective upon approval by a
majority of the votes cast by the stockholders of the Corporation, and will
relate to performance beginning with the first fiscal year of the Corporation
commencing after stockholder approval.
8.2 Amendment; Termination. The Corporation may at any time terminate
or, from time to time, amend the Plan by action of the Board of Directors or by
action of the Committee without stockholder approval unless such approval is
required to satisfy the applicable provisions of Code Section 162(m) or other
relevant laws. The Corporation and the Committee may amend the Plan and take
such other action as they may deem necessary or appropriate to comply with Code
Section 162(m) and regulations issued thereunder. No amendment or termination
of the Plan shall, without the written consent of the Participant, materially
and adversely affect the rights of the Participant under any previously granted
and outstanding Award.
8.3 Code Section 162(m) Compliance. In the event that changes are made
to Code Section 162(m) to permit greater flexibility with respect to any Award
available under the Plan, the Committee may, subject to Section 8.2, make any
adjustments it deems appropriate. If the applicable tax or securities laws
change to permit the Committee discretion to alter the governing performance
goal measures set forth in Section 5.1 without obtaining stockholder approval
of such change, the Committee shall have sole discretion to make such changes
without obtaining stockholder approval. At all times when Code Section 162(m)
is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m); provided, however, that
- 7 -
<PAGE> 8
in the event the Board of Directors of the Corporation determines that such
compliance is not desired with respect to any Award available for grant under
the Plan, then compliance with Code Section 162(m) will not be required.
CHECKFREE CORPORATION
By: /s/ Peter J. Kight
-----------------------------------------------------
Peter J. Kight, President and Chief Executive Officer
Adopted: September 15, 1997
- 8 -
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company
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 Services Corporation, a Delaware corporation;
CheckFree Investment Corporation, a Delaware corporation; and
RCM Systems, Inc., a Wisconsin corporation.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-98440, 33-98444, 33-98442, 33-98446, 333-21799 and 333-21795) on Form
S-8 and the Registration Statement (No. 333-24079) on Form S-3 of CheckFree
Corporation of our report dated August 8, 1997, except for Note 17 as to which
the date is August 29, 1997, appearing in the Annual Report on Form 10-K of
CheckFree Corporation for the year ended June 30, 1997.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
September 25, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each director and/or officer of CheckFree Corporation (the
"Corporation") whose signature appears below hereby appoints Peter J. Kight,
Mark A. Johnson, and Curtis A. Loveland as the undersigned's attorneys or any
of them individually as the undersigned's attorney, to sign, in the
undersigned's name and behalf and in any and all capacities stated below, and
to cause to be filed with the Securities and Exchange Commission (the
"Commission"), the Corporation's Annual Report on Form 10-K (the "Form 10-K")
for the fiscal year ended June 30, 1997, and likewise to sign and file with the
Commission any and all amendments to the Form 10-K, and the Corporation hereby
also appoints such persons as its attorneys-in-fact and each of them as its
attorney-in-fact with like authority to sign and file the Form 10-K and any
amendments thereto granting to each such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or the undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 8th day of
August, 1997.
Signature Title
/s/ Peter J. Kight Chairman of the Board of Directors,
- ---------------------------- President, and Chief
Peter J. Kight Executive Officer
/s/ Mark A. Johnson Vice Chairman,
- ----------------------------- Corporate Development and
Mark A. Johnson Marketing, Director
/s/ James S. Douglass Executive Vice President and
- ----------------------------- Chief Financial Officer
James S. Douglass
/s/ Gary A. Luoma, Jr. Vice President,
- ----------------------------- Chief Accounting Officer and
Gary A. Luoma, Jr. Assistant Secretary
/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
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