<PAGE> 1
As filed with the Securities and Exchange Commission on April 18, 2000
Registration No. 333-32644
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CHECKFREE HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7374 58-2360335
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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4411 East Jones Bridge Road
Norcross, Georgia 30092
(678) 375-3000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
Peter F. Sinisgalli
President and Chief Operating Officer
CheckFree Holdings Corporation
4411 East Jones Bridge Road
Norcross, Georgia 30092
(678) 375-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies of Correspondence to:
Robert J. Tannous, Esq. Hugh Douglas Camitta, Esq.
Porter, Wright, Morris & Arthur LLP Pepper Hamilton LLP
41 South High Street 100 Renaissance Center, 36th Floor
Columbus, Ohio 43215 Detroit, Michigan 48243
(614) 227-1953 (313) 393-7454
------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
----------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of
Securities to be Proposed Maximum Proposed Maximum Amount of
Registered Amount to be Registered Offering Price Per Unit(1) Aggregate Offering Price(1) Registration Fee(1)
<S> <C> <C> <C> <C>
Common stock, $.01 par
value................. 8,161,933(2) $30.63(2) $250,000,000 $11,506
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933. At December 31, 1999,
BlueGill Technologies, Inc. had an accumulated capital deficit. Pursuant to
Section 6(b) and Rule 457(f)(2), the registration fee was calculated based
on one-third of the aggregate par values on December 31, 1999 of 9,186,799
shares of common stock, $.001 par value (which includes 4,302,799 issuable
in connection with stock options and warrants which are exercisable prior to
the merger), 12,503,301 shares of Series A Preferred Stock, $.001 par value,
and 12,825,651 shares of Series B Preferred Stock, $.001 par value, of
BlueGill Technologies, Inc. to be cancelled in the merger.
(2) The number of shares to be registered and the maximum offering price per
share have been adjusted to reflect the current market price of our common
stock.
<PAGE> 2
BLUEGILL TECHNOLOGIES, INC.
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
BlueGill's board of directors unanimously approved a merger agreement among
CheckFree Holdings Corporation, CheckFree Acquisition Corporation IV, and
BlueGill Technologies, Inc., and has determined the merger to be fair to you and
in your best interests. Your consent, as a stockholder of BlueGill, is now
needed to adopt the merger agreement. In addition, the consent of BlueGill's
preferred stockholders not to treat the merger as a liquidation is being
requested. Following the merger, the BlueGill stockholders will collectively own
less than 6% of the CheckFree common stock.
In the merger, based on CheckFree's stock price on the date of the
announcement of the merger, each share of your BlueGill common stock or BlueGill
preferred stock would have been exchanged for approximately 0.09286 shares of
CheckFree common stock.
Based on the average closing price of CheckFree Corporation's common stock
for the three trading days immediately preceding March 15, 2000, which was
$87.75, the equivalent value of one share of BlueGill stock would be $8.15. At
this price 3,205,128 shares of CheckFree common stock will be issued. The number
of diluted shares of BlueGill common stock available for conversion was
34,515,751. This amount includes all of BlueGill's outstanding common stock, all
outstanding preferred stock on an as converted basis as well as all vested
options and warrants on a fully diluted basis. The precise number of shares to
be converted will be unknown until closing.
Additionally, the precise number of shares of CheckFree common stock you
will receive in the merger is based on the weighted average intraday trading
price of CheckFree common stock on the Nasdaq National Market during the three
days immediately preceding the closing of the merger. Specifically, if the
average trading price of CheckFree common stock is:
o Greater than $101.40 per share, CheckFree will issue the number of
shares of its common stock equal to $325,000,000 divided by its
average trading price;
o $78.00 or more and is equal to or less than $101.40 per share,
CheckFree will issue a total of 3,205,128 shares of its common stock
to BlueGill's stockholders;
o $50.00 or more but less than $78.00 per share, CheckFree will issue
the number of shares of its common stock equal to $250,000,000 divided
by its average trading price;
o Less than $50.00 per share, CheckFree exercises its right to terminate
the merger agreement, and BlueGill provides CheckFree with a
reinstatement notice, CheckFree will issue a total of 5,000,000
shares; or
o Less than $50.00 per share, CheckFree does not exercise its right to
terminate the merger agreement, CheckFree will issue the number of
shares of its common stock equal to $250,000,000 divided by its
average trading price.
The effect of these price thresholds on the BlueGill balance sheet, as
adjusted for purchase accounting, with respect to the goodwill acquired, the
assets acquired and the liabilities acquired will be as follows:
o If the CheckFree share price is in excess of $101.40:
(in thousands)
Goodwill acquired $280,065
Assets acquired 343,724
Liabilities acquired 21,708
o If the CheckFree share price is between $78.00 and $101.40:
(in thousands, except share price)
$78.00 $101.40
-------- --------
Goodwill acquired $253,309 $253,309
Assets acquired 316,968 316,968
Liabilities acquired 21,708 21,708
o If the CheckFree share price is between $50.00 and $78.00:
(in thousands, except share price)
$50.00 $78.00
-------- --------
Goodwill acquired $205,065 $280,065
Assets acquired 268,724 268,724
Liabilities acquired 21,708 21,708
o If the CheckFree price per share is below $50.00, CheckFree elects to
terminate, and BlueGill elects to accept 5 million shares, then for
every $1.00 lower than the $50.00 price goodwill acquired will decline
by $5.0 million from the $205.1 million level, assets acquired will
decline by $5.0 million from the $268.7 million level and liabilities
acquired will remain constant at the $21.7 million level.
o If the CheckFree price per share is below $50.00 and CheckFree does
not elect to terminate, then key components remain constant as
follows:
(in thousands)
Goodwill acquired $280,065
Assets acquired 268,724
Liabilities acquired 21,708
CheckFree common stock is listed on the Nasdaq National Market under the
trading symbol "CKFR." On April 17, 2000, CheckFree common stock closed at
$30.63 per share. Since BlueGill is not publicly traded, it is difficult for
you to assess the value of the BlueGill stock you own. Based on the current
trading price for CheckFree common stock, the total consideration to be paid to
the BlueGill stockholders equals approximately $259,971,000.
The merger cannot be completed unless the holders of:
o Two-thirds of the then outstanding shares of Series A preferred stock;
o Either three-fourths of the outstanding shares of Series B preferred
stock or a majority of the outstanding shares of Series B preferred
stock, including at least one "Series B Institutional Investor;" and
o A majority of the common stock and the preferred stock, voting
together, with the preferred stock voting on an as if converted basis;
vote to approve the merger agreement and the merger. Each holder of a share of
BlueGill common stock and BlueGill preferred stock will be entitled to cast one
vote per share.
Regardless of whether the merger is treated as a liquidation:
o the CheckFree common stock to be issued in the merger will not contain
any of the rights, preferences and privileges which BlueGill preferred
stock now contains, including liquidation preferences, redemption
rights and class voting; and
o the form and amount of consideration receivable by a BlueGill
preferred stockholder will be the same.
This information statement/prospectus provides you with detailed
information concerning CheckFree, BlueGill and the merger. Please give all of
the information contained in the information statement/prospectus your careful
attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE
SECTION ENTITLED "RISK FACTORS" ON PAGE 12 OF THIS INFORMATION
STATEMENT/PROSPECTUS.
To expedite the transaction, your approval is being solicited by written
consent. Please take the time to vote on the merger by signing, dating and
returning by overnight courier or mail your consent.
THE BLUEGILL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU APPROVE THE
MERGER AND MERGER AGREEMENT AND APPROVE THAT THE MERGER NOT BE TREATED AS A
LIQUIDATION UNDER BLUEGILL'S CERTIFICATE OF INCORPORATION. We appreciate your
interest in BlueGill and consideration of this matter.
Harold N. Davis
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement/prospectus is dated as of April 18, 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Table of Contents..................................... 2
Summary............................................... 3
Recent Developments................................... 8
Risk Factors.......................................... 9
Forward-Looking Statements............................19
Where You Can Find More Information...................20
Comparative Per Share Information.....................21
Market Price Data; Dividend Policy....................23
Selected Historical Consolidated Financial
Data of CheckFree..................................24
Selected Historical Consolidated Financial
Data of BlueGill...................................26
Selected Historical Consolidated Financial
Data of the TransPoint Entities....................27
Unaudited Pro Forma Combining Financial Data of
Checkfree, BlueGill and the TransPoint Entities.....28
Unaudited Pro Forma Condensed Combining
Financial Information .............................30
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes to
CheckFree, BlueGill and the TransPoint Entities....31
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes
to CheckFree and BlueGill..........................38
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes to
CheckFree and the TransPoint Entities..............48
The Merger............................................55
Background of the Merger...........................55
Approval by BlueGill Stockholders..................56
BlueGill's Reasons for the Merger;
Recommendation of BlueGill's
Board of Directors...............................58
Report of BlueGill's Financial Advisor.............60
The Merger Agreement...............................62
Exchange of Certificates...........................66
Appraisal Rights...................................66
Conflicts of Interest of Directors and Officers of
BlueGill in the Merger...........................69
Nasdaq Listing.....................................70
Regulatory Approvals...............................70
Accounting Treatment...............................70
Income Tax Consequences............................70
U.S. Federal Income Tax............................70
Canadian Federal Income Tax........................71
Resales by Affiliates..............................71
The TransPoint Acquisition............................72
CheckFree Holdings Corporation........................81
General............................................81
Electronic Commerce Industry Background............82
The Electronic Solution............................84
The CheckFree Advantage............................84
Our Business Strategy..............................85
Products and Services..............................87
Competition........................................90
Sales, Marketing and Distribution..................90
Customer Care and Technical Support................91
Remittances........................................92
Technology.........................................93
Research and Development...........................94
Government Regulation..............................94
Proprietary Rights.................................95
Employees..........................................97
Management.........................................97
Committees of the Board of Directors..............101
Director Compensation.............................101
Executive Compensation............................101
Compensation Committee Interlocks
and Insider Participation.......................103
Stock Option Plans................................103
Security Ownership of Principal Stockholders
and Management..................................108
Certain Relationships and Related
Transactions....................................110
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................111
Description of CheckFree Securities...............131
CheckFree Acquisition.............................149
BlueGill Technologies, Inc...........................150
General...........................................150
Electronic Commerce Industry Background...........150
The Electronic Solution...........................151
Products..........................................152
Technology........................................152
Competition.......................................152
Sales, Marketing and Distribution.................153
Research and Development..........................153
Employees.........................................153
Trading of BlueGill Securities....................153
Stock Ownership...................................153
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................153
Comparison of Rights of CheckFree
Stockholders and BlueGill Stockholders............160
Experts..............................................163
Legal Maters.........................................163
CheckFree Financial Statements.......................F-1
BlueGill Financial Statements.......................F-36
TransPoint Financial Statements.....................F-54
Appendices
Appendix A - Agreement and Plan of Merger............A-1
Appendix B - Section 262 of the Delaware General
Corporation Law....................................B-1
Appendix C - BlueGill Action by Written Consent of
Stockholders Without a Meeting.....................C-1
</TABLE>
2
<PAGE> 4
SUMMARY
This section summarizes selected information about the merger from this
information statement/prospectus. To understand the merger fully, we strongly
encourage you to read carefully this entire information statement/ prospectus,
including the financial statements and the appendices, and the documents we have
filed with the Securities and Exchange Commission. For information on how to
obtain the documents that we have filed with the Commission, see "Where You Can
Find More Information" on page 24.
THE COMPANIES
CHECKFREE HOLDINGS CORPORATION
4411 EAST JONES BRIDGE ROAD
NORCROSS, GEORGIA 30092
(678) 375-3000
WWW.CHECKFREE.COM
The reference to our website address above does not constitute
incorporation by reference of the information contained on our website, so you
should not consider any information on this website to be a part of this
information statement/prospectus.
We are the leading provider of electronic billing and payment services. We
operate our business through three independent but inter-related divisions:
o Electronic Commerce;
o Investment Services; and
o Software.
Our Electronic Commerce business provides services that allow consumers to:
o receive electronic bills through the Internet;
o pay bills received electronically or in paper form to anyone;
o perform ordinary banking transactions, including balance inquiries,
transfers between accounts and on-line statement reconciliations.
Our Investment Services business offers portfolio accounting and
performance measurement services to investment advisors, brokerage firms, banks
and insurance companies and financial planning application software to financial
planners.
Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions.
CHECKFREE ACQUISITION CORPORATION IV
4411 EAST JONES BRIDGE ROAD
NORCROSS, GEORGIA 30092
(678) 375-3000
CheckFree Acquisition was incorporated in Delaware in December 1999, and is
our wholly owned subsidiary formed for the purpose of facilitating the merger.
BLUEGILL TECHNOLOGIES, INC.
935 TECHNOLOGY DRIVE
ANN ARBOR, MICHIGAN 48108
(734) 205-4100
WWW.BLUEGILL.COM
The reference to BlueGill's website address above does not constitute
incorporation by reference of the information contained on that website, so you
should not consider any information on this website to be a part of this
information statement/prospectus.
BlueGill Technologies, Inc. was incorporated in Delaware on September 20,
1996. BlueGill provides software used for Internet billing and statement
delivery which enables customers to:
o install and launch an electronic bill presentment product;
o send e-mail notifications and present electronic bills through the
Internet;
o connect to a variety of bill aggregators and payment methods; and
o establish interactive on-line relationships with customers.
This proprietary software converts traditional paper-based bills and statements
into electronic bills and statements which can be delivered over the Internet.
BlueGill currently markets its products directly to individual bill
providers, statement providers, and to companies that deliver Internet bills for
third party customers. BlueGill's software products are targeted primarily at
large corporate billers, including telephone companies, utilities, insurance
companies and financial services institutions. BlueGill has in excess of 35
customers delivering Internet bills and statements on their own behalf.
3
<PAGE> 5
In addition, BlueGill has a number of resellers that both sell and support
BlueGill's products in the United States and internationally.
Following completion of the merger BlueGill will continue offering its
customers the opportunity to deliver bills and other documents to a variety of
Internet portals and banks.
THE MERGER
We have included a copy of the merger agreement in this information
statement/prospectus as Appendix A. We encourage you to read the merger
agreement because it is the legal document that governs the merger.
CheckFree Acquisition will merge with and into BlueGill, and BlueGill will
continue as the surviving corporation. The following is an illustration of the
proposed merger:
[FLOW CHART]
As consideration for the merger, each outstanding share of BlueGill's
common stock, Series A preferred stock and Series B preferred stock will convert
into the right to receive fully paid and non-assessable shares of our common
stock. The amount of the consideration you will receive in the merger is based
on a value negotiated by the parties and may not reflect the true value of your
BlueGill stock.
The parties determined the value of the consideration based on:
o internal financial analyses;
o valuation's of public companies that have businesses similar to
BlueGill's business; and
o discussions that BlueGill's management had with various investment
banking firms while exploring a possible initial public offering.
We will issue shares of our common stock to BlueGill stockholders as merger
consideration, the number of which will be based on the weighted average
intraday trading price of our common stock on the Nasdaq National Market during
the three days immediately before the closing date of the merger. The number of
shares of our common stock that you will receive for each share of BlueGill
capital stock that you own will equal the number of shares of our common stock
divided by the number of diluted shares of BlueGill common stock computed
according to the merger agreement.
Specifically, if the weighted average intraday trading price of our common
stock is:
o Greater than $101.40 per share, we will issue the number of shares of
our common stock equal to $325,000,000 divided by our average trading
price;
o $78.00 or more and is equal to or less than $101.40 per share, we will
issue a total of 3,205,128 shares of our common stock to BlueGill's
stockholders;
o $50.00 or more but less than $78.00 per share, we will issue the
number of shares of our common stock equal to $250,000,000 divided by
our average trading price;
o Less than $50.00 per share, we exercise our right to terminate the
merger agreement, and BlueGill provides us with a reinstatement
notice, we will issue a total of 5,000,000 shares; or
o Less than $50.00 per share, we do not exercise our right to terminate
the merger agreement, we will issue the number of shares of our common
stock equal to $250,000,000 divided by our average trading price.
The effect of these price thresholds on the BlueGill balance sheet, as
adjusted for purchase accounting, with respect to the goodwill acquired, the
assets acquired and the liabilities acquired will be as follows:
o If the CheckFree share price is in excess of $101.40:
(in thousands)
Goodwill acquired $280,065
Assets acquired 343,724
Liabilities acquired 21,708
o If the CheckFree share price is between $78.00 and $101.40:
(in thousands, except share price)
$78.00 $101.40
-------- --------
Goodwill acquired $253,309 $253,309
Assets acquired 316,968 316,968
Liabilities acquired 21,708 21,708
o If the CheckFree share price is between $50.00 and $78.00:
(in thousands, except share price)
$50.00 $78.00
-------- --------
Goodwill acquired $205,065 $280,065
Assets acquired 268,724 268,724
Liabilities acquired 21,708 21,708
o If the CheckFree price per share is below $50.00, CheckFree elects to
terminate, and BlueGill elects to accept 5 million shares, then for
every $1.00 lower than the $50.00 price goodwill acquired will decline
by $5.0 million from the $205.1 million level, assets acquired will
decline by $5.0 million from the $268.7 million level and liabilities
acquired will remain constant at the $21.7 million level.
o If the CheckFree price per share is below $50.00 and CheckFree does
not elect to terminate, then key components remain constant as
follows:
(in thousands)
Goodwill acquired $280,065
Assets acquired 268,724
Liabilities acquired 21,708
Example:
The following table provides examples of the proposed exchange ratio for each
share of BlueGill stock for various assumptions about our weighted average
intraday trading price and assuming BlueGill has 34,515,751 shares of diluted
common stock to be exchanged in the merger:
<TABLE>
<CAPTION>
3-DAY AVERAGE STOCK PRICE EXCHANGE RATIO
------------------------- --------------
<S> <C>
$103.00 0.09142
$ 90.00 0.09286
$ 65.00 0.11143
$ 45.00 /
Termination Exercise 0.14486
$ 45.00 /
No Termination Exercise 0.16096
</TABLE>
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<PAGE> 6
If the merger is completed, based on CheckFree's stock price on the date of
the announcement of the merger you will receive approximately 0.09286 of a share
of CheckFree common stock for each share of BlueGill common stock or BlueGill
preferred stock you own. Based on the average closing price of CheckFree's
common stock for the three trading days immediately preceding March 15, 2000,
which was $87.75, the equivalent value of one share of BlueGill common stock
would be $8.15.
The exact number of shares of CheckFree common stock to be issued for each
share of BlueGill common stock or BlueGill preferred stock is not fixed and will
be adjusted based upon changes in the value of our common stock. AS A RESULT,
THE VALUE OF THE SHARES YOU RECEIVE IN THE MERGER WILL NOT BE KNOWN AT THE TIME
YOU VOTE ON THE MERGER AND MAY GO UP OR DOWN AS THE MARKET PRICE OF OUR COMMON
STOCK GOES UP OR DOWN. BlueGill is not permitted to "walk away" from the merger
or resolicit the consent of its stockholders based solely on changes in the
value of CheckFree common stock. Currently, we anticipate closing the merger
three business days after the receipt of the necessary consents.
Example:
On April [__], 2000, the most recent practicable date prior to the filing of
this information statement/prospectus, you would have been entitled to receive
_______ shares of CheckFree common stock for each share of BlueGill common stock
and BlueGill preferred stock you own. The actual exchange ratio, however, will
depend on the value of the CheckFree common stock prior to closing, and may be
more or less than the value given in this example. During the past 90 days, the
per share price of CheckFree common stock has traded as follows:
<TABLE>
<CAPTION>
INTRADAY
WEIGHTED
HIGH LOW AVERAGE
------- ------ -------
<S> <C> <C>
$125.63 $28.50 $[ ]
</TABLE>
We urge you to obtain current price quotations for CheckFree common stock.
If you would like an updated exchange ratio for the merger, you can call
(800) 964-4552.
ESCROW
10% of the shares of the CheckFree common stock that you will receive in
the merger will be held in escrow by Fifth Third Bank, as escrow agent, to pay
indemnification claims under the merger agreement. We may make a claim for
indemnification for any losses, claims, damages or expenses we may incur arising
from a breach or misrepresentation of any representations or warranties made by
BlueGill in the merger agreement. We cannot make a claim for indemnification
until our total claims exceed $1 million, and thereafter we are entitled to a
dollar for dollar offset against the escrow.
The terms of the escrow are governed by an escrow agreement, a copy of
which is attached as an exhibit to the merger agreement. Under the terms of the
escrow agreement, a committee of five BlueGill stockholders, Harold N. Davis,
Robert D. Pavey, Mark Siegel, John McIlwraith, and Thomas C. Kinnear, will act
as shareholders' agent to authorize the payment of any indemnification claims
out of the escrow. Any disputes between us and the shareholders' agent will be
settled through arbitration.
To the extent not needed to pay any claims, the escrowed shares will be
released and delivered to you upon the earlier of:
o one year after the closing date of the merger; or
o completion of an audit on the merged companies and our filing of our
Annual Report on Form 10-K with the Securities and Exchange Commission
for the first fiscal year after the closing date of the merger.
IN THE WORST CASE SCENARIO, YOU WILL ONLY RECEIVE 90% OF THE MERGER
CONSIDERATION.
REASONS FOR THE MERGER
BlueGill's board of directors believes that the merger is in your best
interests because it will produce the following benefits:
o The opportunity for synergies between BlueGill and CheckFree,
CheckFree's market leadership and growth potential and the
attractiveness of the terms of the merger to you.
o The CheckFree common stock that you will acquire in the merger will be
publicly listed on the Nasdaq National Market.
o The merger is structured to qualify as a tax-free exchange.
o CheckFree's willingness to maintain the independent operations of
BlueGill and initially to retain the continued employment of all
BlueGill employees following the merger.
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<PAGE> 7
o BlueGill will be able to offer its customers a wider range of billing
and payment services.
BlueGill's board of directors considered the following risks and detriments
of the merger:
o The recent market price volatility of CheckFree's common stock.
o The uncertainty as to the number of CheckFree shares which a BlueGill
stockholder will receive.
o The attractiveness of alternative strategies, like an IPO or merger
with another company, which could produce greater value for BlueGill
stockholders.
o CheckFree's ability to manage BlueGill after the merger and to grow
CheckFree.
o CheckFree's financial condition, including its operating losses.
o The impact that a material merger between CheckFree and a third party
might have on the ability to complete the BlueGill - CheckFree
merger in a timely manner.
The board did not consider in its analysis information about TransPoint's
business, operations and finances or the possible impact of a CheckFree -
TransPoint merger on the business, operations, or finances of CheckFree or
BlueGill.
CONDITIONS TO THE MERGER
We will complete the merger only if specific conditions are satisfied or,
in some cases, waived, including the following:
o approval by the BlueGill stockholders;
o absence of any law or court order prohibiting the merger;
o execution of the escrow agreement by the BlueGill stockholders;
o notification from holders of less than 10% of BlueGill stock of their
intention to assert their appraisal rights under applicable law; and
o receipt of satisfactory closing certificates from CheckFree and
BlueGill.
Any of these conditions to the merger may be waived by the appropriate party. If
BlueGill waives a condition to the merger, it will resolicit stockholder
approval of the merger. Approval of the merger by our stockholders will not be
required.
EXPENSES
We are bearing principally all of the transaction expenses of the merger.
ACCOUNTING TREATMENT
We intend to account for the merger using the purchase method of accounting
under generally accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission.
REGULATORY APPROVALS
Under the requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, we and BlueGill each filed a pre-merger notification report with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice. As a condition to CheckFree's and BlueGill's obligation
to complete the merger, the waiting period under the Hart-Scott-Rodino Act must
have expired or been earlier terminated. This waiting period expired on January
24, 2000.
APPRAISAL RIGHTS
We have included a summary of the applicable laws governing your appraisal
rights in this information statement/prospectus as Appendix B. We encourage you
to read the summary because it contains the specific legal requirements that
govern your appraisal rights.
Under applicable law, non-consenting BlueGill stockholders have the right
to receive an appraisal of the value of their shares in connection with the
merger and liquidate them at a judicially determined value. As a condition of
the merger, however, we are not required to close the merger if holders of more
than 10% of BlueGill stock have notified BlueGill of their intention to assert
their appraisal rights. Failure to timely take any of the steps required under
applicable law may result in the loss of your appraisal rights.
CONFLICTS OF INTEREST OF BLUEGILL DIRECTORS AND OFFICERS IN THE MERGER
BlueGill's directors and officers have interests in the merger that are
different from, or in addition to, yours as a stockholder. If we complete the
merger, BlueGill's officers will have employment agreements with the combined
company. In addition, upon consummation of the merger, options to purchase
approximately 1,445,000 shares of BlueGill common stock held by BlueGill's
senior management will become immediately exercisable. The combined company will
continue to provide indemnification arrangements and directors and
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officers liability insurance for BlueGill's existing directors and officers
similar to those provided before the merger.
INCOME TAX CONSEQUENCES
We anticipate that the merger will be a tax-free reorganization for U.S.
federal and Canadian income tax purposes, and that BlueGill stockholders will
recognize no gain or loss upon conversion of their BlueGill stock into shares of
our common stock, except with respect to cash received, if any, in lieu of
fractional shares. BlueGill stockholders may, however, recognize income, gain or
loss in connection with the exercise of appraisal rights.
These conclusions are based upon advice of counsel, not upon an opinion of
counsel, and, therefore, you should consult with your own tax advisers
concerning the federal or Canadian income tax consequences of the merger, as
well as the applicable state, local, foreign or other tax consequences, based
upon your individual circumstances.
BLUEGILL STOCKHOLDER APPROVAL
The merger must be approved by the BlueGill stockholders. The BlueGill
board of directors is seeking this stockholder approval by written consent of
stockholders rather than at a special meeting of stockholders, because the
BlueGill board believes that approval of the merger can be obtained most
expeditiously by written consent. The BlueGill board has fixed March 27, 2000,
as the record date to determine which stockholders are entitled to consent to
the merger. An Action by Written Consent of Stockholders is attached to this
information statement/prospectus as Appendix C.
You may revoke your consent at any time prior to the date that there
are a sufficient number of consents received by BlueGill to approve the merger.
To revoke your consent, you must deliver to BlueGill's principal executive
offices a signed and dated revocation.
There are no agreements regarding the BlueGill stockholder consents being
solicited. BlueGill officers as a group own approximately 72% of BlueGill's
outstanding common stock, less than 0.2% of BlueGill's outstanding Series A
preferred stock, and no shares of Series B preferred stock.
BlueGill's certificate of incorporation requires that the merger be
approved by the holders of a supermajority of BlueGill's two outstanding series
of preferred stock, as well as by the holders of a majority of BlueGill's common
stock and preferred stock voting together as a single class. In addition, the
BlueGill board of directors will also seek approval by written consent of its
preferred stockholders not to treat the merger as a liquidation.
In a liquidation, BlueGill's preferred stockholders receive liquidation
preferences before sharing remaining assets on an as if converted basis with the
common stockholders. If the liquidation payments exceed $2.33 for each share of
Series A preferred stock and $3.04 for each share of Series B preferred stock,
preferred stockholders will receive no liquidation preferences and will share
assets available for distribution with the common stockholders. In the merger,
the consideration will exceed these thresholds. Consequently, treating the
merger as a liquidation will not result in preferential payments to the
preferred stockholders. A preferred stockholder would receive the same form and
amount of consideration in the CheckFree merger whether or not the preferred
stockholders agree not to treat the merger as a liquidation. BlueGill intends to
proceed with the merger even if this preferred stockholder consent is not
obtained.
Under the merger agreement, the obligation of CheckFree and CheckFree
Acquisition to complete the merger is conditioned on, among other requirements,
holders of not more than 10% of BlueGill's outstanding capital stock notifying
BlueGill of their intention to assert appraisal rights. BlueGill is, therefore,
seeking consents from holders of more than 90% of its capital stock. If the
merger is not approved by the BlueGill stockholders, CheckFree may terminate the
merger agreement and collect a termination fee of $7.5 million from BlueGill, in
which case BlueGill may be required to pay CheckFree an additional $17.5 million
under specific circumstances provided in the merger agreement.
BlueGill will bear the costs of the solicitation of written consents from
its stockholders.
ADDITIONAL INFORMATION
After carefully reading and considering the information contained in this
information statement/prospectus, please respond by signing and dating the
accompanying form of Action by Written Consent of Stockholder and promptly
return it to BlueGill's principal executive offices at:
BlueGill Technologies, Inc.
935 Technology Drive
Ann Arbor, Michigan 48108
Attention: Vinay Gupta, Corporate Secretary
(734) 205-4100
IN ORDER TO EXPEDITE THE MERGER, YOU ARE REQUESTED TO RETURN YOUR CONSENTS BY
OVERNIGHT DELIVERY SERVICE.
You do not need to send your stock certificates at this time. You will
receive separate written instructions from the exchange agent on how to exchange
your stock certificates for shares of CheckFree common stock. Please do not send
in your stock certificates with your consent.
If you have any questions about the merger or how to submit your consent,
or if you need additional copies of this information statement/prospectus or
the accompanying form of Action by Written Consent of Stockholder, or if you
wish to receive a copy of the report of BlueGill's financial advisor, you should
contact:
BlueGill Technologies, Inc.
935 Technology Drive
Ann Arbor, Michigan 48108
Attention: Vinay Gupta, Corporate Secretary
(734) 205-4100
COMPARISON OF RIGHTS OF CHECKFREE STOCKHOLDERS AND BLUEGILL STOCKHOLDERS
In the merger, all of BlueGill's stock, both common and preferred, will be
exchanged for CheckFree common stock. Since both CheckFree and BlueGill are
Delaware corporations, the statutory rights of the BlueGill stockholders will
not change. BlueGill's preferred stock, however, will be converted into shares
of our common stock. BlueGill preferred stockholders will no longer have the
liquidation preference they currently have nor will the preferred stock be
redeemable.
EFFECTIVE TIME
Assuming that all conditions to the merger are either satisfied or waived,
we anticipate closing the merger three business days after the receipt of the
necessary consents.
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RECENT DEVELOPMENTS
ACQUISITION OF TRANSPOINT
On February 15, 2000, we announced that we entered into a definitive merger
agreement with MSFDC LLC and its subsidiaries, TransPoint Technology & Services
LLC, TransPoint LLC, and MSFDC International, LP, collectively referred to as
or TransPoint, entities owned by Microsoft Corporation, First Data Corporation
and Citicorp, N.A. Under the terms of the merger agreement, all outstanding
ownership interests in TransPoint, which are held by Microsoft, First Data and
Citibank, will be transferred to us, and joint marketing agreements will be
established, in exchange for 17 million shares of our common stock or
approximately 23% of our common stock.
CHASE MANHATTAN AGREEMENT
On March 28, 2000, we announced that we had entered into a multi-year
non-exclusive extension to our contract with Chase Manhattan Bank for electronic
payment services.
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RISK FACTORS
A. RISKS RELATED TO THE MERGER
OUR COMMON STOCK HAS BEEN VOLATILE OVER THE PAST THREE MONTHS.
Since December 15, 1999, our stock price has been extremely volatile,
trading at a high of $125.63 per share and a low of $28.50 per share for the
period. Our stock price could dramatically decrease between the time that the
BlueGill stockholders approve the merger and the time the merger closes. We can
not assure that the price of our common stock at the time you vote to approve
the merger will be the same as the price of our common stock when we close the
transaction. The volatility in our stock price has been caused by:
o actual or anticipated fluctuations in our operating results;
o actual or anticipated fluctuations in our subscriber growth;
o announcements by us, our competitors or our customers;
o announcements of the introduction of new or enhanced products and
services by us or our competitors;
o announcements of joint development efforts or corporate partnerships
in the electronic commerce market;
o market conditions in the banking, telecommunications, technology and
other emerging growth sectors;
o rumors relating to our competitors or us; and
o general market or economic conditions.
THE NUMBER OF SHARES YOU WILL RECEIVE IN THE MERGER WILL BE UNKNOWN UNTIL
CLOSING.
You will not know the number of shares you will receive in the merger until
closing. The number of shares to be issued in the merger will be determined at
closing based on the number of diluted shares of BlueGill outstanding at closing
and the price of our common stock. We can not assure you that the number of
shares that you would be entitled to receive at the time you vote on the
transaction will be the same as the amount of shares you receive at closing.
WE HAVE ENTERED INTO A MERGER AND CONTRIBUTION AGREEMENT WITH TRANSPOINT WHICH,
IF COMPLETED WILL DILUTE YOUR EQUITY INTEREST AND MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have entered into a merger and contribution agreement with TransPoint
whereby:
o we will form a new holding company named CheckFree Corporation;
o each of our stockholders will receive a share of CheckFree Corporation
common stock for each share of our common stock they own; and
o CheckFee Corporation will issue 17,000,000 shares of common stock to
TransPoint.
If both this transaction and the TransPoint acquisition occur, you will
become a CheckFree Corporation stockholder and your equity interest will be
diluted by approximately 23%. After the TransPoint acquisition is completed,
BlueGill stockholders will own less than 5% of CheckFree Corporation's common
stock.
Additionally, the TransPoint acquisition may adversely affect our stock
price, results of operations and financial condition. We will need to devote
substantial time and resources to the completion of the acquisition and
integration of TransPoint's business with our own.
BLUEGILL'S DIRECTORS AND OFFICERS HAVE DIFFERENT INTERESTS RELATING TO THE
MERGER.
BlueGill's directors and officers have interests in the merger that are
different from, or are in addition to, yours. In particular, we expect to retain
all of BlueGill's employees, including all of BlueGill's officers, after the
merger. These employees will be entitled to participate in our employee benefit
plans, including grants of stock options in our stock option plan. Additionally,
in connection with the merger, the vesting of options held by some BlueGill
employees will accelerate.
If we complete the merger, BlueGill's officers will have employment
agreements with the combined company. Additionally, options to purchase
approximately 1,445,000 shares of BlueGill common stock held by BlueGill's
senior management will become immediately exercisable. Under the terms of the
merger agreement, we agreed to indemnify the officers, directors, employees and
agents of BlueGill and its subsidiaries against all judgments, fines, losses,
claims, damages, costs or expenses or liabilities arising
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from their positions relating to any act or omission occurring at or prior to
closing. We also agreed to continue to pay the insurance premiums on the
directors and officers insurance policies for all of the current directors and
officers of BlueGill for six years for up to 200% of the current policy
premiums.
YOU MAY ONLY RECEIVE 90% OF THE MERGER CONSIDERATION DUE TO INDEMNITY PROVISIONS
IN THE MERGER AGREEMENT.
You may only receive 90% of the merger consideration you are entitled to.
According to the merger agreement, 10% of the merger consideration will be
placed into escrow to pay indemnification claims related to the merger. We will
make claims against the escrowed funds if we incur losses, damages or expenses
in excess of $1,000,000 arising from BlueGill's breach or misrepresentation of
any representations or warranties in the merger agreement. Escrow funds not
used for such claims will be returned to BlueGill for distribution to its
stockholders.
WE ARE REQUIRED TO AMORTIZE GOODWILL THAT WILL CAUSE OUR EARNINGS PER SHARE TO
DECREASE.
Because we will account for the merger and the TransPoint transaction using
the purchase method, the amortization of goodwill from the BlueGill and
TransPoint acquisitions will result in a charge to our earnings that will
decrease our earnings per share. We will be required to amortize approximately
$253,308,793 over a period of five years or $50,661,759 per year in connection
with the BlueGill merger assuming a purchase price of $308,215,000, and
approximately $806,003,165 over a period of five years or $160,200,633 per year
in connection with the TransPoint acquisition, assuming a purchase price of
$1,253,408,000. Additionally, because we will issue shares of our common stock
in the merger, and since historically BlueGill is not a profitable entity, the
merger may cause our earnings per share to decrease. A drop in our earnings per
share could have a negative impact on the market price of our common stock.
Analysts and investors carefully review a company's earnings per share and often
base investment decisions on a company's earnings per share.
AFTER THE MERGER, BLUEGILL MAY NOT ACHIEVE ANTICIPATED REVENUES, EARNINGS OR
CASH FLOW.
After the closing of the merger, we can not assure you that BlueGill will
achieve its anticipated revenues, earnings or cash flow. Any shortfall may
decrease the value and price of our common stock and have an adverse effect on
our business or financial condition.
THE BLUEGILL MERGER AND THE TRANSPOINT ACQUISITION WILL RESULT IN IMMEDIATE AND
SUBSTANTIAL DILUTION IN OUR PER SHARE EARNINGS AND A SUBSTANTIAL INCREASE IN
OUR LOSS FROM OPERATIONS.
The BlueGill merger and the TransPoint acquisition on a pro forma basis
would result in immediate and substantial dilution of earnings of $5.44 per
share for the year ended June 30, 1999 and earnings of $2.49 per share for the
six months ended December 31, 1999. Additionally, the BlueGill and TransPoint
transactions on a pro forma basis would increase our loss from operations from
$3,733,000 to $485,050,000 for the year ended June 30, 1999 and from $12,640,000
to $230,266,000 for the six months ended December 31, 1999. The anticipated
dilution and the increase in our loss from operations could have a negative
impact on the market price of our common stock. Analysts and investors carefully
review a company's earnings per share and often base investment decisions on a
company's operating profits and losses and per share earnings.
IF THE MERGER IS NOT COMPLETED, BLUEGILL MAY BE REQUIRED TO PAY CHECKFREE UP TO
$25 MILLION.
The merger agreement provides that Bluegill must pay CheckFree a $7.5
million break up fee if BlueGill does not close the transaction because it has
not meet all of the conditions to the merger, including the approval of the
merger by the BlueGill stockholders. BlueGill may also be required to pay an
additional $17.5 million to CheckFree if, prior to the termination of the merger
agreement, BlueGill enters into negotiations with a third party and the third
party acquires BlueGill within twelve months following the termination of the
merger agreement.
INTEGRATION OF BLUEGILL'S BUSINESSES AND TECHNOLOGIES MAY NOT BE SUCCESSFUL AND
WE MAY NOT REALIZE ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A
TIMELY MANNER.
The failure to successfully integrate BlueGill's operations may have a
material adverse effect on our business and results of operations. We anticipate
that the acquisition of BlueGill will result in economic, operational and other
benefits, including increased profitability, greater operational efficiencies
and better products for our customers. Any failure to accomplish these goals, or
the failure to achieve them in a timely manner, may have a material adverse
effect on our business and results of operations.
THE ACQUISITION MAY RESULT IN DISRUPTION OF OUR EXISTING BUSINESS, DISTRACTION
OF MANAGEMENT, DIVERSION OF OTHER RESOURCES.
The integration of BlueGill may take management time and resources that
will have to be diverted from our main business. This diversion of time and
resources could cause the market price of our common stock to decrease. Our
management will need to spend its time integrating BlueGill into CheckFree's
operations. Management will need to focus some of its efforts onto BlueGill and
away from our main business. This could cause our business to suffer.
Additionally, we will need to devote resources into the continued development of
BlueGill. These resources will come from our existing business and will have to
be diverted from our existing operations.
YOUR RIGHTS AS A STOCKHOLDER OF CHECKFREE WILL BE DIFFERENT THAN YOUR CURRENT
RIGHTS AS A BLUEGILL STOCKHOLDER.
Stockholders of BlueGill preferred stock will lose their liquidation
preference and the preferred stock's redemption value once their shares are
converted into shares of our common stock. Currently, stockholders of BlueGill
preferred stock have a liquidation preference over the common stockholders. Once
the BlueGill preferred
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stock is converted into shares of our common stock, the stockholders of BlueGill
preferred stock will lose that liquidation preference. Further, BlueGill's
preferred stock is currently redeemable. Once the BlueGill preferred stock is
converted into shares of our common stock, the stockholders of BlueGill
preferred stock will lose their redemption rights.
AS A RESULT OF THE MERGER, WE WILL HAVE AN INCREASED INTERNATIONAL PRESENCE IN
WHICH WE HAVE HAD LIMITED BUSINESS EXPERIENCE.
Historically, we have not offered or sold our products and services
internationally. If we are unable to successfully adapt our business operations
to international regulations and local business customs and practices, it could
have a material adverse effect on our business and financial condition.
YOU MAY HAVE TO PAY TAXES ON THE MERGER CONSIDERATION YOU RECEIVE.
Neither we nor BlueGill has obtained an opinion of counsel regarding the
United States tax consequences of the merger. Therefore, there is a risk that
you will have to pay taxes on the merger consideration you receive. You should
rely on your own tax advisor regarding the tax consequences of the merger to
you.
B. RISKS RELATED TO CHECKFREE
THE MARKET FOR OUR ELECTRONIC COMMERCE SERVICES IS EVOLVING AND MAY NOT CONTINUE
TO DEVELOP OR GROW RAPIDLY ENOUGH FOR US TO BECOME CONSISTENTLY PROFITABLE.
If the number of electronic commerce transactions does not continue to grow
or if consumers or businesses do not continue to adopt our services, it could
have a material adverse effect on our business, financial condition and results
of operations. The electronic commerce market is still evolving and currently
growing at a rapid rate. We believe future growth in the electronic commerce
market will be driven by the cost, ease-of-use and quality of products and
services offered to consumers and businesses. In order to consistently increase
and maintain our profitability, consumers and businesses must continue to adopt
our services.
WE HAVE NOT OPERATED PROFITABLY IN THE PAST AND EXPECT TO EXPERIENCE NET LOSSES
IN THE FUTURE.
We have not consistently operated profitably to date. Since our inception,
our accumulated losses have totaled approximately $301,905,000. We incurred:
o a loss from operations of $7.2 million and a net loss of $3.7 million
in the fiscal year ended June 30, 1998;
o a loss from operations of $3.7 million and net income of $10.5 million
for the fiscal year ended June 30, 1999; and
o a loss from operations of $12.6 million and a net loss of $7.9 million
for the six months ended December 31, 1999.
In addition, BlueGill has incurred significant losses to date, including a
net loss of $7.1 million for the fiscal year ended December 31, 1999.
We anticipate having a net loss from operations in fiscal 2000 and may
experience net losses and may not be able to sustain or increase our
profitability in the future. For the six months ended December 31, 1999, we
invested over $15.1 million in research and development and over $18 million in
sales and marketing. We intend to continue to make significant investments in
research and development and sales and marketing. If the investment of
our capital is not successful to grow our business, it will have a material
adverse effect on our business and financial condition, as well as negatively
impact your investment in our business and limit our ability to pay dividends in
the future to our stockholders.
OUR FUTURE PROFITABILITY DEPENDS ON OUR ABILITY TO IMPLEMENT OUR STRATEGY
SUCCESSFULLY TO INCREASE ADOPTION OF ELECTRONIC BILLING AND PAYMENT METHODS.
Our future profitability will depend, in part, on our ability to implement
our strategy successfully to increase adoption of electronic billing and payment
methods. Our strategy includes investment of time and approximately $40 million
during fiscal 2000 in programs designed to:
o drive consumer awareness of electronic billing and payment;
o encourage consumers to sign up for and use our electronic billing and
payment services offered by our distribution partners;
o build our infrastructure to handle seamless processing of
transactions;
o continue to develop state of the art, easy-to-use technology; and
o increase the number of billers whose bills we can present and pay
electronically.
If we do not successfully implement our strategy, revenue growth will be
minimal, and expenditures for these programs will not be justified.
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Our investment in these programs will have a negative impact on our
short-term profitability. Additionally, our failure to implement these programs
successfully or to increase substantially adoption of electronic commerce
billing and payment methods by consumers who pay for the services could have a
material adverse effect on our business, financial condition and results of
operations.
COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
Electronic commerce is new and evolving rapidly, resulting in a dynamic
competitive environment. We face significant competition in our each of our
business units, Electronic Commerce, Investment Services and Software
businesses. Increased competition or other competitive pressures may result in
price reductions, reduced margins or loss of business, any of which could have a
material adverse effect on our business, financial condition and results of
operations. Further, we expect competition to persist, increase and intensify in
the future. First, we need to switch billers and consumers from paper bills sent
by mail and paid by check to electronic bill presentment and payment. Second, a
number of financial institutions have developed, and others in the future may
develop, in-house home banking services similar to ours. For example, in June
1999, Chase Manhattan Corporation, First Union Corporation and Wells Fargo & Co.
announced the formation of a new venture called Spectrum that will allow
individuals and businesses to receive and pay bills electronically. To the best
of our knowledge, Spectrum has done limited electronic presentment of bills, and
is developing a "pay anyone" capability. In addition, recently MasterCard
International announced that it would begin offering online bill presentment to
enable people to receive and pay bills over the Internet by September 2000.
Additionally, TransPoint has entered into its own agreements with financial
institutions to offer on-line home banking and electronic billing and payment
services to consumers. As previously disclosed, we have entered into an
agreement to acquire TransPoint and its operations. In the event that the
TransPoint Acquisition is not completed, TransPoint will continue to be a
competitor. We also face increased competition from billers directly presenting
bills to their customers electronically and from new competitors offering
billing and payment services utilizing scan and pay technology. These "scan and
pay" companies offer a service whereby a consumer's bill is received by the
company, scanned to create an electronic image of the bill, and electronically
delivered to the consumer who can elect to pay that bill either by writing a
paper check or through an electronic transfer of funds. We cannot assure you
that we will be able to compete effectively against financial institutions,
Spectrum, Mastercard TransPoint, billers directly delivering bills to their
customers, scan and pay companies or other current and future electronic
commerce competitors.
In addition, we cannot assure you that we will be able to compete
effectively against current and future competitors in the investment services
and software products markets. The markets for our investment services and
software products are also highly competitive. In Investment Services, our
competition comes primarily from providers of portfolio accounting software. In
Software, our competition comes from several different market segments,
including large diversified computer software and service companies and
independent suppliers of software products. Because there are relatively low
barriers to entry, we expect competition in the software market to increase
significantly in the future.
Across all of our market segments, many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical, marketing, customer service and other resources, greater name
recognition and a larger installed base of customers than we do. As a result,
these competitors may be able to respond to new or emerging technologies and
changes in customer requirements faster and more effectively than we can, or to
devote greater resources to the development, promotion and sale of products than
we can. If these competitors were to acquire a significant market share, it
could have a material adverse effect on our business, financial condition and
results of operations.
SOME OF OUR CUSTOMERS MAY COMPETE AGAINST US WHICH MAY RESULT IN A LOSS OF
REVENUE.
From time to time, some of our customers may compete against us which may
have a material adverse effect on our revenues and results of operations. For
example, in June 1999, Chase Manhattan, First Union and Wells Fargo announced
the formation of Spectrum that will allow individuals and businesses to receive
and pay bills electronically. Other of our significant customers may in the
future decide to compete against us and such competition may have a material
adverse affect on our business and financial results.
SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS MAY DAMAGE CUSTOMER
RELATIONS AND INHIBIT OUR GROWTH.
Any failures in our security and privacy measures could have a material
adverse effect on our business, financial condition and results of operations.
We electronically transfer large sums of money and personal information about
consumers, including bank account and credit card information, social security
numbers, and merchant account numbers. If we are unable to protect, or
consumers perceive that we are unable to protect, the security and privacy of
our electronic transactions, our growth and the growth of the electronic
commerce market in general could be materially adversely affected. A security or
privacy breach may:
o cause our customers to lose confidence in our services;
o deter consumers from using our services;
o harm our reputation;
o expose us to liability;
o increase our expenses from potential remediation costs; and
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o decrease market acceptance of electronic commerce transactions.
While we believe that we utilize proven applications designed for premium
data security and integrity to process electronic transactions, there can be no
assurance that our use of these applications will be sufficient to address
changing market conditions or the security and privacy concerns of existing and
potential subscribers.
WE RELY ON THIRD PARTIES TO DISTRIBUTE OUR ELECTRONIC COMMERCE SERVICES, WHICH
MAY NOT RESULT IN WIDESPREAD ADOPTION.
We rely on our contracts with financial institutions, businesses, billers,
Internet portals and other third parties like Intuit Inc. to provide branding
for our electronic commerce services and to market our services to their
customers. None of these third parties accounted for more than 10% of our total
revenue for the year ended June 30, 1999 or for the six months ended December
31, 1999. These contracts are an important source of the growth in demand for
our electronic commerce services. If any of these third parties abandon, curtail
or insufficiently increase its marketing efforts, it could have a material
adverse effect on our business, financial condition and results of operations.
CONSOLIDATION IN THE BANKING INDUSTRY MAY ADVERSELY AFFECT OUR ABILITY TO SELL
OUR ELECTRONIC COMMERCE SERVICES, INVESTMENT SERVICES AND SOFTWARE.
Mergers, acquisitions and personnel changes at key financial institutions
have the potential adversely to affect our business, financial condition and
results of operations. Currently, the banking industry is undergoing large-scale
consolidation, causing the number of financial institutions to decline. This
consolidation could cause us to lose:
o current and potential customers;
o business opportunities, if combined financial institutions were to
determine that it is more efficient to develop in-house home banking
services similar to ours or offer our competitors' products or
services; and
o revenue, if combined financial institutions were able to negotiate a
greater volume discount for, or to discontinue the use of, our
products and services.
WE ARE DEPENDENT UPON A SMALL NUMBER OF FINANCIAL INSTITUTION CUSTOMERS FOR A
SIGNIFICANT PERCENTAGE OF OUR SUBSCRIBERS.
We rely on our contracts with three key financial institutions for a
substantial portion of our subscriber base and the volume of electronic
transactions that we process. As of December 31, 1999, these three financial
institutions accounted for approximately 1.4 million subscribers, or
approximately 47% of our total subscriber base. No single customer, however,
accounts for more than 10% of our revenues. The loss of the contract with any of
these key financial institutions or a significant decline in the number of
transactions processed through them could have a material adverse effect on our
business, financial condition and results of operations.
IF WE DO NOT SUCCESSFULLY RENEW OR RENEGOTIATE OUR AGREEMENTS WITH OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER.
Our agreements for electronic commerce services with financial institutions
generally provide for terms of three to five years. These agreements are
renegotiated from time to time when financial institutions migrate from our
PC-based platform to our web-based platform. If we are not able to renew or
renegotiate these agreements on favorable terms, it could have a material
adverse effect on our business, financial condition and results of operations.
The profitability of our Software business depends, to a substantial
degree, upon our software customers electing to periodically renew their
maintenance agreements. If a substantial number of our software customers
declined to renew these agreements, our revenues and profits in this business
segment would be materially adversely affected.
OUR FUTURE PROFITABILITY DEPENDS ON AN INCREASE IN THE PROPORTION OF
TRANSACTIONS WE PROCESS ELECTRONICALLY.
If we are unable to increase the percentage of transactions that we process
electronically, our margins could decrease, which could have a material adverse
effect on our business, financial condition and results of operations. We
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processed electronically 45% of our transactions for the year ended June 30,
1999 and 52% of the transactions for the six months ended December 31, 1999. Our
future profitability will depend, in part, on our ability to increase the
percentage of transactions we process electronically. Compared with conventional
paper-based transactions, electronic transactions:
o cost much less to complete;
o give rise to far fewer errors, which are costly to resolve; and
o generate far fewer subscriber inquiries and, therefore, consume far
fewer customer care resources.
THE TRANSACTIONS WE PROCESS EXPOSE US TO CREDIT RISKS.
Any losses resulting from returned transactions, merchant fraud or
erroneous transmissions could result in liability to financial institutions,
merchants or subscribers, which could have a material adverse effect on our
business, financial condition and results of operations. The electronic and
conventional paper-based transactions we process expose us to credit risks.
These include risks arising from returned transactions caused by:
o insufficient funds;
o unauthorized use;
o stop payment orders;
o payment disputes;
o closed accounts;
o theft;
o frozen accounts; and
o fraud.
We are also exposed to credit risk from merchant fraud and erroneous
transmissions.
WE MAY EXPERIENCE BREAKDOWNS IN OUR PAYMENT PROCESSING SYSTEM THAT COULD DAMAGE
CUSTOMER RELATIONS AND EXPOSE US TO LIABILITY.
A system outage or data loss could have a material adverse effect on our
business, financial condition and results of operations. To successfully operate
our business, we must be able to protect our payment processing and other
systems from interruption by events that are beyond our control. For example,
our system may be subject to loss of service interruptions caused by hostile
third parties similar to those experienced by many companies operating Internet
websites during February 2000 or other instances of deliberate system sabotage.
Other events that could cause system interruptions include:
o fire;
o natural disaster;
o power loss;
o telecommunications failure;
o unauthorized entry; and
o computer viruses.
For the fiscal year ended June 30, 1999, we incurred a charge of $2.7
million due to problems accessing and using our system. Without the charge, our
loss from operations in our electronic commerce segment would have been $2.8
million compared to the actual $5.5 million we lost. These problems stemmed from
system errors we experienced in April 1999 due to system degradation issues in
connection with the migration of subscribers to our Genesis platform, which
resulted in consumers inability to connect with and transmit data to our
processing system. This system failure did not result in the loss of any
consumer data.
Although we completed the initial migration of some of our subscribers from
our pre-existing data processing platforms to a new system that we call the
Genesis platform, we will continue to migrate subscribers from non-Genesis
platforms to the Genesis platform at the request of our other customers. Our
main processing facility is located in Norcross, Georgia, and we have other
processing facilities located in Ohio, Illinois and Texas. During the transition
from the pre-existing platforms to the Genesis platform, we may be exposed to
loss of data or unavailability of systems due to inadequate back-ups, reduced or
eliminated redundancy, or both. Although we regularly back-up our data logs
hourly and our overall system daily, as well as take other measures to protect
against data loss and system failures, there is still some risk that we may lose
critical data or experience system failures. We constantly review our usage and
capacity constraints. We have engineered our systems to ensure that we never
exceed 80% utilization of capacity at peak processing times. That means that, in
general, we average processing at 40%-50% of capacity with no peak time
consuming more than 80% of the system's resources. As a precautionary measure,
we have entered into disaster recovery agreements for the processing systems at
all our sites, and we conduct business resumption tests on a scheduled basis.
Our property and business interruption insurance may not be adequate to
compensate us for all losses or failures that may occur.
14
<PAGE> 16
WE MAY EXPERIENCE SOFTWARE DEFECTS AND DEVELOPMENT DELAYS, DAMAGING CUSTOMER
RELATIONS, DECREASING OUR POTENTIAL PROFITABILITY AND EXPOSING US TO LIABILITY.
Our electronic commerce services and our software products are based on
sophisticated software and computing systems which often encounter development
delays, and the underlying software may contain undetected errors or defects.
Defects in our software products and errors or delays in our processing of
electronic transactions could result in:
o additional development costs;
o diversion of technical and other resources from our other development
efforts;
o loss of credibility with current or potential customers;
o harm to our reputation; or
o exposure to liability claims.
In addition, we rely on technologies supplied to us by third parties that
may also contain undetected errors or defects that could have a material adverse
effect on our business, financial condition and results of operations. Although
we attempt to limit our potential liability for warranty claims through
disclaimers in our software documentation and limitation-of-liability provisions
in our license and customer agreements, we cannot assure you that these measures
will be successful in limiting our liability.
15
<PAGE> 17
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING
RESULTS TO FLUCTUATE.
We have historically experienced seasonal fluctuations in our net sales,
and we expect to experience similar fluctuations in the future . If our net
sales are below the expectations of securities analysts and investors due to
seasonal fluctuations, our stock price could decrease unexpectedly. Our growth
in new electronic commerce subscribers is affected by seasonal factors like
holiday-based personal computer sales. These seasonal factors may impact our
operating results by concentrating subscriber 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
subscribers generally tend to be less active users during the summer months,
resulting in lower revenue during this period.
Our software sales also have historically displayed seasonal variability,
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 in software sales is due, in part, to
calendar year-end buying patterns of financial institution customers and our
software sales compensation structure, which measures sales performance at our
June 30 fiscal year end.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE OR CHANGES IN INDUSTRY
STANDARDS, OUR SERVICES COULD BECOME OBSOLETE AND WE COULD LOSE OUR CUSTOMERS.
If competitors introduce new products and services embodying new
technologies, or if new industry standards and practices emerge, our existing
product and service offerings, proprietary technology and systems may become
obsolete. Further, if we fail to adopt or develop new technologies or to adapt
our products and services to emerging industry standards, we may lose current
and future customers, which could have a material adverse effect on our
business, financial condition and results of operations. The electronic commerce
industry is changing rapidly. To remain competitive, we must continue to enhance
and improve the functionality and features of our products, services and
technologies. For example, we are currently migrating our products and services
from a PC-based platform to a web-based platform.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, PERMITTING COMPETITORS
TO DUPLICATE OUR PRODUCTS AND SERVICES.
Our success and ability to compete is dependent, in part, upon our
proprietary technology, which includes our patent for our electronic billing and
payment processing system, our source code information for our software
products, and our operating technology. We rely primarily on patent, copyright,
trade secret and trademark laws to protect our technology. In addition, we have
been granted a patent for some features of our electronic billing and payment
processing system, which we believe provides some measure of security for our
technologies. If challenged, we cannot assure you that our patent will prove to
be valid or provide the protection that we need. Further, the source code for
our proprietary software is protected both as a trade secret and as a
copyrighted work. We generally enter into confidentiality and assignment
agreements with our employees, consultants and vendors, and generally control
access to and distribution of our software, documentation and other proprietary
information.
Because our means of protecting our proprietary rights may not be adequate,
it may be possible for a third party to copy, reverse engineer or otherwise
obtain and use our technology without authorization. In addition, the laws of
some countries in which we sell our products do not protect software and
intellectual property rights to the same extent as the laws of the U.S.
Unauthorized copying, use or reverse engineering of our products could have a
material adverse effect on our business, financial condition and results of
operations.
A third party could also claim that our technology infringes its
proprietary rights. As the number of software products in our target markets
increases and the functionality of these products overlap, we believe that
software developers may increasingly face infringement claims. These claims,
even if without merit, can be time-consuming and expensive to defend. A third
party asserting infringement claims against us in the future may require us to
enter into costly royalty arrangements or litigation.
OUR BUSINESS COULD BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, WHICH
COULD MAKE OUR BUSINESS MORE EXPENSIVE TO OPERATE.
We believe that we are not required to be licensed by the Office of the
Comptroller of the Currency, or OCC, the Federal Reserve Board or other federal
agencies that regulate or monitor banks or other types of providers of
electronic commerce services. A number of states have legislation regulating or
licensing check sellers, money transmitters or service providers to banks, and
we have registered under this legislation in specific instances. Because
electronic commerce in general, and most of our products and services in
particular, are so new, the application of many of these laws and regulations is
uncertain and difficult to interpret. The entities responsible for interpreting
and enforcing these laws and regulations could amend these laws or regulations
or issue new interpretations of existing laws or regulations. Any of these
changes could lead to increased operating costs and reduce the convenience and
functionality of our products or services, possibly resulting in reduced market
acceptance. It is also possible that new laws and regulations may be enacted
with respect to the Internet, including taxation of electronic commerce
activities. The adoption of any of these laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for our products
or services, increase our cost of doing business or could otherwise have a
material adverse effect on our business, financial condition and results of
operations.
The Federal Reserve rules provide that we can only access the Federal
Reserve's Automated Clearinghouse through a bank. If the Federal Reserve rules
were to change to further restrict our access to the Automated Clearinghouse or
limit our ability to provide Automated Clearinghouse transaction processing
services, it could have a material adverse effect on our business, financial
condition and results of operations.
16
<PAGE> 18
RISKS RELATED TO OUR COMMON STOCK AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR
COMMON STOCK FOR SALE IN THE FUTURE COULD ADVERSELY AFFECT OUR STOCK PRICE.
The availability for future sale of a substantial number of shares of our
common stock in the public market, or issuance of common stock upon the exercise
of stock options, warrants or conversion of the notes or otherwise could
adversely affect the market price for our common stock. As of January 31, 2000,
we had outstanding 52,635,730 shares of our common stock, of which 34,532,321
shares of our issued and outstanding common stock were held by nonaffiliates.
The holders of the remaining 18,103,409 shares were entitled to resell them only
by a registration statement under the Securities Act of 1933 or an applicable
exemption from registration. As of January 31, 2000, we had an additional
21,087,430 shares of our common stock available for future sale, including:
o outstanding options to purchase 5,826,583 shares of our common stock,
of which options for 1,428,287 shares were fully vested and
exercisable at an average weighted exercise price of approximately
$9.21 per share;
o issued warrants to purchase 11,400,000 shares of our common stock, of
which warrants for 2,725,000 shares were fully vested and exercisable
at a weighted exercise price of approximately $20.86 per share;
o up to 704,347 shares available for issuance under our Associate Stock
Purchase Plan;
o up to 799,943 shares available for issuance under our 401(k) Plan; and
o up to 2,356,557 shares of our common stock issuable upon conversion of
the notes.
As of March 31, 2000, the following entities hold shares or warrants to
purchase shares of our common stock in the following amounts:
o Intuit, Inc., which holds 10,175,000 shares;
o Integrion Financial Network, L.L.C., which with current and former
members, collectively holds warrants to purchase up to 9,700,000
shares, 2,700,000 of which are fully vested and exercisable; and
o Bank One, which holds warrants to purchase 1,000,000 shares and may be
entitled to receive warrants to purchase up to 2,000,000 additional
shares,none of which are vested or exercisable.
Each of Intuit, Integrion and Bank One may be entitled to registration
rights. If Intuit, Integrion or Bank One, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, these sales may have an adverse effect on the market price of our common
stock.
If we complete the TransPoint acquisition, CheckFree Corporation will
issue 17,000,000 shares of common stock as follows:
o 8,567,250 shares to Microsoft;
o 6,567,250 shares to First Data; and
o 2,015,500 shares to Citibank.
We have agreed with Microsoft, First Data and Citibank to file a shelf
registration statement that would allow continuous resales of the shares that
they will receive on the closing date of the acquisition. Although Microsoft and
First Data will be limited in their ability to transfer their shares of common
stock during the next three years pursuant to stockholder agreements with us,
they will be able to transfer significant portions of their common stock in the
future in both registered and unregistered sales. One year after the acquisition
is completed, Microsoft and Citibank may be able to sell up to the greater of
one percent of CheckFree Corporation's average weekly trading volume or one
percent of CheckFree Corporation's outstanding common stock in reliance on
registration exemptions. In addition, Microsoft and First Data will be permitted
to a limited extent to engage in hedging transactions with respect to our common
stock. Sales of substantial amounts of our common stock by either Microsoft or
First Data, or the perception that these sales could occur, may adversely affect
prevailing market prices for our common stock.
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE
ANY CHANGE IN CONTROL MORE DIFFICULT.
Our certificate of incorporation and by-laws contain provisions that may
have the effect of delaying or preventing a change in control, may discourage
bids at a premium over the market price of our common stock and may adversely
affect the market price of our common stock and the voting and other rights of
the holders of our common stock. These provisions include:
o division of our board of directors into three classes serving
staggered three-year terms;
o removal of our directors by the stockholders only for cause upon 80%
stockholder approval;
o prohibiting our stockholders from calling a special meeting of
stockholders;
o ability to issue additional shares of our common stock or preferred
stock without stockholder approval;
o prohibiting our stockholders from unilaterally amending our
certificate of incorporation or by-laws except with 80% stockholder
approval; and
o advance notice requirements for raising business or making nominations
at stockholders' meetings.
17
<PAGE> 19
We also have a stockholder rights plan that allows us to issue
preferred stock with rights senior to those of our common stock without any
further vote or action by our stockholders. The issuance of our preferred stock
under the stockholder rights plan could decrease the amount of earnings and
assets available for distribution to the holders of our common stock or could
adversely affect the rights and powers, including voting rights, of the holders
of our common stock. In some circumstances, the issuance of preferred stock
could have the effect of decreasing the market price of our common stock.
We are also subject to provisions of the Delaware corporation law that, in
general, prohibit any business combination with a beneficial owner of 15% or
more of our common stock for five years unless the holder's acquisition of our
stock was approved in advance by our board of directors.
In addition, both the commercial alliance agreement with Microsoft and the
marketing agreement with First Data, each of which we will execute in connection
with the closing of the TransPoint acquisition, both allow the termination of
the agreement by Microsoft or First Data, as the case may be, under specific
change of control circumstances. If either Microsoft or First Data terminates
under these circumstances, we will lose a portion of the future revenue
guarantees under the applicable agreement. This potential termination event
could discourage third parties from acquiring us.
18
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This information statement/prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements often,
although not always, include words or phrases like "will likely result,"
"expect," "will continue," "anticipate," "estimate," "intend," "plan,"
"project," "outlook," or similar expressions. We have based these
forward-looking statements on our current expectations and assumptions about
future events. These forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
statements. These risks and uncertainties include those set forth under "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The forward-looking statements contained in this
information statement/prospectus include statements about the following:
o our ability to integrate BlueGill's business and operations with our
own;
o anticipated trends in our business, including trends in the electronic
commerce, investment services, and software segments;
o our intention to develop and introduce new products and services;
o our anticipated growth and growth strategies; and
o anticipated levels of adoption of electronic billing and payment.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this information statement/prospectus might not occur.
19
<PAGE> 21
WHERE YOU CAN FIND MORE INFORMATION
We must comply with the informational requirements of the Securities
Exchange Act of 1934 and its rules and regulations. Under the Exchange Act, we
must file reports, proxy statements, and other information with the Securities
and Exchange Commission. Copies of these reports, proxy statements, and other
information can be inspected and copied at:
Public Reference Room
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
or at the public reference facilities of the regional offices of the Commission
at:
500 West Madison Street or: 7 World Trade Center
Suite 1400 Suite 1300
Chicago, Illinois 60661-2511 New York, New York 10048-1102
You may obtain information on the operation of the Public Conference Room
by calling the Commission at 1-800-SEC-0330. You may also obtain copies of our
materials by mail at prescribed rates from the Public Reference Room at the
address noted above. Finally, you may obtain these materials electronically by
accessing the Commission's home page on the Internet at HTTP://WWW.SEC.GOV.
Our common stock is listed on the Nasdaq National Market. Therefore,
reports and other information concerning us should be available for inspection
and copying at the offices of the Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006-1504.
All information contained in this information statement/prospectus with
respect to us and CheckFree Acquisition, was supplied by us and all information
contained in this information statement/prospectus with respect to BlueGill was
supplied by BlueGill. Neither CheckFree nor BlueGill can warrant the accuracy or
completeness of information relating to the other party.
20
<PAGE> 22
COMPARATIVE PER SHARE INFORMATION
The following table presents historical and unaudited pro forma per share
data for CheckFree, BlueGill and TransPoint, which we agreed to acquire on
February 15, 2000, and on a consolidated basis. This information is qualified in
its entirety by the historical financial statements and accompanying notes for
CheckFree, for BlueGill and for TransPoint contained in this information
statement/prospectus. You should read this table in conjunction with those
statements and notes.
You should also read the following unaudited pro forma financial
information in conjunction with CheckFree's, BlueGill's and TransPoint's
unaudited pro forma financial statements and accompanying notes included in
this information statement/prospectus. For more information, please refer to
the section of this information statement/prospectus entitled "Unaudited Pro
Forma Condensed Combining Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
CHECKFREE HISTORICAL
Net Income (Loss) $ 0.18 $ (0.15)
Cash Dividends Declared -- --
Book Value 3.61 3.86
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
BLUEGILL HISTORICAL
Net Income (Loss) $ (0.41) $ (1.43)
Cash Dividends Declared -- --
Book Value (0.45) (1.84)
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
TRANSPOINT HISTORICAL (1) N/A N/A
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
CHECKFREE / BLUEGILL / TRANSPOINT PRO
FORMA COMBINED
Net Income (Loss) $ (5.26) $ (2.64)
Cash Dividends Declared -- --
Book Value 25.43
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
CHECKFREE / BLUEGILL PRO FORMA COMBINED
Net Income (Loss) $ (1.03) $ (0.73)
Cash Dividends Declared -- --
Book Value 8.95
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
CHECKFREE / TRANSPOINT PRO FORMA
COMBINED
Net Income (Loss) $(4.52) $(2.29)
Cash Dividends Declared -- --
Book Value 22.35
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
EQUIVALENT BLUEGILL PRO FORMA
COMBINED (2)
Net Income (Loss) $ (0.10) $(0.07)
Cash Dividends Declared -- --
Book Value 0.83
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
EQUIVALENT TRANSPOINT PRO FORMA
COMBINED N/A N/A
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
EQUIVALENT BLUEGILL / TRANSPOINT PRO
FORMA COMBINED (1) N/A N/A
</TABLE>
- -----------------------------------------
(1) The TransPoint business is conducted through four limited liability
companies and a limited partnership. Under the terms of the limited
liability agreements and the limited partnership agreement, there are no
shares outstanding.
(2) Represents the CheckFree pro forma combined results multiplied by an
assumed share conversion factor of 0.09286 per the merger agreement
with BlueGill.
22
<PAGE> 24
MARKET PRICE DATA; DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
"CKFR." The following table provides the high and low sales prices of our common
stock for the periods indicated as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
FISCAL PERIOD HIGH LOW
<S> <C> <C>
FISCAL 1998
First Quarter ............................. $ 23.13 $ 16.50
Second Quarter ............................ $ 31.44 $ 20.25
Third Quarter ............................. $ 28.50 $ 20.00
Fourth Quarter ............................ $ 30.63 $ 20.44
FISCAL 1999
First Quarter ............................. $ 31.50 $ 8.25
Second Quarter ............................ $ 23.44 $ 5.75
Third Quarter ............................. $ 46.00 $ 20.63
Fourth Quarter ............................ $ 69.13 $ 24.50
FISCAL 2000
First Quarter ............................. $ 44.25 $ 23.13
Second Quarter ............................ $ 107.50 $ 34.00
Third Quarter ............................. $ 125.63 $ 55.77
Fourth Quarter (through April 17, 2000).... $ 70.75 $ 28.50
</TABLE>
On April 17, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $30.63 per share. As of April 17, 2000, there were
approximately 556 holders of record of our common stock.
We have not paid cash dividends since 1986, and do not anticipate doing so
in the foreseeable future. We presently anticipate that all of our future
earnings will be retained for the development of our business. The payment of
any future dividends will be at our board of directors' discretion and will be
based on our future earnings, financial condition, capital requirements and
other relevant factors.
23
<PAGE> 25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
CHECKFREE HOLDINGS CORPORATION
Our selected consolidated financial data for the fiscal year ended June 30,
1997 and as of and for the fiscal years ended June 30, 1998 and 1999, have been
derived from our audited consolidated financial statements, included elsewhere
in this information statement/prospectus. Our selected consolidated financial
data as of and for the fiscal year ended December 31, 1994 and 1995, as of and
for the six months ended June 30, 1996, and as of June 30, 1997, have been
derived from our audited consolidated financial statements, which we have not
included in this information statement/prospectus. The selected and consolidated
financial data as of and for each of the six month periods ended December 31,
1998, and 1999 are derived from unaudited financial statements included in this
information statement/prospectus which, in the opinion of management, reflect
all adjustments necessary for a fair presentation of the results for the interim
periods. The selected consolidated financial data for the twelve months ended
June 30, 1996, are derived from unaudited consolidated financial statements
which, in the opinion of management, reflect all adjustments necessary for a
fair presentation of the results for the respective period. You should read the
selected consolidated financial data provided below in conjunction with the
section of this information statement/prospectus entitled, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the related Notes contained elsewhere
in this information statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996(1) 1997 1998
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and merchant
discount ................................ $ 38,282 $ 49,330 $ 33,305 $ 59,053 $ 104,522 $ 159,255
License fees .............................. -- -- 10,970 10,970 33,088 28,952
Maintenance fees .......................... -- -- 1,978 1,978 22,567 25,848
Other ..................................... 984 -- 4,787 4,788 16,268 19,809
--------- --------- --------- --------- --------- ---------
Total revenues ...................... 39,266 49,330 51,040 76,789 176,445 233,864
Expenses:
Cost of processing, servicing and
support ................................. 24,212 30,258 35,438 51,236 102,721 129,924
Research and development .................. 4,724 6,876 9,907 13,765 32,869 36,265
Sales and marketing ....................... 4,427 7,242 17,167 21,349 32,670 28,839
General and administrative ................ 2,598 4,134 7,338 9,598 18,707 20,677
Depreciation and amortization ............. 1,922 2,485 6,997 8,246 24,919 24,999
In-process research and development(2) .... -- -- 122,358 122,358 140,000 719
Charge for stock warrants(3) .............. -- -- -- -- -- 32,827
Exclusivity amortization(4) ............... -- -- -- -- 5,958 2,963
--------- --------- --------- --------- --------- ---------
Total expenses ...................... 37,883 50,995 199,205 226,552 357,844 277,213
Net gain on dispositions of assets(5) ....... -- -- -- -- 6,250 36,173
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ............... 1,383 (1,665) (148,165) (149,763) (175,149) (7,176)
Interest:
Income .................................... 298 2,135 1,659 3,104 2,153 3,464
Expense ................................... (795) (645) (325) (484) (834) (632)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... 886 (175) (146,831) (147,143) (173,830) (4,344)
Income tax expense (benefit)(6) ............. 400 40 (8,628) (8,650) (12,017) (641)
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item ..... 486 (215) (138,203) (138,493) (161,813) (3,703)
Extraordinary item .......................... -- -- (364) (364) -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) ......................... $ 486 $ (215) $(138,567) $(138,857) $(161,813) $ (3,703)
========= ========= ========= ========= ========= =========
Basic income (loss) per common
share before extraordinary item(7)......... $ 0.02 $ (0.01) $ (3.69) $ (4.14) $ (3.44) $ (0.07)
Basic income (loss) per common share(7)...... $ 0.02 $ (0.01) $ (3.70) $ (4.15) $ (3.44) $ (0.07)
Basic equivalent number of shares
outstanding(7)............................. 25,232 28,219 37,450 33,435 46,988 55,087
Diluted income (loss) per common
share before extraordinary item(7) ........ $ 0.02 $ (0.01) $ (3.69) $ (4.14) $ (3.44) $ (0.07)
Diluted income (loss) per common
share(7) .................................. $ 0.02 $ (0.01) $ (3.70) $ (4.15) $ (3.44) $ (0.07)
Diluted equivalent number of shares
outstanding(7) ............................ 27,103 28,219 37,420 33,435 46,988 55,087
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1999 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and merchant
discount ................................ $ 201,059 $ 93,575 $ 120,931
License fees .............................. 15,975 6,412 6,197
Maintenance fees .......................... 17,746 9,202 8,956
Other ..................................... 15,351 7,230 5,905
--------- --------- ---------
Total revenues ...................... 250,131 116,419 141,989
Expenses:
Cost of processing, servicing and
support ................................. 146,704 71,457 86,889
Research and development .................. 21,085 12,157 15,110
Sales and marketing ....................... 32,354 15,232 18,577
General and administrative ................ 31,466 14,358 19,287
Depreciation and amortization ............. 24,630 11,999 14,756
In-process research and development(2) .... 2,201 -- --
Charge for stock warrants(3) .............. -- -- --
Exclusivity amortization(4) ............... -- -- --
--------- --------- ---------
Total expenses ...................... 258,440 125,203 154,629
Net gain on dispositions of assets(5) ....... 4,576 3,914 --
--------- --------- ---------
Income (loss) from operations ............... (3,733) (4,870) (12,640)
Interest:
Income .................................... 2,799 1,585 1,437
Expense ................................... (618) (366) (1,294)
--------- --------- ---------
Income (loss) before income taxes ........... (1,552) (3,651) (12,497)
Income tax expense (benefit)(6) ............. (12,009) (13,558) (4,592)
--------- --------- ---------
Income (loss) before extraordinary item ..... 10,457 9,907 (7,905)
Extraordinary item .......................... -- -- --
--------- --------- ---------
Net income (loss) ......................... $ 10,457 $ 9,907 $ (7,905)
========= ========= =========
Basic income (loss) per common
share before extraordinary item(7)......... $ 0.20 $ 0.19 $ (0.15)
Basic income (loss) per common share(7)...... $ 0.20 $ 0.19 $ (0.15)
Basic equivalent number of shares
outstanding(7)............................. 52,444 53,419 52,023
Diluted income (loss) per common
share before extraordinary item(7) ........ $ 0.18 $ 0.18 $ (0.15)
Diluted income (loss) per common
share(7) .................................. $ 0.18 $ 0.18 $ (0.15)
Diluted equivalent number of shares
outstanding(7) ............................ 56,529 54,664 52,023
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
--------------------- ---------------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......................$ 2,209 $ 63,840 $ 20,987 $ 32,086 $ 36,535 $ 12,446
Working capital ................................. 11,399 81,792 45,496 20,002 78,238 24,245
Total assets .................................... 30,512 115,642 196,230 223,836 250,112 252,761
Convertible notes(8) ............................ -- -- -- -- -- --
Long-term obligations, less current portion ..... 8,213 7,282 8,324 8,401 6,467 3,882
Total stockholders' equity ...................... 16,372 99,325 137,675 148,644 183,854 186,903
<CAPTION>
AS OF
DECEMBER 31,
---------------------
1998 1999
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......................$ 36,535 $152,779
Working capital ................................. 39,285 159,679
Total assets .................................... 218,105 457,728
Convertible notes(8) ............................ -- 172,500
Long-term obligations, less current portion ..... 6,816 906
Total stockholders' equity ...................... 165,226 202,378
</TABLE>
(1) On April 19, 1996, we elected to change our fiscal year end from December
31 to June 30. To assist in the analysis of the selected consolidated
financial data, unaudited results for the twelve months ended June 30, 1996
are provided.
(2) In connection with the acquisitions of Intuit Services Corporation in
January 1997, Advanced Mortgage Technologies, Inc. in October 1997 and
Mobius Group, Inc. in March 1999, we recorded charges to expense of $140.0
million, $0.7 million, and $2.2 million, respectively, for acquired
in-process research and development that were determined to have no future
value. See Note 2 to the audited consolidated financial statements
contained elsewhere in this information statement/prospectus.
(3) The $32.4 million and $0.4 million charges for stock warrants in the fiscal
year ended June 30, 1998 resulted from the vesting of warrants related to a
ten year processing agreement with Integrion and to a consulting agreement
with a third party, respectively. See Note 15 to the audited consolidated
financial statements contained elsewhere in this information
statement/prospectus.
(4) In connection with an exclusivity arrangement entered into upon our
acquisition of Intuit Services Corporation in January 1997, we recorded
amortization expense of $6.0 million for the fiscal year ended June 30,
1997 and $3.0 million for the fiscal year ended June 30, 1998.
(5) The $6.3 million net gain on dispositions of assets in the year ended June
30, 1997 resulted from the March 1997 sale of our credit card business. The
$36.2 million net gain in the year ended June 30, 1998 resulted from the
sales of our recovery management business in August 1997, our item
processing business in March 1998 and our electronic banking and wire
businesses in April 1998. The resulting gains from these sales were $28.2
million, $3.2 million, and $14.7 million, respectively. The gains were
offset by losses on the sale of the leasing business, discontinuation of
the web investor business and write-offs of equipment. The resulting losses
were $4.7 million, $1.0 million and $4.2 million, respectively. The $28.4
million net gain in the nine months ended March 31, 1998 resulted from the
$28.2 million gain on the August 1997 sale of our recovery management
business, the $3.2 million gain on the March 1998 sale of our item
processing business, and the $3.0 million write-off of equipment and
capitalized costs.
(6) In connection with the creation of a special purpose subsidiary to
administer our employee medical benefits program, we recorded a one-time
tax benefit of approximately $12.2 million during the quarter ended
December 31, 1998. See Note 7 to the audited consolidated financial
statements contained elsewhere in this information statement/prospectus.
(7) The earnings per share amounts prior to the fiscal year ended June 30, 1998
have been restated to comply with Statement of Financial Accounting
Standards No. 128 "Earnings per Share" as required. For further discussion
of earnings per share and the impact of Statement 128, see Note 1 to the
audited consolidated financial statements contained elsewhere in this
information statement/prospectus.
(8) In November 1999, we issued $172.5 million of 6 1/2% convertible
subordinated notes that are due on December 1, 2006. Interest on the notes
is payable on June 1 and December 1 annually, commencing on June 1, 2000.
The notes may be converted, at the holder's option, into 13.6612 shares of
our common stock per note and we may redeem the notes at any time on or
after December 1, 2002.
25
<PAGE> 27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF BLUEGILL TECHNOLOGIES, INC.
The following selected financial data for the years ended December 31,
1997, 1998 and 1999 should be read in conjunction with the consolidated
financial statements and the related notes, which have been audited by Arthur
Andersen LLP, independent public accountants, included elsewhere in this
information statement/prospectus, and with "BlueGill Technologies, Inc. -
Management's Discussion and Analysis of Results of Operations and Financial
Condition." The data provided below for the years ended December 31, 1997, 1998
and 1999 are derived from, and are qualified by reference to, the audited
financial statements of BlueGill included elsewhere in this information
statement/prospectus and should be read in conjunction with those financial
statements and the related notes. The selected financial data for the period
ended December 31, 1996 were derived from the unaudited financial information
obtained from BlueGill.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER
20, 1996)
THROUGH
DECEMBER 31, YEARS ENDED DECEMBER 31,
------------ ------------------------------------------------
1996 1997 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ -- $ 422,500 $ 1,474,678 $ 5,396,967
Cost of revenues ............................. -- 74,000 218,095 533,965
------------ ------------ ------------ ------------
Gross profit ............................. -- 348,500 1,256,583 4,863,002
Operating expenses:
Research and development ................. 53,264 479,938 894,944 2,123,192
Selling, general and administrative ...... 129,126 845,198 2,416,938 10,290,279
------------ ------------ ------------ ------------
Total operating expenses .............. 182,390 1,325,136 3,311,882 12,413,471
Loss from operations .................. (976,636) (2,055,299) (7,550,469)
Interest income .............................. 3,329 11,471 148,167 482,650
Interest expense ............................. (100) (22,177) (36,295) (29,458)
Provision (benefit) for income taxes ......... -- -- -- --
------------ ------------ ------------ ------------
Net loss ..................................... $ (179,161) $ (987,342) $ (1,943,427) $ (7,097,277)
============ ============ ============ ============
Net loss per share ........................... $ (0.05) $ (0.22) $ (0.41) $ (1.43)
Weighted average common shares ............... 3,900,000 4,530,340 4,766,000 4,969,736
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1996 1997 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash ........................................ $ 251,508 $ 98,528 $ 4,111,200 $ 17,039,531
Working capital ............................. 200,305 (321,260) 4,079,462 15,561,223
Total assets ................................ 274,384 409,267 4,867,052 20,258,540
Redeemable preferred stock .................. -- -- 6,468,387 25,963,387
Total stockholders' equity (deficit) ........ 223,181 (266,521) (2,141,085) (9,135,145)
</TABLE>
26
<PAGE> 28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE TRANSPOINT ENTITIES
The following selected consolidated financial data of TransPoint as of and
for the period June 18, 1997 (inception) to July 3, 1998 and as of and for year
ended July 2, 1999, have been derived from audited consolidated financial
statements, included elsewhere in this information statement/prospectus. The
selected and consolidated financial data for the six month period ended December
31, 1998 and as of and for the six month period ended December 31, 1999 are
derived from unaudited financial statements included in this information
statement/prospectus which, in the opinion of management, reflect all
adjustments necessary for a fair presentation of the results for the interim
periods. You should read the selected consolidated financial data provided below
in conjunction with the TransPoint consolidated financial statements and related
notes thereto contained elsewhere in this information statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 18, 1997)
THROUGH YEAR ENDED SIX MONTHS ENDED
JULY 3, JULY 2, DECEMBER 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................. $ -- $ -- $ -- $ 3,060
Operating expenses:
Product development .................... 10,032,522 26,599,520 11,901,143 1,520,976
Selling, general and administrative .... 5,839,118 18,637,762 7,282,878 18,292,485
------------ ------------ ------------ ------------
Total operating expense .............. 15,871,640 45,197,282 19,184,021 19,813,461
Other expense ............................ (18,118) (463,632) (22,832) (911,449)
------------ ------------ ------------ ------------
Loss before minority interest ..... (15,853,522) (44,733,650) (19,161,189) (18,898,952)
Minority interest ........................ -- (2,063,542) -- (2,875,506)
------------ ------------ ------------ ------------
Net loss ................................. $(15,853,522) $(42,670,108) $(19,161,189) $(16,023,446)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JULY 3, JULY 2, DECEMBER 31,
1998 1999 1999
----------- ---------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............ $ -- $ 51,113,749 $ 19,837,565
Working capital ...................... (6,514,307) 34,232,286 6,160,130
Total assets ......................... 1,660,852 52,824,291 30,721,311
Minority interest .................... -- (45,936,458) (43,060,952)
Total members' capital deficiency .... (4,853,455) (9,993,630) (26,017,076)
</TABLE>
27
<PAGE> 29
UNAUDITED PRO FORMA COMBINING FINANCIAL DATA OF CHECKFREE HOLDINGS CORPORATION,
BLUEGILL TECHNOLOGIES, INC. AND THE TRANSPOINT ENTITIES
The following table summarizes the unaudited pro forma combining financial
data, giving effect to the mergers, which will be accounted for as purchases, as
if they had occurred on December 31, 1999, for balance sheet presentation
purposes and as of July 1, 1998, for statement of operations presentation
purposes, and the pro forma adjustments described in the Notes to the Unaudited
Pro Forma Condensed Combining Financial Information. The BlueGill and TransPoint
financial data included in the pro forma amounts are for the twelve months ended
June 30, 1999, and for the six months ended December 31, 1999. You should read
this information in conjunction with:
o the historical financial statements of CheckFree, BlueGill, and
TransPoint including the respective notes to these statements, which
we have included elsewhere in this information statement/prospectus,
and
o the consolidated historical financial data for CheckFree, BlueGill
and TransPoint, and the other pro forma information, including the
related notes, which are included elsewhere in this information
statement/prospectus.
For additional information, you should refer to the sections of this document
entitled "Recent Developments" and "Unaudited Pro Forma Condensed Combining
Financial Information."
The pro forma financial data are not necessarily indicative of the future
financial position or future results of operations of the combined companies, or
the financial position or results of operations of the companies that would have
actually occurred had the merger been consummated at the dates specified.
UNAUDITED PRO FORMA COMBINING FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKFREE, BLUEGILL, AND
CHECKFREE TRANSPOINT
HISTORICAL AMOUNTS COMBINING PRO FORMA
-------------------------- --------------------------
YEAR SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1999 1999 1999
--------- ------------ --------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ........................ $ 250,131 $ 141,989 $ 253,621 $ 145,069
Income (loss) from operations ............. (3,733) (12,640) (485,050) (231,717)
Income (loss) before income taxes ......... (1,552) (12,497) (482,211) (230,266)
Net income (loss).......................... 10,457 (7,905) (381,861) (190,504)
COMMON SHARE DATA:
Basic income (loss) per common share ...... $ 0.20 $ (0.15) $ (5.26) $ (2.64)
Basic equivalent number of shares
outstanding ............................. 52,444 52,023 72,649 72,228
Diluted income (loss) per common share .... $ 0.18 $ (0.15) $ (5.26) $ (2.64)
Diluted equivalent number of shares
outstanding ............................. 56,529 52,023 72,649 72,228
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1999 1999
-------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ............................. $ 82,685 $236,761 $ 375,590
Total assets ............................... 252,761 457,728 2,434,981
Current liabilities ........................ 58,440 77,082 187,586
Long-term obligations, less current portion. 7,418 178,268 178,268
Total stockholders' equity ................. 186,903 202,378 1,847,046
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
CHECKFREE AND BLUEGILL CHECKFREE AND TRANSPOINT
COMBINING PRO FORMA COMBINING PRO FORMA
-------------------------- --------------------------
YEAR SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1999 1999 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ........................ $ 253,621 $ 145,066 $ 250,131 $ 141,992
Income (loss) from operations ............. (80,851) (46,907) (407,931) (197,450)
Income (loss) before income taxes ......... (78,476) (46,367) (405,286) (196,396)
Net income (loss).......................... (57,246) (40,365) (314,157) (158,044)
COMMON SHARE DATA:
Basic income (loss) per common share ...... $ (1.03) $ (0.73) $ (4.52) $ (2.29)
Basic equivalent number of shares
outstanding ............................. 55,649 55,228 69,444 69,023
Diluted income (loss) per common share .... $ (1.03) $ (0.73) $ (4.52) $ (2.29)
Diluted equivalent number of shares
outstanding ............................. 55,649 55,228 69,444 69,023
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1999
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets .................................. $255,753 $ 356,598
Total assets .................................... 774,696 2,118,013
Current liabilities ............................. 90,789 173,879
Long-term obligations, less current portion ..... 178,268 178,268
Total stockholders' equity ...................... 497,638 1,551,786
</TABLE>
29
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
for CheckFree gives effect to:
o The combined proposed acquisition by CheckFree of both BlueGill
Technologies, Inc. and the TransPoint business using the purchase
method of accounting, based on preliminary allocations of the total
estimated purchase price. The historical financial information has
been derived from the respective historical financial statements of
CheckFree, BlueGill and TransPoint, and should be read in conjunction
with the financial statements and the related notes included elsewhere
in this information statement/prospectus.
o The proposed acquisition by CheckFree of BlueGill using the purchase
method of accounting, based on preliminary allocations of the total
estimated purchase price. The historical information has been derived
from the respective historical financial statements of CheckFree and
BlueGill and should be read in conjunction with the financial
statements and the related notes included in this information
statement/prospectus.
o The proposed acquisition by CheckFree of the TransPoint business using
the purchase method of accounting, based on preliminary allocations of
the total estimated purchase price. The historical information has
been derived from the respective historical financial statements of
CheckFree and TransPoint and should be read in conjunction with the
financial statements and the related notes included in this
information statement/prospectus.
The unaudited pro forma condensed combining balance sheets have been
prepared assuming the respective mergers took place as of December 31, 1999 and
allocate the total estimated purchase prices to the fair values of assets and
liabilities of the acquired companies based on preliminary valuations.
The unaudited pro forma condensed combining statements of operations
combine CheckFree's, BlueGill's and TransPoint's historical statements of
operations and give effect to the acquisitions, excluding the immediate
write-off of estimated in-process research and development costs and including
the amortization of goodwill and other intangible assets resulting from the
acquisitions, as if they occurred on July 1, 1998, the beginning of the earliest
period presented.
The total estimated purchase prices of BlueGill and TransPoint have been
allocated on a preliminary basis to assets and liabilities based on management's
estimates of their fair values with the excess costs over the net assets
acquired allocated to goodwill and other intangible assets. These allocations
are subject to change pending a final determination and analysis of the total
purchase prices and the fair values of the assets acquired and liabilities
assumed. The impact of these changes could be material.
The unaudited pro forma condensed combining financial information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial condition that would have actually occurred
if the acquisitions, either individually or combined, had been completed as of
the dates indicated, nor is it necessarily indicative of the future operating
results or financial position of the combined companies. The pro forma
adjustments are based on the information available as of the date of this
information statement/prospectus.
30
<PAGE> 32
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH BLUEGILL AND THE TRANSPOINT ENTITIES
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
---------------------------------------- PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents ....................... $ 152,779 $ 17,040 $ 19,837 $ 100,000 (1) $ 289,656
Investments ..................................... 17,015 -- -- -- 17,015
Accounts receivable, net ........................ 46,780 1,804 -- -- 48,584
Prepaid expenses and other assets ............... 11,863 148 -- -- 12,011
Deferred income taxes ........................... 8,324 -- -- -- 8,324
----------- ----------- ----------- ----------- -----------
Total current assets .......................... 236,761 18,992 19,837 100,000 375,590
Property and equipment, net ........................ 80,416 1,265 1,445 -- 83,126
Capitalized software, net .......................... 21,584 -- 9,439 202,061 (1) 221,184
(11,900) (2)
Goodwill, net ...................................... 30,559 -- -- 1,059,312 (1) 1,089,871
Other intangible assets, net ....................... 12,795 -- -- 576,800 (1) 589,595
Investments ........................................ 31,663 -- -- -- 31,663
Deferred income taxes .............................. 31,095 -- -- -- 31,095
Other noncurrent assets ............................ 12,855 2 -- -- 12,857
----------- ----------- ----------- ----------- -----------
Total assets .................................. $ 457,728 $ 20,259 $ 30,721 $ 1,926,273 $ 2,434,981
=========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable ................................ $ 8,679 $ 1,234 $ 12,181 $ -- $ 22,094
Line of credit .................................. -- 556 -- -- 556
Accrued liabilities ............................. 37,494 969 1,246 3,855 (1) 44,764
1,200 (3)
Deferred income taxes ........................... -- -- -- 88,341 (1) 88,341
Current portion of long-term obligations ........ 5,069 -- -- -- 5,069
Deferred revenue ................................ 25,840 672 250 -- 26,762
----------- ----------- ----------- ----------- -----------
Total current liabilities ..................... 77,082 3,431 13,677 93,396 187,586
Accrued rent and other ............................. 4,862 -- -- -- 4,862
Obligations under capital leases - less current
portion .......................................... 906 -- -- -- 906
Convertible subordinated notes ..................... 172,500 -- -- -- 172,500
Minority interest .................................. -- -- 43,061 (43,061) (1) --
Deferred income taxes .............................. -- -- -- 222,081 (1) 222,081
----------- ----------- ----------- ----------- -----------
Total liabilities ............................. 255,350 3,431 56,738 272,416 587,935
Redeemable preferred stock ......................... -- 25,963 -- (25,963) (1) --
Stockholders' equity:
Common stock .................................... 524 6 -- 196 (1) 726
Additional paid-in capital ...................... 504,058 1,698 -- 1,655,868 (1) 2,160,424
(1,200) (3)
Other ........................................... (299) (632) -- 632 (1) (299)
Member's capital deficiency ..................... -- -- (26,017) 26,017 (1) --
Accumulated deficit ............................. (301,905) (10,207) -- 10,207 (1) (313,805)
(11,900) (2)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity .................... 202,378 (9,135) (26,017) 1,679,820 1,847,046
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ................................... $ 457,728 $ 20,259 $ 30,721 $ 1,926,273 $ 2,434,981
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
31
<PAGE> 33
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND THE TRANSPOINT ENTITIES
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
---------------------------------------- PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 201,059 $ -- $ -- $ -- $ 201,059
License fees .................................. 15,975 2,517 -- -- 18,492
Maintenance fees .............................. 17,746 48 -- -- 17,794
Other ......................................... 15,351 925 -- -- 16,276
--------- --------- --------- --------- ---------
Total revenues ........................... 250,131 3,490 -- -- 253,621
Expenses:
Cost of processing, servicing and support ..... 146,704 969 3,062 -- 150,735
Research and development ...................... 21,085 1,457 26,560 -- 49,102
Sales and marketing ........................... 32,354 2,318 11,302 -- 45,974
General and administrative .................... 31,466 2,045 2,404 -- 35,915
Depreciation and amortization ................. 24,630 106 1,870 432,714 (4) 459,320
In-process research and development ........... 2,201 -- -- -- 2,201
--------- --------- --------- --------- ---------
Total expenses ........................... 258,440 6,895 45,198 432,714 743,247
Net gain on dispositions of assets ............ 4,576 -- -- -- 4,576
--------- --------- --------- --------- ---------
Loss from operations ............................. (3,733) (3,405) (45,198) (432,714) (485,050)
Other:
Minority interest ............................. -- -- 2,064 (2,064) (5) --
Interest, net ................................. 2,181 194 464 -- 2,839
--------- --------- --------- --------- ---------
Loss before income taxes ......................... (1,552) (3,211) (42,670) (434,778) (482,211)
Income tax benefit ............................... (12,009) -- (88,341) (4) (100,350)
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ 10,457 $ (3,211) $ (42,670) $(346,437) $(381,861)
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ 0.20 $ (5.26)
========= =========
Equivalent number of shares ................... 52,444 20,205 (1) 72,649
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ 0.18 $ (5.26)
========= =========
Equivalent number of shares ................... 56,529 16,120 (6) 72,649
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
32
<PAGE> 34
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND THE TRANSPOINT ENTITIES
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
---------------------------------------- PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 120,931 $ -- $ 3 $ -- $ 120,934
License fees .................................. 6,197 2,231 -- -- 6,428
Maintenance fees .............................. 8,956 224 -- -- 9,180
Other ......................................... 5,905 622 -- -- 6,527
--------- --------- --------- --------- ---------
Total revenues ........................... 141,989 3,077 3 -- 145,069
Expenses:
Cost of processing, servicing and support ..... 86,899 789 7,616 -- 95,304
Research and development ...................... 15,110 1,226 1,521 -- 17,857
Sales and marketing ........................... 18,577 3,132 7,799 -- 29,508
General and administrative .................... 19,287 3,193 1,267 -- 23,747
Depreciation and amortization ................. 14,756 147 1,610 193,857 (4) 210,370
In-process research and development ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Total expenses ........................... 154,629 8,487 19,813 193,857 376,786
Net gain on dispositions of assets ............ -- -- -- --
--------- --------- --------- --------- ---------
Loss from operations ............................. (12,640) (5,410) (19,810) (193,857) (231,717)
Other:
Minority interest ............................. -- -- 2,876 (2,876) (5) --
Interest, net ................................. 143 397 911 -- 1,451
--------- --------- --------- --------- ---------
Loss before income taxes ......................... (12,497) (5,013) (16,023) (196,733) (230,266)
Income tax benefit ............................... (4,592) -- -- (35,170) (4) (39,762)
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (7,905) $ (5,013) $ (16,023) $(161,563) $(190,504)
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (2.64)
========= =========
Equivalent number of shares ................... 52,023 20,205 (1) 72,228
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (2.64)
========= =========
Equivalent number of shares ................... 52,023 20,205 (1) 72,228
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
33
<PAGE> 35
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH BLUEGILL AND THE TRANSPOINT ENTITIES
1. Adjustment to reflect the issuance of CheckFree common stock, options
and related direct acquisition expenses as the total purchase price for the net
assets of BlueGill and TransPoint, and the elimination of BlueGill's redeemable
preferred stock and stockholders' equity and the revaluation of TransPoint's
capitalized software costs and the elimination of TransPoint's minority interest
and member's capital deficiency. The fair market values of intangible assets are
preliminary estimates based on independent appraisals and current facts and
circumstances. The final value of intangible assets will change with any change
in the final purchase price of either BlueGill or TransPoint or both and any
resulting change could be material.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Cash............................................. $ 100,000
Capitalized software, net........................ 202,061
Goodwill, net.................................... 1,059,312
Other intangible assets, net..................... 576,800
BlueGill redeemable preferred stock.............. 25,963
BlueGill common stock............................ 6
BlueGill additional paid in capital.............. 1,698
TransPoint minority interest..................... 43,061
CheckFree common stock...................... $ 202
CheckFree additional paid in capital........ 1,657,566
BlueGill accumulated deficit................ 10,207
BlueGill other equity....................... 632
TransPoint member's capital deficiency...... 26,017
Current deferred income tax liability....... 88,341
Long-term deferred income tax liability..... 222,081
Accrued acquisition expenses................ 3,855
----------- -----------
Totals........................................... $ 2,008,901 $ 2,008,901
=========== ===========
</TABLE>
The following chart indicates the components of the estimated purchase
prices of the acquisitions inherent in the adjusting entry:
<TABLE>
<CAPTION>
(in thousands)
BLUEGILL TRANSPOINT COMBINED
ACQUISITION ACQUISITION TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
CheckFree common stock ................. $ 298,244 $ 1,350,083 $ 1,684,327
Issuance of CheckFree options .......... 9,441 -- 9,441
TransPoint cash infusion ............... -- (100,000) (100,000)
Estimated direct acquisition costs ..... 530 3,325 3,855
----------- ----------- -----------
Total estimated purchase price .... $ 308,215 $ 1,253,408 $ 1,561,623
=========== =========== ===========
</TABLE>
The combined estimated purchase price will be issued in exchange for the
net assets of BlueGill and TransPoint on their respective closing dates.
The purchase price of BlueGill reflects the assumed issuance of 3,205,128
shares of our common stock at $93.05 per share which is the average closing
price of our stock for the three trading days preceding and the three trading
days following the announcement of the acquisition. Under the terms of the
merger agreement, we are also issuing an estimated 243,263 CheckFree options to
replace unvested BlueGill options. The value of the assumed CheckFree option
grant is based on a Black-Scholes valuation model assuming a $93.05 stock price,
an average strike price of $2.18, an average life of 2.9 years, a risk-free
interest rate of 6.47% and volatility of 70%. The option value will vary from
this estimate based on option grants and cancellations, resulting changes in the
average strike price, changes in the fair market value of our stock, and changes
in the risk-free rate and volatility of our stock between the date of this
information statement/prospectus and the closing of the merger.
34
<PAGE> 36
The purchase price of TransPoint reflects the assumed issuance of
17,000,000 shares of our common stock at $79.42 per share, which is the average
end of day price of our stock for the three trading days preceding and the three
days following the announcement of the acquisition. Under the terms of the
merger and contribution agreement, TransPoint is to be funded with $100 million
in cash immediately prior to the closing of the transaction.
The following table provides the preliminary allocation of the purchase
price inherent in the adjusting entry:
<TABLE>
<CAPTION>
(in thousands)
BLUEGILL TRANSPOINT
ACQUISITION ACQUISITION COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
In process research and development .......... $ 11,900 $ -- $ 11,900
Current technologies and products ............ 14,600 185,000 199,600
----------- ----------- -----------
Sub-total capitalized software, net .... 26,500 185,000 211,500
Goodwill, net ................................ 253,309 806,003 1,059,312
Other intangible assets:
Workforce in place ........................ 2,600 -- 2,600
Customer list ............................. 10,200 25,000 35,200
Tradename ................................. 14,800 29,000 43,800
Strategic agreements ...................... -- 494,000 494,000
Covenants not to compete .................. 1,200 -- 1,200
----------- ----------- -----------
Sub-total other intangible assets ...... 28,800 548,000 576,800
Deferred income taxes ........................ (17,222) (293,200) (310,422)
Net assets of respective company:
Cash and cash equivalents ................. 17,040 19,838 36,878
Property and equipment .................... 1,265 1,445 2,710
Other, net ................................ (1,477) (13,678) (15,155)
----------- ----------- -----------
Sub-total net assets ................... 16,828 7,605 24,433
----------- ----------- -----------
Total purchase price ......................... $ 308,215 $ 1,253,408 $ 1,561,623
=========== =========== ===========
</TABLE>
Details of specific technologies and the related useful lives of all
intangible assets are described in the Notes to Unaudited Pro Forma Condensed
Combining Financial Information for CheckFree and BlueGill on page 41 and
CheckFree and TransPoint on page 51.
2. Adjustment to write off the balance of in-process research and
development. As the amounts are non-deductible for federal and state tax
purposes, there is no related income tax benefit resulting from the charge.
Refer to Note B in the Notes to Unaudited Pro Forma Condensed Combining
Financial Information for CheckFree and BlueGill on page 43 and CheckFree and
TransPoint on page 53 for a detailed description of in-process research and
development for the respective acquisition. The amount of in-process research
and development is $11.9 million for BlueGill and $0 million for TransPoint.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Accumulated deficit.................. $11,900
Capitalized software, net....... $11,900
</TABLE>
3. Adjustment to accrue the cost of registering CheckFree shares to be
issued for BlueGill of $525,000 and for TransPoint of $675,000.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Additional paid-in capital.......... $ 1,200
Accrued liabilities............ $ 1,200
</TABLE>
35
<PAGE> 37
4. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired.
<TABLE>
<CAPTION>
(in thousands)
COMBINED
BLUEGILL TRANSPOINT ADJUSTMENT
---------- ---------- ---------------------------
<S> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
Depreciation and amortization .......... $ 73,713 $ 359,001 $ 432,714
Current deferred income tax liability .. 9,221 79,120 88,341
Capitalized software, net .......... 4,145 61,667 $ 65,812
Goodwill, net ...................... 50,662 161,201 211,863
Other intangible assets, net ....... 18,906 136,133 155,039
Income tax benefit ................. 9,221 79,120 88,341
---------- ----------
Total .................................. $ 521,055 $ 521,055
========== ==========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization .......... $ 28,857 $ 165,000 $ 193,857
Current deferred income tax liability .. 1,410 33,760 35,170
Capitalized software, net .......... 1,453 30,833 $ 32,286
Goodwill, net ...................... 25,331 80,600 105,931
Other intangible assets, net ....... 2,073 53,567 55,640
Income tax benefit ................. 1,410 33,760 35,170
---------- ----------
Total .................................. $ 229,027 $ 229,027
========== ==========
</TABLE>
Goodwill amortization is non-deductible for federal and state income tax
purposes. A blended effective income tax rate of 40% was applied to the
deductible amortization to determine the related income tax benefit in the
entries above.
5. Adjustment to reflect the elimination of minority interest recorded in
the period due to the acquisition of all of the ownership interest in TransPoint
by CheckFree.
6. When combined with BlueGill's historical loss, TransPoint's historical
loss and the combined pro forma adjustments, the historical CheckFree net income
for the year ended June 30, 1999 resulted in a combined net loss. As a result,
due to the anti-dilutive effect on earnings per share, the equivalent number of
shares for purposes of determining diluted earnings per share, was reduced to
agree with the equivalent number of shares for basic earnings per share. The
following chart identifies by type of potentially dilutive security, the number
of additional shares that could potentially dilute basic earnings per share in
the future and the number of shares issued for both BlueGill and TransPoint.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
CheckFree common shares issued for:
TransPoint ............................................ 17,000
BlueGill .............................................. 3,205
Potentially dilutive securities:
Options and warrants .................................. (4,085)
--------
Net adjustment to dilutive shares outstanding .............. 16,120
========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in preparing the
Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro
Forma Condensed Combining Statement of Operations provide a reasonable basis for
presenting the significant effects of the acquisitions of BlueGill and
TransPoint; that the pro forma adjustments give appropriate effect to those
assumptions; and that the pro forma adjustments are properly applied in the
Unaudited Pro Forma Condensed Combining Balance Sheet and Statement of
Operations.
36
<PAGE> 38
Note B: The Unaudited Pro Forma Condensed Combining Balance Sheet of
CheckFree, BlueGill and TransPoint has been prepared as if the mergers were
completed as of December 31, 1999 and were accounted for as purchases.
The number of CheckFree common shares to be issued in the BlueGill merger
will depend on a number of factors as specified in Note F in the Notes to
Unaudited Pro Forma Condensed Combining information with BlueGill on page 51. We
have assumed for purposes of these pro forma financial statements that 3,205,128
shares of CheckFree common stock will be issued with a fair market value of
$93.05 per share. The excess of fair value over the strike price of options
issued per the merger agreement carry a value of $9,441,000. We expect to incur
$530,000 of direct acquisition costs. The total purchase price of $308,215,128
was allocated to the assets acquired and liabilities assumed based on BlueGill's
December 31, 1999 balance sheet.
We will issue 17,000,000 shares of our common stock at an assumed value of
$79.42 for the net assets of TransPoint. Under the merger and contribution
agreement, TransPoint is to be funded with $100 million of cash immediately
prior to the closing of the transaction. We expect to incur approximately
$3,325,000 of direct acquisition costs. The total purchase price of
$1,253,408,000 was allocated to assets acquired and liabilities assumed based on
TransPoint's December 31, 1999 balance sheet.
The allocation of the BlueGill and TransPoint purchase prices among their
related identifiable tangible and intangible assets and purchased in-process
research and development is based on preliminary estimates of the fair market
value of those assets. Final determination of the allocation of the purchase
prices will be based on independent appraisals that we expect to have completed
shortly after the respective mergers are consummated. For a detailed description
of in-process research and development charges, see Note B for BlueGill on page
43 and Note B for TransPoint on page 53.
Note C: CheckFree's statement of operations for the year ended June 30,
1999, has been combined with the BlueGill statement of operations and the
TransPoint statement of operations for the twelve months ended June 30, 1999.
Our statement of operations for the six month period ended December 31, 1999 has
been combined with the BlueGill statement of operations and the TransPoint
statement of operations for the six months ended December 31, 1999. Actual
statements of operations of CheckFree and BlueGill, and CheckFree and TransPoint
will be combined from the effective date of the respective merger, with no
retroactive restatement.
Note D: The unaudited pro forma condensed combining statement of operations
for CheckFree, BlueGill and TransPoint have been prepared as if the merger was
completed as of July 1, 1998, the beginning of the earliest period presented.
The unaudited pro forma combined net income (loss) per share is based on the
weighted average number of shares of our common stock outstanding during the
periods, adjusted to give effect to shares assumed to be issued had the mergers
taken place as of July 1, 1998.
Note E: The unaudited pro forma condensed combining statement of operations
do not include a charge for the value of the estimated $11.9 million (no income
tax effect) of purchased research and development arising from the merger with
BlueGill, which will be expensed at acquisition, as such expense will have no
continuing impact.
37
<PAGE> 39
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH BLUEGILL
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
---------------------------- PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents .................. $ 152,779 $ 17,040 $ -- $ 169,819
Investments ................................ 17,015 -- -- 17,015
Accounts receivable, net ................... 46,780 1,804 -- 48,584
Prepaid expenses and other assets .......... 11,863 148 -- 12,011
Deferred income taxes ...................... 8,324 -- -- 8,324
--------- --------- --------- ---------
Total current assets .................. 236,761 18,992 -- 255,753
Property and equipment, net ................... 80,416 1,265 -- 81,681
Capitalized software, net ..................... 21,584 -- 26,500 (1) 36,184
(11,900)(2)
Goodwill, net ................................. 30,559 -- 253,309 (1) 283,868
Other intangible assets, net .................. 12,795 -- 28,800 (1) 41,595
Investments ................................... 31,663 -- -- 31,663
Deferred income taxes ......................... 31,095 -- -- 31,095
Other noncurrent assets ....................... 12,855 2 -- 12,857
--------- --------- --------- ---------
Total assets ........................... $ 457,728 $ 20,259 $ 296,709 $ 774,696
========= ========= ========= =========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable ........................... $ 8,679 $ 1,234 $ -- $ 9,913
Line of credit ............................. -- 556 -- 556
Accrued liabilities ........................ 37,494 969 530 (1) 39,518
525 (3)
Deferred income taxes ...................... -- -- 9,221 (1) 9,221
Current portion of long-term obligations ... 5,069 -- -- 5,069
Deferred revenue ........................... 25,840 672 -- 26,512
--------- --------- --------- ---------
Total current liabilities .............. 77,082 3,431 10,276 90,789
Accrued rent and other ........................ 4,862 -- -- 4,862
Obligations under capital leases - less current
portion ..................................... 906 -- -- 906
Convertible subordinated notes ................ 172,500 -- -- 172,500
Deferred income taxes ......................... -- -- 8,001 (1) 8,001
--------- --------- --------- ---------
Total liabilities ...................... 255,350 3,431 18,277 277,058
Redeemable preferred stock .................... -- 25,963 (25,963)(1) --
Stockholders' equity:
Common stock ............................... 524 6 26 (1) 556
Additional paid-in capital ................. 504,058 1,698 305,955 (1) 811,186
(525) (3)
Other ...................................... (299) (632) 632 (1) (299)
Accumulated deficit ........................ (301,905) (10,207) 10,207 (1) (313,805)
(11,900)(2)
--------- --------- --------- ---------
Total stockholder's equity ............. 202,378 (9,135) 304,395 497,638
--------- --------- --------- ---------
Total liabilities and
stockholders' equity ......... $ 457,728 $ 20,259 $ 296,709 $ 774,696
========= ========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
38
<PAGE> 40
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------ PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 201,059 $ -- $ -- $ 201,059
License fees .................................. 15,975 2,517 -- 18,492
Maintenance fees .............................. 17,746 48 -- 17,794
Other ......................................... 15,351 925 -- 16,276
---------- ---------- ---------- ----------
Total revenues ........................... 250,131 3,490 -- 253,621
Expenses:
Cost of processing, servicing and support ..... 146,704 969 -- 147,673
Research and development ...................... 21,085 1,457 -- 22,542
Sales and marketing ........................... 32,354 2,318 -- 34,672
General and administrative .................... 31,466 2,045 -- 33,511
Depreciation and amortization ................. 24,630 106 73,713(4) 98,449
In-process research and development ........... 2,201 -- -- 2,201
---------- ---------- ---------- ----------
Total expenses ........................... 258,440 6,895 73,713 339,048
Net gain on dispositions of assets ............ 4,576 -- -- 4,576
---------- ---------- ---------- ----------
Loss from operations ............................. (3,733) (3,405) (73,713) (80,851)
Other:
Interest, net ................................. 2,181 194 -- 2,375
---------- ---------- ---------- ----------
Loss before income taxes ......................... (1,552) (3,211) (73,713) (78,476)
Income tax benefit ............................... (12,009) -- (9,221)(4) (10,430)
---------- ---------- ---------- ----------
Net income (loss) ................................ $ 10,457 $ (3,211) (64,492) $ (57,246)
========== ========== ========== ==========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ 0.20 $ (1.03)
========== ==========
Equivalent number of shares ................... 52,444 3,205(1) 55,649
========== ========== ==========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ 0.18 $ (1.03)
========== ==========
Equivalent number of shares ................... 56,529 (880)(5) 55,649
========== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
39
<PAGE> 41
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------ PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 120,931 $ -- $ -- $ 120,931
License fees .................................. 6,197 2,231 -- 8,428
Maintenance fees .............................. 8,956 224 -- 9,180
Other ......................................... 5,905 622 -- 6,527
---------- ---------- ---------- ----------
Total revenues ........................... 141,989 3,077 -- 145,066
Expenses:
Cost of processing, servicing and support ..... 86,899 789 -- 87,688
Research and development ...................... 15,110 1,226 -- 16,336
Sales and marketing ........................... 18,577 3,132 -- 21,709
General and administrative .................... 19,287 3,193 -- 22,480
Depreciation and amortization ................. 14,756 147 28,857(4) 43,760
In-process research and development ........... -- -- -- --
---------- ---------- ---------- ----------
Total expenses ........................... 154,629 8,487 28,857 191,973
Net gain on dispositions of assets ............ -- -- -- --
---------- ---------- ---------- ----------
Loss from operations ............................. (12,640) (5,410) (28,857) (46,907)
Other:
Interest, net ................................. 143 397 -- 540
---------- ---------- ---------- ----------
Loss before income taxes ......................... (12,497) (5,013) (28,857) (46,367)
Income tax benefit ............................... (4,592) -- (1,410)(4) (6,002)
---------- ---------- ---------- ----------
Net income (loss) ................................ $ (7,905) $ (5,013) $ (27,447) $ (40,365)
========== ========== ========== ==========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (0.73)
========== ==========
Equivalent number of shares ................... 52,023 3,205(1) 55,228
========== ========== ==========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (0.73)
========== ==========
Equivalent number of shares ................... 52,023 3,205(1) 55,228
========== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
40
<PAGE> 42
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH BLUEGILL
1. Adjustment to reflect the issuance of CheckFree common stock, CheckFree
options and related acquisition expenses as the total purchase price for the net
assets of BlueGill, and the elimination of BlueGill's redeemable preferred stock
and shareholders' equity. The fair market values of intangible assets are
preliminary estimates based on an independent appraisal, and current facts and
circumstances. The final value of intangible assets will change with any change
in the final purchase price and any resulting change could be material.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Capitalized software, net ........................ $ 26,500
Goodwill, net .................................... 253,309
Other intangible assets, net ..................... 28,800
BlueGill redeemable preferred stock .............. 25,963
BlueGill common stock ............................ 6
BlueGill additional paid-in capital .............. 1,698
CheckFree common stock ..................... $ 32
CheckFree additional paid-in capital ....... 307,653
BlueGill accumulated deficit ............... 10,207
BlueGill other equity ...................... 632
Current deferred income tax liability ...... 9,221
Long term deferred income tax liability .... 8,001
Accrued acquisition expenses ............... 530
---------- ----------
Totals ........................................... $ 336,276 $ 336,276
========== ==========
</TABLE>
The following chart indicates the components of the estimated purchase
price inherent in the adjusting entry:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
CheckFree common stock ........................... $ 298,244
Issuance of CheckFree options .................... 9,441
Estimated direct acquisition costs ............... 530
----------
Total estimated purchase price .............. $ 308,215
==========
</TABLE>
The estimated purchase price will be issued in exchange for of the common
and preferred shares, warrants and vested options of BlueGill on the closing
date.
The purchase price reflects the assumed issuance of 3,205,128 shares of our
common stock at $93.05 per share which is the average end of day price of our
stock for the three trading days preceding and the three days following the
announcement of the acquisition of BlueGill. Under the terms of the merger
agreement, we are also issuing an estimated 243,263 CheckFree options to replace
unvested BlueGill options. The value of the assumed CheckFree option grant is
based on a Black-Scholes valuation model assuming a $93.05 stock price, an
average strike price of $2.18, an average life of 2.9 years, a risk-free
interest rate of 6.47% and volatility of 70%. The option value will vary from
this estimate based on option grants and cancellations, resulting changes in the
average strike price, changes in the fair market value of our stock, and changes
in the risk-free rate and volatility of our stock between the date of the
information statement/prospectus and the closing of the merger.
The following table provides the allocation of the purchase price inherent
in the adjusting entry:
41
<PAGE> 43
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
In-process research and development (Note B) $ 11,900
Current technology and products:
Print / extraction (estimated life of 3 years).... 4,200
Data management engine (estimated life of 4 years).... 6,700
API or application protocol interfaces (estimated life of 2 years).... 1,100
Web applications (estimated life of 5 years).... 2,600
--------
Sub-total IPR&D and current technology and products........................ 26,500
Goodwill (estimated life of 5 years).... 253,309
Other intangible assets:
Workforce in place (estimated life of 3 years).... 2,600
Customer list (estimated life of 5 years).... 10,200
Tradename (estimated life of 1 year ).... 14,800
Covenants not to compete (estimated life of 1 year ).... 1,200
--------
Sub-total other intangible assets.......................................... 28,800
Deferred income taxes.......................................................... (17,222)
Net assets of BlueGill:
Cash and cash equivalents.................................................... 17,040
Property and equipment....................................................... 1,265
Other, net................................................................... (1,477)
--------
Sub-total net assets....................................................... 16,828
--------
Total Purchase Price........................................................... $308,215
========
</TABLE>
The useful lives of the various intangible assets identified are based on
management's preliminary estimates. Under the caption of current technology and
products, lives are based on assumptions regarding the time expected for the
indicated technology or product to become obsolete, which are driven primarily
by planned future development work designed to replace the existing technology
or product. The useful life assigned to goodwill is based upon currently
acceptable lives for such assets. The useful life on workforce in place is
based on our estimate of the average tenure expected from the BlueGill employee
base. The useful life we assigned to the customer base is based on our estimate
of the future revenue base from the existing customers. Although the BlueGill
tradename is widely known at this time, we currently have no plans to continue
to utilize the name once the technologies of BlueGill and CheckFree are
consolidated in to a single product offering, which we expect to take place
within one year of the merger. We assigned a one-year life to the covenants not
to compete to coincide with the contractual life of the related agreements. We
will amortize these intangible assets on a straight-line basis over their
estimated useful lives.
2. Adjustment to write off the balance of in-process research and
development. As the amount is not deductible for federal or state income tax
purposes, there is no related income tax benefit resulting from the charge.
Refer to Note B for an explanation of in process research and development.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Accumulated deficit ............... $ 11,900
Capitalized software, net ....... $ 11,900
</TABLE>
3. Adjustment to accrue the cost of registering CheckFree shares to be
issued for BlueGill.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Additional paid-in capital ........ $ 525
Accrued liabilities ............. $ 525
</TABLE>
4. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired from BlueGill.
42
<PAGE> 44
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
YEAR ENDED JUNE 30, 1999
Depreciation and amortization ............... $ 73,713
Current deferred income tax liability ....... 9,221
Capitalized software, net ................. $ 4,145
Goodwill, net ............................. 50,662
Other intangible assets, net .............. 18,906
Income tax benefit ........................ 9,221
---------- ----------
Total ....................................... $ 82,934 $ 82,934
========== ==========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization ............... $ 28,857
Current deferred income tax liability ....... 1,410
Capitalized software, net ................. $ 1,453
Goodwill, net ............................. 25,331
Other intangible assets, net .............. 2,073
Income tax benefit ........................ 1,410
---------- ----------
Total ....................................... $ 30,267 $ 30,267
========== ==========
</TABLE>
Goodwill amortization is non-deductible for federal and state income tax
purposes. A blended effective income tax rate of 40% was applied to the
deductible amortization to determine the related income tax benefit in the
entries above.
5. When combined with BlueGill's historical loss and the pro forma
adjustments, the historical CheckFree net income for the year ended June 30,
1999 resulted in a combined net loss. As a result, due to the anti-dilutive
effect on earnings per share, the equivalent number of shares for purposes of
determining diluted earnings per share, was reduced to agree with the equivalent
number of shares for basic earnings per share. The following chart identifies by
type of potentially dilutive security, the number of additional shares that
could potentially dilute basic earnings per share in the future and the number
of shares issued for BlueGill.
<TABLE>
<S> <C>
CheckFree common shares issued for BlueGill ........... 3,205
Potentially dilutive securities:
Options and warrants ................................ (4,085)
Other ............................................... --
----------
Total potentially dilutive securities ............. (4,085)
----------
Net adjustment to dilutive shares outstanding.......... (880)
==========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in preparing the
Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro
Forma Condensed Combining Statement of Operations provide a reasonable basis for
presenting the significant effects of the acquisition of BlueGill; that the pro
forma adjustments give appropriate effect to those assumptions; and that the pro
forma adjustments are properly applied in the Unaudited Pro Forma Condensed
Combining Balance Sheet and Statement of Operations.
Note B: The unaudited pro forma condensed balance sheet of CheckFree and
BlueGill has been prepared as if the merger was completed as of December 31,
1999, and was accounted for as a purchase. The number of CheckFree common shares
to be issued in the merger will depend on a number of factors as specified in
the merger agreement. We have assumed for purposes of these pro forma financial
statements that 3,205,128 shares of CheckFree common stock will be issued with a
fair market value of $93.05 per share. The total purchase price of $308,215,000
was allocated to assets acquired and liabilities assumed based on BlueGill's
December 31, 1999 balance sheet.
The allocation of the BlueGill purchase price among the identifiable
tangible and intangible assets and purchased in process research and development
is based on preliminary estimates of the fair market value of those assets.
Final determination of the allocation of the purchase price will be based on
independent appraisals that we expect to have completed shortly after the merger
is consummated.
43
<PAGE> 45
BlueGill currently has five general technologies and application suites
under development that meet the specific requirements of SFAS No. 2 for
qualification as in-process research and development or IPRD. Critical elements
of SFAS No. 2's definition of IPRD are that:
o the product has not yet demonstrated its technological feasibility; and
o the product does not have an alternative future use.
These in-process technologies and applications include print and extraction
technology, the Data Management Engine (DME) technology, API technology, web
applications and OFX payment technology. Their descriptions are found below.
Print and extraction technology. Print and extraction technology allows for
the extraction and print parsing of a biller's legacy billing information
through to BlueGill's products. The following features of the print / extraction
technology are under development:
o PDF Server, which converts line data input streams into PDF data
output;
o SmartXpress 2.2.0 that comprises updates to accommodate core changes to
BlueGill's DME 2.2.0; and
o SmartXpress 2.3.0 which comprises enhancements to SmartXpress user
functionality.
Data Management Engine (DME) technology. The DME technology allows for
archiving of transactions and linkage of data to the necessary environment
within the BlueGill network. The DME is the main translator of input data to
output data. The following features are under development:
o WebStream, which is a quick-to-market bill presentment system that is a
repackaging of existing components;
o Archive Interface, which is a generic archive interface to support
linkage to OnDemand and INSCI;
o Xerox Metacode Support, which is Xerox print support on the AIX,
Solaris and HP-UX platforms; and
o SQL Server Support, which is additional data base support.
APIs. The API technology encompasses knowledge engineering procedures and
expert system analysis, design and development. The API technology works in
between the print/extraction and parsing modules and the web applications or
templates. The API "surrounds" the DME as its interface to these other
technologies. The following features are under development:
o BlueGill Engine 2.2.0,which encompasses pre-requisites for Biller
Direct and OFX;
o BlueGill Engine 3.0.0 - Pure JAVA Interface, which provides a pure JAVA
version of the public API set; and
o CheckFree E-Bill 3.1 Format Support, which provides batch mode support
for the CheckFree E-Bill 3.1 format.
Web Applications. The web application technologies help in the design of
industry specific templates for electronic billing and statement presentation.
The following features are under development:
o i-Biller Template for the utility industry billing statement templates;
o i-Broker Template for the brokerage industry statement templates;
o i-Telco Template for the telecommunications industry billing templates;
o Control Center, which is the host for BlueGill Administration
applications consisting of functions like relationship management,
remote control execution of BlueGill programs, viewing of program
execution reports, viewing of program execution logs, market direct,
statement preview, and enrollment and activation of customers; and
o Statement Counter, which accumulates transaction charges for statement
viewing.
Payments or OFX. The payments or OFX technology will allow for bill
publishing services to be integrated with the i-Series products and bill
consolidators. The following feature is under development:
o OFX Bill Publisher Server, which is the core OFX engine integrated with
the i-Series engine support and Bill Publisher component to link to
consolidators.
44
<PAGE> 46
There are risks and uncertainties associated with the completion of these
in-process technologies. These risks include:
o Not Technologically Feasible.
The acquired IPRD had not demonstrated technological or commercial
feasibility as of the transaction date for BlueGill. Significant risks
exist because BlueGill is unsure of the obstacles it will encounter in
the form of market acceptance, time and cost necessary to produce a
technologically feasible product. SFAS No. 2 does not specifically
require an analysis of the development effort expended relative to an
acquisition date. It is reasonable to assume, however, that an IPRD
project would require a significant amount of time and cost in order to
modify for CheckFree's use in the marketplace. Should the proposed
technology fail to become viable, it is unlikely that CheckFree would
be able to realize any value from the sale of the technology to another
party.
o No Alternative Future Use.
The acquired IPRD consists of BlueGill's work to date on its products.
The products are very specific to the tasks and markets for which it is
intended. As is typically the case with software, there are no
alternative uses for the in-process work in the event that the product
does not become feasible for CheckFree. The development effort for the
acquired IPRD does not possess an alternative future use for CheckFree
under the terms of SFAS No. 2.
o If the BlueGill project underway fails, there will be a very limited
life to the existing product because the continuing pace of
technological developments in the marketplace will have rendered them
non-competitive. In the event of a failure, the technology acquired, as
embodied in either current or in-process products, will have no
alternative use and would be written off as a loss by CheckFree.
o As of the valuation date, all of the IPRD technologies were subject to
numerous technological, timing, cost and market risks. In addition to
these risks already mentioned, another major risk associated with the
technologies pertains to the language it's written in. According to
BlueGill management, all of the base code may go to the JAVA computer
language, causing large sections of the codes to be re-written.
The following table represents information regarding the status of the
various in-process research and development projects to be acquired:
45
<PAGE> 47
<TABLE>
<CAPTION>
ESTIMATED EXPECTED
STAGE OF ESTIMATED COST TO
COMPLETION COMPLETION DATE COMPLETE VALUATION
-------------- ------------------ -------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Print / Extraction ........... 25% December 2000 $ 168 $ 1,300
Data Management Engine ....... 75% February 2000 10 4,900
APIs ......................... 54% December 2000 229 2,700
Web Applications ............. 79% March 2000 8 2,100
Payments or OFX .............. 43% December 2000 112 900
------- -------
Total ................... $ 527 $11,900
======= =======
</TABLE>
The method used to allocate the purchase consideration to IPRD was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPRD projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
o analysis of the stage of completion of each project;
o exclusion of value related to research and development yet-to-be
completed as part of the on-going IPRD projects; and
o the contribution of existing technologies and applications.
The projected revenue used in the income approach are based upon the
incremental revenues associated with a portion of the project related to
BlueGill's technology likely to be generated upon completion of the project and
the beginning of commercial sales, as estimated by management. The projections
assume that the projects will be successful and the project's development and
commercialization are as set forth by management. The discount rate used in this
analysis is an after tax rate of 25%.
Note C: CheckFree's statement of operations for the year ended June 30,
1999, has been combined with the BlueGill statement of operations for the twelve
months ended June 30, 1999. Our statement of operations for the six month period
ended December 31, 1999 has been combined with the BlueGill statement of
operations for the six month period ended December 31, 1999. Actual income
statements of CheckFree and BlueGill will be combined from the effective date of
the merger, with no retroactive restatement.
Note D: The unaudited pro forma condensed combining statement of operations
for CheckFree and BlueGill have been prepared as if the merger was completed as
of July 1, 1998, the beginning of the earliest period presented. The unaudited
pro forma combined net income (loss) per share is based on the weighted average
number of shares of our common stock outstanding during the periods, adjusted to
give effect to shares assumed to be issued had the merger taken place as of July
1, 1998.
Note E: The unaudited pro forma condensed combining statement of operations
do not include a charge for the value of the estimated $11.9 million (no income
tax effect) of purchased research and development arising from the merger, which
will be expensed at acquisition, as this expense will not have a continuing
impact.
Note F: The merger agreement between CheckFree and BlueGill includes
specific terms and conditions to address the impact on the purchase price and
the relative number of shares of our common stock to be issued in the event of
significant variation in the price of our common stock from the date of the
merger agreement to the closing date. The initially agreed upon purchase price
was $250 million, or 3,205,128 shares of our common stock when the market value
of the stock was $78.00 per share. The following is a summary of the impact on
the purchase price and/or the shares to be issued based on specified values of
the average trading price of our common stock. The average trading price is
defined in the agreement as the weighted average intraday trading price of our
common stock on the Nasdaq National Market during the three days immediately
preceding the closing date of the merger, as reported by Bloomberg.
o If the average trading price is greater than or equal to $78.00 per
share and less than or equal to $101.40 per share, the number of shares
of our common stock shares to be issued as consideration will remain
fixed at 3,205,128. To the extent that the ultimate purchase price
exceeds $250 million, the additional amount, up
46
<PAGE> 48
to $75 million, will be reflected on our balance sheet as additional
goodwill. This additional goodwill will be amortized on a straight-line
basis over an estimated life of five years commencing immediately upon
the closing of the merger agreement.
o If the average trading price is greater than $101.40 per share, the
purchase price will be fixed at $325 million and the number of shares
of our common stock to be issued as consideration will be reduced
accordingly. At the baseline average trading price of $101.40 per
share, we will issue 3,205,128 shares in consideration for BlueGill's
stock. If the average trading price is $106.40, or $5.00 per share
above the $101.40 baseline, the number of shares of our common stock
shares will reduce by 150,617 to 3,054,511 and if the average trading
price is $111.40, or $10.00 per share above the $101.40 baseline, the
number of shares of our common stock will reduce by 287,723 to
2,917,415. The additional purchase price of $75 million from the
baseline price of $250 million will be reflected on the balance sheet
as goodwill and will be amortized on a straight-line basis over the
next five years.
o If the average trading price is greater than or equal to $50.00 per
share and less than or equal to $78.00 per share, the purchase price
will be fixed at $250 million and the number of shares of our common
stock to be issued as consideration will increase accordingly. At a
baseline average trading price of $78.00 per share, we again issue
3,205,128 shares in consideration for BlueGill's stock. If the average
trading price is $73.00 per share, or $5.00 per share below the $78.00
baseline, the number of shares of our common stock issued will increase
by 219,529 shares to 3,424,657 and if the average trading price is
$68.00 per share, or $10.00 per share below the $78.00 baseline, the
number of shares of our common stock issued will increase by 471,342
shares to 3,676,470. Because the price will remain fixed at $250
million, under this scenario there will be no added impact on the
balance sheet or future statements of operations.
o If the average trading price is less than $50.00 per share there are
two options available:
(1) We may terminate the merger. If BlueGill, however, elects to
reinstate the merger agreement, the number of shares of our common
stock to be issued as consideration will be fixed at 5,000,000. If
the average trading price is $45.00 per share, the purchase price
would become $225 million and if the average trading price is
$40.00 per share, the purchase price would become $200 million. To
the extent that the purchase price is lower than $250 million, the
reduction will reflect itself in lower goodwill on the balance
sheet and will result in lower straight-line goodwill amortization
expense over the next five year period.
(2) If we do not terminate the merger, the purchase price will be
fixed at $250 million and the number of shares of our common stock
issued in consideration will be determined by dividing $250
million by the average trading price. In this instance, if the
average trading price is $45.00 per share, we would issue
5,555,555 shares in consideration for BlueGill's stock and if the
average trading price is $40.00 per share, we would issue
6,250,000 shares in consideration for BlueGill's stock. Because
the purchase price will remain fixed at $250 million, under this
scenario there will be no added impact on the balance sheet or
future statements of operations.
47
<PAGE> 49
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH THE TRANSPOINT ENTITIES
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------ PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents .......................... $ 152,779 $ 19,837 $ 100,000 (1) $ 272,616
Investments ........................................ 17,015 -- -- 17,015
Accounts receivable, net ........................... 46,780 -- -- 46,780
Prepaid expenses and other assets .................. 11,863 -- -- 11,863
Deferred income taxes .............................. 8,324 -- -- 8,324
----------- ----------- ----------- -----------
Total current assets .......................... 236,761 19,837 100,000 356,598
Property and equipment, net ........................... 80,416 1,445 -- 81,861
Capitalized software, net ............................. 21,584 9,439 175,561 (1) 206,584
Goodwill, net ......................................... 30,559 -- 806,003 (1) 836,562
Other intangible assets, net .......................... 12,795 -- 548,000 (1) 560,795
Investments ........................................... 31,663 -- -- 31,663
Deferred income taxes ................................. 31,095 -- -- 31,095
Other noncurrent assets ............................... 12,855 -- -- 12,855
----------- ----------- ----------- -----------
Total assets ................................... $ 457,728 $ 30,721 $ 1,629,564 $ 2,118,013
=========== =========== =========== ===========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable ................................... $ 8,679 $ 12,181 $ -- $ 20,860
Accrued liabilities ................................ 37,494 1,246 3,325 (1) 42,740
675 (2)
Deferred income taxes .............................. -- -- 79,120 (1) 79,120
Current portion of long-term obligations ........... 5,069 -- -- 5,069
Deferred revenue ................................... 25,840 250 -- 26,090
----------- ----------- ----------- -----------
Total current liabilities ...................... 77,082 13,677 83,120 173,879
Accrued rent and other ................................ 4,862 -- -- 4,862
Obligations under capital leases - less current
portion ............................................. 906 -- -- 906
Convertible subordinated notes ........................ 172,500 -- -- 172,500
Minority interest ..................................... -- 43,061 (43,061)(1) --
Deferred income taxes ................................. -- -- 214,080 (1) 214,080
----------- ----------- ----------- -----------
Total liabilities .............................. 255,350 56,738 254,139 566,227
Stockholders' equity:
Common stock ....................................... 524 -- 170 (1) 694
Additional paid-in capital ......................... 504,058 -- 1,349,913 (1) 1,853,296
(675)(2)
Members' capital deficiency ........................ -- (26,017) 26,017 (1) --
Other .............................................. (299) -- -- (299)
Accumulated deficit ................................ (301,905) -- -- (301,905)
----------- ----------- ----------- -----------
Total stockholder's equity ..................... 202,378 (26,017) 1,375,425 1,551,786
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ................................... $ 457,728 $ 30,721 $ 1,629,564 $ 2,118,013
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
48
<PAGE> 50
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH THE TRANSPOINT ENTITIES
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------ PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 201,059 $ -- $ -- $ 201,059
License fees .................................. 15,975 -- -- 15,975
Maintenance fees .............................. 17,746 -- -- 17,746
Other ......................................... 15,351 -- -- 15,351
--------- --------- --------- ---------
Total revenues ........................... 250,131 -- -- 250,131
Expenses:
Cost of processing, servicing and support ..... 146,704 3,062 -- 149,766
Research and development ...................... 21,085 26,560 -- 47,645
Sales and marketing ........................... 32,354 11,302 -- 43,656
General and administrative .................... 31,466 2,403 -- 33,869
Depreciation and amortization ................. 24,630 1,870 359,001 (3) 385,501
In-process research and development ........... 2,201 -- -- 2,201
--------- --------- --------- ---------
Total expenses ........................... 258,440 45,197 359,001 662,638
Net gain on dispositions of assets ............ 4,576 -- -- 4,576
--------- --------- --------- ---------
Loss from operations ............................. (3,733) (45,197) (359,001) (407,931)
Other:
Minority interest ............................. -- 2,063 (2,063)(4) --
Interest, net ................................. 2,181 464 -- 2,645
--------- --------- --------- ---------
Loss before income taxes ......................... (1,552) (42,670) (361,064) (405,286)
Income tax benefit ............................... (12,009) -- (79,120)(3) (91,129)
--------- --------- --------- ---------
Net income (loss) ................................ $ 10,457 $ (42,670) $(281,944) $(314,157)
========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ 0.20 $ (4.52)
========= =========
Equivalent number of shares ................... 52,444 17,000 (1) 69,444
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ 0.18 $ (4.52)
========= =========
Equivalent number of shares ................... 56,529 12,915 (5) 69,444
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
49
<PAGE> 51
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH THE TRANSPOINT ENTITIES
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------ PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ...................... $ 120,931 $ 3 $ -- $ 120,934
License fees .................................. 6,197 -- -- 6,197
Maintenance fees .............................. 8,956 -- -- 8,956
Other ......................................... 5,905 -- -- 5,905
--------- --------- --------- ---------
Total revenues ........................... 141,989 3 -- 141,992
Expenses:
Cost of processing, servicing and support ..... 86,899 7,616 -- 94,515
Research and development ...................... 15,110 1,521 -- 16,631
Sales and marketing ........................... 18,577 7,799 -- 26,376
General and administrative .................... 19,287 1,267 -- 20,554
Depreciation and amortization ................. 14,756 1,610 165,000 (3) 181,366
In-process research and development ........... -- -- -- --
--------- --------- --------- ---------
Total expenses ........................... 154,629 19,813 165,000 339,442
Net gain on dispositions of assets ............ -- -- -- --
--------- --------- --------- ---------
Loss from operations ............................. (12,640) (19,810) (165,000) (197,450)
Other:
Minority interest ............................. -- 2,876 (2,876)(4) --
Interest, net ................................. 143 911 -- 1,054
--------- --------- --------- ---------
Loss before income taxes ......................... (12,497) (16,023) (167,876) (196,396)
Income tax benefit ............................... (4,592) -- (33,760)(3) (38,352)
--------- --------- --------- ---------
Net income (loss) ................................ $ (7,905) $ (16,023) $(134,116) $(158,044)
========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share............. $ (0.15) $ (2.29)
========= =========
Equivalent number of shares.................... 52,023 17,000 (1) 69,023
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share............. $ (0.15) $ (2.29)
========= =========
Equivalent number of shares.................... 52,023 17,000 (1) 69,023
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
50
<PAGE> 52
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH THE TRANSPOINT ENTITIES
1. Adjustment to reflect the issuance of CheckFree common stock and related
acquisition expenses as the total purchase price for the net assets of
TransPoint, and the revaluation of TransPoint's capitalized software costs and
the elimination of TransPoint's minority interest and member's capital
deficiency, net of a contractual infusion of $100 million of cash by TransPoint.
The fair market values of intangible assets are preliminary estimates based on
an independent appraisal, and current facts and circumstances. The final value
of intangible assets will change with any change in the final purchase price and
any resulting change could be material.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash .................................................. $ 100,000
Capitalized software, net ............................. 175,561
Goodwill, net ......................................... 806,003
Other intangible assets, net .......................... 548,000
TransPoint minority interest .......................... 43,061
CheckFree common stock ........................ $ 170
CheckFree additional paid-in capital .......... 1,349,913
TransPoint member's capital deficiency ....... 26,017
Current deferred income tax liability ......... 79,120
Long term deferred income tax liability ....... 214,080
Accrued acquisition expenses .................. 3,325
------------ ------------
Totals ................................................ $ 1,672,625 $ 1,672,625
============ ============
</TABLE>
The following chart indicates the components of the estimated purchase
price inherent in the adjusting entry:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
CheckFree common stock ................. $ 1,350,083
TransPoint cash infusion ............... (100,000)
Estimated direct acquisition costs ..... 3,325
-----------
Total estimated purchase price .... $ 1,253,408
===========
</TABLE>
The estimated purchase price will be issued in exchange for the net assets
of TransPoint on the closing date.
The purchase price reflects the assumed issuance of 17,000,000 shares of
our common stock at $79.42 per share, which is the average end of day price of
our stock for the three trading days preceding and the three days following the
announcement of the acquisition of TransPoint. Under the terms of the merger and
contribution agreement, TransPoint is to be funded with $100 million in cash
before the closing of the transaction.
The following table provides the allocation of the purchase price inherent
in the adjusting entry:
51
<PAGE> 53
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
In-process research and development (Note B) $ 0
Current technology and products:
BIS / communications (estimated life of 3 years)........ 26,000
Service center (estimated life of 3 years)........ 85,000
Delivery applications (estimated life of 3 years)........ 50,000
Payments / interface (estimated life of 3 years)........ 24,000
-----------
Sub-total IPRD and current technology and products ............................ 185,000
Goodwill (estimated life of 5 years)........ 806,003
Other intangible assets:
Customer list (estimated life of 3 years)........ 25,000
Tradename (estimated life of 1 year )........ 29,000
Strategic agreements (estimated life of 5 years)........ 494,000
-----------
Sub-total other intangible assets............................................. 548,000
Deferred income taxes................................................................... (293,200)
Net assets of TransPoint:
Cash and cash equivalents............................................................ 19,838
Property and equipment............................................................... 1,445
Liabilities assumed.................................................................. (13,678)
-----------
Sub-total net assets......................................................... 7,605
-----------
Total Purchase Price....................................................................$ 1,253,408
===========
</TABLE>
The useful lives of the various intangible assets identified are based on
management's preliminary estimates. Under the caption of current technology and
products, lives are based on assumptions regarding the time expected for the
indicated technology or product to become obsolete, which are driven primarily
by planed future development work designed to replace the existing technology or
product. The useful life assigned to goodwill is based upon currently acceptable
lives for such assets. The useful life we assigned to the customer list is based
on the estimate of the future revenue base from the existing customers. The
useful life we assigned to tradename is based on the estimated time that will
pass before we discontinue the use of the related name. We assigned a five-year
life to the strategic agreements to coincide with the contractual life of the
related agreements. We will amortize these intangible assets on a straight-line
basis over their estimated useful lives.
2. Adjustment to accrue the cost of registering CheckFree shares to be
issued for TransPoint.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Additional paid-in capital.......... $ 675
Accrued liabilities............ $ 675
</TABLE>
52
<PAGE> 54
3. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired from
TransPoint.
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
YEAR ENDED JUNE 30, 1999
Depreciation and amortization ........... $ 359,001
Current deferred income tax liability ... 79,120
Capitalized software, net ........... $ 61,667
Goodwill, net ....................... 161,201
Other intangible assets, net ........ 136,133
Income tax benefit................... 79,120
----------- -----------
Total ................................... $ 438,121 $ 438,121
=========== ===========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization ........... $ 165,000
Current deferred income tax liability ... 33,760
Capitalized software, net ........... $ 30,833
Goodwill, net ....................... 80,600
Other intangible assets, net ........ 53,567
Income tax benefit .................. 33,760
----------- -----------
Total ................................... $ 198,760 $ 198,760
=========== ===========
</TABLE>
Goodwill amortization is non-deductible for federal and state income tax
purposes. A blended effective income tax rate of 40% was applied to the
deductible amortization to determine the related income tax benefit in the
entries above.
4. Adjustment to reflect the elimination of minority interest recorded in
the period due to the acquisition of all of the ownership interest in TransPoint
by CheckFree.
5. When combined with TransPoint's historical loss and the pro forma
adjustments, the historical CheckFree net income for the year ended June 30,
1999 resulted in a combined net loss. As a result, due to the anti-dilutive
effect on earnings per share, the equivalent number of shares for purposes of
determining diluted earnings per share, was reduced to agree with the equivalent
number of shares for basic earnings per share. The following chart identifies by
type of potentially dilutive security, the number of additional shares that
could potentially dilute basic earnings per share in the future and the number
of shares issued for TransPoint.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
CheckFree common shares issued for TransPoint...... 17,000
Potentially dilutive securities:
Options and warrants.......................... (4,085)
---------
Net adjustment to dilutive shares outstanding...... 12,915
=========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in preparing the
Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro
Forma Condensed Combining Statement of Operations provide a reasonable basis for
presenting the significant effects of the acquisition of TransPoint; that the
pro forma adjustments give appropriate effect to those assumptions; and that the
pro forma adjustments are properly applied in the Unaudited Pro Forma Condensed
Combining Balance Sheet and Statement of Operations.
Note B: The Unaudited Pro Forma Condensed Combining Balance Sheet of
CheckFree and TransPoint has been prepared as if the transaction was completed
as of December 31, 1999, and was accounted for as a purchase. We will issue
17,000,000 shares of our common stock valued at $79.42 for the net assets of
TransPoint. Under the terms of the merger and contribution agreement, TransPoint
is to be funded with $100 million of cash immediately prior to the closing of
the transaction. We expect to incur approximately $3.3 million of direct
acquisition costs. The total purchase price of $1,253,408,000 was allocated to
assets acquired and liabilities assumed based on TransPoint's December 31, 1999
balance sheet.
The allocation of the TransPoint purchase price among the identifiable
tangible and intangible assets is based on preliminary estimates of the fair
market value of those assets. Final determination of the allocation of
53
<PAGE> 55
the purchase price will be based on independent appraisals that we expect to
have completed shortly after the transaction is consummated.
This transaction is expected to close within four to six months. TransPoint
released the latest version of their electronic billing and payment processing
system just one week prior to the announcement of this transaction. As a result,
at this time, the value of in-process research and development is nominal and
therefore not reflected. However, we will reassess the fair market value of the
assets and liabilities assumed from TransPoint at the time of closing and we
expect a portion of the purchase price to be allocated to in-process research
and development at that time. Due to uncertainties regarding the specific
products or technology enhancements that will be included in the next release
and the specific date of the closing, we cannot currently provide a reasonable
estimate of the expected value of in-process research and development.
Note C: CheckFree's statement of operations for the year ended June 30,
1999, has been combined with the TransPoint statement of operations for the
twelve months ended June 30, 1999. Our statement of operations for the six month
period ended December 31, 1999 has been combined with the TransPoint statement
of operations for the six months ended December 31, 1999. Actual income
statements of CheckFree and TransPoint will be combined from the effective date
of the transaction, with no retroactive restatement.
Note D: The unaudited pro forma condensed combining statements of
operations for CheckFree and TransPoint have been prepared as if the transaction
was completed as of July 1, 1998, the beginning of the earliest period
presented. The unaudited pro forma combined net income (loss) per share is based
on the weighted average number of shares of our common stock outstanding during
the periods, adjusted to give effect to shares assumed to be issued had the
transaction taken place as of July 1, 1998.
54
<PAGE> 56
THE MERGER
BACKGROUND OF THE MERGER
We develop and provide electronic billing and payment services and related
products for financial institutions, businesses and their customers. Our
services facilitate the electronic distribution and payment of bills as well as
payment of any bill for financial institutions and portals and their customers.
BlueGill develops, markets and supports electronic billing software designed to
facilitate the creation and hosting of bills which can be distributed to
consumers at their financial institution or portal web sites through services
like those offered by us.
Since 1998, CheckFree and BlueGill have had a cooperative business
relationship through which billers using BlueGill software for creation and
hosting of their bills have been able to distribute these bills to consumers at
their financial institution or portal Internet financial services sites through
our distribution, payment and tracking system. The billers have compensated
BlueGill for software and services in a traditional software revenue model and
CheckFree for distribution, payment and tracking services in a transaction fee
revenue model.
Given our existing commercial relationships, from time to time, we and
BlueGill have discussed business opportunities, including utilizing BlueGill
software in the CheckFree electronic billing offering and other opportunities,
to advance the electronic billing and payment software and distribution market.
On August 4, 1999, Mark Johnston, our vice chairman, Hal Davis, BlueGill's
president, and Vinay Gupta, BlueGill's chief financial officer, met in Columbus,
Ohio to discuss the possibility of an acquisition. On September 9, 1999, Pete
Sinisgalli, Mark Johnson, Jim Douglass and David Odom on behalf of CheckFree and
Hal Davis, Vinay Gupta, Ray Simonson and Richard Pickering on behalf of BlueGill
met at BlueGill's offices in Ann Arbor, Michigan to discuss a tighter alliance
between our organizations. These discussions included CheckFree investing in
BlueGill as well as the possibility that CheckFree acquire BlueGill. At the
September 9, 1999 meeting, the BlueGill representatives also made a presentation
of BlueGill's business overview. On September 20, 1999, officers of both
companies met in Ann Arbor, Michigan to further explore these opportunities.
These discussions were later followed up with additional discussions on December
1, 1999 in BlueGill's office in Waterloo, Ontario. During this time period,
CheckFree determined that to achieve the benefits of the BlueGill
technology, an acquisition was more appropriate than a strategic alliance with
BlueGill. CheckFree did not consider any other alternatives for the acquisition
of the BlueGill technology.
During 1999, BlueGill's board of directors considered ways to strengthen
the company's management, technology and market position and to provide
additional financing and stockholder liquidity. BlueGill identified and entered
into preliminary discussions with a potential merger partner. It also held
preliminary exploratory conversations with investment bankers to determine
possible interest in a public offering of BlueGill common stock. At the time the
CheckFree merger opportunity matured in December 1999, the BlueGill board of
directors decided that on balance, after weighing the risks and opportunities of
each alternative relative to the others, the merger with CheckFree was
BlueGill's best alternative. Regarding the merger alternative, the merger
partner did not have the breadth of product which CheckFree had and was not a
public company, and the merger raised management, integration and control
issues. Regarding the public offering alternative, BlueGill's board was
concerned about BlueGill's short operating history, the need to build revenues
and management to strengthen the interest of underwriters and the public, the
receptivity of the market to a BlueGill offering in the latter part of 2000 and
the diversion of management which would be involved in a public offering.
On December 7, 1999, Pete Sinisgalli, Mark Johnson and Jim Douglass met
with Hal Davis and Vinay Gupta in our Atlanta offices to begin the initial
discussion and negotiation of the principal terms and structure under which we
might effect the purchase of BlueGill. These conversations continued in a
telephone conversation on December 8, 1999, between Jim Douglass and Vinay Gupta
based upon an outline of an acquisition proposal from CheckFree. On December 9,
1999, BlueGill's board retained Broadview International, LLC to assist in the
negotiations and as financial advisor. Broadview discussed with Pete Sinisgalli,
Jim Douglass and Allen Shulman in telephone conversations on December 8, 9, 10
and 11, 1999 issues regarding price, collar, floor, ceiling, break-up fees and
walking rights. In determining the fair consideration for the transaction,
CheckFree considered the internal financial analysis prepared as a result of its
due diligence review, valuations of public companies having businesses similar
to BlueGill as well as discussions with BlueGill's management regarding recent
valuations that BlueGill discussed with various investment banking firms, while
exploring a possible initial public offering. CheckFree's board of directors did
not consider BlueGill's net asset values, liquidation values or going concern
values.
On December 14, 1999, representatives of CheckFree and BlueGill met in Ann
Arbor, Michigan to initiate a due diligence process. Concurrently, CheckFree's
and BlueGill's management teams and their financial advisors and attorneys began
negotiation of the definitive terms and conditions of the merger. BlueGill
engaged Pepper Hamilton LLP as legal counsel on the transaction. CheckFree
engaged Porter, Wright, Morris & Arthur LLP as legal counsel on the transaction.
On December 15, 1999, Vinay Gupta and Jim Douglass, with their respective
counsels, met in Detroit, Michigan to negotiate escrow, indemnification and
operational provisions and BlueGill's representations. Negotiations on the terms
and conditions of the merger agreement and due diligence continued in person
until December 17, 1999. On December 18 and 19, 1999, the parties legal counsel
negotiated via telephone regarding the details of a definitive merger agreement,
a stock restriction agreement which limits the ability of Mr. Davis, Mr. Gupta
and Mr. Simonson to sell shares of our common stock after the completion of the
merger, employment agreements, and an escrow agreement. On Monday, December 20,
1999, the parties reached agreement on the terms and conditions of the merger
agreement and the stock restriction and employment agreements. Peter Sinisgalli
and Hal Davis met in Ann Arbor, Michigan on December 20, 1999 and signed the
agreement. The amount of the consideration to be received by the BlueGill
stockholders was based on negotiations of the parties and may not reflect the
true value of the BlueGill stock being exchanged in the merger. Our board of
directors approved the terms of the merger agreement and the structure of the
acquisition on December 14, 1999, and BlueGill's board of directors approved the
merger agreement and related agreements on December 20, 1999. The merger
agreement was executed in the evening on December 20, 1999, and was announced on
December 21, 1999.
55
<PAGE> 57
APPROVAL BY BLUEGILL STOCKHOLDERS
General
BlueGill is furnishing this information statement/prospectus to holders of
BlueGill common stock and BlueGill preferred stock in connection with the
solicitation by BlueGill's board of directors of written consents. This
information statement is first being furnished to BlueGill stockholders on or
about April __, 2000.
Matters with respect to which Consents Are Solicited
BlueGill common and preferred stockholders, voting together as a single
class, with preferred stock voting on an as converted basis, are being asked to
consent to the Agreement and Plan of Merger, dated as of December 20, 1999,
among BlueGill, CheckFree and CheckFree Acquisition.
BlueGill Series A preferred stockholders and BlueGill Series B preferred
stockholders, each voting separately as a class, are being asked to consent to:
o the merger agreement; and
o not treating the merger as a deemed liquidation under BlueGill's
certificate of incorporation.
Record Date
BlueGill's board of directors has fixed the close of business on March 27,
2000 as the record date for determining the stockholders entitled to consent in
writing to the corporate matters outlined above.
Consents
BlueGill's board requests that each of its common and preferred
stockholders date and sign the accompanying form of Action by Written Consent of
Stockholder and promptly return it to BlueGill's principal executive offices at:
BlueGill Technologies, Inc., 935 Technology Drive, Ann Arbor, Michigan 48108;
Attention Vinay Gupta, Corporate Secretary. IN ORDER TO EXPEDITE THE MERGER,
BLUEGILL STOCKHOLDERS ARE REQUESTED TO RETURN THEIR CONSENTS BY OVERNIGHT
DELIVERY SERVICE.
Under Delaware law, no consent will be effective to approve the merger
unless, within 60 days of the earliest dated consent, consents signed by a
sufficient number of stockholders are delivered to BlueGill. A stockholder may
consent to the merger after this 60-day period by delivering a dated and signed
consent, but that consent will not be included in determining whether or not a
sufficient number of consents have been received to approve the merger.
A stockholder may revoke his, her or its consent at any time prior to the
date consents signed by a sufficient number of holders to approve the merger are
received by BlueGill. To revoke a consent, a stockholder must deliver to
BlueGill's corporate secretary, at the above referenced address, a dated and
signed revocation.
Approval Required
BlueGill's certificate of incorporation requires that the merger be
approved by:
o holders of two-thirds of the outstanding shares of BlueGill Series A
preferred stock;
o either:
(1) holders of three-quarters of the outstanding shares of Series B
preferred stock, or
(2) holders of a majority of the outstanding shares of Series B
preferred stock, including at least one Series B Institutional
Investor; and
o holders of a majority of the common stock and the preferred stock,
voting on an as converted basis, voting together as a single class.
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<PAGE> 58
A Series B Institutional Investor is any institutional "accredited investor"
who:
o holds at least 1,000,000 shares of Series B Preferred Stock;
o is not a holder of any shares of Series A preferred stock or a direct
holder of any shares of common stock;
o is not a "Strategic Investor;" and
o is not an affiliate of BlueGill, any holder of Series A preferred
stock, any holder of record of common stock or a "Strategic Investor."
As used in the definition of a Series B Institutional Investor:
o an institutional "accredited investor" is an entity that is a party as
an "Investor" to BlueGill's Investor Rights Agreement dated as of June
9, 1999, as amended, and that is an accredited investor as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities
Act of 1933 and is eligible under all applicable state and foreign
securities laws to purchase offerings of new securities of BlueGill
without the requirement for approval by or registration, qualification
or filing, except a notice filing, with any governmental authority or
any required furnishing of disclosure materials; and
o an individual or entity will not be deemed an affiliate of BlueGill
solely by virtue of ownership of 10% or more of the capital stock of
BlueGill or by virtue of being or having the power to nominate and/or
elect a director of BlueGill.
A "Strategic Investor" means any investor in the capital stock of BlueGill that
invests in this capital stock for any reason other than solely for the financial
performance of the investment.
Under BlueGill's certificate of incorporation, a merger in which BlueGill's
stockholders immediately prior to the merger receive securities conferring less
than 50% of the voting power of the surviving corporation or its parent is
deemed a liquidation. The merger with CheckFree Acquisition would, consequently,
be deemed a liquidation under this provision. If, however, both:
o the holders of a majority of Series A preferred stock then outstanding,
voting as a single class; and
o the holders of either:
(1) three-quarters of the Series B preferred stock then outstanding;
or
(2) a majority of the Series B preferred stock then outstanding,
including at least one Series B Institutional Investor, as
defined in the previous paragraph, in the case of clause (1) and
(2) voting as a single class,
vote not to treat the merger as a liquidation, then the merger will
not be so treated.
BlueGill's board is seeking consents from the holders of Series A preferred
stock and holders of Series B preferred stock not to treat the merger as a
liquidation.
In a liquidation of BlueGill, the preferred stockholders receive a
liquidation preference of $.5174 per share of Series A preferred stock and $1.52
per share of Series B preferred stock and then share remaining assets pro rata
with the holders of common stock, treating preferred stock as if it were
converted into common stock. If liquidation payments to holders of preferred
stock would, absent the liquidation preferences, exceed $2.33 per share of
Series A preferred stock and $3.04 per share of Series B preferred stock, then
no liquidation preference would be paid and in the liquidation preferred
stockholders on an as converted basis and common stockholders will share the
assets available for distribution pro rata.
The consideration that a BlueGill preferred stockholder will receive in the
merger will exceed $2.33 per share of Series A and $3.04 per share of Series B.
Treating the merger as a liquidation would, therefore, not result in the payment
of preferential amounts to preferred stockholders. BlueGill believes that the
securities to be delivered in the merger would be the value of the consideration
available for distribution to BlueGill stockholders. Hence, the form and amount
of consideration receivable by a BlueGill preferred stockholder would be the
same whether or not the merger is treated as a deemed liquidation.
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<PAGE> 59
In a deemed liquidation, BlueGill preferred stockholders should not have
appraisal rights. If this consent is not obtained, BlueGill's board will
nevertheless proceed with the merger if it is approved.
A condition in the merger agreement to CheckFree and CheckFree Acquisition
closing the merger is that holders of not more than 10% of BlueGill's capital
stock have notified BlueGill of their intention to assert appraisal rights under
Delaware law. BlueGill is, therefore, seeking consents from holders of more than
90% of its capital stock.
Stockholders Who Do Not Consent
If BlueGill does not receive the consents from all its stockholders,
BlueGill must provide prompt notice of the taking of the corporate action to the
stockholders who did not consent in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for this meeting were as of the date consents signed by a sufficient
number of stockholders to take the action were delivered. In addition, a
BlueGill stockholder who has not consented to the merger will have appraisal
rights to the extent these rights are perfected under Delaware law.
Failure to Approve
Under the merger agreement, if BlueGill or CheckFree terminates the merger
agreement because BlueGill stockholders do not approve the merger on or before
April 30, 2000, BlueGill must pay to CheckFree a termination fee of $7.5
million. In addition, BlueGill may be required to pay CheckFree an additional
$17.5 million, if the merger agreement is terminated as provided in the prior
sentence, if prior to that termination a third party has announced or begun
negotiations with BlueGill of a superior acquisition proposal, as defined in the
merger agreement, and if within 12 months of the termination a definitive
agreement with respect to that superior acquisition is entered into.
Solicitation Expenses
BlueGill will bear the costs of the solicitation of consents.
Board Recommendation
THE BLUEGILL BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT
AND THE MERGER ARE ADVISABLE AND ARE FAIR TO, AND IN THE BEST INTERESTS OF,
BLUEGILL AND ITS STOCKHOLDERS. ACCORDINGLY, THE BLUEGILL BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS APPROVE THE MERGER AGREEMENT AND THE MERGER, AS WELL AS ELECT NOT
TO TREAT THE MERGER AS A DEEMED LIQUIDATION UNDER BLUEGILL'S CERTIFICATE OF
INCORPORATION.
The merger is of great importance to all BlueGill stockholders. Each
BlueGill stockholder is urged to read and carefully consider the information in
this information statement and to complete, date, sign and promptly return the
attached consent.
BlueGill stockholders should not send any stock certificates with the
consents, unless accompanied by a duly executed letter of transmittal and the
other documents required by the transmittal letter.
BLUEGILL'S REASONS FOR THE MERGER; RECOMMENDATION OF BLUEGILL'S BOARD OF
DIRECTORS
In reaching its determination that the merger with CheckFree will be
beneficial to BlueGill and its stockholders, the BlueGill board of directors
considered a number of potential benefits, including the following:
o the strengthening of BlueGill's business, management, financial
condition, earnings and prospects because of expected synergies with
CheckFree;
o the CheckFree common stock to be exchanged in the merger will be
publicly listed on the Nasdaq Stock Market, providing liquidity for
BlueGill stockholders;
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<PAGE> 60
o the merger is structured to qualify as a tax free exchange so that
BlueGill stockholders will be able to convert their shares of BlueGill
stock into CheckFree common stock without U.S. or Canadian taxpayers
incurring any federal income tax liability, other than as a result of
the receipt of cash in lieu of fractional shares;
o the value of the consideration being offered by CheckFree and the terms
of the merger agreement which protect that value;
o the ability to realize benefits from the merger sooner than benefits
from alternative strategies, like an IPO or merger with another private
company;
o Checkfree's willingness to maintain the independent operations of
BlueGill and initially to retain the continued employment of all
BlueGill employees following the merger, enhancing the career
opportunities of BlueGill employees;
o the belief that most BlueGill customers will continue to do business
with the newly merged entity because of the reputation of CheckFree and
the wider range of billing and payment services which that entity will
be able to offer in the future;
o BlueGill options outstanding at the effective time of the merger will
be assumed by CheckFree so that the options will be exercisable for
CheckFree common stock, but with an exercise price that maintains the
intrinsic value of the options; and
o the CheckFree stock being placed in escrow will be the limit of the
liability of BlueGill stockholders.
In reaching its determination that the merger with CheckFree will be
beneficial to BlueGill and its stockholders, the BlueGill board considered a
number of potential risks and detriments, including the following:
o the long term value to BlueGill stockholders might be greater than that
offered in the merger if BlueGill remained independent or merged with a
similar size private company and in either case then went public;
o the recent volatility in the market price of CheckFree common stock;
o CheckFree's operating losses;
o the termination fee BlueGill might be required to pay;
o the precise merger consideration will not be known at the time of the
BlueGill stockholder vote and will only be fixed on the evening before
the merger;
o increases in the value of BlueGill will not be reflected in the merger
consideration payable;
o the risks relating to the strategic option of BlueGill remaining
independent, including the need to consummate additional financing
rounds to provide additional capital for expansion, the possibility
that companies with greater access to capital may seek to enter the
BlueGill business or purchase its competitors and the management
requirements of BlueGill as it grows;
o harm to BlueGill's business from the length of time required for the
closing of the merger;
o CheckFree management's ability to integrate smoothly BlueGill and other
subsequent acquisitions into CheckFree;
o some BlueGill customers and potential customers may not wish to do
business with BlueGill to the extent they consider CheckFree a
competitor; and
o the impact that a material merger between CheckFree and a third company
might have on the ability to complete expeditiously the
BlueGill-CheckFree merger.
The Board did not factor into its analysis information concerning TransPoint's
business, operations and finances or the possible impact of a
CheckFree-TransPoint merger on the business, operations or finances of CheckFree
or BlueGill.
The benefits, risks and detriments set forth above are not intended to be
exhaustive, but are intended to include substantially all of the material
factors considered by the BlueGill board. In view of the complexity and variety
of factors considered by the BlueGill board, the BlueGill board of directors did
not quantify or otherwise attempt to
59
<PAGE> 61
assign any relative or specific weights to the various factors considered.
Individual directors may have given differing weights to the different factors.
FOR THESE REASONS, THE BLUEGILL BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE PROPOSAL TO APPROVE THE MERGER AND THE MERGER AGREEMENT WITH CHECKFREE.
REPORT OF BLUEGILL'S FINANCIAL ADVISOR
In deciding to recommend the merger, BlueGill's board of directors
considered a report prepared by Broadview International LLC. The report was
presented at BlueGill's December 12, 1999 board meeting. BlueGill's board did
not adopt the report. The Broadview report summarized the CheckFree offer and
included an overview of CheckFree and a valuation summary of BlueGill. A
BlueGill stockholder can request a copy of the report from BlueGill's secretary
at 935 Technology Drive, Ann Arbor, Michigan 48108.
The Broadview valuation summary provided an analysis of BlueGill in
comparison to similar public companies and analyzed the CheckFree offer in light
of similar transactions. A summary of these analyses is shown in the tables
presented below. However, the tables alone do not constitute a complete
description of the financial analyses. Therefore, you must read the tables
together with the text of each summary to understand fully the financial
analyses used by Broadview.
The Broadview report is neither an opinion on the fairness of the price
offered by CheckFree in the merger nor a recommendation to any person on whether
to vote to approve the merger.
In preparing its report, Broadview did not make or obtain an independent
appraisal or valuation of any of BlueGill's assets. The analyses performed by
Broadview are not necessarily indicative of actual values or actual future
results. The actual values or future results may be significantly more or less
favorable than suggested by the analyses. In addition, Broadview's report was
based upon market, economic, financial and other conditions as they existed and
could be evaluated as of the date of Broadview's report. Therefore, any change
since the date of the report may impact Broadview's report.
Public Company Comparison Analysis
Broadview considered ratios of share price and market capitalization to
selected historical and projected operating results in order to derive multiples
placed on a company in a particular market segment. Broadview adjusted market
capitalization for cash and debt when necessary. In performing this analysis,
Broadview compared BlueGill's financial information to publicly available
information taken from a group of public companies in the web-based banking and
payment processing software industry. The group consists of the following
companies that Broadview considered comparable to BlueGill:
o Trintech o Online Resources
o Digital Insight o CheckFree Holdings
o S1 Corp o Cybercash
For this analysis, Broadview examined publicly available information, selected
analyst projections and projections prepared by BlueGill management. BlueGill
management prepared these projections by extrapolating historical growth
trends. The projections were adjusted to account for the introduction of new
products, anticipated changes to pricing, and additions to personnel and
facilities.
The following table presents the median multiples and the range of
multiples for the group of companies for total market capitalization divided by
selected operating metrics as of December 10, 1999. The total market
capitalization is comprised of equity market capitalization plus total debt
minus cash and cash equivalents:
<TABLE>
<CAPTION>
Median Multiple Range of Multiples
--------------- ------------------
<S> <C> <C> <C>
Total Market Capitalization to
Projected Calendar Year 1999
Revenue........................ 23.99x 12.26x - 45.32x
</TABLE>
60
<PAGE> 62
<TABLE>
<S> <C> <C> <C>
Total Market Capitalization to
Projected Calendar Year 2000
Revenue........................ 15.62x 6.19x - 33.88x
</TABLE>
The following table presents the median implied value and the range of
implied values of BlueGill's stock as of December 10, 1999. Broadview used the
multiples shown above and the appropriate BlueGill operating metric to calculate
the values. Broadview also used the projected calendar year 1999 revenue of $5.4
million and projected calendar year 2000 revenue of $18.6 million:
<TABLE>
<CAPTION>
Median Implied Value Range of Implied Values
-------------------- -----------------------
<S> <C> <C> <C>
Total Market Capitalization to
Projected Calendar Year 1999
Revenue........................ $109,622,000 $65,249,000 - $150,686,000
Total Market Capitalization to
Projected Calendar Year 2000
Revenue........................ $221,814,000 $99,348,000 - $357,290,000
</TABLE>
No company in the comparable public company group is identical to BlueGill.
In selecting and evaluating the companies in the group, Broadview made numerous
assumptions, including the following:
o Each company's SEC filings included accurate representations of that
company's financials,
o The analyst projections for each company were fair and accurate,
o The business descriptions provided in each company's SEC filings and on
their websites were fair and accurate representations of each company's
business, and
o The share prices reported publicly available quote sources were
accurate representations of each company's actual stock price.
Broadview also applied a private company discount 30% to account for the
non-liquidity of BlueGill's shares and BlueGill's relative small size in
relation to the average public company. Mathematical analysis, like determining
the median, average or range, is not in itself a meaningful method of using
comparable company data.
As the value of the CheckFree shares payable as the merger consideration
will vary between approximately $250 million and $325 million, the amount being
paid, based upon the public company comparison analysis, would exceed the
median implied value and would be toward the higher end of the range of implied
values.
Transaction Comparison Analysis
Broadview considered ratios of equity purchase price to selected historical
operating results to indicate multiples that strategic and financial acquirers
have paid for companies in a particular market segment. When appropriate, the
equity purchase price was adjusted for the seller's cash and debt. In performing
this analysis, Broadview reviewed a number of transactions that they considered
similar to the merger. Broadview selected transactions in 1999 involving sellers
in the web-based e-business software industry. For this analysis, Broadview
examined publicly available information, as well as information from Broadview's
proprietary database of published and confidential merger and acquisition
transactions in the IT, communication and media industries. The web-based
e-business software transactions consisted of the following acquisitions:
<TABLE>
<S> <C>
o RightPoint Corp. by E.piphany Inc.; o Marketwave by Accrue Software;
o Andromedia by Macromedia; o NetGravity by DoubleClick;
o Nfront Inc. by Digital Insight Corp.; o Conduit Software by ProBusiness Services Inc.;
o Amplitude Software by Critical Path, Inc.; o Smart Technologies by i2 Technologies;
o Digital Market by Agile Software; o Confidential by Confidential; and
o Flycast Communications by CMGI; o AdForce by CMGI.
o Seeker Software by Concur Technologies;
</TABLE>
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The following table presents multiples calculated as of December 10, 1999.
The table shows the median multiple and the range of multiples of adjusted price
divided by the seller's revenue for the twelve months preceding the acquisitions
listed above. The adjusted price is equal to the equity price plus the total
debt, minus cash and cash equivalents:
<TABLE>
<CAPTION>
Median Multiple Range of Multiples
--------------- ------------------
<S> <C> <C> <C>
Adjusted Price to Last Reported
Twelve Months Revenue............ 42.81x 8.14x - 100.70x
</TABLE>
The following table presents the median implied value and the range of
implied values of BlueGill's stock as of December 10, 1999. Broadview used the
multiples shown above and BlueGill's revenue for the twelve months ended
September 30, 1999 of $3.9 million to calculate the values:
<TABLE>
<CAPTION>
Median Implied Value Range of Implied Values
-------------------- -----------------------
<S> <C> <C> <C>
Adjusted Price to Last Reported
Twelve Months Revenue............ $184,492,000 $50,388,000 - $408,408,000
</TABLE>
No transaction considered in the transaction comparison analysis is
identical to the merger. Broadview made numerous assumptions with respect to
web-based e-business software and general economic conditions in selecting and
evaluating the comparable transactions. You should be aware that many of these
considerations are beyond the control of either BlueGill or CheckFree.
Mathematical analysis, like determining the average, median, or range, is not in
itself a meaningful method of using comparable transaction data.
As the value of the CheckFree shares payable as the merger consideration
will vary between approximately $250 million and $325 million, the amount being
paid, based upon the transaction comparison analysis, would exceed the median
implied multiple and would be toward the higher end of the range of implied
values.
Broadview is not updating its report. The BlueGill board of directors has
not conducted any further analyses to determine whether there have been any
subsequent events that would materially impact the factors it analyzed in
December 1999 when it decided to recommend the merger.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this information
statement/prospectus. We urge you to read the merger agreement carefully.
The merger agreement provides that, following its approval by BlueGill's
stockholders and, if necessary, by our stockholders, and the satisfaction or
waiver of the other conditions to the merger, CheckFree Acquisition will merge
with and into BlueGill. BlueGill will continue as the surviving corporation of
the merger, and become our wholly owned subsidiary, and CheckFree Acquisition
will cease to exist.
The merger will become effective once CheckFree and BlueGill file a
certificate of merger with the Delaware Secretary of State, as required under
the applicable Delaware law. We expect that this will occur in April 2000.
Conversion of BlueGill Shares; Merger Consideration
In the merger, all issued and outstanding shares of BlueGill common stock,
Series A preferred stock, and Series B preferred stock, including shares of
BlueGill common stock issuable upon the exercise of outstanding warrants and
options, will convert into the right to receive fully paid and non-assessable
shares of our common stock, as determined under the merger agreement. The number
of shares of our common stock that we will issue to BlueGill's stockholders as
merger consideration will be based on the average trading price of our common
stock on the Nasdaq National Market during the three days immediately before the
closing date of the merger and on the number of diluted shares of BlueGill
common stock calculated according to the merger agreement. Specifically, if the
average trading price of our common stock during the three days immediately
before the closing date of the merger is:
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<PAGE> 64
o greater than $101.40 per share, we will issue the number of shares of
our common stock equal to $325,000,000 divided by our average trading
price;
o $78.00 or more and is equal to or less than $101.40 per share, we will
issue a total of 3,205,128 shares of our common stock to BlueGill's
stockholders;
o $50.00 or more but less than $78.00 per share, we will issue the number
of shares of our common stock equal to $250,000,000 divided by our
average trading price;
o if:
(1) less than $50.00 per share,
(2) we exercise our right to terminate the merger agreement, and
(3) BlueGill provides us with a reinstatement notice as discussed
in greater detail below,
then we will issue a total of 5,000,000 shares; or
o if:
(1) less than $50.00 per share, and
(2) we do not exercise our right to terminate the merger
agreement,
then we will issue the number of shares of our common stock equal to
$250,000,000 divided by our average trading price.
The effect of these price thresholds on the BlueGill balance sheet, as
adjusted for purchase accounting, with respect to the goodwill acquired, the
assets acquired and the liabilities acquired will be as follows:
o If the CheckFree share price is in excess of $101.40:
(in thousands)
Goodwill acquired $280,065
Assets acquired 343,724
Liabilities acquired 21,708
o If the CheckFree share price is between $78.00 and $101.40:
(in thousands, except share price)
$78.00 $101.40
-------- --------
Goodwill acquired $253,309 $253,309
Assets acquired 316,968 316,968
Liabilities acquired 21,708 21,708
o If the CheckFree share price is between $50.00 and $78.00:
(in thousands, except share price)
$50.00 $78.00
-------- --------
Goodwill acquired $205,065 $280,065
Assets acquired 268,724 268,724
Liabilities acquired 21,708 21,708
o If the CheckFree price per share is below $50.00, CheckFree elects to
terminate, and BlueGill elects to accept 5 million shares, then for
every $1.00 lower than the $50.00 price goodwill acquired will decline
by $5.0 million from the $205.1 million level, assets acquired will
decline by $5.0 million from the $268.7 million level and liabilities
acquired will remain constant at the $21.7 million level.
o If the CheckFree price per share is below $50.00 and CheckFree does
not elect to terminate, then key components remain constant as
follows:
(in thousands)
Goodwill acquired $280,065
Assets acquired 268,724
Liabilities acquired 21,708
Each outstanding share of BlueGill stock will be worth the total number of
shares of our common stock that we issue divided by the number of diluted shares
of BlueGill common stock outstanding immediately before the effective time of
the merger. This number will represent the exchange ratio of BlueGill stock for
our common stock. The number of diluted shares of BlueGill common stock will be
computed based on the treasury stock method of accounting and will include
BlueGill preferred stock, warrants and vested options, but exclude unvested
common stock and unvested options.
CheckFree common stock which will be delivered as the merger consideration
will not have any of the rights, preferences or privileges which BlueGill
preferred stock currently contain, including liquidation preferences,
redemption rights and class voting.
We will deposit 10% of the merger consideration issuable to each BlueGill
stockholder with the escrow agent designated in the escrow agreement between us,
BlueGill, the BlueGill stockholders, the agent of the BlueGill stockholders and
the escrow agent. We may make a claim for indemnification for any losses,
claims, damages or expenses we may incur arising from a breach or
misrepresentation of any representations or warranties made by BlueGill in the
merger agreement. We cannot make a claim for indemnification until our claim
exceeds $1 million, thereafter we are entitled to a dollar for dollar offset
against the escrow. The terms of the escrow are governed by an escrow agreement,
a copy of which is attached as an exhibit to the merger agreement. Under the
terms of the escrow agreement, a committee of five BlueGill stockholders, Harold
N. Davis, Robert D. Pavey, Mark Siegel, John McIlwraith, and Thomas C. Kinnear,
will act as shareholders' agent to authorize the payment of any indemnification
claims out of the escrow. Any disputes between us and the shareholders' agent
will be settled through arbitration. To the extent not needed to pay claims,
these shares will be released from escrow and delivered to the BlueGill
stockholders upon the first to occur of:
o one year after the closing date of the merger; or
o the completion of an audit on the merged companies and our filing of
our Annual Report on Form 10-K with the Commission for the first fiscal
year after the closing date of the merger.
No fractional shares of our common stock will be issued to BlueGill
stockholders. Instead, each BlueGill stockholder otherwise entitled to receive a
fractional share will receive its cash value, as calculated according to the
merger agreement. BlueGill stockholders will not receive interest with respect
to any of these cash payments.
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<PAGE> 65
When the merger is completed, we will assume all warrants and options to
purchase BlueGill common stock that have not been exercised or cancelled prior
to the effective time of the merger. After the effective time, these warrants
and options will represent warrants and options to purchase our common stock and
will continue to have the same terms and conditions set forth in the applicable
warrant or option agreement in effect before the merger, except that:
o BlueGill options and warrants will be or become exercisable for the
number of whole shares of our common stock equal to the number of
BlueGill shares of common stock issuable upon the exercise of the
BlueGill options and warrants immediately before the merger multiplied
by the exchange ratio, rounded to the nearest whole number; and
o the per share exercise price for shares issuable upon the exercise of
the assumed BlueGill options and warrants will be equal to the per
share exercise price immediately before the merger divided by the
exchange ratio, rounded to the nearest whole cent.
All unvested common stock, warrants, and options to purchase BlueGill
common stock that are outstanding immediately before the effective time will
automatically convert into unvested stock, warrants, and options to purchase our
common stock. BlueGill stock that is restricted or subject to forfeiture or
other condition, once converted into shares of our stock, warrants and options,
will contain the same restrictions and conditions.
Covenants and Conditions to Completion of the Merger
The merger agreement contains covenants that CheckFree, CheckFree
Acquisition, and BlueGill have made in connection with the merger. These
covenants relate to:
o the conduct of BlueGill's business before the completion of the merger;
o the preparation and filing of a registration statement with the
Securities and Exchange Commission;
o the indemnification of directors, officers, employees, and agents of
BlueGill for any claim against them concerning the merger; and
o other customary covenants for agreements of this type.
In addition, each of the parties have made representations and warranties
about matters including our respective assets, liabilities, financial
statements, and authority to enter into the merger. These representations and
warranties are customary in this type of transaction.
The merger agreement also contains conditions that CheckFree, CheckFree
Acquisition, and BlueGill each must satisfy before any of us is obligated to
complete the merger. The appropriate party may waive any of these conditions to
the merger. If BlueGill waives a condition to the merger, it will then resolicit
stockholder approval of the merger. These conditions require that:
o BlueGill obtain approval of the merger agreement and merger from its
stockholders, and if required, that we obtain the same approval from
our stockholders;
o the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Act;
o no legal injunction, order or decree be in effect that would prevent
completion of the merger as contemplated by the parties in the merger
agreement;
o the Securities and Exchange Commission declare effective the Form S-4
Registration Statement regarding the merger; and
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<PAGE> 66
o holders of not more than 10% of BlueGill's outstanding stock notify
BlueGill in accordance with Delaware law of their intention to assert
appraisal.
In addition, the merger agreement provides conditions under which CheckFree
or BlueGill may abandon the merger, several of which are customary in this type
of transaction. The merger agreement also allows for termination under the
following circumstances:
o if the average trading price of our common stock on the Nasdaq
National Market is less than $50.00, we may terminate the merger,
provided that we:
(1) provide BlueGill with written notice of termination by 6:00 p.m.
E.S.T. on the business day immediately before the closing date of
the merger; and
(2) pay BlueGill a $7,500,000 termination fee.
BlueGill, however, may reinstate the merger agreement by submitting to
us a written notice of reinstatement by 11:59 p.m. the same day. If
BlueGill opts to reinstate the merger agreement, it will be as if we
never exercised our termination right, and the merger consideration
that we will pay to BlueGill's stockholders will be 5,000,000 shares of
our common stock.
o if the BlueGill stockholders do not approve the merger on or before
April 30, 2000, we will have the right to terminate the merger
agreement and collect a termination fee of $7.5 million from BlueGill.
In addition, BlueGill will be required to pay us an additional $17.5
million termination fee if:
(1) a third party makes a superior acquisition proposal to BlueGill
before termination of the merger agreement; and
(2) within 12 months following termination of the merger agreement,
BlueGill enters into a definitive agreement for this proposal.
o if the merger is not completed by April 30, 2000, then either
CheckFree or BlueGill may terminate the merger agreement provided the
terminating party has not materially breached the agreement.
If we provide BlueGill with a termination notice because the average
trading price of our common stock is below $50.00, BlueGill's board of directors
will meet to determine whether or not its is in the best interest of BlueGill
and its stockholders to reinstate the agreement. At this meeting, BlueGill
anticipates that the BlueGill board of directors will consider factors like:
o the recent volatility of our common stock, including the extent to
which that volatility is a reflection of general market and business
conditions as compared to our business and prospects;
o the amount by which our average trading price is below $50.00;
o a reevaluation of the factors that BlueGill's board of directors
considered in finding that the merger was fair and in the best
interests of its stockholders;
o the effects of not going forward with the merger on BlueGill's
prospects, employees and customers; and
o the benefits and detriments of proceeding and not proceeding with the
merger.
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<PAGE> 67
EXCHANGE OF CERTIFICATES
When the merger is completed, BlueGill common stock and preferred stock
will automatically convert into the right to receive shares of our common stock.
Therefore, BlueGill stockholders will need to exchange their old BlueGill stock
certificates for new CheckFree stock certificates as a result of the merger.
Our transfer agent, The Fifth Third Bank, will deliver to BlueGill's
stockholders of record a letter of transmittal and instructions to facilitate
the exchange of certificates. A BlueGill stockholder who surrenders his or her
certificate to Fifth Third Bank, together with a duly executed letter of
transmittal and a copy of the escrow agreement signed by the stockholder, will
receive, in exchange therefor:
o a certificate representing 90% of the shares of CheckFree common stock
that the stockholder is entitled to receive; and
o when applicable, a check representing cash in lieu of any fractional
shares.
The remaining 10% of the merger consideration will be placed in escrow under the
terms of the escrow agreement.
If a certificate representing shares of BlueGill stock has been lost,
stolen or destroyed, the stockholder must submit to Fifth Third Bank an
affidavit in a form that we and Fifth Third Bank have approved. Upon receipt of
a properly executed affidavit, Fifth Third Bank will deem the lost, stolen or
destroyed certificate to be cancelled. As a condition to issuing a new stock
certificate, however, we may require the holder of any lost, stolen or destroyed
certificate to provide us with a bond in any amount as we may direct.
BLUEGILL STOCKHOLDERS SHOULD NOT SUBMIT ANY STOCK CERTIFICATES NOW, BUT
RATHER SHOULD ONLY SUBMIT STOCK CERTIFICATES UPON RECEIPT OF, AND TOGETHER WITH,
THE LETTER OF TRANSMITTAL AND ACCOMPANYING INSTRUCTIONS, AS WELL AS AN EXECUTED
COPY OF THE ESCROW AGREEMENT.
APPRAISAL RIGHTS
Under Delaware law, BlueGill stockholders of record who have:
o not voted their shares or executed written consents in favor of the
merger; and
o properly exercised and perfected appraisal rights with respect to the
merger under Section 262 of the Delaware General Corporation Law,
will not have their shares converted for shares of our common stock, but will
have the right to receive payment of the appraised value of their shares under
Section 262. Perfection of appraisal rights requires, among other actions, that
the dissenting stockholder deliver a written demand for appraisal in accordance
with Section 262. BlueGill stockholders who follow the procedures set forth in
Section 262 will be entitled to have their shares appraised by the Delaware
Chancery Court and to receive payment of the "fair value" of these shares,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest, as determined by the
court. A BlueGill stockholder, however, will forfeit all rights to appraisal if
he or she:
o subsequently delivers a written withdrawal of his demand for appraisal
of his or her shares;
o fails to perfect or loses his or her appraisal rights as provided in
Section 262; or
o fails to demand payment within the time period provided in Section
262.
BlueGill shares that have lost their appraisal rights will be deemed to have
been converted into and to have become exchangeable for the right to receive the
merger consideration, without interest, at the effective time of the merger.
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<PAGE> 68
Section 262 provides that where a merger is approved and adopted by written
consent of stockholders, as BlueGill has elected to do in this situation, the
corporation must:
o notify each of its stockholders entitled to appraisal rights that
these appraisal rights are available; and
o include in this notice a copy of Section 262.
The corporation must provide this notification either before the effective time
of the merger or within ten days thereafter. The notice to BlueGill's
stockholders and the applicable statutory provisions of Delaware law are
attached to this information statement/prospectus as Appendix B and will be sent
to all holders of BlueGill stock as of the record date. Any BlueGill stockholder
who wishes to exercise appraisal rights or who wishes to preserve the right
to do so, should review the following discussion and Appendix B carefully
because failure to timely and properly comply with the procedures specified will
result in the loss of appraisal rights under the Delaware law.
A HOLDER OF SHARES WISHING TO EXERCISE APPRAISAL RIGHTS MUST DELIVER A
WRITTEN DEMAND FOR APPRAISAL OF SHARES TO BLUEGILL NO LATER THAN 20 DAYS
AFTER THE NOTICE DESCRIBED ABOVE IS MAILED. In addition, a holder of shares
wishing to exercise appraisal rights must hold his shares of record:
o on the date that the holder submits the written demand for appraisal;
and
o at the effective time.
Only a holder of record of shares is entitled to assert appraisal rights
for the shares registered in that holder's name. A demand for appraisal should
be executed by or on behalf of the holder of record, fully and correctly, as his
or her name appears on the stock certificates. If the shares are owned of record
in a fiduciary capacity, like by a trustee, guardian or custodian, execution of
the demand should be made in that capacity. If the shares are owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a holder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is agent for the owner or owners. A record holder who holds shares as nominee
for several beneficial owners may exercise appraisal rights for the shares held
on behalf of one or more beneficial owners while not exercising these rights for
the shares held for other beneficial owners; in that case, the written demand
should set forth the number of shares for which appraisal is sought. Where no
number of shares is expressly mentioned, the demand will be presumed to cover
all shares held in the name of the record owner. BlueGill stockholders who hold
their shares in brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their brokers to determine
the appropriate procedures for the nominee's submission of a demand for
appraisal.
BlueGill stockholders should send or deliver all written demands for
appraisal to BlueGill Technologies, Inc., c/o Vinay Gupta, 935 Technology Drive,
Ann Arbor, Michigan 48108.
Within 120 days after the effective time of the merger, any BlueGill
stockholder who has complied with the requirements for exercise of appraisal
rights will be entitled, upon written request, to receive from BlueGill, a
written statement setting forth:
o the aggregate number of shares not voted in favor of the merger and
for which demands for appraisal have been received; and
o the aggregate number of holders of these shares.
BlueGill must mail these statements within 10 days after receiving a written
request therefor or within 10 days after expiration of the period for delivery
of demands for appraisal under Section 262, whichever is later.
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<PAGE> 69
In addition, within 120 days after the effective time, but not later,
BlueGill or any BlueGill stockholder who has complied with the statutory
requirements summarized above may file a petition with the Delaware Chancery
Court demanding a determination of the fair value of the stockholder's shares.
If a BlueGill stockholder files a petition, BlueGill will also receive a copy.
BlueGill, however, is under no obligation to and has no present intention to
file a petition for the appraisal of the fair value of the shares. It is the
obligation of the BlueGill stockholders to initiate all necessary action to
perfect their appraisal rights within the time prescribed in Section 262.
If a BlueGill stockholder timely files a petition for appraisal, at the
hearing on the petition, the court will determine the stockholders entitled to
appraisal rights and will appraise the fair value of their shares, exclusive of
any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. The court may appoint one or more
appraisers to determine the fair value of the shares and to make a
recommendation to the court. Stockholders considering seeking appraisal should
be aware that:
o the fair value of their shares as determined under Section 262 could
be more than, the same as or less than the value of the consideration
they would receive under the merger agreement if they did not seek
appraisal of their shares; and
o investment banking opinions as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262.
In determining fair value, the court is required to take into account all
relevant factors. In determining fair rate of interest, the court may consider
all relevant factors, including the rate of interest that BlueGill would have
had to pay to borrow money during the pendency of the appraisal proceeding.
The Delaware Supreme Court has discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any technique or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceeding and that "fair price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court has also stated that in determining fair
value, the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which could be
ascertained as of the date of the merger which throw light on future prospects
of the merged corporation. Moreover, the Delaware Supreme Court has stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual instances, may
or may not be a dissenter's exclusive remedy.
The costs of the action may be determined by the court and taxed upon the
parties as the court deems equitable. Upon a stockholder's application, the
court may also order that all or a portion of the expenses incurred by any
stockholder for an appraisal, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all of the shares entitled
to appraisal.
Any holder of shares who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time, be entitled to vote the shares
subject to the demand for any purpose or be entitled to the payment of dividends
or other distributions on those shares, except dividends or other distributions
payable to holders of record of shares as of a record date prior to the
effective time.
If any stockholder who properly demands appraisal of his shares under
Section 262 fails to perfect, or effectively withdraws or loses, his right to
appraisal, as provided under Delaware law, that stockholder's shares will
convert into the right to receive the merger consideration provided for under
the merger agreement. A stockholder will fail to perfect, or effectively lose or
withdraw, his right to appraisal if, among other things:
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<PAGE> 70
o the stockholder fails to demand appraisal of his shares by the date
which is 20 days after the notice is mailed;
o no petition for appraisal is filed within 120 days after the effective
time; or
o the stockholder delivers to BlueGill a written withdrawal of his
demand for appraisal and acceptance of the merger, except that any
attempt to withdraw made more than 60 days after the effective time
will require the written approval of BlueGill.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF THESE
RIGHTS.
CONFLICTS OF INTEREST OF DIRECTORS AND OFFICERS OF BLUEGILL IN THE MERGER
In considering the recommendations of BlueGill's board of directors with
respect to the merger agreement, BlueGill's stockholders should be aware that
the some of the directors and members of management have interests in the merger
that are different from, or in addition to, the interests of the BlueGill
stockholders generally. A description of the interests of these individuals is
set forth below. BlueGill's board of directors was aware of these interests and
considered them, among other things, in approving the merger.
Employment. The BlueGill stockholders who are also employees of BlueGill
will continue to be employed by the combined company following the merger. At
the closing of the merger, Mr. Davis, Mr. Gupta and Mr. Simonson, each a
BlueGill officer, will have employment agreements with the combined company.
These officers, as well as other BlueGill employees who continue their
employment, will also be entitled to participate in CheckFree's employee benefit
plans, including receiving the grant of stock options in CheckFree common stock.
Stock Options. Pursuant to the terms of BlueGill's stock option grants, in
connection with the merger, specified options will become fully vested and
exercisable. Assuming the merger closes on March 31, 2000, the following table
sets forth the number of BlueGill options that will become fully vested and
exercisable at the closing for the BlueGill executives:
<TABLE>
<CAPTION>
NAME AND TITLE OPTIONS WHOSE VESTING ACCELERATE
------------------------------------------------------ ---------------------------------
<S> <C>
Harold Davis, President 181,250 shares
Ray Simonson, Vice President 481,771 shares
Vinay Gupta, CFO, Treasurer and Secretary 315,104 shares
Richard Pickering, Vice President of Marketing 243,750 shares
Scott Bloom, General Counsel 12,500 shares
Kirk Dauksavage, Vice President of Sales 210,000 shares
</TABLE>
Indemnification and Insurance. Under the merger agreement, we will:
o indemnify and hold harmless present directors and officers of BlueGill
for all acts or omissions occurring prior to the effective time of the
merger, including the transactions contemplated by the merger
agreement, to the same extent these persons are indemnified and held
harmless in BlueGill's certificate of incorporation or by-laws as of
the date of the merger agreement; and
o provide, for a period of six years after the effective time of the
merger, an insurance and indemnification policy that grants BlueGill's
officers and directors in office immediately prior to the effective
time of the merger coverage substantially equivalent to BlueGill's
policy in effect as of the date of the merger agreement.
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NASDAQ LISTING
We expect that shares of our common stock to be issued in the merger will
be listed on the Nasdaq National Market. We have filed a listing application
with Nasdaq covering these shares. Nasdaq's approval of this application is a
condition precedent to the completion of the merger.
REGULATORY APPROVALS
Under the requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, CheckFree and BlueGill each filed a pre-merger notification report with
the Federal Trade Commission and the Antitrust Division of the United States
Department of Justice. As a condition to CheckFree's and BlueGill's obligation
to complete the merger, the waiting period under the Hart-Scott-Rodino Act must
have expired or been earlier terminated. This waiting period expired on January
24, 2000.
ACCOUNTING TREATMENT
We intend to account for the merger using the purchase method of accounting
under generally accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission.
INCOME TAX CONSEQUENCES
The following discussion summarizes all material U.S. and Canadian federal
income tax consequences of the merger to BlueGill stockholders. This discussion
does not address all aspects of U.S. and Canadian federal income taxation that
may be relevant to particular stockholders, and may not apply to stockholders
whom:
o are neither U.S. nor Canadian citizens or residents;
o will acquire our common stock through the exercise or termination of
employee stock options or otherwise as compensation; or
o are broker-dealers, retirement plans, tax-exempt entities, financial
institutions or insurance companies.
It also does not address the applicability of any other foreign, state, local or
other tax laws. The discussion assumes that BlueGill stockholders hold their
BlueGill stock as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended, or within the meaning of the Income
Tax Act (Canada).
The following discussion is based on currently existing provisions of the
United States and Canadian tax laws, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. The
discussion is not binding on the Internal Revenue Service or Canadian tax
authorities and no tax rulings will be sought or be obtained in connection with
the merger. There can be no assurance that the Internal Revenue Service or
Canadian tax authorities will agree with the tax consequences of the merger
described above. All of the tax discussion in this information
statement/prospectus is subject to change as a result of changes in the U.S. and
Canadian tax laws, which could impact the continuing validity of the this tax
discussion.
THESE CONCLUSIONS ARE BASED UPON ADVICE OF BLUEGILL'S COUNSEL AND
CHECKFREE'S COUNSEL, TOGETHER WITH WRITTEN REPRESENTATIONS CONTAINED IN
CERTIFICATES DELIVERED BY CHECKFREE AND BLUEGILL IN CONNECTION WITH THE MERGER.
NEITHER BLUEGILL'S COUNSEL NOR CHECKFREE'S COUNSEL ARE DELIVERING AN OPINION
WITH RESPECT TO THE U.S. TAX CONSEQUENCES OF THE MERGER. BLUEGILL STOCKHOLDERS
SHOULD, THEREFORE, CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF
FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
U.S. FEDERAL INCOME TAX
The merger will be a tax-free reorganization under Section 368 of the Code
and will have the following U.S. federal income tax consequences to BlueGill
stockholders:
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o BlueGill stockholders will recognize no gain or loss upon the
conversion of their BlueGill shares into shares of our common stock,
except that they will recognize a gain or loss on their receipt of
cash, if any, in lieu of fractional shares. Any recognized gain or
loss will be capital gain or loss equal to the difference between the
cash received and the portion of the BlueGill stockholder's basis in
the BlueGill stock allocable to the fractional share;
o the tax basis of shares of our common stock received by a BlueGill
stockholder will be the same as the stockholder's basis in BlueGill
shares converted in the merger, reduced by any amount allocable to a
fractional share interest for which cash is received;
o the holding period for the shares of our common stock received in the
merger will include the holding period of the BlueGill shares
converted in the merger; and
o BlueGill stockholders will recognize gain or loss for U.S. income tax
purposes in connection with the exercise of appraisal rights.
Payments made in lieu of issuance of fractional shares of our common stock
may be subject to information reporting to the Internal Revenue Service and a
backup withholding tax. Backup withholding will not apply, however, to a payment
to a BlueGill stockholder or his or her payee that completes and signs the
substitute Form W-9 that will be included as part of the transmittal letter or
otherwise proves to CheckFree and the exchange agent that they are exempt from
backup withholding.
CANADIAN FEDERAL INCOME TAX
We anticipate that the merger will be a tax free reorganization for
Canadian income tax purposes, and that BlueGill stockholders will, unless they
elect otherwise, recognize no gain or loss upon conversion of their BlueGill
shares into shares of our common stock, except that there are special rules with
respect to cash received, if any, in lieu of fractional shares. BlueGill
stockholders will, however, recognize gain or loss for Canadian income tax
purposes in connection with the exercise of appraisal rights.
RESALES BY AFFILIATES
Stockholders who are deemed "affiliates" of BlueGill under Rule 145 of the
Securities Act will only be permitted to transfer their shares of our common
stock issued in the merger under the following circumstances:
o pursuant to an effective registration statement under the Securities
Act;
o in compliance with Rule 145; or
o pursuant to an exemption from the registration requirements of the
Securities Act.
We will place appropriate legends on the certificates of our common stock
to be received by affiliates of BlueGill. We may also issue stock transfer
instructions to our transfer agent, The Fifth Third Bank, reflecting the resale
restrictions on BlueGill affiliates stated above. As a condition to completion
of the merger, the merger agreement requires affiliates of BlueGill to deliver a
written agreement to us stating that they will not sell, transfer, or dispose of
their shares of our common stock received in the merger except in accordance
with the above restrictions.
In addition to these restrictions, Messrs. Hal Davis, Ray Simonson, and
Vinay Gupta have entered into a stock restriction agreement with us which
further inhibits their ability to resell our common stock. This agreement limits
each of these BlueGill stockholders to the sale of a maximum of 25% of their
CheckFree common stock, including from their exercise of BlueGill stock options
converted to CheckFree stock options, during each three-month period following
the closing date of the merger.
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THE TRANSPOINT ACQUISITION
THE DISCUSSION PROVIDED IN THIS "THE TRANSPOINT ACQUISITION" SECTION IS
PROVIDED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO SOLICIT
YOUR VOTE OR PROXY IN CONNECTION WITH THE TRANSPOINT ACQUISITION. PRIOR TO THE
SOLICITATION OF YOUR VOTE OR PROXY FOR THE TRANSPOINT ACQUISITION, YOU WILL
RECEIVE FROM US A PROXY STATEMENT/PROSPECTUS PREPARED IN ACCORDANCE WITH THE
SECURITIES EXCHANGE ACT OF 1934.
On February 15, 2000, we entered into a merger and contribution agreement
with the entities that own the TransPoint business to purchase the TransPoint
business on the terms and conditions described below. Throughout this
information statement/prospectus, we refer to the merger and contribution
agreement and the transactions related to that agreement as the "Transfers."
GENERAL
The TransPoint business is a joint activity of Microsoft Corporation, First
Data Corporation, and Citibank, N.A. TransPoint operates an Internet based
electronic bill presentment and payment service. This service allows businesses
like utility companies, credit card issuers and mortgagees that have
traditionally mailed their customers paper bills and/or statements, to contract
with TransPoint to replace these paper bills and/or statements with electronic
bills and/or statements delivered via the Internet and allows payment to be made
on these electronic bills and/or statements. The TransPoint business is
conducted through four limited liability companies: MSFDC, LLC; TransPoint, LLC;
TransPoint Technology Services, LLC; and TransPoint Accounting, LLC; and a
limited partnership, MSFDC International L.P. These companies collectively do
business under the name "TransPoint." In this information statement/prospectus,
we refer to these companies collectively as the "TransPoint Entities."
CHECKFREE CORPORATION
CheckFree Corporation is a newly formed corporation that currently is our
wholly owned subsidiary and has not, to date, conducted any activities other
than those incident to its formation and the matters contemplated by the merger
and contribution agreement. Upon completion of the Transfers, we and the
TransPoint Entities will become wholly owned subsidiaries of CheckFree
Corporation. Accordingly, the business of CheckFree Corporation will be the
combined businesses currently conducted by us, TransPoint and each of their
subsidiaries.
THE STRUCTURE OF THE TRANSPOINT ACQUISITION
To accomplish the combination of the our and TransPoint businesses, we
formed a new subsidiary, CheckFree Corporation, which currently has one
subsidiary, Chopper Merger Corporation. At the time the Transfers are completed:
o Chopper Merger Corporation will merge into us, and we will be the
surviving corporation and a wholly owned subsidiary of CheckFree
Corporation; and
o the owners of the TransPoint Entities will contribute their equity
interests in the TransPoint Entities to CheckFree Corporation, with the
TransPoint Entities then being held as CheckFree Corporation's wholly
owned subsidiaries.
In connection with the Transfers, CheckFree Corporation will issue shares
of its common stock as follows:
o each of our stockholders will receive one share of CheckFree
Corporation common stock for each share of our common stock that it
holds; and
o the owners of the TransPoint Entities, which include affiliates of
Microsoft, First Data and Citibank, will together receive 17,000,000
shares of CheckFree Corporation common stock, or approximately 23% of
CheckFree Corporation's outstanding common stock.
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The organization and approximate ownership of the companies immediately
before and after the Transfers are illustrated in the diagrams located at the
end of this section entitled "The TransPoint Acquisition."
RECOMMENDATION OF OUR BOARD OF DIRECTORS AND OPINION OF OUR FINANCIAL ADVISOR
Our board of directors:
o believes that the Transfers are fair to our stockholders and in their
best interest;
o unanimously voted to approve the merger and contribution agreement; and
o will unanimously recommend that our stockholders vote for the adoption
of the merger and contribution agreement.
In deciding to approve the merger and contribution agreement, our board of
directors considered an opinion of our financial advisor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as of February 11, 2000, that the Transfers and the
consideration to be delivered to the TransPoint equity holders, taken as a
whole, are fair from a financial point of view to CheckFree Holdings. This
opinion, however, is not a recommendation to any of our stockholders as how to
vote. A copy of the Merrill Lynch fairness opinion will be provided to the
BlueGill stockholders in connection with our proxy solicitation for the
TransPoint acquisition.
The affirmative vote of the holders of a majority of the shares of our
common stock outstanding as of the record date is required to adopt the merger
and contribution agreement.
APPRAISAL RIGHTS
Under Delaware law, our stockholders will not be entitled to appraisal
rights as a result of the TransPoint acquisition.
BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE TRANSFERS
We have agreed that after the Transfers are completed the CheckFree
Corporation board of directors will be comprised of eight members, including our
six current directors, one nominee named by Microsoft and one nominee named by
First Data. Our executive officers immediately before the Transfers will be
executive officers of CheckFree Corporation after the Transfers are completed.
CONFLICTS OF INTERESTS OF DIRECTORS IN THE TRANSFERS
Some of the directors of CheckFree Corporation have interests in the
Transfers that are different from, or are in addition to, the interests of our
stockholders, including the following:
o Henry C. Duques, who will be a director of CheckFree Corporation upon
completion of the Transfers, is the Chairman and Chief Executive
Officer of First Data. First Data and its affiliates will receive
6,567,250 shares of CheckFree Corporation common stock and enter into a
marketing agreement with CheckFree Corporation in connection with the
Transfers.
o Lewis Levin, who will be a director of CheckFree Corporation upon
completion of the Transfers, is the President and Chief Executive
Officer of the TransPoint Entities and a Vice President of Microsoft.
Microsoft and its affiliates will receive 8,567,250 shares of CheckFree
Corporation common stock and enter into a commercial alliance agreement
with CheckFree Corporation in connection with the Transfers.
TREATMENT OF STOCK OPTIONS AND WARRANTS
When the Transfers are completed, each of our outstanding stock options
will be converted into an option to purchase shares of CheckFree Corporation
common stock at an exercise price per share equal to the exercise price
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per share of our common stock subject to the option immediately before the
conversion. In addition, each of our outstanding warrants will be converted into
warrants to purchase shares of CheckFree Corporation common stock at an exercise
price per share equal to the exercise price per share of our common stock
subject to the warrant immediately before the conversion. Except for the changes
discussed above, the Transfers will not result in any changes to the terms and
conditions of our outstanding stock options and warrants.
TREATMENT OF THE NOTES
When the Transfers are completed, each of the $172.5 million aggregate
principal amount of outstanding 6 1/2% subordinated convertible notes due 2006
issued by us will remain an obligation of CheckFree Holdings, but will be
convertible into shares of CheckFree Corporation common stock. The merger,
however, will constitute a change in control as defined in the indenture
governing the notes, entitling the noteholders to require us to purchase their
notes within 30 days of the completion of the Transfers.
TAX CONSEQUENCES
We expect the TransPoint merger to qualify as a tax-free reorganization for
United States federal income tax purposes. In general, our stockholders will not
recognize any gain or loss on the exchange of their CheckFree Holdings common
stock for CheckFree Corporation common stock.
ACCOUNTING TREATMENT
CheckFree Corporation intends to account for the acquisition of the
TransPoint Entities under the purchase method of accounting for business
combinations.
MARKET INFORMATION
We intend to apply to list the CheckFree Corporation common stock to be
issued in the Transfers on the Nasdaq National Market under our current symbol,
"CKFR." Upon completion of the Transfers, the CheckFree Corporation common stock
will continue to trade without interruption under the same symbol as our common
stock traded prior to the Transfers.
OVERVIEW OF THE MERGER AGREEMENT
CONDITIONS TO THE COMPLETION OF THE TRANSFERS. Each of our and TransPoint's
obligation to complete the Transfers is subject to the satisfaction or waiver of
conditions, including those listed below:
o adoption of the merger and contribution agreement by our stockholders;
o termination of any waiting period under United States antitrust laws,
receipt of all other required regulatory approvals and submission of
all required filings with governmental authorities;
o the absence of legal prohibitions to the Transfers;
o the effectiveness under the Securities Act of 1933 of the registration
statement to be filed with the Securities and Exchange Commission;
o the authorization for listing on the Nasdaq National Market of the
CheckFree Corporation shares to be issued in the Transfers;
o the execution of the ancillary documents, including the Microsoft
commercial alliance agreement and the First Data marketing agreement
described below;
o the other party's material compliance with its obligations under the
merger and contribution agreement and the truth and accuracy of the
representations made by this party under the merger and contribution
agreement; and
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o each party receiving from its counsel a written opinion regarding the
tax-free nature of the Transfers.
TERMINATION OF THE MERGER AND CONTRIBUTION AGREEMENT. We and the owners of
the TransPoint Entities may agree to terminate the merger and contribution
agreement at any time. In addition, either we or the owners of the TransPoint
Entities may terminate the merger and contribution agreement under any of the
following circumstances:
o if the effective time of the Transfers has not occurred by February 15,
2001, except that this termination right will not be available to any
party whose failure to fulfill any obligation under the merger and
contribution agreement has resulted in the failure of the closing to
occur on or prior to this date;
o if any governmental entity has issued a final and nonappealable ruling
or taken any other action restraining or prohibiting the Transfers;
o if the other party breaches any of its representations, warranties,
covenants or agreements under the merger and contribution agreement so
that the closing conditions cannot be satisfied, subject to a 15-day
cure period;
o if the approval of our stockholders of the merger and contribution
agreement is not obtained at a duly held stockholders meeting; or
o if a governmental entity conditions its approval to the Transfers upon
a limitation or restriction on one of the parties which that party is
not required to take under the merger and contribution agreement.
The owners of the TransPoint Entities also may terminate the merger and
contribution agreement if our board of directors withdraws or adversely modifies
its recommendation that our stockholders approve the merger and contribution
agreement.
TERMINATION FEES. We will be obligated to pay termination fees to the
owners of the TransPoint Entities in the following amounts under the following
circumstances:
o an aggregate amount of $25 million if the merger and contribution
agreement is terminated under circumstances related to our
stockholders' failure to adopt the merger and contribution agreement or
if our board of directors modifies its recommendation to our
stockholders;
o an aggregate amount of $12.5 million if we terminate the merger and
contribution agreement because a governmental entity has conditioned
the Transfers upon a limitation or restriction that we are not required
to comply with under the merger and contribution agreement; and
o an aggregate amount equal to 3.5% of the fair market value of the
shares of the CheckFree Corporation common stock to be issued to the
owners of the TransPoint Entities under the merger and contribution
agreement if the merger and contribution agreement is terminated under
specified circumstances after a third party makes a proposal to obtain
control of CheckFree Holdings.
COMPLETION AND EFFECTIVENESS OF THE TRANSFERS. We will complete the
Transfers when all of the conditions to completion of the Transfers are
satisfied or waived in accordance with the merger and contribution agreement.
The Transfers will become effective when we file the certificate of merger with
the State of Delaware. We expect to complete the Transfers during the summer of
2000.
RELATED AGREEMENTS
MICROSOFT COMMERCIAL ALLIANCE AGREEMENT
Under the merger and contribution agreement, on the closing date CheckFree
Corporation and Microsoft will execute a commercial alliance agreement that
contains the provisions described below.
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Microsoft's Exclusive Use of CheckFree Corporation's Platform and Services
Under the commercial alliance agreement, Microsoft will agree to use
CheckFree Corporation exclusively for all pay anyone and bill presentment and
payment services offered by Microsoft, subject to various exceptions for types
of services not available from CheckFree Corporation and the provision of
technology in various circumstances related to Microsoft's current business and
product lines.
As part of this exclusivity obligation, Microsoft will create and implement
a Web-based service targeted at individual consumers that will be offered in the
MoneyCentral area of Microsoft's MSN Internet offering. This service will
exclusively utilize our current platform for pay anyone and bill presentment and
payment services. In addition, Microsoft will agree to use its commercially
reasonable efforts to promote the use of the MSN payment service as a benefit
that MSN users will be able to receive if they provide the additional
authentication information to Microsoft that would be needed to access payment
applications and services on MSN. Microsoft will agree that the MSN payment
service will be displayed equally or more prominently on any area of MSN that
includes choices among various providers of pay anyone and bill presentment and
payment services.
Microsoft will also agree that the MSN payment service will be the
exclusive pay anyone and bill presentment and payment service that it promotes
as a feature of its Hotmail email service.
Preferred Supplier Status of CheckFree Corporation
Microsoft will agree to grant CheckFree Corporation a 90-day exclusive
negotiation period for the provision of our pay anyone and/or bill presentment
and payment services targeted at businesses that may be offered by Microsoft.
This will include services targeted at businesses offered by Microsoft's
"bCentral" site. In addition, Microsoft will agree to grant to CheckFree
Corporation a 90-day exclusive negotiation period for the provision of any
future back end payment services for demand deposit accounts with financial
statements that CheckFree Corporation then offers. With respect to back end
services other than for payment services for demand deposit accounts with
financial statements, CheckFree Corporation and Microsoft will agree to
cooperate on jointly developing new payment capabilities.
Integration of CheckFree Corporation Services
To the extent that Microsoft provides payment, invoicing or bill
presentment functionality in any generally available Microsoft Internet and
electronic commerce platforms and tools, similar to Microsoft's BizTalk Server,
and that functionality, incorporates, any third party's pay anyone and bill
presentment and payment services, then Microsoft will integrate our "pay anyone"
and bill presentment and payment services to this platform or tool or provide
interoperability.
CheckFree Corporation Support of Microsoft Platforms
CheckFree Corporation will agree that the version of our biller premises
software that is offered for Microsoft's Windows NT and SQL Server will be the
most favorable version of this software in terms of price, functionality and
performance, taking into account the functionality and its performance
characteristics of these Microsoft platforms. In addition, the software version
and will be commercially released at least 90 days prior to its commercial
release for any other platform. CheckFree Corporation will also agree to grant a
90-day exclusive negotiation period to Microsoft regarding our use of
Microsoft's enhanced user authentication credential services, like Passport, as
a single sign-on authentication to access our services.
Fees and Revenue Guarantees
Beginning no later than 120 days after the closing of the merger and
contribution agreement, Microsoft will begin to pay a quarterly fee to CheckFree
Corporation for the services then provided by CheckFree Corporation to
Microsoft, which will be based on pricing terms set forth in the agreement.
CheckFree Corporation will agree that the pricing and
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other material terms, in the aggregate, that it will offer Microsoft will be at
least as favorable as the terms CheckFree Corporation offers to any third party.
Microsoft will guarantee over the five year term of the agreement that it
will make payments for CheckFree Corporation's services of at least $120 million
in the aggregate. In addition, until this $120 million amount has been paid, the
following monthly guarantee amounts will apply:
<TABLE>
<S> <C>
Year 1 $1.0 million per month
Year 2 $1.5 million per month
Year 3 $2.0 million per month
Year 4 $2.5 million per month
Year 5 $3.0 million per month
</TABLE>
Microsoft will be entitled to receive a credit per bill for bill presentment
services performed for billers for bills received by Microsoft customers using
CheckFree Corporation's services.
If during any month the amount actually paid by Microsoft is less than the
applicable minimum monthly guarantee indicated above for the month, then
Microsoft will owe the difference to CheckFree Corporation, less any credits
earned by Microsoft during this monthly period.
In various circumstances, to the extent Microsoft pays more to CheckFree
Corporation than the monthly minimums, Microsoft will be entitled to
carry-forward and carry-back these excess amounts to other monthly periods to
offset amounts otherwise owed to us pursuant to the minimum guarantees.
Non-Competition
During the five year term of the commercial alliance agreement, Microsoft
will generally agree that it will not engage in, license TransPoint intellectual
property to anyone who engages in, or acquire or invest in, anyone who engages
in the type of pay anyone and bill presentment and payment in which CheckFree
Corporation currently engages, with the following general types of exceptions:
o procuring or offering the types of products that are not offered by
CheckFree Corporation;
o continuing specified existing contractual arrangements that have been
disclosed to CheckFree Corporation, with the obligation to switch to
CheckFree Corporation when possible under these contracts;
o licensing Microsoft technology that generally is of the type not
specifically directed towards pay anyone or bill presentment and
payment services;
o (1) owning up to twenty percent (20%) of any company, provided that not
more than twenty-five percent (25%) of that company's revenues come
from bill payment services, up to a limit of $25 million; or (2) owning
up to ten percent (10%) of any company, provided that not more than
twenty-five percent (25%) of that company's revenues come from bill
payment services (without dollar amount limit); or
o acquiring a company providing otherwise prohibited services if these
services are not more than 25% of the company's consolidated revenues
at the time of acquisition and Microsoft divests the prohibited
services within 12 months of the acquisition.
Term and Termination
The commercial alliance agreement will generally have a term of five years,
but may be terminated earlier by Microsoft in the event of a change of control.
A change of control is defined to have occurred if: (1) any person acquires more
than 30%, or 20% if this person is a competitor to Microsoft, of CheckFree
Corporation voting stock; or (2) if CheckFree Corporation stockholders own less
than 70%, or 80% if this person is a competitor to Microsoft, of CheckFree
Corporation voting stock after a transaction.
Geographic Scope
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Except for our obligation to support the Microsoft platform and the
non-compete provision, which are world-wide obligations, all other provisions in
the agreement apply only to the provision of services primarily targeted as
users in the United States, Canada - excepting pay anyone services, Australia
and New Zealand - excepting pay anyone services.
MARKETING AGREEMENT WITH FIRST DATA
Under the merger and contribution agreement, on the closing date, CheckFree
Corporation and First Data will execute a marketing agreement that contains the
provisions described below.
CheckFree Corporation's Use of First Data Payment Processing Services and
Official Check Product
During the term of the marketing agreement, CheckFree Corporation will
agree to use payment processing services from, and the Official Check product
of, First Data. This obligation, however, in each case is conditioned on
CheckFree Corporation's determination, using its reasonable business judgment,
that it can not obtain substantially similar services from a third party at an
overall economic cost that is less than the overall economic cost of First
Data's services. If CheckFree Corporation is able to find substantially similar
payment processing services at a lower overall economic cost from a third party,
CheckFree Corporation will be required to give First Data the chance to meet
these terms for provision of the services.
When exercising its reasonable business judgment regarding the use of First
Data's payment processing services or Official Check product, CheckFree
Corporation will consider:
o that First Data or its affiliates offers a directly competing product
or service offered by CheckFree Corporation or its affiliates; and
o that the use of First Data's or its affiliates' product or service by
CheckFree Corporation or its affiliates would either:
(1) allow First Data or its affiliates to achieve substantial
competitive benefits due to increased volume; or
(2) provide First Data or its affiliates with CheckFree
Corporation and its affiliates' proprietary technology and
thus with a substantial competitive advantage.
Minimum Revenue Guarantees
If: (1) the fees that CheckFree Corporation receives from First Data and
from various billers for which First Data has played a role in obtaining; and
(2) the expense savings that CheckFree Corporation receives from using First
Data's services do not exceed the annual minimum for the first year of the
agreement or the monthly minimums for the subsequent periods, then First Data
will pay the difference to CheckFree Corporation after the first year or each
monthly period, as applicable. The minimums for the five-year term of the
agreement will be the following:
<TABLE>
<S> <C>
Year 1 $6,000,000 in the aggregate
Year 2 $750,000 per month
Year 3 $1,000,000 per month
Year 4 $1,250,000 per month
Year 5 $1,500,000 per month
</TABLE>
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Use of CheckFree Corporation's Pay Anyone Services
If First Data chooses to offer pay anyone services, it will agree to use
CheckFree Corporation "pay anyone" services if in its reasonable business
judgment substantially similar services could not be obtained at an equal or
lesser overall economic cost from a third party.
Reseller Agreement with First Data
Contemporaneously with the signing of the marketing agreement, First Data
will enter into a non-exclusive reseller agreement for the resale of CheckFree
Corporation's payment processing services.
Non-Competition
First Data generally has agreed that it will not offer or provide an
integrated interactive bill payment system for the delivery or payment of more
than a specified ratio of household bills to an aggregation service company by
means of any interactive service anywhere in the world. This obligation,
however, is subject to exceptions that allow First Data to continue to conduct
various types of payment processing activities during the term of the agreement.
To the extent that First Data engages in an activity that would violate the
general non-compete agreement indicated above, First Data may pursue these
activities if:
o First Data and it affiliates limit the gross revenues that they from
these activities to $50,000,000 per year, with some exceptions;
o except in some circumstances, 25% of all gross revenues derived solely
from these activities will be paid to CheckFree Corporation, with these
payments being counted against the minimum revenue guarantees owed by
First Data to CheckFree Corporation; and
o CheckFree Corporation is notified as soon as practicable after First
Data signs an agreement to engage in these activities.
The non-compete provision also contains customary exceptions for providing
an integrated interactive bill payment system and for investments in persons
that engage in activities that would otherwise violate the non-compete
provision.
Term and Termination
The marketing agreement generally will have a term of 5 years, but may be
terminated earlier by First Data if we undergo a change of control involving the
First Data competitors named in the agreement. A change of control is defined to
have occurred if any First Data competitor acquires more than 30% of CheckFree
Corporation's voting stock or CheckFree Corporation's stockholders own less than
70% of CheckFree Corporation's voting stock after a transaction involving any
specified First Data competitor.
REGULATORY MATTERS
Under United States antitrust laws, we may not complete the Transfers until
we have notified the Antitrust Division of the Department of Justice and the
Federal Trade Commission of the Transfers and filed the necessary report forms,
and until a required waiting period has ended. We have filed the required
information and materials with the Department of Justice and the Federal Trade
Commission, and, on March 31, 2000, we received notice of early termination of
the required waiting period.
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ORGANIZATION AND APPROXIMATE OWNERSHIP IMMEDIATELY
BEFORE AND AFTER THE TRANSFERS
BEFORE THE TRANSFERS:
- ---------------------
CURRENT MICROSOFT FIRST DATA CITIBANK,
CHECKFREE CORPORATION CORPORATION N.A. AND ITS
HOLDINGS AND ITS AND ITS AFFILIATES
STOCKHOLDERS AFFILIATES AFFILIATES
100%
CHECKFREE TRANSPOINT ENTITIES
HOLDINGS (INCLUDING DOMESTIC AND
INTERNATIONAL)
100% CHECKFREE
CORPORATION
100%
CHECKFREE
OPERATING CHOPPER MERGER
SUBSIDIARIES CORPORATION
AFTER THE TRANSFERS:
- --------------------
CURRENT MICROSOFT FIRST DATA CITIBANK,
CHECKFREE CORPORATION CORPORATION N.A. AND ITS
HOLDINGS AND ITS AND ITS AFFILIATES
STOCKHOLDERS AFFILIATES AFFILIATES
77.0% 11.6% 8.9% 2.5%
CHECKFREE CORPORATION
100% 100%
CHECKFREE TRANSPOINT ENTITIES
HOLDINGS (INCLUDING DOMESTIC AND
INTERNATIONAL)
CHECKFREE
OPERATING
SUBSIDIARIES
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CHECKFREE HOLDINGS CORPORATION
GENERAL
We are the leading provider of electronic billing and payment services.
We operate our business through three independent but inter-related divisions:
o Electronic Commerce;
o Investment Services; and
o Software.
Our Electronic Commerce business provides services that allow consumers
to:
o receive electronic bills through the Internet;
o pay any bill--electronic or paper--to anyone; and
o perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
We currently provide electronic billing and payment services for
approximately 3 million consumers. Our services are available through over 350
sources, including:
o 23 of the 25 largest U.S. banks;
o 8 of the top 10 U.S. brokerage firms;
o Internet portals like Yahoo!;
o Internet-based banks like WingspanBank.com;
o Internet financial sites like Quicken.com; and
o personal financial management software like Quicken and Microsoft
Money.
We have developed contracts with over 1,100 merchants nationwide that
enable us to remit more than 50% of all of our bill payments electronically.
During the three-month period ended December 31, 1999, we processed an average
of nearly 14 million transactions per month and, for the year ended June 30,
1999, we processed more than 125 million transactions.
In March 1997, we introduced electronic billing -"E-Bill"- which
enables merchants to deliver billing as well as marketing materials
interactively to their customers over the Internet. As of December 31, 1999, we
had signed contracts for E-Bill services with 89 of the country's largest
billers. In December 1999, we presented more than 38,000 electronic bills, which
is nearly double the number of bills presented through E-Bill services in
September 1999. Additionally, over 100 CheckFree distribution points are live
with Internet billing and payment.
For example, when a customer instructs us to pay a bill, we have the
ability to process the payment either by electronic funds transfer, by paper
check, or by draft drawn on the customer's account. Our patented bill payment
processing system in Norcross, Georgia determines the preferred method of
payment based on a credit analysis of the customer, assessing the customer's
payment history, the amount of the bill to be paid and other relevant factors.
If the results of the credit analysis are favorable, we will assume the
risk of collection of the funds from the customer's account, and if we have an
electronic connection to the merchant, the remittance will be sent
electronically. Otherwise, the remittance will be sent to the merchant by a
paper check or draft drawn directly on the customer's checking account. In an
electronic remittance, the funds are transmitted electronically to the merchant
with the customer's account number included as an addenda record. For a paper
draft, the customer's name, address, and account number is printed on the face
of the check. In addition, our processing system provides the ability to
aggregate multiple electronic and paper remittances due to merchants. Thus, if
multiple payments are going to the same merchant on the same day, we may send
one check for the sum of these payments and include a remittance statement that
provides the customers' names, addresses, account numbers, and payment amounts.
Our strategy is to drive operational efficiency and improve profitability by
increasing the percentage of transactions we process electronically.
We are also a leading provider of institutional portfolio management
and information services and financial application software. Our Investment
Services business offers portfolio accounting and performance measurement
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services to investment advisors, brokerage firms, banks and insurance companies
and financial planning application software to financial planners.
Our portfolio management system solution includes:
o data conversion;
o personnel training;
o trading system;
o graphical client reporting;
o performance measurement;
o technical network support and interface setup; and
o Depository Trust Corporation processing.
Our financial planning software applications include:
o retirement and estate planning modules;
o cash flow, tax and education planning modules;
o asset allocation module; and
o investment manager performance database system.
Our fee-based money manager clients are typically sponsors or managers
of wrap money management products or traditional money managers, managing
investments of institutions and high net worth individuals.
Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support the following software applications, among
others:
o Electronic Funds Transfer.
Through our Paperless Entry Processing System Plus software, we
offer an online, real-time system providing an operational interface
for originating and receiving payments through the automated
clearinghouse. The automated clearinghouse is a nationwide electronic
clearing and settlement system that processes electronically originated
credit and debit transfers among participating depository institutions.
These electronic transactions are substitutes for paper checks and are
typically used for recurring payments like direct deposit payroll
payments and corporate payments to contractors and vendors, debit
transfers that consumers make to pay insurance premiums, mortgages,
loans and other bills, and business to business payments. You may
obtain additional information on the automated clearinghouse at the
Federal Reserve Commission's website at http://www.federalreserve.gov.
We do not maintain a direct connection with the automated
clearinghouse, but rather, clear our electronic transactions through
KeyBank, N.A., under the terms of an automated clearinghouse agreement.
o Reconciliation.
Through our ReconPlus software, we provide United States banks,
international banks and corporate treasury operations with automated
check and non-check reconciliations in high volume, multi-location
environments. Some of the services provided by ReconPlus are automated
deposit verification, consolidated bank account reconciliation and
cash mobilization, immediate and accurate funds availability data and
improved cash control.
o Other.
We also provide software solutions like regulatory compliance
solutions for Form 1099 processing, safe box accounting and other
applications.
During the fiscal year ended June 30, 1999, Electronic Commerce
accounted for 68% of our revenues and Software and Investment Services each
accounted for 16% of our revenues.
ELECTRONIC COMMERCE INDUSTRY BACKGROUND
The majority of today's consumer bill payments are completed using
traditional paper-based methods. According to the Gartner Group, of the
estimated 17 billion consumer bills produced each year, 81% are paid by paper
check, 12% are paid by electronic means and 7% by other means. Many traditional
financial transactions, however, can now be completed electronically due to the
emergence of new communications, computing and security technologies. Many
financial institutions and businesses have invested in these technologies and
are creating the infrastructure for recording, reporting and executing
electronic transactions. We believe the broad impact of the Internet will
increase the use of electronic methods to execute financial transactions.
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Persistence of Traditional Financial Transaction Processes
Many traditional methods of completing financial transactions still
persist, including:
o Paper Checks.
It is estimated that 65 billion checks were written in the United
States in 1998. The use of checks imposes significant costs on
financial institutions, businesses and their customers. These costs
include the writing, mailing, recording and manual processing of
checks.
o Paper Billing.
It is estimated that over 17 billion paper bills are produced
each year, with the cost of submitting a paper bill, including
printing, postage and billing inserts, as high as $3.00 per bill.
o Conventional Banking.
Many financial transactions are conducted in person at banks.
Banks incur substantial expenses in providing personnel and physical
locations, while bank customers incur transportation costs and personal
inconvenience when traveling to a bank facility. Over 90% of the 80
million banking households in the United States are still conducting
most of their financial transactions using conventional banking
methods.
o Business-to-Business Payments.
While consumers bear costs and inconvenience receiving and paying
paper bills, businesses experience an even higher level of cost and
inefficiency when receiving and paying paper bills. For businesses,
issues like discounts for prompt payment, returns, allowances,
disputed charges and other adjustments, as well as reconciliation to
the business' own records, increase the costs of payment.
The Internet's Role in Driving Electronic Commerce
We believe the broad impact of the Internet is driving financial
institutions, businesses and consumers to adopt practices of electronic billing
and payment, banking and business-to-business payments. We expect that the
growth in these electronic commerce activities will increase the need for
services that support secure, reliable and cost-effective financial transactions
between and among these market participants. We believe the combination of the
following trends is driving adoption of electronic commerce:
o Expanding Personal Computer Ownership.
Declining prices for personal computers and rapid growth in the
number of computer-literate consumers are driving increased penetration
of personal computers in U.S. homes.
o Increasing Internet Accessibility.
Reduced communications costs, improved web browsers and faster
connection speeds have made the Internet increasingly accessible to
consumers and to businesses offering products and services on-line.
International Data Corporation estimates that there were 52 million
Internet users in the United States at the end of 1998 and that this
figure will grow to 136 million by the end of 2002.
o Increasing Acceptance of Electronic Commerce.
Consumers have grown increasingly comfortable with the security
of electronic commerce and are willing to conduct large transactions
on-line. International Data Corporation estimates that the total value
of goods and services purchased over the Internet in the United States
will increase from approximately $26 billion in 1998 to over $269
billion in 2002.
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o Emergence of New Industry Participants.
New businesses have emerged which use the broad adoption of the
Internet to compete with traditional businesses. Traditional financial
institutions now compete with Internet-based banks, brokerages and
other financial services companies. These companies do not offer
consumers the possibility of traditional, manual financial
transactions and are driving further adoption of electronic commerce.
THE ELECTRONIC SOLUTION
We believe that consumers will move their financial transactions from
traditional paper-based to electronic transactions if they have an
easy-to-access, easy-to-use, compelling, secure and cost-effective solution for
receiving and paying their bills electronically. We believe that, compared with
conventional paper-based transactions, electronic transactions cost much less to
complete, give rise to far fewer errors and generate far fewer subscriber
inquires. We believe that an electronic solution should allow consumers at their
access point of choice to:
o receive electronic bills through the Internet;
o pay any bill--electronic or paper--to anyone; and
o perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
We also believe that these functionalities must be delivered on a
platform that:
o is fully supported by end-to-end customer care;
o is available 24 hours a day, 7 days a week; and
o provides the highest level of security, availability and privacy.
Over the past fifteen years, we have developed market leading expertise
and technological capability to provide electronic commerce solutions with these
functionalities.
THE CHECKFREE ADVANTAGE
Our experience as a leading provider of electronic billing and payment
and banking services has facilitated the building of a state of the art
infrastructure. We have leveraged this infrastructure by developing a full suite
of electronic commerce services, all of which we offer in an integrated fashion
through multiple distribution channels.
Infrastructure
Our infrastructure allows consumers to receive and pay both
conventional and electronically presented bills and handle traditional banking
transactions electronically. The key components of our infrastructure are:
o Connectivity with Merchants.
We have established electronic connectivity to over 1,100
merchants, which allows us to remit over 50% of all of our bill
payments electronically. Electronic remittance may be accomplished at
a lower cost than remittances using the traditional paper-based
method. In addition, electronic remittance significantly reduces
payment exceptions and related costs associated with customer care.
o Scalable Genesis Platform.
Our Genesis platform, completed in 1998, is an internally
developed data processing system created by our in-house engineers to
process electronic billings and payments. The Genesis platform was
designed to be scaled to handle more than 30 million
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consumers. We have made significant investments in processes and
technologies supporting our Genesis platform to ensure that
transactions are executed with the highest level of security,
reliability and efficiency.
o Connectivity to Billers.
We believe that our ability to provide consumers with access to
electronic bills will substantially spur adoption of the electronic
solution. By targeting the largest billers in key industries and in
selected population centers, we believe we can provide a significant
number of bills to most consumers at their access point of choice. We
have contracts with 89 billers, which represent the opportunity to
deliver over 500 million bills per month, representing over 68% of the
telecom bills, 24% of the utility bills, 35% of the mortgage bills and
30% of the credit card bills in the United States. Our goal is to
distribute bills from over 90 billers by the end of fiscal 2000. To
encourage billers to utilize our services, we anticipate funding a
portion of some billers' set-up costs.
o Experienced Customer Care Staff.
We have approximately 825 trained, experienced customer care and
merchant services staff that offer seamless end-to-end customer care.
We believe that customer care that provides answers to all the
questions that consumers may have about their transactions is a
critical component of providing a compelling, easy-to-use solution
that consumers will ultimately adopt.
Distribution
We believe that consumers are most attracted to an electronic solution
that enables them to receive and pay all of their bills at a single site. For
many consumers, the site they choose will be their financial institution's web
site, while others will prefer Internet portals or sites operated by individual
merchants. Through contracts with over 350 sources, we are able to distribute
our services to whichever access and aggregation site the consumer prefers.
Significant among these contracts are our agreements with:
o 23 of the 25 largest banks in the United States;
o 8 of the top 10 brokerage firms in the United States;
o Internet portals like Yahoo!;
o Internet-based banks like WingspanBank.com;
o Internet financial sites like Quicken.com; and
o personal financial management software like Quicken and Microsoft
Money.
OUR BUSINESS STRATEGY
Our business strategy is to provide an expanding range of convenient,
secure and cost-effective electronic commerce services and related products to
financial institutions, Internet portals, businesses and their customers. We
have designed our services and products to take advantage of opportunities we
perceive in light of current trends and our fundamental strategy. The key
elements of our business strategy are to:
o Drive increased adoption of electronic commerce services by
consumers.
We believe that consumers will move their financial transactions
from traditional paper-based methods to electronic transactions if
they have an easy-to-access, easy-to-use, secure, compelling and
cost-effective method for receiving and paying their bills
electronically. Our strategy to drive adoption of our electronic
services will focus on the following initiatives.
We intend to use the broad adoption of the Internet by consumers
to encourage the use of our web-based electronic commerce services by
our financial institution and Internet portal customers. To further
drive demand, we are also providing our services through Internet
portals. This strategy should provide consumers with ready access to
easy-to-use, cost-effective applications for receiving and paying
their bills electronically. Part of our strategy to drive consumer
adoption is working with Internet portals to offer our services to
consumers on a free-trial basis. Initially, this strategy will result
in foregone revenues, but we anticipate
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converting a majority of these new customers to fee-based services
at the end of the trial period. As consumers continue to adopt
electronic commerce services, financial institutions and billers will
see greater efficiencies from providing electronic billing and
payment services to their customers.
We are proposing new pricing structures to our financial
institution customers to facilitate their offering electronic billing
and payment to a broad spectrum of consumers. Our traditional
financial institution pricing structure was based on subscriber fees,
with an average cost to the financial institution of approximately $4
per subscriber per month. Under the old pricing structure, the costs
to our financial institution customers grew roughly proportionally to
the number of subscribers added, regardless of activity. Our new
pricing programs include a monthly fixed fee to the financial
institution to cover our infrastructure costs which helps our
financial institution customers more accurately predict the costs, a
small monthly per subscriber fee and a new fee based on the number of
transactions processed. We believe the new pricing structure should
allow our financial institution customers to justify promoting the
service through free trials and other offers.
Additionally, we believe that financial institutions and Internet
portals that offer electronic banking will experience increased
customer retention, have a superior marketing channel and be able to
offer enhanced customer service.
o Continue to distribute electronic commerce services through multiple
channels.
We maintain alliances with market-leading companies to achieve
deeper market penetration and have begun an initiative to offer our
electronic commerce services through Internet portals. To better
reach smaller financial institutions, we have entered into
distribution agreements with some independent firms that we believe
can more efficiently address the needs of this industry segment.
Additionally, by making services available to users of personal
financial management software, like Quicken, Microsoft Money and
Managing Your Money and of business management software, like
QuickBooks, we expand public access to, and awareness of, our
services.
o Focus on customer care and technical support.
We believe that providing superior quality and accessible and
reliable customer care is essential to establishing and maintaining
successful relationships with our customers. We support and service
customers through numerous activities, including technical and
non-technical support, through help desk, e-mail and facsimile, as
well as through service implementation and training. We are enhancing
our support of our services through advanced Internet-based
communications technologies that enable us to efficiently respond to
billing and payment inquiries made by financial institutions, billers
and their customers. In anticipation of greater adoption of our
electronic commerce services, we are increasing the number of our
customer care personnel and focusing on our efficiency in handling
customer care inquiries. Additionally, we established a third
operational center in Phoenix, Arizona to house customer care and
check printing and distribution functions.
o Continue to improve operational efficiency and effectiveness.
We believe that as our business grows and the number of
transactions we process increases, we will be able to take advantage
of operating efficiencies associated with increased volumes, thereby
reducing our unit costs. We recently began an internal program called
the "sigma challenge" which ties employee performance evaluations and
compensation to the achievement of process and system improvements.
Sigma is a measure of quality typically used by manufacturing firms
to minimize defects. The sigma challenge applies sigma measurements
as a barometer of our performance on our key metrics of system
availability and payment timeliness. Small changes in our performance
drive significant sigma movements, focusing our attention on critical
tasks and peak performance. The sigma challenge is designed to take
our quality performance from 99.0%, or 3.8 sigma, where we began our
fiscal year 2000, to 99.9%, or 4.6 sigma, by the end of fiscal 2000.
A 4.6 sigma is the quality standard set by the telecommunications
industry for delivering their services to businesses and consumers or
"dial-tone" quality. Additionally, we expect to derive further
operational efficiency and effectiveness by increasing our electronic
links with billers, enabling a larger percentage of our consumer
transactions to be processed electronically.
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o Drive new forms of electronic commerce services.
Our electronic commerce services are currently applied to
banking, billing and payment and brokerage transactions. We believe
that new applications will be developed as a result of the growth in
electronic commerce generally, and Internet-based commerce
specifically. We intend to leverage our infrastructure and
distribution to address the requirements of consumers and businesses
in these new applications. For example, we plan to leverage our core
payment and processing network to accomplish person-to-person and
small business payments.
PRODUCTS AND SERVICES
Electronic Commerce
Our electronic commerce services are primarily targeted to consumers
through financial institutions and Internet portals. We believe that our
services offer significant benefits to financial institutions and Internet
portals, including an enhanced electronic relationship with their consumers
under which they can market other products and services and, for financial
institutions, a lower cost of providing traditional banking and bill payment
services. We are continually developing new electronic commerce services and
enhancing our existing services for each of our target markets.
We have arrangements with more than 350 sources through which electronic
payment services are provided to their customers. The following financial
institutions and Internet portals are some of our largest customers of our
electronic commerce services, as determined by the number of subscribers:
o Bank of America; o Merrill Lynch & Co.;
o Bank One; o NationsBank;
o Charles Schwab & Co.; o U.S. Bancorp;
o Chase Manhattan Bank; o Wells Fargo;
o First Union; o WingspanBank.com; and
o KeyCorp; o Yahoo!
This list of our customers is not exhaustive and may not fully represent our
customer base.
Bill Payment and Banking. Our bill payment services enable financial
institution and Internet portal customers, as well as direct consumer
subscribers to pay bills electronically using a variety of devices like personal
computers and touch-tone telephones. Bills paid by consumers using our bill
payment services typically include credit card, monthly mortgage and utility
bills, but a cornerstone of our services is that we can facilitate electronic
payment by consumers to anyone, regardless of whether payment is ultimately made
through an electronic or traditional paper method. Consumers can use our
services to make any payment electronically from any checking account at any
financial institution in the United States. Recurring bills like mortgages can
be paid automatically and scheduled in advance, as specified by the consumer. As
of December 31, 1999, we had approximately 3 million consumers using our bill
payment and home banking services.
We support home electronic banking services for financial institutions
and their customers. Among these are balance inquiries, fund transfers, customer
service, customer billing and marketing. Our service facilitates on-line
reconciliation to personal computer and web-based account registers, matching
cleared items with previously entered transactions.
Revenues are generated through contracts with individual financial
institutions. We historically negotiated with the financial institution an
implementation fee, a base monthly fee per customer account on the service
provided, and in some cases, a variable per transaction fee which may decrease
based on the volume of transactions. We recently announced the adoption of new
pricing programs that include a monthly fixed fee to the financial institution
to cover our infrastructure costs which helps our financial institution
customers more accurately predict the costs, a small monthly per subscriber fee
and a new fee based on the number of transactions processed. Contracts typically
have three to five year terms and generally provide for minimum fees if
transaction volumes are not met. We utilize direct sales and distribution
alliances to market to financial institutions and have the ability to customize
services for each institution.
Billing and Payment. Our electronic billing and payment service permits
billers to deliver full-color electronic bills to their customers, together with
detailed information and electronic promotional inserts. We also offer the
opportunity to market interactively, and to use one-to-one marketing techniques.
The recipients can use the service to electronically make the payment. We are
marketing the service to be incorporated into our electronic banking and bill
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payment services. We have entered into a variety of arrangements with financial
institutions, Internet portals and billers to provide these services and, in
some cases, will share revenue derived from billers with the financial
institutions and the Internet portals. In the near term, we will offer
free-trial periods for our electronic billing and payment services to accelerate
the rate of adoption of our services. We believe that billers could eventually
achieve substantial savings by utilizing our billing and payment service, but we
believe that an even stronger incentive for billers to present bills
electronically is the opportunity our system offers for more effective marketing
to customers.
Business Payments. We facilitate electronic payments for businesses
through our offerings of business bill payment and banking and electronic
accounts receivable processing services. As we do for consumers, we enable
businesses to make payments to anyone. We employ a direct sales force to market
the service through banks and others. Our electronic accounts receivable
collections for businesses are provided to health and fitness and various other
industries, enabling these businesses to collect monthly fees through electronic
funds transfer or credit cards. Services are typically provided under contracts
for three years with automatic renewals. For providing collection services,
businesses pay us implementation fees, transaction fees and credit card discount
fees.
Investment Services
We offer portfolio management and information services for fee-based
money managers and financial planners within investment advisory firms,
brokerage firms, banks and insurance companies. Our fee-based money manager
clients are typically sponsors or managers of wrap money management products or
traditional money managers, who manage investments of institutions and high net
worth individuals.
Our full range of portfolio management services provides our clients
with portfolio management tools, tax lot reporting, trade modeling, performance
measurement and reconciliation. Our information services and software allow
traditional money managers and consultants to allocate client assets, select and
benchmark performance of money managers and report on manager performance. Each
of these features allows our clients to avoid spending time on these functions
and focus on their key business.
Revenues in our portfolio management services are generated through
multiple year agreements that provide for monthly revenue on a volume basis.
Revenue from our information services and software is typically generated
through annual agreements.
Our integrated outsourced solution utilizes a Unix platform. The system
is highly scalable, making us the system of choice for firms managing a large
number of portfolios.
Software
We are a leading provider of electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support software products for automated
clearinghouse processing, reconciliation and regulatory compliance. In addition,
we offer software consulting and training services.
Our financial application software revenues are derived primarily from
the sale of software licenses and software maintenance fees. Our software is
sold under perpetual licenses, and maintenance fees are received through
renewable agreements.
In April 1998, we announced our intention to divest ourselves of many of
our software products and businesses. By September 1998, we sold our item
processing, wire transfer and cash management, leasing, mortgage, and imaging
software products and businesses.
Our retained software products provide systems that range from back
office operations to front-end interface with the clients of our customers.
Applications include automated clearinghouse origination and processing
reconciliation, regulatory compliance and safe deposit box accounting. While we
have no pending agreements to dispose of our remaining software businesses, we
do receive offers for them from time to time.
Automated Clearinghouse. The automated clearinghouse network was
developed in the 1970s to permit the electronic transfer of funds, curtailing
the growth in the number of paper checks in circulation. The automated
clearinghouse network acts as the clearing facility for routing electronic funds
transfer entries between financial institutions. All automated clearinghouse
transfers are handled in a standard format established through the National
Automated Clearing House Association. More than 15,000 financial institutions
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participate in the automated clearinghouse system. There are 31 automated
clearing houses, which geographically coincide with the twelve Federal Reserve
Banks, their branches and processing centers. Our electronic funds transfer
products are interrelated and may be used by either businesses or financial
institutions depending on the services they offer their customers and employees.
We developed the Paperless Entry Processing System Plus, with 46 of the
top 50 originators utilizing the product to process approximately 74% of all
automated clearinghouse transactions nationally, it is the most widely used,
comprehensive automated clearinghouse processing system in the United States.
Paperless Entry Processing System Plus is an on-line, real-time system providing
an operational interface for originating and receiving electronic payments
through the automated clearinghouse.
Reconciliation. Our reconciliation products allows users to verify and
compare their financial records, data and accounts against related information
derived from third party sources. RECON-PLUS provides United States 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. Services provided by our reconciliation products
include:
o automated deposit verification;
o consolidated bank account reconciliations and cash mobilization;
o immediate and accurate funds availability data; and
o improved cash control.
In 1995, we introduced RECON-PLUS for Windows, a client/server based
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, automated teller machine transactions, automated clearinghouse transfers
and securities transactions.
Our account reconciliation package is one of the most widely used
account reconciliation systems in the United States banking industry. The
account reconciliation package/service management system which was developed in
1995 to replace and augment the existing package, is a fully integrated on-line
and real time system that enables banks to immediately process their customer
transactions to produce accurate, timely reconciliations while streamlining
back-office processes. The account reconciliation package/service management
system also groups accounts across banks within bank holding companies and
allows banks to streamline their operations by reconciling their intra-bank
transactions.
Other Software Products. We also offer software products and services
dealing with safe box accounting and compliance with government regulations.
Licenses. We generally grant non-exclusive, non-transferable perpetual
licenses to use our application software at a single site. Our standard license
agreements contain provisions designed to prevent disclosure and unauthorized
use of our software. License fees vary according to a number of factors,
including the types and levels of services we provide. Multiple site licenses
are available for an additional fee. In our license agreements, we generally
warrant that our products will function in accordance with the specifications
set forth in our product documentation. A significant portion of the license fee
payable under our standard license agreement is due 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 our software and maintenance for the first three to
twelve months.
Maintenance and Support. Maintenance includes enhancements to our
software. Customers who obtain maintenance generally retain maintenance service
from year to year. To complement customer support, we frequently participate in
user groups with our customers. These groups exchange ideas and techniques for
using our products and provide a forum for customers to make suggestions for
product acquisition, development and enhancement.
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COMPETITION
Electronic Commerce
Portions of the electronic commerce market are becoming increasingly
competitive. We face significant competition in all of our customer markets.
First, we need to switch billers and consumers from paper bills sent by mail and
paid by check to electronic bill presentment and payment. Second, a number of
banks have developed, and others may in the future develop, home banking
services in-house. For example, Chase Manhattan Corporation, First Union
Corporation and Wells Fargo & Co. recently announced the formation of a new
venture called Spectrum that will allow individuals and businesses to receive
and pay bills electronically. To the best of our knowledge Spectrum has done
limited electronic presentment of bills, and is developing a "pay anyone"
capability. In addition, recently Mastercard International announced that it
would begin offer online bill presentment to enable people to receive and pay
bills over the Internet by September 2000. A number of relatively small
companies, like Travelers Express, recently acquired by Marshall & Ilsley Bank
Inc., compete with us in electronic bill payment. Additionally, TransPoint LLC,
a joint venture among Microsoft Corporation, First Data Corporation and Citibank
N.A., competes aggressively with us in the area of electronic billing and
payment. TransPoint has entered into its own agreements with financial
institutions to offer on-line home banking and electronic billing and payment to
consumers. As previously announced, we have entered into an agreement to acquire
TransPoint and its operations. We also compete for business bill payment
customers with ACI and Deluxe Data, which provide automated clearinghouse
processing. We also face increased competition from new competitors offering
billing and payment services utilizing scan and pay technology. These "scan and
pay" companies offer a service whereby a consumer's bill is received by the
company, scanned to create an electronic image of the bill, and electronically
delivered to the consumer who can elect to pay that bill either by writing a
paper check or through an electronic transfer of funds. We believe that our
competitors, however, will need to make substantial progress to able to offer
electronic commerce services comparable to the services we currently offer to
our customers through multiple distribution channels.
Because the electronic commerce industry is expected to grow
substantially in the coming years, we anticipate continued strong competition,
but we believe that the increased attention and credibility this 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
Competition for portfolio services includes two main segments. We
compete with providers of portfolio accounting software, including Advent
Software, and PORTIA, a division of Thomson Financial. We also compete with
service bureau providers like SunGard Portfolio Solutions and FMC Service
Bureau.
Software
The computer application software industry is highly competitive. In the
financial applications software market, we compete directly or indirectly with a
number of firms, including large diversified computer software service companies
and independent suppliers of software products. We believe that there is at
least one direct competitor for most of our software products, but no competitor
competes with us in all of our software product areas.
Our product lines also have numerous competitors. The RECON-PLUS product
competes with Chesapeake, Driscoll and Geac.
We believe that the major factors affecting customer decisions in our
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. Our ability to compete
successfully also requires that we continue to develop and maintain software
products and respond to regulatory change and technological advances. We believe
that we currently compete favorably in the marketplace with respect to these
criteria. See "Risk Factors--Competitive pressures we face may have a material
adverse effect on us."
BlueGill is expanding into international markets where we may discover
new local competitors that have the advantages of existing relationships with
customers, local technical support staff, and local language support.
SALES, MARKETING AND DISTRIBUTION
Our sales, marketing and distribution efforts are designed to maximize
access to potential customers. We market and support our 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 which are involved in our target customer
markets. In order to foster a better understanding of the needs of our larger
bank customers, and to help us respond to identified needs, we employ a number
of account managers assigned to specific banks. We solicit billers for our
electronic billing and payment services through a regionally assigned sales
force.
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In the electronic commerce segment, we offer our services and related
products to the nation's largest financial institutions directly through our
sales force, and market to smaller institutions through strategic alliances with
companies like EDS, Fiserv, Alltel and Equifax. We currently offer substantially
all of our services and related products only to the domestic marketplace.
Recently, we announced our initiative to offer our electronic commerce
services through Internet portals. We believe that these Internet portals will
enhance and speed up the rate of adoption of electronic commerce services by
consumers. Part of this strategy contemplates working with Internet portals to
offer our services to consumers on a free-trial basis. Initially, this strategy
will result in foregone revenue, but we anticipate converting a majority of
these new customers to fee-based services at the end of the trial period.
Additionally, the distribution of electronic home banking and electronic
consumer and business billing and payment services is widened though inclusion
or access through front-end personal financial management software, like
Quicken, Microsoft Money and Managing Your Money.
We market investment services through our direct sales force. We
generate new customers through direct solicitation, user groups and
advertisements. We also participate in trade shows and sponsor industry seminars
for distribution alliances.
We market financial application software products through our direct
sales force and through indirect sales through Alltel banking services.
Salespersons have specific product responsibility and receive support from
technical personnel as needed. We generate new customers through direct
solicitations, user groups, advertisements, direct mail campaigns and strategic
alliances. We also participate in trade shows and sponsor 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.
An element of our strategy is the creation and maintenance of
distribution alliances that maximize access to potential customers for our
electronic commerce services and related products. We believe that these
alliances enable us to offer services and related products to a larger customer
base than can be reached through stand-alone marketing efforts. We seek
distribution alliances with companies who have maximum penetration and leading
reputations for quality with our target customers. To date, we have entered into
or are negotiating distribution alliances with several companies, including
AT&T, Alltel, EDS, Fiserv, Five Paces, and Home Financial Network. We also have
arrangements with MicroBank for RECON-PLUS for Windows. On October 29, 1997, we
entered into a 10-year processing alliance with Integrion Financial Network,
L.L.C. to provide financial institutions with a fully integrated, end-to-end,
cost effective electronic billing and payment processing service employing
Integrion's Gold Message Standard for Electronic Commerce, its Interactive
Financial Services platform and our processing infrastructure.
One of the ramifications of this strategy is that we do not, for the
most part, have a direct relationship with the end-users of our products. See
"Risk Factors--We rely on third parties to distribute our electronic commerce
services, which may not result in widespread adoption."
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of our strategy in each business segment. To
meet customers' needs most efficiently, our customer care staff is organized
into vertical teams that support each of our business segments. These teams,
however, 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. Through advanced communications technology, we have a
virtual call center enabling incoming calls to be transparently routed to
various physical support sites as volume demands dictate. An important driver of
our profit margins is the percentage of transactions we complete electronically.
Experience has shown that the demand on customer care resources reduces
substantially as the percentage of electronic remittances grows. We have long
been a leader in electronic remittance, and our merchant systems group
continually establishes and maintains electronic links directly to the internal
systems of payees.
The level and types of services we provide vary by customer market. The
customer care group, consisting of approximately 825 employees, supports payment
inquiry, customer service and technical support and interfaces with the merchant
systems group to improve posting efficiencies. Representatives in our business
customer care group are
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individually assigned to business customers in order to provide high-level
customer service and technical support. Our consumer care group provides various
levels of support that depend upon the customer's requirements. This includes
providing direct customer care on a private label basis as well as research and
support.
In order to maintain the ability to provide quality customer service as
our subscriber base increases, we established a third operational center in
Phoenix, Arizona to house customer care, check printing and distribution
functions. This center, when fully staffed, will house up to 800 associates
focused on customer care services.
To maintain our customer care standards, we employ extensive internal
monitoring systems and conduct 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.
REMITTANCES
Payment Systems. Across our various electronic commerce service
offerings, we utilize the Federal Reserve's Automated Clearing House 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, we access these systems through contractual arrangements with
processing banks. For access to conventional paper check clearing systems, we do
not need a special contractual relationship, except for contractual
relationships with the processing bank and its customers. These 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 risks typically faced by companies utilizing each of
these payment clearance systems, and we have our own set of operating procedures
and proprietary risk management systems and practices to mitigate credit-related
risks. See "Risk Factors--The transactions we process expose us to credit risks"
and "--Our business could become subject to increased government regulation,
which could make our business more expensive to operate."
Automated Clearinghouse. The automated clearinghouse is used by banks,
corporations and governmental entities for electronic settlement of
transactions, direct deposits of payroll and government benefits and payment of
bills like mortgages, utility payments and loans. We use the automated
clearinghouse to execute some of our customers' payment instructions. Like other
users of the automated clearinghouse, we bear credit risk resulting from
returned transactions caused by insufficient funds, stop payment orders, closed
accounts, frozen accounts, unauthorized use, disputes, theft or fraud. See "Risk
Factors--The transactions we process expose us to credit risks" and "--Our
business could become subject to increased government regulation, which could
make our business more expensive to operate."
Paper Drafts. We use conventional check clearance methods for paper
drafts to execute some customers' payment instructions. We bear 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, we may bear other risks for theft or fraud associated with paper
drafts due to unauthorized use of our services. When a customer instructs us to
pay a bill, we have 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. We manage the
risk we assume by adjusting the mix of electronic and paper draft transactions
in individual cases and overall. Regardless of whether we use paper drafts or
electronic funds transfers, we retain all risks associated with transmission
errors when we are unable to have erroneously transmitted funds returned by an
unintended recipient.
Other Clearance Systems. While we presently utilize the two principal
payment clearance systems, we intend to use other clearance systems like
automated teller machine networks to provide balance inquiry and fund transfers
functions, and other clearance systems that may develop in the future.
Risk Mitigation. Our patented bill payment processing system determines
the preferred method of payment to balance processing costs, operational
efficiencies and risk of loss. We manage our risks associated with the use of
the various payment clearance systems through risk management systems, internal
controls and system security. We also maintain a reserve for these risks, which
reserve was $1.2 million at December 31, 1999, and we have not incurred losses
in excess of 0.93% of our revenues in any of the past five years. As further
protection against losses due to transmission errors, we maintain errors and
omissions insurance. See "Risk Factors -- The transactions we process expose us
to credit risks" and "--We may be unable to protect our proprietary technology,
permitting competitors to duplicate our products and services."
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TECHNOLOGY
Our historical approach to technology has been to utilize a combination
of hardware, networks, proprietary software and databases to solve our customer
needs and to meet the varying requirements of the electronic commerce market.
Electronic Commerce. Our core technology capabilities were developed to
handle settlement services, merchant database services and on-line inquiry
services on a traditional mainframe system with direct communications to
businesses.
We have 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, various
types of networks or the Internet to our computing complex in Norcross, Georgia.
Within this complex, there is a wide variety of application servers that capture
transactions and route them to our back-end banking, billing and payment
applications for processing. The back-end applications are run on IBM
mainframes, Tandems or Unix servers.
We have developed proprietary databases within our client-server system,
including a financial institution file that allows accurate editing and
origination of automated clearinghouse and paper transactions to financial
institutions. We have also developed a merchant information file consisting of
over 1 million companies that allows accurate editing and initiation of payments
to billers. These databases have been constructed over the past 15 years as a
result of our transaction processing experience.
Platform Integration: The Genesis Project. In 1998, we integrated the
existing legacy data processing sites and platforms operated in Columbus, Ohio,
Aurora, Illinois, and Austin, Texas, into our central processing site at our
headquarters in Norcross, Georgia. We recently completed the planned migrations
of our customers to the new Genesis platform from our Aurora, Illinois and
Columbus, Ohio platforms. We have designated this integration the Genesis
Project. The integration has required 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. See "Risk Factors--We may experience breakdowns in our payment
processing system that could damage customer relations and expose us to
liability."
The Austin platform was designated to host subscribers using a
particular personal financial management product that is not expected to be
supported indefinitely. We expect that these financial institutions will migrate
these subscribers to different software, which will prompt further migrations to
Genesis.
Significant numbers of high-level employees have been and will be hired
to facilitate the accomplishment of the Genesis Project, and to manage the
integrated site. We intend to operate the legacy platforms without substantial
disruption until all of our customers have been migrated to the Genesis
platform. To date, over 2 million of our nearly 3 million customers have been
migrated to the Genesis platform.
Redundancy and Back-up Systems. We believe that we have implemented
appropriate back-up and recovery procedures to ensure against any loss of data
on any platform. To maximize availability, we have redundant computer systems to
ensure that financial transaction requests can always be honored. Archival
storage is kept on site as well as off site in fireproof facilities. Diesel
generators provide power to the computing facilities in the event of a power
disruption.
Our operations are dependent on our ability to protect our computer
equipment against damage from fire, earthquake, power loss, telecommunications
failure or similar event. Although we have contracted for the emergency
provision of an alternate site to aid in disaster recovery, this measure will
not eliminate the significant risk to our operations from a natural disaster or
system failure. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, operating
results and financial condition. Our property and business interruption
insurance may not be adequate to compensate us for all losses that may occur.
See "Risk Factors --We may experience breakdowns in our payment processing
system that could damage customer relations and expose us to liability."
Sigma Challenge. We recently began an internal program called the "sigma
challenge" which ties employee performance evaluations and compensation to the
achievement of process and system improvements. Sigma is a
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measure of quality typically used by manufacturing firms to minimize defects.
The sigma challenge applies sigma measurements as a barometer of our performance
on our key metrics of system availability and payment timeliness. Small changes
in our performance drive significant sigma movements, focusing our attention on
critical tasks and peak performance. The sigma challenge is designed to take our
quality performance from 99.0%, or 3.8 sigma, where we began our fiscal year
2000, to 99.9%, or 4.6 sigma, by the end of fiscal 2000. A 4.6 sigma is the
quality standard set by the telecommunications industry for delivering their
services to businesses and consumers or "dial-tone" quality.
Financial Application Software. Our 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.
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 our Chicago office. This data
center functions seven days a week, twenty-four hours a day. Clients can obtain
access from their personal computers either through a dedicated circuit or
through dial-up applications. 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 supports the concentration of local dedicated links plus dial-up access.
In addition to the dedicated private network, clients use frame relay services
from several companies to access services.
Research and Development
We maintain 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. We have established the following guidelines for pursuing the
development of new services:
o distinctive benefits to customers;
o ability to establish a leadership position in the market served;
o sustainable technological advantages; and
o first to market.
We believe that in the emerging electronic commerce market it will be
critical to rapidly develop, test and offer new services and enhancements. To
that end, our goal for the time period from conceptualization to commercial
availability of new services is less than one year. As of December 31, 1999, our
research and development group consisted of approximately 246 employees.
Additionally, we use independent third party software development contractors as
needed. We spent 19.4% of revenues during the six-month transition period ended
June 30, 1996, 18.6% of revenues during the fiscal year ended June 30, 1997,
15.5% of revenues during the fiscal year ended June 30, 1998, 8.4% of revenues
during the fiscal year ended June 30, 1999 and 10.6% of revenues during the six
months ended December 31, 1999 on research and development. These research and
development expenses have been reduced for capitalized software development
costs of $1.3 million in the six-month transition period ended June 30, 1996,
none in the fiscal year ended June 30, 1997, $0.7 million in the fiscal year
ended June 30, 1998, $7.4 million in the fiscal year ended June 30, 1999 and
$3.2 million for the six months ended December 31, 1999. We anticipate that we
will continue to commit substantial resources to research and development
activities for the foreseeable future.
GOVERNMENT REGULATION
We believe that we are 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 Office of the Comptroller of the Currency,
however, periodically audits us, since we are 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 us, which could impede our ability to
do business in the regulator's jurisdiction. A number of states have legislation
regulating or licensing check sellers, money transmitters or service providers
to banks, and we have registered under this legislation in specific instances.
We do not believe that any state or federal legislation of this type materially
affects us. In addition, through our processing agreements, we agree 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
our processing banks. We may be subject to audit or examination under any of
these requirements. Violations of these requirements could limit or further
restrict our access to the payment clearance systems or our ability to obtain
access to these systems from banks. Further, the Federal Reserve rules
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provide that we can only access the Federal Reserve's automated clearinghouse
through a bank. If the Federal Reserve rules were to change to further restrict
our access to the automated clearinghouse or limit our ability to provide
automated clearinghouse transaction processing services, our business could be
materially adversely affected.
In conducting various aspects of our business, we are subject to laws
and regulations relating to commercial transactions generally, like the Uniform
Commercial Code, and are 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 the basic rights, liabilities, and responsibilities of
consumers who use electronic money transfer services and of financial
institutions that offer these services. For us, 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. These
limitations on the consumer's liability may result in liability to us.
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. 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,
these laws, rules, and regulations could be imposed on our business and industry
and could have a material adverse effect on our business, operating results and
financial condition. See "Risk Factors--Our business could become subject to
increased government regulation, which could make our business more expensive to
operate."
Proprietary Rights
We own the following federally registered trademarks and service marks:
<TABLE>
<S> <C>
o CHECKFREE(R); o MOBILEPAY(R);
o CHECKFREE and Design(R); o MBIUS GROUP and Design(R);
o CHECKFREE (Stylized Letters)(R); o MOE(R);
o CHECKFREE EASY(R); o MPREPS(R);
o CHECKFREE EXTRA(R); o M-SEARCH(R);
o CHECKFREE MANAGER(R); o MSEARCH(R);
o CHECKFREE WALLET(R); o OMNI(R);
o CHECKFREE-BILL and Design(R); o ORBS(R);
o CHECKFREE FREES YOU FROM CHECKS(R); o PAWWS(R);
o CLAS(R); o PAWTRACKS(R);
o CLRS(R); o PEP+(R);
o CLUB HOOCH(R); o PEP PAPERLESS ENTRY PROCESSING(R);
o CPIM(R); o PODIUM(R);
o CSSII(R); o PTT(R);
o DASH(R); o QUICKILL(R);
o DECISION MANAGER(R); o SBA(R);
o DISC and Design(R); o SERVANTIS SYSTEMS(R);
o DISC CHECKBOOK-PLUS(R); o SERVANTIS WORLD$NET(R);
o DISC WORLD$NET(R); o SUPRRB(R);
o ECP(R); o TCM THE CONTROL MACHINE(R);
o EPOCH(R); o THE SECONDARY MARKETER(R);
o FASTOCK PC(R); o THE WAY MONEY MOVES and Design(R);
o FMS(R); o TRS(R);
o INTEGRATED DECISION MANAGER(R); o TST(R); and
o MAX(R); o VAULT(R).
o M-WATCH(R);
o MWATCH(R);
<CAPTION>
Additionally, we have applied to federally register the following service
marks:
o CEC CENTER FOR ELECTRONIC o CHECKFREE E-BILL(SM);
COMMERCE and Design(SM); o CHECKFREE ELECTRIC MONEY(SM);
o CHECKFREE CHARITY NET(TM) o CHECKFREE RECON SELECT(TM)
o CHECKFREE(SM); o CHECKFREE YES/PC(TM)
o CHECKFREE CONNECT(SM); o DEFAULT NAVIGATOR(TM)
</TABLE>
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o ECX(SM); o RCM 2001...THE NEXT GENERATION(TM).
o M-PLAN(TM) o RECOVERY MANAGEMENT SYSTEM(TM)
o MPLAN(SM); o SSI(TM)
o M-PREPS(TM) o SSI and Design(TM) and
o M-VEST(TM) o STYLE ANALYSIS PLUS(TM).
o MY-BILLS.COM(SM);
We are awaiting further information to file applications for the
following marks:
o CHECKFREE and Design(SM); o CHECKFREE RRS(TM)
o CHECKFREE APECS; o CHECKFREE RECON(TM)
o CHECKFREE A.R.M.(TM) o CHECKFREE RECON-PLUS(TM)
o CHECKFREE ARP; o CHECKFREE TRADE RECON(TM)
o CHECKFREE ARP/(SM)S; o CHECKFREE RPS(TM)
o CHECKFREE DIRECTCOLLECT; o CHECKFREE WEB RECON(TM) and
o CHECKFREE IRS(TM) o REVOLUTIONIZING THE WAY MONEY MOVES(SM)
o CHECKFREE IRS/SRS(TM)
o CHECKFREE LCR(TM)
We are also the owner of a multitude of domain name registrations,
including:
o billdelivery.com; o ficare.com;
o billercare.com; o getbills.com;
o billme.com; o mybills.com;
o check-free.com; o paybills.org;
o checkfree.com; o paymybills.org;
o checkfree-ecx.com; o paythebill.com;
o checkfreeva.com; o rcm2001.com;
o custcare.com; o stockcontrol.com; and
o ebills.com; o cfree.com.
We regard our financial transaction services and related products like
our software as proprietary and rely 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 our
services and related products. Although we believe our consumer financial
software to be proprietary, we do not depend on our software to compete, but
rather on our services to which the software provides access.
We also copyright some of our programs and software documentation and
trademark some product names. Our management believes that these actions provide
appropriate legal protection for our intellectual property rights in our
software products. Furthermore, our management believes that the competitive
position for some of our products depends primarily on the technical competence
and creative ability of our personnel and that our business is not materially
dependent on copyright protection or trademarks. See "Risk Factors -- We may be
unable to protect our proprietary technology, permitting competitors to
duplicate our products and services."
Our United States Letters Patent No. 5,383,113, issued on January 17,
1995, relates to our system and method for electronically providing services
including payment of bills and financial analysis. Incorporating the system
described in the patent, we 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." Our patent expires on January 17, 2012. See
"Business - Competition," "Risk Factors (Competitive pressures we face may have
a material adverse effect on us) "Risk Factors (We may be unable to protect our
proprietary technology, permitting competitors to duplicate our products and
services)."
Existing intellectual property laws afford only limited protection, and
it may be possible for unauthorized third parties to copy our services and
related products or to reverse engineer or obtain and use information we regard
as proprietary. There can be no assurance that our competitors will not
independently develop services and related products that are substantially
equivalent or superior to ours. As the technology we use evolves, however, our
dependence upon the patented technology continues to decrease.
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EMPLOYEES
As of December 31, 1999, we employed approximately 2,162 full-time
employees, including approximately 534 in systems and development, including
software development, approximately 825 in customer care, and approximately 803
in sales and marketing, administration, financial control, corporate services,
and human resources. We are not a party to any collective bargaining agreement
and are not aware of any efforts to unionize our employees. We believe that our
relations with our employees are good. We believe our future success and growth
will depend in large measure upon our ability to attract and retain qualified
technical, management, marketing, business development and sales personnel.
MANAGEMENT
The following table sets forth information concerning our directors,
executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Peter J. Kight ................. 44 Chairman and Chief Executive Officer
Mark A. Johnson ................ 47 Vice Chairman, Corporate Development and Marketing and Director
William P. Boardman ............ 58 Director
George R. Manser ............... 68 Director
Eugene F. Quinn ................ 46 Director
Jeffrey M. Wilkins ............. 55 Director
Peter F. Sinisgalli ............ 44 President and Chief Operating Officer
Allen L. Shulman ............... 51 Executive Vice President, Chief Financial Officer and General Counsel
Lynn D. Busing ................. 48 Executive Vice President, Corporate Banking
James S. Douglass .............. 34 Executive Vice President, Corporate Development
Ravi Ganesan ................... 34 Executive Vice President and Chief Technology Officer
Matthew S. Lewis ............... 34 Executive Vice President, EC Product Management and Marketing
John J. Limbert ................ 52 Executive Vice President, EC Customer Operations
Curtis A. Loveland ............. 53 Secretary
Gary A. Luoma, Jr. ............. 43 Vice President, Chief Accounting Officer and Assistant Secretary
Keven M. Madsen ................ 40 Vice President and Treasurer
David Mangum ................... 34 Senior Vice President, Finance and Accounting
Randal A. McCoy ................ 37 Executive Vice President, EC Software Development
Terrie O'Hanlon ................ 38 Senior Vice President, Communications and Media Relations
Stephen Olsen .................. 39 Executive Vice President, EC Information Technology Operations
Harley J. Ostis ................ 43 Senior Vice President, Human Resources
Francis X. Polashock ........... 45 Executive Vice President and President, CheckFree Investment
Services
Glen Sarvady ................... 37 Vice President, Operations Strategy and Planning
Thomas Stampiglia .............. 44 President, Software Division
</TABLE>
DIRECTORS
Peter J. Kight, our founder, has served as our Chairman and Chief
Executive Officer since December 1997. He also serves as Chairman and Chief
Executive Officer of CheckFree Corporation, a position he has held since 1981,
as President of CheckFree Investment Corporation and CheckFree Management
Corporation, and as Chairman and Chief Executive Officer of CheckFree Investment
Services Corporation. Mr. Kight is also a director of CheckFree Corporation,
CheckFree Investment Services Corporation and CheckFree Management Corporation.
From 1997 to 1999, Mr. Kight served as President of CheckFree Holdings
Corporation and, from 1981 to 1999, he served as President of CheckFree
Corporation. Mr. Kight is a Director of Metatec International, Inc., a publicly
held company that distributes information utilizing CD-ROM technology.
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Mark A. Johnson has served as our Vice Chairman since December 1997. He
also serves as Vice Chairman, Corporate Development of CheckFree Corporation, a
position he has held since May 1997, and as an Executive Vice President of
CheckFree Investment Corporation and CheckFree Management Corporation. Mr.
Johnson has been a Director since 1983. He also serves as a Director of
CheckFree Corporation, CheckFree Investment Corporation, and CheckFree
Management Corporation. Mr. Johnson served as Executive Vice President, Business
Development of CheckFree Corporation from 1993 to 1997, as Treasurer of
CheckFree Corporation from 1993 to 1996, as Senior Vice President of CheckFree
Corporation from 1991 to 1993, and as a Vice President of CheckFree Corporation
from 1982 to 1991. Mr. Johnson is a Director of Claris Corporation (formerly SQL
Financials International, Inc.), a publicly-held company that develops, markets
and supports client/server financial software applications.
William P. Boardman has served as a Director since July 1996. Mr.
Boardman has been an officer of Bank One Corporation since 1984 and is currently
Vice Chairman.
George R. Manser has served as a Director since 1983. In October 1999,
Mr. Manser retired from his position as Director of Corporate Finance for
Uniglobe Travel (USA), L.L.C., which franchises travel agencies throughout the
United States, a position he held since 1998. Since July 1994, Mr. Manser has
served as Chairman of Uniglobe Travel (Capital Cities) Inc., which is the
predecessor of Uniglobe and current holding company of Uniglobe. From 1985 to
1994, he served as Chairman of North American National Corporation, a life
insurance holding company. Mr. Manser is a Director of Cardinal Health Inc., a
publicly-held wholesale drug distributor, State Auto Financial Corporation, a
publicly-held insurance company, AmeriLink Corporation, a publicly-held cabling
services company, and Hallmark Financial Services, Inc., a publicly-held
insurance services company. He is also an Advisory Director to the Corporate
Finance Department of J.C. Bradford & Co., an NASD broker-dealer.
Eugene F. Quinn has served as a Director since 1994. Mr. Quinn is a
principal of Confluence Capital, a private investment firm. From March 1997 to
April 1999, Mr. Quinn served as Senior Vice President for Online and Interactive
Services at MTV Networks, a division of Viacom, Inc. From 1984 to 1997, Mr.
Quinn served as a senior executive at Tribune Company and its Chicago Tribune
subsidiary.
Jeffrey M. Wilkins has served as a Director since 1990. Since August
1989, Mr. Wilkins has served as Chairman, President and Chief Executive Officer
of Metatec Corporation, and its successor Metatec International, Inc., a
publicly-held company which distributes information utilizing CD-ROM technology.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Peter F. Sinisgalli has served as our President since May 1999. He also
has served as President of CheckFree Corporation since May 1999 and as Chief
Operating Officer of CheckFree Corporation since November 1996. Mr. Sinisgalli
also serves as a director of CheckFree Corporation and CheckFree Management
Corporation. From 1994 to 1996, Mr. Sinisgalli was Executive Vice President and
Chief Financial Officer of Dun & Bradstreet Software. From 1993 to 1994, Mr.
Sinisgalli was Senior Vice President, Group Finance of Dun & Bradstreet
Corporation. From 1990 to 1992, Mr. Sinisgalli held various positions with
Nielson Media Research, a division of Dun & Bradstreet Corporation.
Allen L. Shulman has served as our Executive Vice President and Chief
Financial Officer since August 1998 and as General Counsel since May 1997. He
also serves as Executive Vice President, Chief Financial Officer and General
Counsel of CheckFree Corporation and CheckFree Investment Corporation, as
Executive Vice President, Chief Financial Officer and Treasurer of CheckFree
Investment Services Corporation, and as Executive Vice President and Treasurer
of CheckFree Management Corporation. Mr. Shulman is also a director of CheckFree
Management Corporation. From May 1997 to August 1998, he also served as our
Senior Vice President. Immediately prior to joining us, Mr. Shulman was the
managing attorney for the Atlanta office of Horvath & Lieber, P.C. From 1983 to
1996, Mr. Shulman was General Counsel and Chief Financial Officer for United
Refrigerated Services, Inc.
Lynn D. Busing has served as our Executive Vice President since December
1997. He has also served as Executive Vice President, Corporate Banking of
CheckFree Corporation since August 1999. Prior to that, Mr. Busing served as
Executive Vice President, Account Management of CheckFree Corporation from
February 1996 to August 1999.
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Mr. Busing was Senior Vice President of Servantis Systems Holdings, Inc. from
1993 to 1996. From 1987 to 1993, Mr. Busing held various management positions
with Digital Equipment Corporation.
James S. Douglass has served as our Executive Vice President since
December 1997. He has also served as Executive Vice President, Corporate
Development of CheckFree Corporation since August 1999. Prior to that, Mr.
Douglass served as Executive Vice President, Mergers and Acquisitions of
CheckFree Corporation from August 1998 to August 1999. From September 1996 to
August 1998, he served as Executive Vice President and Chief Financial Officer
of CheckFree Holdings Corporation and CheckFree Corporation. From 1994 to 1996,
Mr. Douglass was Vice President, Corporate Controller and Chief Accounting
Officer for Medaphis Corporation. From 1988 to 1994, Mr. Douglass served in
various capacities with KPMG Peat Marwick LLP, finally as senior manager.
Ravi Ganesan has served as our Executive Vice President since December
1997. He has also served as Executive Vice President and Chief Technology
Officer of CheckFree Corporation since January 1997. From 1990 to 1997, Mr.
Ganesan held various positions with Bell Atlantic, most recently as Vice
President, Distributed Operations & Information Technology from 1995 to 1997.
Matthew S. Lewis has served as our Executive Vice President since August
1999. He has also served as Executive Vice President, EC Product Management and
Marketing of CheckFree Corporation since January 1998. Prior to that, Mr. Lewis
served as our Senior Vice President from December 1997 to August 1999, and as
Vice President, Corporate Strategy and Communications for CheckFree Corporation
from March 1996 to December 1997. From 1988 to 1996, Mr. Lewis held various
positions at BankSouth Corporation, including Vice President, Corporate Affairs,
Director of Compliance and Director of Communications and Manager of Public
Relations.
John J. Limbert has served as our Executive Vice President since August
1998. He has also served as Executive Vice President, EC Customer Operations
since May 1998. From 1977 to 1997, Mr. Limbert was employed at Banc One
Corporation in various capacities, most recently as the head of its Eastern
Region Consumer Banks.
Curtis A. Loveland has served as our Secretary since December 1997. He
also serves as Secretary of CheckFree Corporation, a position he has held since
1983, CheckFree Investment Corporation, CheckFree Investment Services
Corporation, and CheckFree Management Corporation. Mr. Loveland has been
associated with the law firm of Porter, Wright, Morris & Arthur LLP since 1973
and a partner since 1979.
Gary A. Luoma, Jr. has served as our Vice President, Chief Accounting
Officer and Assistant Secretary since December 1997. He has also served as Vice
President, Chief Accounting Officer and Assistant Secretary of CheckFree
Corporation, a position he has held since April 1997, as Vice President and
Assistant Secretary of CheckFree Investment Corporation and CheckFree Management
Corporation, and as Assistant Secretary of CheckFree Investment Services
Corporation. Mr. Luoma is also a director of CheckFree Management Corporation.
From 1995 to 1997, Mr. Luoma served as Vice President of Finance, Americas
Operations and Assistant Secretary and, from 1990 to 1995, as Director of
Finance, Planning and Analysis at Dun & Bradstreet Software. From 1983 to 1990,
Mr. Luoma held various financial positions with the American Security Group,
including Assistant Treasurer, Assistant Controller and Internal Audit Manager.
From 1980 to 1983, Mr. Luoma served as a Certified Public Accountant on the
audit staff of Ernst & Whinney.
Keven M. Madsen has served as our Vice President since December 1997 and
as Treasurer since August 1998. He has also served as Vice President and
Treasurer of CheckFree Corporation, a position he has held since July 1997, as
Vice President and Treasurer of CheckFree Investment Corporation, and as Vice
President and Assistant Treasurer of CheckFree Management Corporation. Mr.
Madsen also serves as a director of CheckFree Management Corporation. From
December 1997 to August 1998, he served as our Assistant Treasurer. From 1996 to
1998, Mr. Madsen served as
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<PAGE> 101
Director of Tax & Treasury and Assistant Treasurer of CheckFree Corporation.
From 1990 to 1996, Mr. Madsen served as Manager of Corporate Tax and Treasury
for Dun & Bradstreet Software. Prior to 1990, Mr. Madsen was a Certified Public
Accountant in the audit and tax divisions of Arthur Andersen & Co.
David Mangum has served as our Senior Vice President, Finance and
Accounting since September 1999. From July 1998 to September 1999, he worked as
Vice President, Finance and Administration, Managed Systems Division for
Sterling Commerce, Inc. Prior to that, Mr. Mangum worked as the Director of
Finance for XcelleNet, Inc. from February 1997 to July 1998. From May 1993 to
January 1997, Mr. Mangum served as Director of Finance for Dun & Bradstreet
Software.
Randal A. McCoy has served as our Executive Vice President since August
1999. He has also served as Executive Vice President, EC Software Development of
CheckFree Corporation since August 1999. Prior to that, Mr. McCoy served as
Senior Vice President, Electronic Commerce Development of CheckFree Corporation
from February 1998 to August 1999, and as Vice President, Genesis Platform
Development of CheckFree Corporation from May 1997 to February 1998. From 1990
to 1997, Mr. McCoy was Vice President, Corporate Banking Development at
Servantis Systems, Inc. Prior to that, Mr. McCoy worked as a large systems
architect at BellSouth Corporation.
Terrie O'Hanlon has served as our Senior Vice President, Communications
and Media Relations since June 1998. She has also served as Senior Vice
President, Corporate Communications and Investor Relations of CheckFree
Corporation since August 1999. From June 1998 to August 1999, she served as
Senior Vice President, Communications and Media Relations of CheckFree
Corporation. From 1997 to 1998, Ms. O'Hanlon served as Vice President, Corporate
Communications at Medaphis Corporation. From 1995 to 1997, Ms. O'Hanlon was
Corporate Communications Director of Dun & Bradstreet Software. From 1990 to
1995, Ms. O'Hanlon served as Vice President of Crescent Communications.
Stephen Olsen has served as our Executive Vice President since August
1999. He has also served as Executive Vice President, EC Information Technology
Operations of CheckFree Corporation since August 1999. Prior to that, Mr. Olsen
served as our Senior Vice President from December 1997 to August 1999, and as
Senior Vice President and Chief Information Officer of CheckFree Corporation
from March 1997 to August 1999. From 1996 to 1997, Mr. Olsen served as Vice
President, Chief Information Officer of Geac Computer Corporation. From 1990 to
1996, Mr. Olsen served as Vice President, Chief Information Officer of Dun &
Bradstreet Software.
Harley J. Ostis has served as our Senior Vice President since January
1999. He has also served as Senior Vice President, Human Resources of CheckFree
Corporation since January 1999. From 1981 to 1999, Mr. Ostis held various
positions with Harris Corporation, most recently as Vice President, Human
Resources and Quality for Lanier Worldwide, a division of Harris Corporation.
Francis X. Polashock has served as our Executive Vice President since
December 1997. He also serves as Executive Vice President and President,
CheckFree Investment Services of CheckFree Corporation, a position he has held
since June 1999, and as President of CheckFree Investment Services Corporation.
From May 1997 to June 1999, Mr. Polashock served as Executive Vice President and
General Manager, Investment Services Division of CheckFree Corporation. From
1981 to 1993, Mr. Polashock held several management positions within Dun &
Bradstreet Corporation, most recently as General Manager of Asia Pacific and
Latin America. From 1993 to 1997, Mr. Polashock was involved with several
entrepreneurial ventures targeted at the Chinese marketplace.
Glen Sarvady has served as our Vice President, Operations Strategy and
Planning since August 1999. He has also served as Vice President, Operations
Strategy and Planning of CheckFree Corporation since August 1999. Prior to that,
Mr. Sarvady served as Vice President, Financial Planning and Analysis of
CheckFree Corporation from August 1998 to August 1999, and as Vice President,
Business Development of CheckFree Corporation from 1997 to 1998. From 1988 to
1997, Mr. Sarvady held a variety of financial management positions with Dun &
Bradstreet Corporation, most recently as Vice President, Finance of Dun &
Bradstreet Software.
Thomas Stampiglia has served a President, Software Division since
January 2000. Prior to that, Mr. Stampiglia spent 20 years with Lanier
Worldwide, a division of Harris Corporation, in various capacities, most
recently as Vice President, International Sales
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<PAGE> 102
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has two standing committees: a Stock Option and
Compensation Committee and an Audit Committee. Our Stock Option and Compensation
Committee has the authority to:
o administer our stock option plans, including the selection of
optionees and the timing of option grants; and
o review and monitor key employee compensation policies and
administer our management compensation plans.
The members of our Stock Option and Compensation Committee are Messrs. Quinn
(Chairman), Boardman and Manser. Our Stock Option and Compensation Committee had
a total of four meetings during Fiscal 1999.
Our Audit Committee recommends:
o the annual appointment of our independent public accountants with
whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees;
o the accounting principles used by us in financial reporting;
o internal financial auditing procedures; and
o the adequacy of our internal control procedures.
Messrs. Manser (Chairman), Quinn, and Wilkins serve as members of our Audit
Committee. Our Audit Committee had a total of four meetings during Fiscal 1999.
DIRECTOR COMPENSATION
As compensation for their services, each non-employee director receives
annually, stock options under our 1995 Stock Option Plan to acquire 8,000 shares
of our common stock, which options will vest 100% after one year and terminate
ten years after grant. In addition, each non-employee director receives
out-of-pocket expenses incurred in connection with attendance at board and
committee meetings. On May 7, 1999, Messrs. Boardman, Manser, Quinn, and Wilkins
were each granted stock options to acquire 8,000 shares of our common stock at
an exercise price of $44.4375 per share.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
during our fiscal years ended June 30, 1997, 1998 and 1999 to our chief
executive officer and each of our four other highest compensated executive
officers.
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<PAGE> 103
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-----------------
AWARDS
-----------------
SECURITIES
UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
---- ------------- --------------- ------- -------------
<S> <C> <C> <C> <C> <C>
PETER J. KIGHT 1999 $ 400,000 $ 0(2) 100,000 $ 0
Chairman and Chief Executive 1998 $ 375,000 $ 182,813 100,000 $ 0
Officer 1997 $ 292,692 $ 256,776 300,000 $ 108,800
MARK A. JOHNSON 1999 $ 205,000 $ 0(2) 25,000 $ 1,000
Vice Chairman, Corporate 1998 $ 182,000 $ 54,600 25,000 $ 1,000
Development and Marketing 1997 $ 179,711 $ 80,330 30,847 $ 42,574
PETER F. SINISGALLI(3) 1999 $ 280,000 $ 0(2) 116,000(4) $ 1,000
President and Chief Operating 1998 $ 260,417 $ 103,125 58,000 $ 1,000
Officer 1997 $ 165,675 $ 114,757 192,373 $ 0
SEAN E. FEENEY(5) 1999 $ 200,000 $ 48,000 130,000(4) $ 1,000
Executive Vice President and 1998 $ 197,292 $ 69,920 15,000 $ 1,000
President, CheckFree Software 1997 $ 65,625 $ 40,101 54,322 $ 0
Division/Business Electronic
Commerce
FRANCIS X. POLASHOCK(6) 1999 $ 190,000 $ 45,600 130,000(4) $ 1,000
Executive Vice President and 1998 $ 188,965 $ 65,500 15,000 $ 1,000
President Investment Services 1997 $ 17,276 $ 6,000 100,000 $ 0
Division
</TABLE>
- ----------------------
(1) Includes matching contribution to our 401(k) Plan of $1,000 for Mr.
Johnson, Mr. Sinisgalli, Mr. Feeney, and Mr. Polashock for Fiscal 1999.
Includes matching contribution to our 401(k) Plan of $1,000 for Mr.
Johnson, Mr. Sinisgalli, Mr. Feeney, and Mr. Polashock for Fiscal 1998.
Includes matching contribution to our 401(k) Plan of $980 for Mr. Johnson
and relocation allowances of $108,800 for Mr. Kight and $41,594 for Mr.
Johnson for Fiscal 1997.
(2) The fiscal 1999 bonuses for Messrs. Kight, Johnson and Sinisgalli were
deferred to fiscal 2000. An additional bonus of $156,000 for Mr. Kight,
$49,200 for Mr. Johnson and $92,400 for Mr. Sinisgalli over and above the
fiscal 2000 bonus that they may earn will be paid only if we hit our
performance targets for fiscal 2000.
(3) Mr. Sinisgalli was employed by us effective November 3, 1996.
(4) Includes options granted in fiscal 1999 due to Repricing of options granted
in fiscal years 1998 and 1997 as reflected in the Ten Year Option Repricing
Section on pages 13 and 14.
(5) Mr. Feeney was employed by us effective February 15, 1997.
(6) Mr. Polashock was employed by us effective May 28, 1997.
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<PAGE> 104
The following table provides information regarding the number and value
of stock options held by our Named Executive Officers at June 30, 1999.
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
(#) FISCAL YEAR-END ($)(2)
----------------------------- ------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- ----------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Kight 0 $0 626,741 400,399 $14,942,448 $3,113,686
Mark A. Johnson 121,354 $1,385,863 29,495 52,352 $ 283,467 $ 165,261
Peter F. Sinisgalli 0 $0 88,249 220,124 $ 898,190 $1,663,214
Sean E. Feeney 0 $0 26,881 107,441 $ 311,163 $1,357,930
Francis X. Polashock 0 $0 0 130,000 $ 0 $1,868,750
</TABLE>
- --------------------
(1) Value realized represents the difference between the exercise price of the
option shares and the market price of the option shares on the date the
option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses that may have been owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year end
which was $27.5625 on June 30, 1999. An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price of the
option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Manser, Boardman and Quinn, who are not employees,
are members of the Stock Option and Compensation Committee. Since 1994, Mr.
Kight has served as a member of Metatec International, Inc. and its
predecessor's board of directors, of which Mr. Wilkins is Chairman, President
and Chief Executive Officer.
STOCK OPTION PLANS
1983 Incentive Stock Option Plan. Our board of directors adopted the
1983 Incentive Stock Option Plan on December 19, 1983, and our stockholders
approved it as of December 19, 1983. Our board of directors subsequently amended
the 1983 Plan on February 1, 1990, and our stockholders approved the amendment
on April 20, 1992. The 1983 Plan allows our board of directors or a committee of
our board to grant options to our key associates chosen by our board or
committee for the purchase of up to 2,630,700 shares of our common stock.
Options granted under the 1983 Plan are incentive stock options within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended. The
1983 Plan was replaced in its entirety by the 1993 Plan. The 1983 Plan
terminated on December 19, 1993, and we have not granted any options since the
termination.
1983 Non-Statutory Stock Option Plan. Our board of directors adopted our
1983 Non-Statutory Stock Option Plan on December 19, 1983, and our stockholders
approved it as of the same date. Our board of directors and the stockholders
subsequently amended the Non-Statutory Option Plan on February 1, 1990, and
April 20, 1992. The Non-Statutory Option Plan allows our board of directors or a
committee of the board to grant options to key associates and directors of
CheckFree for the purchase of up to 263,070 shares of our common stock. The
options granted under the Non-Statutory Option Plan are nonqualified stock
options and do not meet the requirements for incentive stock option treatment
under Section 422A of the Internal Revenue Code. The Non-Statutory Option Plan
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<PAGE> 105
was replaced in its entirety by the 1993 Plan. The 1983 Non-Statutory Option
Plan terminated on December 19, 1993, and we have not granted any options since
the termination.
1993 Stock Option Plan. Our board of directors adopted our 1993 Stock
Option Plan on April 28, 1993, and our stockholders approved it as of the same
date. Our board and the stockholders subsequently amended the 1993 Plan on April
14, 1994. The 1993 Plan provides for the grant of options to key associates,
officers, directors, consultants and advisers who render services to CheckFree
for the purchase of up to 4,077,585 shares of our common stock. This number of
shares may be reduced from time to time, however, by the aggregate number of
shares of our common stock issued upon the exercise of options granted under the
1983 Incentive Stock Option Plan and the 1983 Non-Statutory Stock Option Plan.
The options may be either incentive options or nonqualified options. The 1993
Plan replaced in their entirety the 1983 Incentive Option Plan and the 1983
Non-Statutory Stock Option Plan.
Our board of directors administers the 1993 Plan and has the authority
to determine:
o to whom and at what time the stock options may be granted;
o the designation of the option as either an incentive option or
nonqualified option;
o the per share exercise price;
o the duration of each option;
o the number of shares subject to each option and any restrictions on
these shares;
o the rate and manner of exercise; and
o the timing and form of payment.
An incentive option may not have an exercise price less than the fair
market value of our common stock on the date of grant, or an exercise period
more than ten years from the date of grant. In addition, an incentive option is
subject to other limitations that allow the optionholder to qualify for
favorable tax treatment. None of these restrictions applies to the grant of
nonqualified options, which may have an exercise price less than the fair market
value of the underlying CheckFree common stock on the date of grant and may be
exercisable for an indeterminate period of time.
Under the 1993 Plan, an optionholder may pay the exercise price of an
option in cash or, with the consent of our board of directors:
o by delivery of previously acquired shares of our common stock,
valued at their fair market value on the date they are tendered;
o by delivery of a full recourse promissory note for the portion of
the exercise price that exceeds the par value of the shares subject
to the option, the terms and conditions of which will be determined
by our board of directors, along with cash for the par value of the
shares;
o by any combination of the foregoing methods; or
o by delivery of:
(1) written instructions to forward the notice of exercise to a
broker or dealer and to deliver to a specified account a
certificate for the shares purchased upon exercise of the
option, and
(2) a copy of irrevocable instructions to the broker or dealer to
deliver the purchase price of the shares to CheckFree.
An option granted under the 1993 Plan may not be transferred except by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the optionee, only by the optionee or by the optionee's guardian or
legal representative. Any option granted under the 1993 Plan will terminate
automatically:
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<PAGE> 106
o 30 days after the employee's termination of employment with us
other than by reason of death or disability or for cause; and
o one year after the employee's death or termination of employment by
reason of disability, unless the option expires earlier by its
terms.
Options not exercisable as of the date of a change in control of CheckFree will
become exercisable immediately as of that date. Shares of our common stock
issued pursuant to options exercised under the 1993 Plan are subject to
restrictions and limitations on any sale, transfer, assignment, or other
disposition of these shares. The 1993 Plan terminates on April 28, 2003, unless
our board of directors terminates it earlier. The 1993 Plan terminated on
September 28, 1995 and we have not granted any options since the termination.
1995 Stock Option Plan. Our board of directors adopted the 1995 Stock
Option Plan on August 8, 1995, and our stockholders approved it as of the same
date. Our board subsequently amended the 1995 Plan on October 18, 1996, May 1,
1997, September 15, 1997, and August 14, 1998, and our stockholders approved
these amendments on January 27, 1997, October 30, 1997, and November 9, 1998.
The 1995 Plan provides for the grant of options to key associates, officers,
directors, consultants and advisers who render services to CheckFree. The
options may be either incentive options or nonqualified options.
While our board of directors bears responsibility for administering the
1995 Plan, it has delegated all of its powers under the 1995 Plan to the Stock
Option and Compensation Committee. This committee has the authority to
determine:
o to whom and at what time the stock options may be granted;
o the designation of the option as either an incentive option or
nonqualified option;
o the per share exercise price;
o the duration of each option;
o the number of shares subject to each option and any restrictions on
these shares;
o the rate and manner of exercise; and
o the timing and form of payment.
Currently, there are 8,000,000 shares of our common stock available for
issuance under the 1995 Plan. The maximum number of stock options that may be
granted to an individual under the 1995 Plan in any calendar year is 500,000
shares. The committee may adjust the number and class of shares available under
the 1995 Plan and subject to outstanding options to prevent dilution or
enlargement of rights if we experience various changes in our capitalization.
Shares of our common stock attributable to unexercised options that expire or
are terminated may be available for reissuance under the 1995 Plan.
Eligibility to participate in the 1995 Plan extends to all of executive,
administrative, operational and managerial employees of CheckFree, including any
of our current or future subsidiaries or parent. Currently, approximately 2,162
of CheckFree and our subsidiaries' associates qualify for participation. We
anticipate that approximately one-third of those employees eligible will
participate in the 1995 Plan. Participation is at the committee's discretion,
and will depend on each associate's present and potential contributions to the
success of CheckFree and our subsidiaries and other factors as the committee
deems relevant. No associate may be granted in any calendar year options
covering more than 500,000 shares of our common stock.
The committee may determine at the time of grant and thereafter the
terms under which options shall vest and become exercisable. Options not
exercisable as of the date of a change in control of CheckFree will become
exercisable immediately as of that date. A change in control of CheckFree shall
be deemed to have occurred as of the first day that either of the following has
occurred:
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<PAGE> 107
o a person not in control of CheckFree on the effective date of the
1995 Plan becomes the beneficial owner, directly or indirectly, of
securities representing a majority of the combined voting power of
our then outstanding securities, or
o our stockholders approve a plan of complete liquidation, a sale of
all or substantially all of our assets, or a merger, consolidation,
or reorganization of CheckFree with or involving another
corporation, other than a merger, consolidation, or reorganization
that would result in our voting securities outstanding immediately
prior thereto continuing to represent at least a majority of the
combined voting power of our or a surviving entity's voting
securities outstanding immediately after a merger, consolidation,
or reorganization.
The committee may not grant incentive options to an associate who owns,
at the time of the grant, stock representing more than 10% of the total combined
voting power of all classes of stock of CheckFree, any parent or subsidiaries,
unless:
o the exercise price per share of common stock for the shares subject
to these incentive options is at least 110% of the fair market
value per share of our common stock on the date of grant; and
o the incentive options are not exercisable for more than five years
after their date of grant.
In addition, the total fair market value of shares of our common stock subject
to incentive options which are exercisable for the first time by an eligible
associate in a given calendar year may not exceed $100,000, valued as of the
date of the incentive options' grant.
Incentive options:
o may not have an exercise price exceeding ten years from the date of
grant;
o may not have an exercise price less than the fair market value of
our common stock on the date of grant; and
o are subject to other limitations that allow the option holder to
qualify for favorable tax treatment.
None of these restrictions, however, applies to the grant of non-statutory
options, which may:
o have an exercise price less than the fair market value of the
underlying common stock on the date of grant;
o have a total fair market value of shares subject thereto which are
valued in excess of $100,000 in any given calendar year; and
o be exercisable for an indeterminate period of time.
In practice, however, the committee has generally granted non-statutory options
at the fair market value of our common stock on the date of grant.
An optionholder may exercise an option by sending written notice to our
chief financial officer or other officer designated by the committee. An
optionholder may pay the exercise price of an option in cash or, with the
committee's consent:
o by delivery of previously acquired shares of our common stock,
which have been held for at least six months, valued at their fair
market value on the date they are tendered;
o by delivery of a full recourse promissory note for the portion of
the exercise price that exceeds the par value of the shares subject
to the option, the terms and conditions of which will be determined
by the committee, along with cash for the par value of the shares;
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<PAGE> 108
o by any combination of the foregoing methods; or
o by delivery of:
(1) written instructions to forward the notice of exercise to a
broker or dealer and to deliver to a specified account a
certificate for the shares purchased upon exercise of the option,
and
(2) a copy of irrevocable instructions to the broker or dealer to
deliver the purchase price of the shares to CheckFree.
An option granted under the 1995 Plan may not be transferred except by
will or by the laws of descent and distribution, and may be exercised, during
the optionee's lifetime, only by the optionee or by the optionee's guardian or
legal representative. Notwithstanding the foregoing, an optionee may transfer a
non-statutory option to members of his or her immediate family, to one or more
trusts for the benefit of family members or to partnerships in which the family
members are the only partners if:
o the stock option agreement covering the non-statutory option as
approved by the committee expressly so provides; and
o the optionee does not receive any consideration for the transfer.
Non-statutory options held by these transferees are subject to the
same terms and conditions that applied to these non-statutory
options immediately prior to transfer.
Options granted under the 1995 Plan will expire at the time as the
committee determines at the date of grant; provided, however, that no incentive
options may be exercised more than ten years from the date of grant, unless
incentive options are held by a 10% stockholder, in which case these incentive
options may not be exercised more than five years from the date of grant.
Any option granted under the 1995 Plan will, subject to earlier
termination by its terms, terminate automatically if not exercised:
o within 30 days after the optionee's termination of employment with
us other than by reason of death, disability, retirement, or for
cause;
o within one year after the employee's death or termination of
employment by us by reason of disability, as defined in the 1995
Plan;
o within three years after an employee's retirement, as defined in
the 1995 Plan; and
o prior to termination by us for cause, as defined in the 1995 Plan.
The 1995 Plan will terminate on August 8, 2005, unless our board of
directors terminates it earlier.
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<PAGE> 109
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information as of January 31, 2000,
relating to the beneficial ownership of our common stock by:
o each person known to us to own beneficially more than 5% of the
outstanding shares of our common stock;
o each of our directors;
o each of our executive officers; and
o all current directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)(2)
--------------------------------------
STOCKHOLDER NUMBER PERCENT
----------- ---------- ---------
<S> <C> <C>
Peter J. Kight (3) 6,767,418 12.6%
4411 East Jones Bridge Road
Norcross, Georgia 30092
Intuit Inc. 10,175,000 18.9%
2535 Garcia Avenue
Mountain View, California 94039
Gintel Asset Management, Inc.(4) 3,468,975 6.5%
6 Greenwich Office Park
Greenwich, Connecticut 06831
Brown Investment Advisory & Trust Company(5) 6,188,896 11.5%
Brown Advisory Incorporated
19 South Street
Baltimore Maryland 21202
T. Rowe Price Associates, Inc. (6) 3,245,300 6.0%
100 E. Pratt Street
Baltimore, Maryland 21202
Mark A. Johnson (7) 1,473,195 2.7%
Peter F. Sinisgalli 135,894 o
Sean E. Feeney 35,616 o
Francis X. Polashock (8) 776 o
William P. Boardman 25,000 o
George R. Manser (9) 43,307 o
Eugene F. Quinn 35,785 o
Jeffrey M. Wilkins 18,000 o
All directors and executive officers as a group 8,816,988 16.4%
(24 persons) (3)(7)(8)(9)
</TABLE>
- ----------------------
o Represents beneficial ownership of less than 1% of our outstanding common
stock.
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<PAGE> 110
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those shares.
(2) Includes shares purchasable within 60 days after January 31, 2000 pursuant
to the exercise of options covering:
o 626,741 shares for Mr. Kight at a weighted average exercise price of
$3.72 per share,
o 29,495 shares for Mr. Johnson at a weighted average exercise price of
$17.95 per share,
o 118,241 shares for Mr. Sinisgalli at a weighted average exercise price
of $17.70 per share,
o 33,881 shares for Mr. Feeney at a weighted average exercise price of
$16.22 per share,
o 0 shares for Mr. Polashock,
o 25,000 shares for Mr. Boardman at a weighted average exercise price of
$18.09 per share,
o 42,307 shares for Mr. Manser at a weighted average exercise price of
$8.17 per share,
o 26,785 shares for Mr. Quinn at a weighted average exercise price of
$13.32 per share,
o 16,000 for Mr. Wilkins at a weighted average exercise price of $20.25
per share, and
o 1,138,579 shares for all directors and executive officers as a group
at a weighted average exercise price of $8.73 per share.
(3) Includes 8,600 shares held by the Peter J. Kight and Teresa J. Kight 1995
Children's Trust and 1,006,255 shares held by The PJK GRAT 97-1, The PJK
GRAT 97-2, The PJK GRAT 98-1, The PJK GRAT 98-2, The PJK GRAT 98-3 and The
PJK GRAT 98-4. Mr. Kight disclaims ownership of these shares in which he
has no pecuniary interest. Does not include 54,850 shares held by a
charitable foundation of which Mr. Kight is the trustee and disclaims any
beneficial ownership.
(4) Based on information contained in Schedule 13G filed with the Securities
and Exchange Commission on January 29, 1998. Robert M. Gintel, Chief
Executive Officer and 100% stockholder of Gintel Asset Management, Inc., is
also controlling partner of Gintel & Co. Limited Partnership and Gintel-Ray
Ltd. Partnership. In addition, Gintel Asset Management, Inc. has
discretionary power over the accounts for which it acts as investment
advisor. As a result, Gintel Asset Management, Inc. may be deemed to be the
beneficial owner of the shares owned by these other entities.
(5) Based on information contained in Schedule 13G filed with the Securities
and Exchange Commission on February 17, 1999.
(6) Based on information contained in Schedule 13G filed with the Securities
and Exchange Commission on February 8, 1999.
(7) Includes 8,786 shares held by the Mark A. Johnson 1997 Irrevocable
Children's Trust. Mr. Johnson disclaims ownership of these shares in which
he has no pecuniary interest.
(8) Includes 1,800 shares held by Mr. Polashock's minor children which Mr.
Polashock disclaims any beneficial ownership.
(9) Includes 1,000 shares held by Mr. Manser's spouse which Mr. Manser
disclaims any beneficial ownership.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Between Intuit Inc. and CheckFree
We entered into a services and license agreement with Intuit Inc. in
connection with the acquisition of Intuit Services Corporation in January 1997.
As of January 31, 2000, Intuit Inc. owns 18.9% of our outstanding common stock.
The principal objectives of the agreement were to:
o establish a continuing cooperative relationship between the parties
whereby users of Intuit software products and services would continue
to be able to obtain electronic banking and electronic bill payment
services from us through these Intuit products and services;
o provide the means for an orderly transition in the operation and
support of several services offered by Intuit Services Corporation
that were interdependent on technologies, equipment, facilities,
personnel and support services of Intuit and us;
o set forth the terms on which we and Intuit will cooperate to develop,
market, distribute and support some of our respective products and
services; and
o provide for the grant of various technology licenses and mutual
support and technical cooperation agreements among the parties.
During fiscal 1999, we incurred $2,608,072 in royalty expense in connection with
the terms of this agreement.
Transactions Between Bank One Corporation and CheckFree
Mr. Boardman, the vice chairman of Bank One, serves on our board of
directors. On October 26, 1999, we entered into a new agreement with Bank One
Corporation that covers bill payment and other processing services for Bank One,
Wingspanbank.com and First USA. Additionally, Bank One purchased from us 250,000
shares of our common stock at $39.25 per share, the then current market price.
As part of this long-term business agreement, we also agreed to issue to Bank
One warrants to purchase up to 3 million shares of our common stock. Warrants to
purchase 1 million shares of our common stock were issued upon the execution of
the agreement and warrants to purchase the remaining 2 million shares of our
common stock may be issued in the future if specified performance criteria are
met. None of the warrants issued or issuable to Bank One may vest prior to
September 2002. If the warrants vest, they will be exercisable by Bank One at
the market price of our common stock at the time of issuance. Bank One currently
owns less than 1% of our outstanding common stock.
Mr. Kight's Guaranty
In 1993, the State of Ohio issued State Economic Development Revenue
Bonds in the aggregate principal amount of $7,515,000 pursuant to a trust
agreement between the Treasurer of Ohio and The Provident Bank, as trustee. The
proceeds of the bonds were applied to the purchase of real property that we
leased from the Director of Development, State of Ohio for our facilities in
Worthington, Ohio. Mr. Kight guaranteed the obligations evidenced by the bonds
in order to induce their issuance by the State of Ohio pursuant to a guaranty
agreement, dated August 1, 1993, made with Provident. Under the guaranty
agreement, Mr. Kight's liability is limited to an amount equal to the product of
his percentage beneficial ownership of our common stock multiplied by the
outstanding principal of the bonds; provided, however, that Mr. Kight's
liability may not exceed $2,200,000. We agreed to indemnify and reimburse Mr.
Kight for any amount paid by him under the guaranty agreement. Additionally,
under the guaranty agreement, with limited exceptions, the Director of
Development's consent is required for Mr. Kight to sell or otherwise dispose of
his equity interest in our common stock. In June 1999, we sold our facilities in
Worthington, Ohio and, subsequently, Mr. Kight was released from his obligations
under the guaranty agreement.
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Miscellaneous
Curtis A. Loveland, our Secretary, is a partner in the law firm of
Porter, Wright, Morris & Arthur LLP, which firm serves as our outside general
counsel. Mr. Loveland owns less than 1% of our outstanding common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CHECKFREE
OVERVIEW
We operate our business through three independent but inter-related
divisions:
o Electronic Commerce;
o Investment Services; and
o Software.
During the fiscal year ended June 30, 1999, Electronic Commerce
accounted for 68% of our revenues and Investment Services and Software each
accounted for 16% of our revenues.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997 and Mobius Group, Inc. in March 1999. On
December 21, 1999 we announced the planned acquisition of BlueGill Technologies,
Inc. and expect this transaction to close in the quarter ended June 30, 2000.
During fiscal 2000, we announced a new pricing structure to our
financial institution customers. The new pricing program includes a fee based on
the number of transactions processed, a small per subscriber fee and a fixed
monthly fee to cover our infrastructure costs. Our traditional financial
institution pricing structure was based primarily on subscriber fees, which grew
roughly proportionally to the number of subscribers added, regardless of
activity. Both programs provide for monthly minimum fees. Until we see
significant increases in the number of electronic billing and payment customers
enrolling through financial institutions, we do not anticipate that this pricing
change will have a significant impact on our revenues. Once the subscriber
growth rates begin to accelerate and financial institutions adopt the new
pricing program, revenue growth will become more dependent upon consumer usage
of our services. As of December 31, 1999, only one financial institution had
adopted the new pricing program. From an efficiency perspective, electronic
payment of bills is significantly less expensive than traditional paper based
payments. Since June 1998 we have increased our electronic payments ratio from
32% of total payments processed to over 52% by December 1999. Improvement in
this important metric drives down our variable costs and results in increased
gross profits in our electronic payment business.
In March 1997 we introduced electronic billing -- "E-Bill" -- which
enables merchants to deliver billing information as well as marketing materials
to their customers electronically over the Internet. Through December 1999 we
have placed 62 billers into production and are now delivering in excess of
38,000 electronic bills monthly through E-Bill. We derive revenue from our
billers on a per bill presented basis.
During fiscal 1998, we made the decision to sell some of our software
businesses that did not directly promote our strategic direction. These
divestitures included the sale of our recovery management business in August
1997, our item processing business in March 1998, our wire and electronic
banking businesses in April 1998, our leasing business in July 1998, our
mortgage business in September 1998 and our imaging business in October 1998.
While we have no pending agreements to dispose of our remaining software
businesses, we do receive offers for them from time to time.
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The following table sets forth percentages of revenue represented by
consolidated statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
------------------------------- ------------------- -------------------
1997 1998 1999 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues ............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 58.2 55.6 58.7 57.7 60.2 61.4 61.2
Research and development ................ 18.6 15.5 8.4 9.4 11.3 10.4 10.6
Sales and marketing ..................... 18.5 12.3 12.9 12.4 13.6 13.1 13.1
General and administrative .............. 10.6 8.8 12.6 12.8 12.8 12.3 13.6
Depreciation and amortization ........... 14.1 10.7 9.8 10.1 10.7 10.4 10.4
In-process research and development ..... 79.3 0.3 0.9 -- -- -- --
Charge for stock warrants ............... -- 14.0 -- -- -- -- --
Exclusivity amortization ................ 3.4 1.3 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total expenses ............. 202.8 118.5 103.3 102.4 108.6 107.6 108.9
Net gain on dispositions of assets ...... 3.5 15.4 1.8 -- -- 3.4 --
------- ------- ------- ------- ------- ------- -------
Loss from operations .................... (99.3) (3.1) (1.5) (2.4) (8.6) (4.2) (8.9)
Interest:
Income ............................... 1.2 1.5 1.1 1.2 1.6 1.4 1.0
Expense .............................. (0.4) (0.3) (0.2) (0.4) (1.7) (0.3) (0.9)
------- ------- ------- ------- ------- ------- -------
Loss before income taxes ................ (98.5) (1.9) (0.6) (1.6) (8.7) (3.1) (8.8)
Income tax benefit ...................... (6.8) (0.3) (4.8) (20.7) (3.3) (11.6) (3.2)
-------
------- ------- ------- ------- ------- -------
Net income (loss) ....................... (91.7)% (1.6)% 4.2% 19.1% (5.4)% 8.5% (5.6)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
Revenues. Reported revenue increased 22%, from $59.6 million for the
three months ended December 31, 1998 to $73.0 million for the three months ended
December 31, 1999 and by 22%, from $116.4 million for the six months ended
December 31, 1998 to $142.0 million for the six months ended December 31, 1999.
On a pro forma basis, net of the divestitures of our mortgage business in
September 1998 and our imaging business in October 1998 and adjusting for the
acquisition of Mobius Group in March 1999, revenue increased 19% from $61.3
million for the three months ended December 31, 1998 to $73.0 million for the
three months ended December 31, 1999 and by 20%, from $118.0 million for the six
months ended December 31, 1998 to $142.0 million for the six months ended
December 31, 1999. The increase in quarterly pro forma revenue of 19% was driven
by increases of 23% in our Electronic Commerce segment and 26% in our Investment
Services segment, offset slightly by a decline of 5% in our Software segment.
The increase in year to date pro forma revenue of 20% was driven by increases of
24% in our Electronic Commerce segment, 23% in our Investment Services segment
and less than 1% in our Software segment. Quarterly and year to date growth in
Electronic Commerce revenue is driven primarily by an increase in subscribers
from approximately 2.6 million at December 31, 1998 to approximately 3.0 million
at December 31, 1999. Pro forma quarterly and year to date growth in Investment
Services revenue is driven primarily by an increase in portfolios managed from
approximately 573,000 at December 31, 1998 to approximately 820,000 at December
31, 1999. In the Software segment, the decline in pro forma quarterly revenue
and the minimal growth in pro forma year to date revenue were due primarily to
anticipated purchasing moratoriums by customers due to Year 2000 concerns.
Reported processing and servicing revenue increased by 29%, from $48.5
million for the three months ended December 31, 1998 to $62.6 million for the
three months ended December 31, 1999, and by 29%, from $93.6 million for the six
months ended December 31, 1998 to $120.9 million for the six months ended
December 31, 1999. On a pro forma basis, adjusting for the acquisition of Mobius
Group in March 1999, processing and servicing revenue increased by 25%, from
$50.1 million for the three months ended December 31, 1998 to $62.6 million for
the three months ended December 31, 1999, and by 25%, from $96.7 million for the
six months ended December 31, 1998 to $120.9 million for the six months ended
December 31, 1999. Quarter over quarter and year over year pro forma growth in
processing and servicing revenue is primarily the result of the previously
mentioned growth in subscribers in our Electronic Commerce segment and
portfolios managed in our Investment Services segment. Our
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processing agreement with Yahoo! allows for a free three month trial period for
subscribers who enroll through Yahoo! Because these subscribers are not
generating revenue during this free period, we do not count them in our active
subscriber base. Additionally, we now have 62 billers in production that
presented approximately 38,000 electronic bills in the month ended December 31,
1999. The number of bills we presented electronically has nearly doubled since
the month ended September 30, 1999 and we expect growth in this area to
continue. When combined with a recently announced transaction based pricing
model for our largest customers, it will become more difficult to correlate
revenue solely to the number of subscribers, with transactions processed
becoming an additional indicator.
Reported license fee revenue decreased by 6%, from $3.4 million for the
three months ended December 31, 1998 to $3.2 million for the three months ended
December 31, 1999 and by 3% from $6.4 million for the six months ended December
31, 1998 to $6.2 million for the six months ended December 31, 1999. On a pro
forma basis, adjusting for the impact of divested software businesses, license
revenue decreased by 6%, from $3.4 million for the three months ended December
31, 1998 to $3.2 million for the three months ended December 31, 1999 and
increased by 2% from $6.1 million for the six months ended December 31, 1998 to
$6.2 million for the six months ended December 31, 1999. The pro forma decline
in license revenue on a quarter over quarter basis and the relatively flat pro
forma performance on a year over year basis was due primarily to expected
purchasing moratoriums from customers with Year 2000 concerns.
Reported maintenance fee revenue increased by 7%, from $4.2 million for
the three months ended December 31, 1998 to $4.5 million for the three months
ended December 31, 1999 and decreased by 2% from $9.2 million for the six months
ended December 31, 1998 to $9.0 million for the six months ended December 31,
1999. On a pro forma basis, adjusting for the impact of divested software
businesses, maintenance revenue increased by 7%, from $4.2 million for the three
months ended December 31, 1998 to $4.5 million for the three months ended
December 31, 1999 and by 8%, from $8.3 million for the six months ended December
31, 1998 to $9.0 million for the six months ended December 31, 1999. This
increase is due to new maintenance paying customers added during fiscal 1999 and
moderate price increases, offset slightly by retention rates in the upper 80%
range for the core maintenance base in the Software business.
Reported other revenue, consisting mostly of consulting fees, decreased
by 23%, from $3.4 million for the three months ended December 31, 1998 to $2.6
million for the three months ended December 31, 1999 and by 18%, from $7.2
million for the six months ended December 31, 1998 to $5.9 million for the six
months ended December 31, 1999. On a pro forma basis, adjusting for the impact
of divested software businesses and the acquisition of Mobius Group, other
revenue decreased by 23%, from $3.4 million for the three months ended December
31, 1998 to $2.6 million for the three months ended December 31, 1999 and by
13%, from $6.8 million for the six months ended December 31, 1998 to $5.9
million for the six months ended December 31, 1999. The decrease in pro forma
other revenue is due primarily to the decline in software implementations due to
customer's software implementation freezes in the quarter in preparation for
Year 2000.
Cost of Processing and Support. Our cost of processing, servicing and
support was $34.3 million or 57.7% of total revenue for the three months ended
December 31, 1998 and $43.9 million or 60.2% of total revenue for the three
months ended December 31, 1999. Cost of processing, servicing and support was
$71.5 million or 61.4% of total revenue for the six months ended December 31,
1998 and $86.9 million or 61.2% of total revenue for the six months ended
December 31, 1999. Cost of processing, servicing and support as a percentage of
servicing only revenue (all revenue except license) was 61.2% for the three
months ended December 31, 1998 and 62.9% for the three months ended December 31,
1999 and was 64.9% for the six months ended December 31, 1998 and 64.0% for the
six months ended December 31, 1999. We have seen improvements in this ratio in
two areas. First we have seen an increase in the percentage of electronic
payments from approximately 42% at December 31, 1998 to approximately 52% at
December 31, 1999, whereby electronic payments carry a significantly lower
variable cost per unit than paper based payments. Additionally we have seen
improvements from the leverage inherent in converting two thirds of our
subscribers from two legacy systems to our new Genesis processing system. These
improvements, however, are offset by E-Bill implementation costs as we continue
to move an increasing number of billers into live production and by transaction
costs generated by subscribers enrolled by Yahoo!, currently within their free
three-month trial period.
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Research and Development. Our research and development costs were $5.6
million or 9.4% of total revenue for the three months ended December 31, 1998
and $8.3 million or 11.3% of total revenue for the three months ended December
31, 1999. Research and development costs were $12.2 million or 10.4% of total
revenue for the six months ended December 31, 1998 and $15.1 million or 10.6% of
total revenue for the six months ended December 31, 1999. Adjusted for
capitalized development costs of $1.6 million for the three months ended
December 31, 1998, of $1.3 million for the three months ended December 31, 1999,
of $2.8 million for the six months ended December 31, 1998 and of $3.2 million
for the six months ended December 31, 1999, our gross research and development
costs were $7.2 million or 12.1% of total revenue for the three months ended
December 31, 1998 and $9.6 million or 13.2% of total revenue for the three
months ended December 31, 1999 and were $15.0 million or 12.9% of total revenue
for the six months ended December 31, 1998 and $18.3 million or 12.8% of total
revenue for the six months ended December 31, 1999. We continue to invest a
significant portion of our revenue into research and development activities in
all business segments in anticipation and support of revenue growth, quality
improvement and efficiency enhancement opportunities.
Sales and Marketing. Sales and marketing costs were $7.4 million or
12.4% of total revenue for the three months ended December 31, 1998 and $9.9
million or 13.6% of total revenue for the three months ended December 31, 1999.
Sales, marketing and royalty costs were $15.2 million or 13.1% of total revenue
for the six months ended December 31, 1998 and $18.6 million or 13.1% of total
revenue for the six months ended December 31, 1999. We have increased our sales
staff to sign additional billers in support of our electronic billing product
offerings and have increased program management staff in support of new
non-subscriber based products designed to leverage our existing electronic
payment infrastructure. We expect to incur increased promotional expenses in
support of electronic billing and payment offerings through financial
institutions and Internet portals like Yahoo! and other customers like
WingspanBank.com in an effort to accelerate the growth of subscribers in our
Electronic Commerce segment.
General and Administrative. General and administrative expenses were
$7.6 million or 12.8% of total revenue for the three months ended December 31,
1998 and $9.4 million or 12.8% of total revenue for the three months ended
December 31, 1999. General and administrative expenses were $14.4 million or
12.3% of total revenue for the six months ended December 31, 1998 and $19.3
million or 13.6% of total revenue for the six months ended December 31, 1999.
The increase in general and administrative expenses is due principally to an
increase in facilities costs resulting from new facilities in Dublin, Ohio,
Jersey City, New Jersey and Phoenix, Arizona; an increase in administrative
staff required to manage growth in all areas of the company; and an increase in
our reserve for estimated doubtful accounts consistent with realized revenue
growth.
Depreciation and Amortization. Depreciation and amortization costs
increased from $6.0 million for the three months ended December 31, 1998 to $7.8
million for the three months ended December 31, 1999 and from $12.0 million for
the six months ended December 31, 1998 to $14.8 million for the six months ended
December 31, 1999. Reductions in depreciation and amortization expense resulting
from the divestiture of previously mentioned software businesses have been
offset by amortization of intangible assets resulting from the acquisition of
Mobius Group and increased depreciation expense resulting from capital spending
in support of growth and quality improvement initiatives.
Net Gain on Dispositions of Assets. The net gain on dispositions of
assets of $3.9 million in the six months ended December 31, 1998 is the net
result of the gain on the sale of our mortgage business of approximately $6.3
million offset by the loss on the sale of the imaging business of approximately
$2.4 million.
Interest. Net interest declined from net interest income of $0.4 million
for the three months ended December 31, 1998 to net interest expense of $0.1
million for the three months ended December 31, 1999. Net interest declined from
net interest income of $1.2 million for the six months ended December 31, 1998
to net interest income of $0.1 million for the six months ended December 31,
1999. The varied net interest amounts are the net result of the timing of
significant transactions in each of the periods identified. At September 30,
1998, we had approximately $56.2 million of cash, cash equivalents and
investments on hand, primarily resulting from proceeds from the divestitures of
various software businesses. We spent approximately $31.0 million in cash from
September 1998 through October 1998 to buy back approximately 4.7 million of
common shares when the market price of our stock was relatively low. Investment
yields on our average cash, cash equivalents and invested assets exceeded
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interest expense on outstanding capital lease obligations, resulting in net
interest income of $0.4 million for the three months ended December 31, 1998 and
$1.2 million for the six months ended December 31, 1998. On November 29, 1999,
we received net proceeds of approximately $166.9 million from the issuance of
$172.5 million of 6 1/2% subordinated convertible notes. Additionally, in
October 1999, we received approximately $9.8 million from the direct purchase of
250,000 shares of our common stock, at market value, by Bank One and, in
December 1999, we received approximately $6.2 million from the exercise of
outstanding common stock warrants. Direct interest expense and amortization of
issuance costs resulting from the convertible debt combined with interest
expense from capital leases exceeded the interest income earned on cash, cash
equivalents and invested assets for the quarter resulting in net interest
expense of $0.1 million for the three months ended December 31, 1999. For the
six months ended December 31, 1999 our interest income exceeded interest expense
by $0.1 million.
Income Taxes. We recorded an income tax benefit of $12.4 million for the
three months ended December 31, 1998 (effective rate not meaningful) and an
income tax benefit of $2.4 million or an effective tax rate of 37.8% for the
three months ended December 31, 1999. We recorded an income tax benefit of $13.6
million for the six months ended December 31, 1998 (effective rate not
meaningful) and an income tax benefit of $4.6 million or an effective tax rate
of 36.8% for the six months ended December 31, 1999. In the quarter ended
December 31, 1998 we recorded a one-time tax benefit of approximately $12.2
million arising out of our medical benefits management subsidiary. Net of this
one-time benefit, the reported effective rates differ from the blended statutory
rate of 40% in all periods due to goodwill and other non-deductible expenses,
jobs credits and tax exempt interest income.
YEARS ENDED JUNE 30, 1998 AND 1999
Revenues. Our total reported revenue increased by $16.2 million, or 7%,
from $233.9 for the year ended June 30, 1998 to $250.1 million for the year
ended June 30, 1999. This increase in revenue was due to growth in our
Electronic Commerce and Investment Services segments, offset by a decrease in
our Software segment. The decrease in our Software segment revenue was the
result of our divestitures of some of our software businesses. We divested our
recovery management business in August 1997, our item processing business in
March 1998, our wire and electronic banking businesses in April 1998, our
leasing business in July 1998, our mortgage business in September 1998 and our
imaging business in October 1998.
On a pro forma basis, excluding the impact of our divested software
businesses, the discontinuance of our web investor business in our Electronic
Commerce segment in June 1998, and revenue from the Mobius Group acquisition in
our Investment Services segment in March 1999, our total revenue increased 21%,
from $204.4 million for the year ended June 30, 1998 to $246.4 million for the
year ended June 30, 1999. The increase in our pro forma revenue from fiscal 1998
to fiscal 1999 was driven by increases of 23% in our Electronic Commerce
segment, 26% in our Investment Services segment and 6% in our Software segment.
Our growth in pro forma Electronic Commerce revenue was driven primarily by
subscriber growth from approximately 2.4 million at June 30, 1998 to nearly 3.0
million at June 30, 1999. Our growth in pro forma Investment Services revenue
was driven primarily by an increase in portfolios managed from approximately
500,000 at June 30, 1998 to approximately 700,000 at June 30, 1999, offset by
lower average revenue per portfolio, as marketing efforts have shifted the mix
of new business toward retail versus institutional portfolios. Although demand
has been somewhat dampened due to customer focus on Year 2000 projects, in our
Software segment we had moderate pro forma revenue growth, primarily due to
increased implementations in our automated clearinghouse product line.
Our reported processing and servicing revenue increased by $41.8
million, or 26%, from $159.3 million for the year ended June 30, 1998 to $201.1
million for the year ended June 30, 1999. On a pro forma basis, adjusted for
revenue contributed by our acquisition of Mobius Group in March 1999 and the
discontinuance of our web investor business in our Electronic Commerce segment
in June 1998, revenue increased by 26% from $158.4 million for the year ended
June 30, 1998 to $199.2 million for the year ended June 30, 1999. This growth
was primarily the result of increases in our subscribers in our Electronic
Commerce segment and the number of portfolios managed in our Investment Services
segment as discussed in the foregoing paragraph. In January 1999, we announced
the signing of a material Internet distribution agreement with Yahoo! Although
there are no guarantees in the timing or extent of its success, we believe this
agreement has the potential to provide significant increases in the number of
our subscribers over the next year and beyond. Due to introductory promotional
pricing incentives, we do not expect
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significant incremental revenue from this channel in fiscal year 2000. Longer
term, our per subscriber revenue contribution from the portal channel is
expected to be comparable to our existing financial institution channel.
Our reported license revenue declined by $13.0 million, from $29.0
million for the year ended June 30, 1998 to $16.0 million for the year ended
June 30, 1999. This decline was primarily due our divestitures of some of our
software business previously described. On a pro forma basis, excluding the
impact of the divested software businesses, our license fee revenue declined by
$1.3 million, from $17.0 million for the year ended June 30, 1998 to $15.7
million for the year ended June 30, 1998. The pro forma decline in license fee
revenue was primarily due to softness in our software sales resulting from
purchasing moratoriums imposed by customers and potential customers focusing on
their Year 2000 issues.
Our reported maintenance revenue declined by $8.1 million, from $25.8
million for the year ended June 30, 1998 to $17.7 million for the year ended
June 30, 1999. On a pro forma basis, excluding the impact of our divestitures of
some of our software businesses, previously mentioned, our maintenance fee
revenue increased by $0.7 million, from $16.1 million for the year ended June
30, 1998 to $16.8 million for the year ended June 30, 1999. The increase in our
pro forma maintenance revenue was primarily due to first year maintenance
revenue related to new software sales generated in the second half of fiscal
1998 combined with high retention rates and moderate price increases related to
renewal maintenance revenues.
Our reported other revenue, consisting mainly of consulting fees,
declined by $4.4 million from $19.8 million for the year ended June 30, 1998 to
$15.4 million for the year ended June 30, 1999. On a pro forma basis, excluding
the impact of our divested software businesses, our other revenue increased by
$1.8 million, from $12.9 million for the year ended June 30, 1998 to $14.7
million for the year ended June 30, 1999. The increase was primarily due to
implementations related to new software sales in the second half of fiscal 1998
and early fiscal 1999 and consulting projects related to implementations and
client requested Year 2000 contract-based assistance in our Investment Services
segment.
Cost of Processing, Servicing and Support. Our processing, servicing and
support costs consist primarily of data processing costs, customer care,
technical support, third party transaction fees and consulting delivery costs.
The cost of processing, servicing and support was $129.9 million or 55.6% of
total revenue for the year ended June 30, 1998 and $146.7 million or 58.7% of
total revenue for the year ended June 30, 1999. Our processing, servicing and
support cost as a percentage of servicing only revenue, which includes all
revenue except license revenue, was 63.4% for the year ended June 30, 1998 and
62.7% for the year ended June 30, 1999.
Revenue growth in our Electronic Commerce segment slowed as financial
institutions have been focusing on converting our electronic billing and payment
offerings from a PC software-based to a web-based product, which has depressed
the denominator in the ratio of cost of processing, servicing and support to
processing only revenue. On the cost side, or the numerator in this ratio, we
continue to focus attention on increasing the percentage of electronic versus
paper based payments. On a per transaction basis, electronic payments are
significantly less expensive than paper based payments. Our electronic payment
percentage has increased from approximately 31% at June 30, 1998 to
approximately 45% at June 30, 1999. Although we continued to realize cost
savings as a result of our successful efforts to increase the percentage of our
bill payment transactions processed electronically versus paper, during this
period, we continued to invest in added capacity in anticipation of expected
revenue growth as our customers complete their web-based conversions and refocus
their efforts on marketing these products to achieve higher subscriber growth.
While subscriber growth during the third and fourth quarters of fiscal 1999 was
approximately 6%, Internet-based subscriber growth in the same quarters exceeded
20%, which may indicate that web-based offerings will spur consumer adoption.
Additionally, we are incurring the costs of implementing customers for
electronic billing and payment for E-Bill without receiving adequate revenue to
fully offset the costs. Finally, our Yahoo! distribution agreement has resulted
in an increase in our operating expenses during the second half of fiscal 1999.
These additional operating costs for professional service programs to support
timely and effective electronic billing and payment offerings by billers,
investments in hardware, software and technical staff to deliver dial-tone
quality to up to one million additional subscribers and additional customer care
staff and related training, will continue into fiscal year 2000.
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Research and Development. Our research and development costs consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel and were stated net of capitalized software
development costs. Our research and development costs were $36.3 million or
15.5% of total revenue for the year ended June 30, 1998 and $21.1 million or
8.4% of total revenue for the year ended June 30, 1999. The divested software
businesses incurred research and development costs of $8.5 million in the year
ended June 30, 1998. Additionally, upon completion of the base Genesis platform
in late fiscal 1998 and the transition of resources from Year 2000-related
projects that may not be capitalized for GAAP purposes, we capitalized software
development costs of $0.7 million for the year ended June 30, 1998 and $7.4
million in the year ended June 30, 1999. As a result, on an absolute dollar
basis and net of divested business units, our total research and development
expenditures and capitalized software development costs remained constant at
$28.5 million for the years ended June 30, 1998 and 1999. We are continuing to
invest significantly in research and development in all three of our business
segments in anticipation and support of expected revenue growth, quality
improvement and efficiency enhancement opportunities.
Sales and Marketing. Our sales and marketing expenses consist primarily
of salaries and commissions of sales and product marketing associates, public
relations and advertising costs, customer acquisition fees, and royalties paid
to distribution partners. Our sales and marketing costs were $28.8 million or
12.3% of total revenue for the year ended June 30, 1998 and $32.4 million or
12.9% of total revenue for the year ended June 30, 1999. Reduced sales and
marketing expenses resulting from our divested software businesses have been
replaced by increased sales expenses related to activities in our electronic
billing area and funding for the creation and launch of a new trade group, the
Electronic Banking Association, which is expected to increase the general
population's awareness of, and interest in, the electronic banking industry.
Additionally, during the fourth quarter of fiscal 1999, we experienced a system
error that led some users of our electronic bill payment service to experience
intermittent problems accessing and using the system. In response to this
situation, we provided service fee credits of approximately $1.9 million, over
and above contractually determined penalties, to our financial institution
customers. Our sales and marketing expenses are expected to increase in fiscal
2000 upon the launch of products related to our Yahoo! distribution agreement.
General and Administrative. Our general and administrative expenses
consist primarily of salaries for administrative, executive, accounting and
finance, and human resource employees. Our general and administrative expenses
were $20.7 million or 8.8% of total revenue for the year ended June 30, 1998 and
$31.5 million or 12.6% total revenue for the year ended June 30, 1999. During
the year ended June 30, 1999 we recognized several non-recurring charges
including: $1.3 million in real estate expenses related to the sale of a
facility in Columbus, Ohio and a separate move to a new facility in Jersey City,
New Jersey, $0.9 million in charges related to an uncompleted follow-on stock
offering in June 1999, $0.6 million in charges related to the establishment of a
benefits company intended to better manage future benefit expenses in
anticipation of growth in associates, and charges to third parties to support
various other tax and legal related matters. The divestiture of our various
software businesses has not resulted in a corresponding reduction in existing
infrastructure since business specific systems and administrative functions must
remain to support our retained software businesses and our growing Electronic
Commerce and Investment Services segments. As anticipated revenue growth
materializes, we expect general and administrative expenses to decline as a
percentage of revenue from its current level and return to levels more in line
with our historical experience.
Depreciation and Amortization. Our depreciation and amortization
expenses were $25.0 million for the year ended June 30, 1998 and $24.6 million
for the year ended June 30, 1999. Our divestiture of several software businesses
resulted in a significant reduction in depreciation and amortization from the
elimination of both tangible and intangible assets. These reductions have been
offset by incremental depreciation resulting from significant capital
investments throughout fiscal 1998 and 1999 in support of the data center
migration to our Norcross, Georgia facility, the development of the Genesis
project and the support of new business initiatives like preparation for the
release of products related to our Yahoo! distribution agreement.
In-Process Research and Development. The in-process research and
development charge of $2.2 million incurred in fiscal 1999 resulted from our
purchase of the Mobius Group in March 1999. Please refer to the Notes to
Consolidated Financial Statements included in this information
statement/prospectus for a detailed discussion of this charge. Since the Mobius
acquisition, the M-Plan Retirement and Estate Planning Module was delivered on
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schedule in May 1999 and the M-Search Revision, M-Vest Revision and M-Plan Cash
Flow, Tax and Education modules are all expected to be delivered as planned on
the expected release dates as outlined in the footnote referred to above. The
in-process research and development charge of $0.7 million in fiscal 1998
resulted from our acquisition of Advanced Mortgage Technology, Inc. in October
1997. The related development projects from the AMTI acquisition continued as
planned until the time the software and assets of the mortgage product line,
including these projects, were sold in September 1998.
Charge for Stock Warrants. The $32.8 million charge for stock warrants
in the year ended June 30, 1998 resulted from two separate transactions. A $32.4
million charge resulted from the vesting of three million warrants in March 1998
related to a ten year processing agreement with Integrion that we announced in
October 1997. A $0.4 million charge resulted from the vesting of 25,000 warrants
in June of 1998 related to a five year consulting agreement with a third party.
These non-cash charges were based on a Black-Scholes option pricing model
valuation of the warrants at the date of vesting. An additional seven million
warrants will vest incrementally upon achievement of a series of strategic
targets and each incremental vesting will result in a future non-cash charge
based on the fair market value of warrants and our common stock at the date of
vesting.
Exclusivity Amortization. The exclusivity amortization of $3.0 million
in the year ended June 30, 1998 was the final amortization related to an
exclusivity arrangement we entered into with Intuit, Inc. in conjunction with
our purchase of Intuit Services Corporation in January 1997.
Net Gain on Dispositions of Assets. The net gain of $36.2 million in the
year ended June 30, 1998 was the result of several transactions. We recorded
gains on the sales of our recovery management business of $28.2 million, our
item processing business of $3.2 million and our wire and electronic banking
businesses of $14.7 million. The gains in 1998 were offset by a loss on the sale
of our leasing business of $4.7 million, expected losses on non-cancelable
contracts and related costs totaling $1.0 million resulting from the decision to
exit the web investor portion of our Electronic Commerce segment and charges
totaling $4.2 million for equipment and other assets related primarily to data
center consolidations where we determined that the book value of the assets
exceeded their net realizable value. The net gain of $4.6 million in the year
ended June 30, 1999 was also the result of several transactions. We recorded
gains on the sale of our mortgage business of $6.4 million and the sale of a
building in Columbus, Ohio of $1.1 million and offset these gains with a loss on
the sale of our imaging business of $2.9 million.
Interest. Our interest income decreased from $3.5 million for the year
ended June 30, 1998 to $2.8 million for the year ended June 30, 1999. The
reduction was primarily due to a decrease in average cash and investments from
$49.3 million for the year ended June 30, 1998 to $43.3 million for the year
ended June 30, 1999. Cash proceeds from the various software divestitures in
fiscal 1998 and early in fiscal 1999 were significantly offset by a share
repurchase in the first and second quarters of fiscal 1999.
Our interest expense remained constant at $0.6 million for the years
ended June 30, 1998 and 1999. At the end of fiscal 1999 we paid off
approximately $2.5 million in debt related to the sale of our building in
Columbus, Ohio. We expect leasing activities to increase in fiscal 2000 that
will more than offset interest expense savings resulting from the debt
reduction.
Income Taxes. Our effective tax rate was 14.8% for the year ended June
30, 1998 and was not meaningful in the year ended June 30, 1999. The difference
in our effective rate and our statutory rate of 35% in fiscal 1998 was primarily
due to non-deductible in-process research and development expenses,
non-deductible intangible amortization and state and local taxes. In fiscal
1999, we recorded a one-time tax benefit of approximately $12.2 million arising
out of the medical benefits management subsidiary. Net of this one-time benefit,
the resulting tax expense would have been $0.2 million against a pre-tax loss of
$1.6 million. The difference between this adjusted number and the statutory rate
of 35% is primarily due to non-deductible in-process research and development
expenses, non-deductible intangible amortization and state and local taxes.
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YEARS ENDED JUNE 30, 1997 AND 1998
Revenues. Our total revenue increased by $57.5 million, or 32.6%, from
$176.4 million for the year ended June 30, 1997 to $233.9 million for the year
ended June 30, 1998. We eliminated estimated purchased profits in deferred
revenues assumed in our Servantis acquisition in February 1996 as a purchase
accounting adjustment, reducing 1997 revenue by approximately $7.8 million.
On a pro forma basis, our total revenue increased 32.3% as a result of
growth of 50% in our Electronic Commerce segment, 33% in our Investment Services
segment and 6% in our Software segment. The pro forma results are defined as
prior year results excluding the elimination of purchased profits and adjusting
for our Intuit Services Corporation acquisition and divestitures of our
securities business which was sold in October 1996, our credit card processing
business which was sold in March 1997, and our recovery management business
which was sold in August 1997. Our pro forma growth in our Electronic Commerce
segment was driven primarily by an increase in subscribers from approximately
1.7 million at June 30, 1997, which number includes the Intuit Services
Corporation subscribers acquired in January 1997, to approximately 2.4 million
at June 30, 1998. Our Investment Services revenue growth was primarily due to an
increase in portfolios managed from approximately 350,000 at June 30, 1997 to
over 500,000 at June 30, 1998. Growth in our Software segment was primarily the
result of license and related maintenance and services growth in the
reconciliation and compliance product lines from fiscal 1997 to fiscal 1998. It
should be noted that the rate of our subscriber growth is primarily determined
by the direct marketing efforts of our financial institution clients. Historical
subscriber growth, therefore, may not be indicative of future growth. For
example, in the fourth quarter of fiscal 1998, many of our financial institution
clients reduced marketing efforts to their customers to convert from a PC-based
software offering to a more efficient web-based offering, which resulted in a
lower rate of subscriber growth that continued throughout fiscal 1999.
Our reported processing and servicing revenue increased from $94.5
million for the year ended June 30, 1997 to $159.3 million for the year ended
June 30, 1998. On a pro forma basis, excluding the elimination of purchased
profits and the sale of our recovery management business, processing and
servicing revenue increased by 46% from $109.4 million for the year ended June
30, 1997 to $159.3 million for the year ended June 30, 1998. This growth was due
primarily to the increase in subscribers in our Electronic Commerce segment and
the increase in portfolios managed in our Investment Services segment previously
discussed.
Our reported merchant discount revenue decreased from $10.0 million for
the year ended June 30, 1997 to $0 for the year ended June 30, 1998 due to the
sale of our credit card processing business in March 1997.
Our reported license fee revenue decreased from $33.1 million for the
year ended June 30, 1997 to $29.0 for the year ended June 30, 1998. On a pro
forma basis, adjusting for the sales of our securities and recovery management
businesses, license revenue increased from $26.3 million in fiscal 1997 to $29.0
million in fiscal 1998. Increases in our pro forma license revenue were driven
primarily by growth in reconciliation and compliance software sales.
Our reported maintenance revenue increased from $22.6 million for the
year ended June 30, 1997 to $25.8 million for the year ended June 30, 1998. On a
pro forma basis, excluding elimination of purchased profits and adjusting for
the sales of our securities and recovery management businesses, our maintenance
revenue increased from $25.2 million for the year ended June 30, 1997 to $25.8
million for the year ended June 30, 1998. Increases from maintenance price
increases of approximately 7% and first year maintenance from new license sales
were offset by customer retention rates in the mid-to-upper 80% range.
Our reported other revenue, consisting mainly of consulting fees,
increased from $16.3 million for the year ended June 30, 1997 to $19.8 million
for the year ended June 30, 1998. On a pro forma basis, excluding the
elimination of purchased profits and adjusting for the sales of our securities
and recovery management businesses, other revenue increased from $15.9 million
for fiscal 1997 to $19.8 million for fiscal 1998. Year to date increases were
due to increased implementations in all of our business segments.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $102.7 million or 58.2% of total revenue for the year
ended June 30, 1997 and $129.9 million or 55.6% of total revenue for the year
ended June 30, 1998. Our cost of processing, servicing and support as a
percentage of servicing only revenue, which
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includes all revenue except license revenue, and net of purchased profits of
$6.5 million in the 1997 servicing only revenue, was 68.5% for the year ended
June 30, 1997 and 63.4% for the year ended June 30, 1998. The efficiency
improvement from fiscal 1997 to fiscal 1998 was due primarily to the economies
of scale and leverage inherent in our business model as well as an increase in
the percentage of electronic transaction processing versus paper processing,
which resulted in lower customer care and remittance costs per transaction. For
the year ended June 30, 1998, we added 10% to the rate of payments processed
electronically. Electronic transactions for Intuit Services Corporation
operations alone increased from 10% at June 1997 to 19% at June 1998.
Research and Development. Our research and development costs were $32.9
million or 18.6% of total revenue for the years ended June 30, 1997 and $36.3
million or 15.5% of total revenue for the year ended June 30, 1998. Excluding
purchased profits, research and development costs were 17.8% of total revenue
for the year ended June 30, 1997 and 15.5% of total revenue for the year ended
June 30, 1998. The absolute dollar increase of $3.4 million was primarily due to
additional resources supporting our platform integration efforts referred to as
project Genesis and efforts associated with Year 2000 compliance activities.
There were no software development costs capitalized for Year 2000 activities or
for project Genesis in either fiscal year, however approximately $0.7 million of
software development cost was capitalized in fiscal 1998 for initial phases of
key customer care and electronic billing initiatives.
Sales and Marketing. Our sales and marketing costs were $32.7 million or
18.5% of total revenue for the years ended June 30, 1997 and $28.8 million or
12.3% of total revenue for the year ended June 30, 1998. In conjunction with our
purchase of Intuit Services Corporation, we agreed to pay a $1.0 million per
month marketing charge to Intuit, Inc. for six months commencing in February
1997. Excluding purchased profits and five months of Intuit, Inc. marketing
charges in fiscal 1997 and one month in fiscal 1998, our sales and marketing
costs were 15.0% of total revenue for the year ended June 30, 1997 and 11.9% of
total revenue for the years ended June 30, 1998. Underlying costs as a
percentage of revenue has declined due to economies of scale and leverage
inherent in our business model.
General and Administrative. Our general and administrative expenses were
$18.7 million or 10.6% of total revenue for the year ended June 30, 1997 and
$20.7 million or 8.8% of total revenue for the year ended June 30, 1998.
Excluding purchased profits, our general and administrative expenses were 10.2%
of total revenue for the year ended June 30, 1997 and 8.8% of total revenue for
the year ended June 30, 1998. Overall, our general and administrative costs
decreased as a percentage of revenue from fiscal 1997 to fiscal 1998 due to our
ability to leverage corporate support services as revenue continues to grow.
Depreciation and Amortization. Our depreciation and amortization
expenses increased slightly from $24.9 million for the year ended June 30, 1997
to $25.0 million for the year ended June 30, 1998. Amortization declined due to
the sales of our securities business in October 1996, our recovery management
business in August 1997, our item processing business in March 1998 and our wire
and electronic banking businesses in April 1998, reductions in intangible assets
related to the release of a deferred tax benefit valuation allowance in the
quarter ended September 30, 1997 and a purchase price adjustment related to our
Intuit Services Corporation acquisition in the quarter ended December 31, 1997.
These reductions were offset by depreciation and amortization resulting from
purchases of property, plant and equipment required for Genesis development,
data center centralization and in support of growth of the business and tangible
and intangible asset additions related to our purchase of Intuit Services
Corporation in January 1997.
In-Process Research and Development. The in-process research and
development charge of $140.0 million in 1997 was related to our purchase of
Intuit Services Corporation and $0.7 million in 1998 was related to our purchase
of Advanced Mortgage Technologies, Inc. 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.
Charge for Stock Warrants. The $32.8 million charge for stock warrants
in the year ended June 30, 1998 resulted from two separate transactions. A $32.4
million charge resulted from the vesting of three million warrants in March 1998
related to a ten-year processing agreement that we announced in October 1997
with Integrion. A $0.4 million charge resulted from the vesting of 25,000
warrants in June of 1998 related to a five-year consulting agreement with a
third party. These non-cash charges were based on a Black-Scholes option pricing
model valuation of the warrants at the date of vesting. An additional seven
million warrants will vest incrementally upon achievement of a series of
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strategic targets and each incremental vesting of warrants will result in a
future non-cash charge based on the fair market value of our common stock at the
date of vesting.
Exclusivity Amortization. The exclusivity amortization expense in the
years ended June 30, 1997 and 1998 were the result of the exclusivity
arrangement we entered into with Intuit, Inc. in connection with our purchase of
Intuit Services Corporation in January 1997.
Net Gain on Dispositions of Assets. The net gain on dispositions of
assets totaling $6.3 million in the year ended June 30, 1997 resulted from the
sale of the credit card business in March 1997. The gain of $36.2 million in
fiscal 1998 was the net result of several transactions. We realized gains on the
sales of our recovery management business of $28.2 million, our item processing
business of $3.2 million, and electronic banking and wire businesses of $14.7
million. These gains were offset by an anticipated loss from the pending sale of
the leasing business of $4.7 million, expected losses on non-cancelable
contracts and related costs totaling $1.0 million resulting in the decision to
exit the web investor portion of our Investment Services segment and charges
totaling $4.2 million for equipment and other assets related primarily to data
center consolidations where we determined the book value of the assets exceeded
their net realizable value.
Interest. Our interest income increased by $1.3 million or 59%, from
$2.2 million for the year ended June 30, 1997 to $3.5 million for the year ended
June 30, 1998. This increase was the result of an increase in average cash and
investments from $39.2 million to $49.3 million combined with an increase in
average yield.
Our interest expense decreased from $0.8 million for the year ended June
30, 1997 to $0.6 million for the years ended June 30, 1998 due to lower
outstanding notes payable and capital lease obligations from fiscal 1997 to
fiscal 1998.
Income Taxes. Our effective income tax benefit was 6.9% for the year
ended June 30, 1997 and 14.8% for the year ended June 30, 1998. For both years,
the difference between our effective rate and the statutory rate of 35% was due
primarily to non-deductible in-process research and development expenses,
non-deductible intangible amortization, and state and local taxes.
SEGMENT INFORMATION
The following table sets forth our operating revenue and operating
income by industry segment for the periods noted. Charges identified as
exclusivity amortization, in-process research and development, charge for stock
warrants, net gain on dispositions of assets were separated from the operating
results of the segment for a better understanding of the underlying performance
of each segment. Explanations of these charges can be found above:
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<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating revenue:
Electronic commerce ...................... $ 85,926 $ 137,972 $ 169,443
Software ................................. 68,113 66,143 41,384
Investment services ...................... 22,406 29,749 39,304
--------- --------- ---------
Total operating revenue ......... $ 176,445 $ 233,864 $ 250,131
========= ========= =========
Operating income (loss):
Operating income (loss) excluding
specific items:
Electronic commerce ................... $ (20,487) $ (1,342) $ (5,490)
Software .............................. 4,324 8,393 14,637
Investment services ................... 2,171 6,225 8,093
Corporate ............................. (21,449) (20,116) (23,348)
Specific items:
Exclusivity amortization .............. (5,958) (2,963) --
In-process research and development ... (140,000) (719) (2,201)
Charge for stock warrants ............. -- (32,827) --
Net gain on dispositions of assets .... 6,250 36,173 4,576
--------- --------- ---------
Total operating income (loss) ... $(175,149) $ (7,176) $ (3,733)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Operating revenue:
Electronic commerce ...................... $ 41,298 $ 50,703 $ 79,385 $ 98,484
Software ................................. 19,730 18,060
9,535 9,076
Investment services ...................... 17,304 25,445
8,772 13,190
--------- --------- --------- ---------
Total operating revenue .............. $ 59,605 $ 72,969 $ 116,419 $ 141,989
========= ========= ========= =========
Operating income (loss):
Electronic commerce ...................... $ (778) $ (5,060) $ (5,388) $ (10,810)
Software ................................. 3,720 2,283 4,935 4,766
Investment services ...................... 895 3,080 2,690 5,445
Corporate ................................ (5,245) (11,021) (12,041)
(6,578)
Net gain on disposition of assets ........ -- -- 3,914 --
--------- --------- --------- ---------
Total operating income (loss) ........ $ (1,408) $ (6,275) $ (4,870) $ (12,640)
========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
Revenue in our Electronic Commerce business unit increased by 23%, from
$41.3 million for the three months ended December 31, 1998 to $50.7 million for
the three months ended December 31, 1999 and increased by 24%, from $79.4
million for the six months ended December 31, 1998 to $98.5 million for the six
months ended December 31, 1999. The increase in revenue is due primarily to an
increase in subscribers from approximately 2.6 million at December 31, 1998 to
approximately 3.0 million at December 31, 1999. While underlying growth in total
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subscribers approximated 7% and, within that figure underlying Internet-based
subscribers grew in excess of 20%, the total subscriber based remained
consistent from last quarter at approximately 3.0 million. As expected in our
discussion last quarter, we had approximately 200,000 subscribers deleted during
the quarter ended December 31, 1999 as our financial institution customers
removed subscribers using personal financial management software that was not
Year 2000 compliant. We have assisted our customers in actively soliciting these
subscribers to upgrade to Year 2000 compliant software and to remove
non-compliant subscribers from our systems through December 1999. We do not
expect these deletions to have a material impact on our expected earnings for
the remainder of the year.
Our processing agreement with Yahoo! allows for a free three month trial
period for subscribers who enroll through Yahoo! Because these subscribers are
not generating revenue during this free period, we do not count them in our
active subscriber base. Early on in the program with Yahoo! we provided bill
payment services only and in December 1999, we added electronic billing
capability that now allows for a fully electronic round trip billing and payment
experience through the Yahoo! offering. Now that the services are complete, we
expect an increase in the nature and extent of advertising promotions through
the various Yahoo! properties like Yahoo.com, Yahoo! Calendar and Yahoo! Wallet.
Additionally, we now have 62 billers in production that presented
approximately 38,000 electronic bills in the month ended December 31, 1999. The
number of bills we presented electronically has nearly doubled since the month
of September 1999 and we expect growth in this area to continue. Our recently
announced acquisition of BlueGill Technologies, expected to close in the quarter
ended March 31, 2000, will facilitate our efforts to provide quality billing
content and by simplifying and accelerating the process of taking bills from
paper to electronic, BlueGill will help us speed adoption of electronic billing
services available today. When combined with a recently announced transaction
based pricing model for our largest customers, it will become more difficult to
correlate revenue solely to the number of subscribers, with transactions
processed becoming an additional indicator. We exited the quarter ended December
31, 1999 processing approximately 14 million transactions per month, an increase
of 1 million per month over that which we processed in September 1999.
Operating losses in our Electronic Commerce segment increased from $0.8
million for the three months ended December 31, 1998 to $5.1 million for the
three months ended December 31, 1999 and from $5.4 million for the six months
ended December 31, 1998 to $10.8 million for the six months ended December 31,
1999. As we have explained in previous quarters, we are investing heavily in the
following four areas :
o marketing and price incentives to spur industry growth;
o compressing the time from E-Bill contract execution to live billing;
o improved infrastructure and programs that improve quality and
performance; and
o extension of payment offerings through leverage of our existing
infrastructure.
Additionally, as subscribers sign up for electronic billing and payment
offerings through portals and other sponsors that offer free trial periods, we
will incur the variable costs associated with processing transactions from these
customers with no revenue to offset the costs. These combined factors will
continue to place downward pressure on operating margins in this segment for the
remainder of the fiscal year.
Reported revenue in our Software segment declined by 4%, from $9.5
million for the three months ended December 31, 1998 to $9.1 million for the
three months ended December 31, 1999 and by 8% from $19.7 million for the six
months ended December 31, 1998 to $18.1 million for the six months ended
December 31, 1999. The decline in the periods mentioned is partially due to the
divestiture of our mortgage and imaging businesses in the prior year. On a pro
forma basis, net of the divestitures, revenue declined by 4%, from $9.5 million
for the three months ended December 31, 1998 to $9.1 million for the three
months ended December 31, 1999 and increased by 1% from $17.9 million for the
six months ended December 31, 1998 to $18.1 million for the six months ended
December 31, 1999. The revenue results were as expected due to purchasing
moratoriums by customers concerned with Year 2000 issues.
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Reported operating income in our Software segment decreased from $3.7
million for the three months ended December 31, 1998 to $2.3 million for the
three months ended December 31, 1999 and decreased slightly from $4.9 million
for the six months ended December 31, 1998 to $4.8 million for the six months
ended December 31, 1999. On a pro forma basis, net of divestitures, operating
income decreased from $3.7 million for the three months ended December 31, 1998
to $2.3 million for the three months ended December 31, 1999 and decreased from
$6.6 million for the six months ended December 31, 1998 to $4.8 million for the
six months ended December 31, 1999. The decrease in operating margins reflects
investments in new initiatives like the recent launch of missingmoney.com, a
state-sponsored Internet site we developed with the National Association of
Unclaimed Property to enable customers to find and claim money owed to them from
non-refunded deposits, unclaimed securities, and other accounts held by states.
Additional resources have also been assigned to our new automated clearinghouse
alliance services program that carries a profit margin that is inherently
lower than that of our traditional product offerings in this area.
Reported revenue in our Investment Services segment increased by 50%,
from $8.8 million for the three months ended December 31, 1998 to $13.2 million
for the three months ended December 31, 1999 and by 47%, from $17.3 million for
the six months ended December 31, 1998 to $25.4 million for the six months ended
December 31, 1999. This increase is partially due to our acquisition of Mobius
Group in March of 1999. On a pro forma basis, adjusting for the impact of the
Mobius Group acquisition, revenue increased 27% from $10.4 million for the three
months ended December 31, 1998 to $13.2 million for the three months ended
December 31, 1999 and by 23%, from $20.7 million for the six months ended
December 31, 1998 to $25.4 million for the six months ended December 31, 1999.
Growth in pro forma revenue is driven primarily by an increase in portfolios
managed from approximately 573,000 at December 31, 1998 to approximately 820,000
at December 31, 1999. A major portion of portfolio growth over the past year has
occurred in retail versus institutional accounts that carry a lower unit price.
In October 1999 we launched our new M-Plan product from Mobius. Consultants,
plan sponsors, investment managers and financial planners use Mobius M-Plan for
integrating retirement, capital needs, tax, education and real estate planning
needs for their customers.
Operating income in our Investment Services segment increased from $0.9
million for the three months ended December 31, 1998 to $3.1 million for the
three months ended December 31, 1999 and from $2.7 million for the six months
ended December 31, 1998 to $5.4 million for the six months ended December 31,
1999. On a pro forma basis, adjusting for the acquisition of Mobius Group,
operating income increased from $0.9 million for the three months ended December
31, 1998 to $3.1 million for the three months ended December 31, 1999 and from
$2.9 million for the six months ended December 31, 1998 to $5.4 million for the
six months ended December 31, 1999. In the quarter ended December 31, 1998 we
incurred one time charges of $0.6 million related to real estate transactions in
this business unit. Additionally, increases in operating income are due to the
marginal profit inherent in the increase in portfolios managed and synergies
realized in the integration of Mobius Group into the operations of the business
segment.
The Corporate segment represents charges for legal, human resources,
accounting and finance and various other of our unallocated overhead charges.
Our Corporate segment incurred an operating loss of $5.2 million, or 9% of total
revenue for the three months ended December 31, 1998 versus an operating loss of
$6.6 million, or 9% of total revenue for the three months ended December 31,
1999. Our Corporate segment incurred an operating loss of $11.0 million, or 9%
of total revenue for the six months ended December 31, 1998 versus an operating
loss of $12.0 million, or 8% for the six months ended December 31, 1999. The
unallocated portions of our expenses have remained fairly consistent as a
percentage of revenue. As subscriber price promotions allowing for free trial
periods begin to expire and related customers begin paying for various related
electronic billing and bill payment services, we believe our corporate costs
will begin to decline as a percentage of revenue as we regain the leverage
inherent in our normalized business model.
The net gain on dispositions of assets of $3.9 million in the six months
ended December 31, 1998 is the net result of the gain on the sale of our
mortgage business of approximately $6.3 million, offset by the loss on the sale
of our imaging business of approximately $2.4 million.
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YEARS ENDED JUNE 30, 1998 AND 1999
Revenue in our Electronic Commerce segment increased by 23%, or $31.4
million, from $138.0 million for the year ended June 30, 1998, to $169.4 million
for the year ended June 30, 1999. This increase was primarily due to an increase
in subscribers from approximately 2.4 million at June 30, 1998 to approximately
3.0 million at June 30, 1999.
Our operating loss in our Electronic Commerce segment increased from a
loss of $1.3 million for the year ended June 30, 1998 to a loss of $5.5 million
for the year ended June 30, 1999. This increase in our operating loss was due to
the temporary slowing of revenue growth caused by financial institutions
converting their PC-based systems to our new web-based platform. At the same
time, we continued to invest in our payment processing infrastructure to enhance
our future quality and efficiency in anticipation of the revenue growth expected
when financial institutions complete their technology conversions and refocus
their marketing efforts on new subscriber growth. These investments include
additional customer care resources geared toward improved quality and
significant E-Bill implementation costs, which were not offset by additional
revenue during the year ended June 30, 1999.
As of June 30, 1999, we had activated 29 billers for our E-Bill product
offering, had an additional 21 billers actively engaged in the implementation
process and had another 14 awaiting implementation. We believe that as we
continue to activate additional billers for our electronic billing and payment
product offerings, the number of users will continue to increase, which should
drive revenue and operating income growth in the future.
In January 1999, we announced a distribution agreement with Yahoo!
designed to promote on-line billing, payment and electronic banking to Internet
users. Our planned investments related to this agreement has placed downward
pressure on margins in the second half of fiscal 1999, however, these costs will
prepare us for up to one million additional subscribers for our services. These
investments have allowed us to grow our professional services and customer care
staff to support anticipated greater deployment of electronic billing and
payment services by billers, as well as expand our sales and marketing and
related training activities.
In April 1999, we experienced a system error that led some users of our
electronic bill payment service to experience intermittent problems accessing
and using the system. As a result of this outage, we recorded charges totaling
$2.7 million. Net of this charge, the operating loss in our Electronic Commerce
segment would have been $2.8 million in the year ended June 30, 1999.
Revenues in our Software segment declined by $24.7 million or 37%, from
$66.1 million for the year ended June 30, 1998 to $41.4 million for the year
ended June 30, 1999. This decline reflects the impact of the divestiture of
several of our software businesses. Excluding the effects of the divestitures,
revenue in our Software segment rose by $2.2 million or 6%, from $37.4 million
in the year ended June 30, 1998 to $39.6 million for the year ended June 30,
1999. Despite this increase, our license revenue was lower than anticipated due
primarily to purchasing moratoriums imposed by potential customers who deferred
new software purchases as a result of addressing their internal Year 2000
issues. This slowdown in license sales was offset by greater maintenance and
consulting revenue resulting from prior sales of software licenses.
Operating income in our Software segment increased from $8.4 million for
the year ended June 30, 1998 to $14.6 million for the year ended June 30, 1999.
Excluding the effects of the divestitures, operating income increased from $10.7
million for the year ended June 30, 1998 to $16.4 million for the year ended
June 30, 1999. Of the increase in retained business operating income of $5.7
million, $2.2 million was a result of the revenue growth previously described
and approximately $2.4 million was a reporting anomaly related to allocated
corporate fixed costs in the fiscal 1998 results. Our pro forma operating income
in the year ended June 30, 1998 was carrying a full burden of allocated overhead
from our Software segment to avoid unreasonably impacting other segments on a
restated pro forma basis. When the effects of allocations are ignored,
underlying operating profit margins in our Software segment remained fairly
consistent from year to year.
Revenues in our Investment Services segment increased by $9.6 million,
or 32%, from $29.7 million for the year ended June 30, 1998 to $39.3 million for
the year ended June 30, 1999. On March 8, 1999, we acquired
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Mobius Group to augment the product line of this segment. Investment consultants
and asset managers may now use Mobius Group's M-Vest service to determine the
ideal asset allocation for their clients; use M-Search to determine the ideal
investment manager candidates; use CheckFree APL and APL wrap products to
provide investment platform and trading tools; and use either M-Watch or
CheckFree APL for their investment oversight and reporting to the end client.
Excluding the effects of the acquisition, revenue increased by $7.6 million, or
26%, from $29.7 million for the year ended June 30, 1998 to $37.4 million for
the years ended June 30, 1999. The increase was due primarily to an increase in
the number of institutional portfolios managed from approximately 500,000 at
June 30, 1998 to approximately 715,000 at June 30, 1999, offset somewhat by an
increase in the number of retail brokerage accounts managed which carry a lower
unit price.
Operating income in our Investment Services segment increased from $6.2
million for the year ended June 30, 1998 to $8.1 million for the year ended June
30, 1999. Excluding the effects of the acquisition of Mobius Group, operating
income increased from $6.2 million for the year ended June 30, 1998 to $8.7
million for the years ended June 30, 1999. This increase was due to the greater
number of portfolios managed, offset somewhat by costs of approximately $0.9
related to the moving of the segment's main office in fiscal 1999.
Expenses in our Corporate segment represent charges for human resources,
legal, finance and various other unallocated overhead charges. The Corporate
segment charges were $20.1 million and $23.3 million for the years ended June
30, 1998 and 1999, respectively. The fiscal 1999 results included one-time
charges of $0.6 million incurred in December 1998 for the formation of a
special-purpose subsidiary created to administer our employee medical benefits
program; $0.4 million in real estate related charges incurred in the sale of a
building in Columbus, Ohio in June of 1998; and $0.9 million in charges incurred
in the preparation of a follow-on stock offering that was terminated in June
1998. Net of these one-time charges, our corporate charges remained relatively
consistent at 8.6% of total revenue in both years.
YEARS ENDED JUNE 30, 1997 AND 1998
Revenue in our Electronic Commerce business unit increased by $52.0
million, or 61%, from $85.9 million for the year ended June 30, 1997 to $137.9
million for the years ended June 30, 1998. On a pro forma basis, assuming twelve
months of Intuit Services Corporation results are included in and the credit
card processing business is excluded from reported results, our revenue
increased 50%. This growth was driven primarily by growth in subscribers from
approximately 1.7 million at June 30, 1997 to approximately 2.4 million at June
30, 1998.
Operating losses in our Electronic Commerce segment improved from $20.5
million for the year ended June 30, 1997 to $1.3 million for the year ended June
30, 1998. On a pro forma basis, operating results improved from a loss of $31.4
million for the year ended June 30, 1997 to a loss of $1.3 million for the year
ended June 30, 1998. Favorable operating results are primarily due to continued
revenue growth as well as continued efficiency improvements in remittance and
customer care costs, reduction in costs from the integration of Intuit Services
Corporation and significant economies of scale and leverage inherent in the
segment's business model. Cost improvements in customer care and remittance are
primarily the result of growth in the percentage of electronic versus paper
payments, year over year. In the fourth quarter of fiscal 1998, many of our
financial institution clients reduced marketing efforts toward new subscribers
to allow them time to convert from a PC based software front-end offering to a
more efficient web-based offering. This resulted in a decline in quarter over
quarter subscriber growth and had a dampening effect on subscriber growth going
forward.
Revenue in our Software segment decreased from $68.1 million for the
year ended June 30, 1997 to $66.1 million for the years ended June 30, 1998. On
a pro forma basis, adjusting the prior year to exclude the effect of purchased
profits and to eliminate results of the divested credit management business,
revenue increased by 6% year over year. Revenue growth was primarily the result
of increased license sales driven by growth in our reconciliation and compliance
products and related maintenance and services revenue generated from new license
sales in fiscal 1997 and 1998.
Operating profits in our Software segment improved from $4.3 million for
the year ended June 30, 1997 to $8.4 million for the year ended June 30, 1998.
On a pro forma basis, operating income increased from $5.3 million to $8.3
million for the same periods, respectively. Gains on the sale of divested
businesses allowed us to release a deferred tax
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benefit valuation allowance which in turn reduced goodwill and other intangible
assets resulting from our Servantis acquisition. Additionally, at the end of the
third quarter of fiscal 1998, when we announced intentions to divest software
units, related intangible assets were reclassified on the balance sheet as
assets held for sale and we discontinued amortization on these assets at that
time. The resulting decrease in intangible amortization in our Software segment
on a year over year basis was approximately $3.7 million, which was the primary
reason for the improvement.
Revenue in our Investment Services segment increased from $22.4 million
in the year ended June 30, 1997 to $29.7 million for the year ended June 30,
1998. This improvement is due primarily to an increase in portfolios managed
from approximately 350,000 at June 30, 1997 to approximately 500,000 at June 30,
1998.
Operating profits in our Investment Services segment increased from $2.2
million for the year ended June 30, 1997 to $6.2 million in the years ended June
30, 1998. Improvements in operating results were due to revenue growth and the
leverage and economies of scale inherent in the segment's business model.
Our Corporate segment incurred expenses of $21.4 million for the year
ended June 30, 1997 and $20.1 million for the year ended June 30, 1998. The
improvement was due to successful efforts to assimilate the various acquisitions
and leverage the existing infrastructure in response to overall growth in the
business.
YEAR 2000 READINESS
We had a staff of approximately 100 technical associates on site to
review and test our internal and third party systems through the evening of
December 31, 1999 and into January 1, 2000. We had no significant internal
systems issues arise as a result of crossing into the Year 2000, and interfaces
with customers and suppliers have caused no adverse impact. While we continue to
monitor our systems for any related issues that may arise, additional costs in
this regard are anticipated only to the extent necessary to complete final
documentation of the testing activities that we performed and for activities
necessary to wind down our project team assigned to Year 2000.
Although the development of Genesis has taken into account relevant Year
2000 issues, the planned conversion was not accelerated due to year 2000 issues
and Year 2000 related costs in the development of the Genesis platform are
therefore not included in our costs below. The following chart reflects our Year
2000 specific costs. The fiscal year 1999 and prior costs were attributed to
remediation of legacy systems and applications. The year to date fiscal year
2000 costs include minor remediation and testing and verification activities.
The cost to complete include the direct costs of the 100 associates that were on
site on January 1, 2000 and through the weekend to perform final testing as we
crossed into the Year 2000, as well as anticipated remaining project
documentation and wind down costs.
<TABLE>
<CAPTION>
YTD
FISCAL FISCAL FISCAL FISCAL COST TO
BUSINESS SEGMENT 1997 1998 1999 2000 COMPLETE TOTAL
- -------------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Electronic commerce $ 0 $ 100 $ 1,360 $ 800 $ 20 $ 2,280
Software -- 500 525 171 10 1,206
Investment services -- 375 937 110 25 1,447
Corporate -- -- 270 81 -- 351
--------- --------- --------- --------- --------- ---------
Total $ 0 $ 975 $ 3,092 $ 1,162 $ 55 $ 5,284
========= ========= ========= ========= ========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash, cash equivalents and short- and
long-term investments on hand totaling $201.5 million. Our balance sheet
reflects working capital of $159.7 million and our current ratio stands at 3.1.
The following table sets forth a summary of cash flow activity and
should be referred to in conjunction with statements regarding our liquidity and
capital resources:
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------------------ ------------- ------------- -------------
1998 1999 1999 1999 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities ............... $ (11,673) $ 25,571 $ 2,651 $ 10,647 $ 13,298
Investing activities ............... 12,767 (16,217) (10,528) (51,571) (62,099)
Financing activities ............... (33,443) 3,355 1,870 187,264 189,134
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents ................ $ 4,449 $ (24,089) $ (6,007) $ 146,340 $ 140,333
============= ============= ============= ============= =============
</TABLE>
DECEMBER 31, 1999
Net cash provided by financing activities reflects the most significant
positive impact on cash flow in the quarter ended December 31, 1999. On November
29, 1999, we issued $172.5 million of 6 1/2% convertible subordinated notes that
provided $166.9 million of proceeds, net of underwriting and other direct
issuance costs. During the quarter, we also received $19.2 million from the
direct sale of 250,000 shares of stock to Bank One and the issuance of 300,000
shares upon exercise of vested warrants from Integrion members. This amount of
$19.2 million included an overpayment of $3.2 million due to a duplicate
submission of cash proceeds by one of our customers on the last day of the
quarter that was returned on the first day of the subsequent quarter.
Additionally, we received $1.3 million from the exercise of employee stock
options and from our employee stock purchase plan and we spent $0.2 million on
principal payments for capital leases.
We invested approximately $39.6 million of the proceeds above in the
purchase of investments designated as held to maturity, $10.7 in capital
expenditures and $1.3 million in the capitalization of software development
costs, resulting in net cash used in investing activities of $51.6 million.
Net cash provided by operation of $10.6 million reflects a significant
improvement over the $2.7 million provided by operations in the previous
quarter. This improvement is driven by an improvement of $11.1 million in
accounts receivable, which was primarily the result of timing of payments by our
customers from quarter to quarter.
Convertible Subordinated Notes. On November 29, 1999, we issued $172.5
million of 6 1/2% convertible subordinated notes that are due on December 1,
2006. We will pay interest on the notes on June 1 and December 1, of each year,
commencing on June 1, 2000. The notes may be converted, at the holder's option,
into 13.6612 shares of common stock per note and we may redeem the notes at any
time on or after December 1, 2002. On January 14, 2000, we filed a shelf
registration statement to register the underlying shares. Under the terms of the
offering, should we fail to obtain a declaration of effectiveness of the shelf
registration statement from the Securities and Exchange Commission by March 28,
2000, we will incur penalty interest in the amount of 0.5%. The penalty interest
would stop accruing at the time we obtain the appropriate declaration of
effectiveness. We expect to use the net proceeds from this offering for working
capital and general corporate purposes, including expansion of our services to a
broader market and potential acquisitions.
Credit Facility. On October 31, 1999, our $20 million working capital
line of credit with Key Bank was set to expire. We extended the line until
December 31, 1999 while we negotiated a new agreement. In December 1999, we
entered into a three-year, $30 million working capital line of credit with Key
Bank that carries an interest rate of either LIBOR plus 200 basis points or
Prime, at our discretion. These are the same terms that were in place on the
original line as well. As of January 3, 2000, the LIBOR rates were 5.8825% for
one month, 6.0% for three months, 6.13125% for six months and 6.5% for one year
and the Prime rate was 8.5%. In this instance, it would be more beneficial to us
to choose the LIBOR option for any capital needs for less than one year and the
Prime rate option for needs exceeding one year. As of December 31, 1999, there
was no balance outstanding on this line and we had no plans or expectations to
draw from the line through June 30, 2000. Although we have significant working
capital in place at December 31, 1999, we feel it prudent to have access to a
credit facility given our plans for growth.
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Because of our successful efforts in completing the convertible
subordinated note offering and in executing the new working capital line of
credit, we discontinued negotiations with various vendors in establishing an
additional lease line of credit.
The net result of the activities in the quarter ended December 31, 1999
is a significant improvement in our liquidity and capital resources. We believe
that existing cash, cash equivalents, investments and available financing
alternatives will be sufficient to meet our presently anticipated working
capital and capital investment requirements through June 30, 2000. In the longer
term, our working capital and capital investment requirements will be somewhat
dependent upon the timing of significant customer adoption of our electronic
billing and payment services and the result of acquisitions, and, therefore, we
are not in a position to make longer-term predictions at this time.
JUNE 30, 1999
For the year ended June 30, 1999, we generated $25.6 million of cash
flow from operations. Of this amount, $14.3 million represented net proceeds
from trading securities transactions, which GAAP requires us to reflect in cash
flow from operations.
From an investing perspective we used $40.4 million for the purchase of
property and software, of which approximately $14.9 million was for the purchase
of land and a building in Dublin, Ohio and another $6.4 million in leasehold
improvements to ready the building for occupancy. The remaining $19.1 million
was used for computer equipment and software and leasehold improvements in
support of initiatives to grow the business and improve quality. We received
$18.4 million from the net sale of the various software business divestitures
during the fiscal year and the sale of a building in Columbus, Ohio and $14.9
million from the repayment of a note receivable established in fiscal 1998
related to the purchase of the Dublin, Ohio facility. We capitalized $8.0
million in software development costs related to new business initiatives in all
three of our business segments. Additionally, we spent approximately $0.2
million in cash in connection with the acquisition of Mobius Group, purchased
$1.9 million in held-to-maturity securities and received $1.0 million in
proceeds from the sale of held-to-maturity securities.
From a financing perspective, we used $31.3 million in the purchase of
approximately 4.7 million shares of treasury stock for an average price of
approximately $6.65 per share. We used $3.3 million in cash for principal
payments under capital leases and another $3.6 million to fund an escrow account
to release our obligation for bonds with the Department of Economic Development
of the State of Ohio to facilitate the sale of land and a building in Columbus,
Ohio. We received $2.9 million in proceeds from the exercise of options under
the employee stock option plan and $1.9 million from the purchase of shares
under the employee stock purchase plan.
For the year ended June 30, 1998, we used $11.7 million of cash flow in
operating activities. During this year, $24.5 million in net investments in
trading securities were reflected as cash used in operations. In previous
periods, all of our investments were classified as available for sale, and,
therefore, related investment activities did not impact operating cash flow. The
change to trading securities reflects efforts to maximize yields within our
conservative investment guidelines and not to significantly impact the risk
profile of our portfolio.
From an investing perspective, we generated $54.9 million of cash from
the sale of various software businesses, $24 million from sales and maturities
of available-for-sale investments, $8.9 million from receipt of a purchase price
adjustment related to our Intuit Services Corporation acquisition and $0.3
million from the sales of other assets. Investing receipts were offset by $27.9
million in investment in property additions, primarily for computer and
operational equipment and facilities related to completion of the Genesis
platform, $20.3 million in the purchase of investments, $14.9 million of
investment in a note receivable in conjunction with the proposed purchase of a
building in Dublin, Ohio, $10.0 million as final payment on the purchase of
Intuit Services Corporation; payment of $1.0 million for the purchase of
Advanced Mortgage Technology, Inc., and $0.7 million in capitalization of
software development costs.
From a financing perspective, $5.4 million of cash was provided by stock
option exercises under our Stock Option Plans, stock purchases under our
Associate Stock Purchase Plan and our matching contributions under our 401(k)
Plan, which was offset by payments of $1.1 million in satisfaction of an
outstanding note payable and $0.9 million in capital lease obligations.
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As a result of the above, our current ratio improved from 1.3 at June
30, 1997 to 2.3 at June 30, 1998 and related working capital increased from
$20.0 million at June 30, 1997 to $78.2 million at June 30, 1998.
INFLATION
We believe the effects of inflation have not had a significant impact on
our results of operations.
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DESCRIPTION OF CHECKFREE SECURITIES
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common
stock, $.01 par value, and 15,000,000 shares of preferred stock, $.01 par value.
The following summary description of our capital stock is not intended
to be complete and is qualified in its entirety by this reference to our
restated certificate of incorporation and our amended and restated by-laws.
Common Stock
As of March 15, 2000, there were 53,095,584 shares of our common stock
outstanding, excluding treasury shares, held of record by approximately 553
stockholders. All of the issued and outstanding shares of our common stock are
fully paid and nonassessable. Holders of validly issued and outstanding shares
of our common stock are entitled to one vote per share of record on all matters
to be voted upon by stockholders.
At a meeting of stockholders at which a quorum is present, a majority of
the votes cast decides all questions, unless the matter is one upon which a
different vote is required by express provision of law or our certificate of
incorporation or by-laws. There is no cumulative voting with respect to the
election of directors, however, our board of directors is classified, which
means that the holders of a majority of the shares at a meeting at which a
quorum is present can elect all of the directors of the class then to be elected
if they choose to do so, and, in the event, the holders of the remaining shares
would not be able to elect any directors of that class.
Stockholders have no preemptive or other rights to subscribe for
additional shares nor any other rights to convert their common stock into any
other securities.
Subject to the preferences that may apply to the holders of any
outstanding shares of our preferred stock, holders of our common stock are
entitled to these dividends as our board of directors may declare out of funds
legally available for that purpose. Our payment of dividends, if any, rests
within our board's discretion and will depend on our operating results,
financial condition and capital expenditure plans, as well as other factors
considered relevant by our board. We may enter into bank credit agreements that
include financial covenants restricting the payment of dividends.
Upon our liquidation, dissolution or the winding-up of our business, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of our common stock outstanding at that time, subject
to prior distribution rights of our creditors and preferential rights of any
outstanding shares of preferred stock.
Preferred Stock
As of the date of this information statement/prospectus, we have
13,500,000 authorized shares of preferred stock, none of which are outstanding.
Our certificate of incorporation authorizes our board of directors to issue up
to 15,000,000 shares of preferred stock in one or more series and to establish
the relative voting, dividend, redemption, liquidation, conversion and other
powers, preferences, rights, qualifications, limitations and restrictions as our
board of directors may determine without further approval of our stockholders.
Our board's issuance of preferred stock could be used, under some circumstances,
as a method of delaying or preventing a change in our control. It could also
permit our board, without any action by holders of our common stock, to issue
preferred stock, which could have a detrimental effect on the rights of holders
of common stock, including loss of voting control. In some circumstances, this
could have the effect of decreasing the market price of our common stock.
The issuance of any series of preferred stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of that
series, if and when established, will depend upon, among other things, our
future capital needs, the then-existing market conditions and other factors
that, in the judgment of our board of directors, might warrant the issuance of
preferred stock. As of the date of this information statement/prospectus, there
are no plans, agreements or understandings relative to the issuance of any
shares of preferred stock.
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Rights Plan
On January 31, 1997, our board of directors authorized and declared a
dividend of one preferred stock purchase right for each share of our common
stock, par value $.01 per share. The dividend was payable on February 14, 1997,
to the holders of record of our common stock as of the close of business on that
date. The Fifth Third Bank serves as Rights Agent under the Rights Agreement.
Delaware Law and Charter and Bylaw Provisions With Potential Anti-takeover
Effects
Various provisions of Delaware law and of our certificate of
incorporation and by-laws may be considered to have an anti-takeover effect and
may delay, deter or prevent a tender offer, proxy contest or other takeover
attempt that a stockholder might consider to be in the stockholder's best
interest. This includes an attempt that might result in payment of a premium
over the market price for shares held by our stockholders.
Delaware Anti-takeover Law. As a Delaware corporation, we are subject to
the provisions of Delaware law, including Section 203. In general, Section 203
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested stockholder
unless:
o prior to that date, the board of directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
o upon becoming an interested stockholder, the stockholder then owned at
least 85% of the voting stock, as defined in Section 203; or
o after that date, the business combination is approved by both the
board of directors and by holders of at least 66-2/3% of the
corporation's outstanding voting stock, excluding shares owned by the
interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns or, within the prior three years, did own, 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, to date we have not made this election.
Classified Board of Directors. Our certificate of incorporation provides
for our board of directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of our board of
directors will be elected each year. Classification of our 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 CheckFree.
Moreover, under the Delaware Law, where a corporation has a classified board of
directors, the stockholders may remove a director only for cause. Our
certificate of incorporation provides that any director or the entire board of
directors may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 80% of all of the our
outstanding shares of capital stock entitled to vote on the election of
directors at a meeting of stockholders called for that purpose. If, however, our
board of directors, by an affirmative vote of at least 66-2/3% of the entire
board, recommends removal of a director to the stockholders, this removal may be
effected by the affirmative vote of the holders of at least a majority of the
outstanding shares of our capital stock present in person or represented by
proxy and entitled to vote on the election of directors at a meeting of
stockholders called for that purpose.
These provisions, when coupled with provisions of our certificate of
incorporation authorizing only our board of directors to fill vacant
directorships, will preclude our stockholders from removing incumbent directors
without cause, and simultaneously gaining control of the board of directors by
filling the vacancies with their own nominees.
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Special Meetings of Stockholders. Our by-laws provide that special
meetings of stockholders may be called by the president and shall be called by
the president or secretary at the written request of two-thirds of our board of
directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our by-laws require stockholders who are seeking either:
o to bring business before a meeting of stockholders, or
o to nominate candidates for election as directors at a meeting of
stockholders,
to provide us with timely written notice of their intention. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, our
principal executive office not less than 70 days nor more than 90 days prior to
the scheduled meeting; or, for a special meeting, not later than the close of
business on the seventh day following the earlier of:
o the day on which the notice of the date of the meeting was mailed, or
o the day on which public disclosure of the date of the special meeting
was made.
Our by-laws also contain requirements as to the form and substance of a
stockholder's notice. These provisions may preclude some stockholders from
making nominations for directors at an annual or special meeting or from
bringing other matters before the stockholders at a meeting.
Action By Written Consent of the Stockholders. Under Delaware law,
unless a corporation provides otherwise in its certificate of incorporation, any
action that must or may be taken at any annual or special meeting of
stockholders, may be taken instead by written consent. The consent must state
the action so taken and be signed by the holders of outstanding stock having at
least the minimum number of votes that would be necessary to take that action at
a meeting at which all shares entitled to vote thereon were present and voted.
Our certificate of incorporation limits the availability of any action by
written consent of the stockholders to those actions taken by unanimous consent
of the stockholders.
Directors' Response to Acquisition Proposals. Our certificate of
incorporation requires that our board of directors base the our response to any
"acquisition proposal" on the board's evaluation of what is in CheckFree's best
interest. In making that evaluation, our board of directors must consider all
relevant factors including, without limitation:
o the best interest of the stockholders which, for this purpose,
requires our board of directors to consider not only the consideration
offered in the acquisition proposal in relation to the then current
market price of our common stock, but also in relation to the current
value of CheckFree in a freely negotiated transaction and in relation
to the board's then estimate of our future value as an independent
entity or as the subject of a future acquisition proposal; and
o other factors that our board of directors deems relevant, including,
among others:
(1) our long-term and short-term interests, and
(2) the social, legal and economic effects upon our employees,
suppliers, customers, creditors and other affected persons, firms
and corporations and on the communities and geographical areas in
which we and our subsidiaries operate or are located.
Our certificate of incorporation defines the term "acquisition proposal"
to include any:
o proposal for our consolidation or merger with another
corporation;
o share exchange involving our outstanding capital stock;
o liquidation or dissolution of CheckFree;
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o transfer of all or a material portion of our assets; and
o tender offer or exchange offer for any of our outstanding stock.
Supermajority Voting Requirements. Our certificate of incorporation and
by-laws provide that their provisions may not be altered, amended or repealed in
any respect, and that new provisions inconsistent with existing provisions may
not be adopted, unless that action is approved by the affirmative vote of the
holders of at least 80% of all of the outstanding shares of our capital stock
entitled to vote on that matter at a meeting of stockholders called for that
purpose. If, however, our board of directors, by an affirmative vote of at least
66-2/3% of the entire board, recommends approval of that amendment to the
stockholders, then the approval may be effected by the affirmative vote of the
holders of a majority of the outstanding shares of our capital stock present in
person or represented by proxy and entitled to vote on that matter at a meeting
of stockholders called for that purpose.
Stockholder Rights Plan. We have adopted a stockholder rights plan that
allows us to issue preferred stock with rights senior to those of our common
stock without any further vote or action by our stockholders. The issuance of
our preferred stock under the stockholder rights plan could decrease the amount
of earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of the holders of our common stock. In some circumstances, the issuance of our
preferred stock could have the effect of decreasing the market price of our
common stock.
Director Liability and Indemnification
Our certificate of incorporation provides that none of our directors
will be personally liable to us or to our stockholders for monetary damages for
breach of fiduciary duty as a director; provided, however, that this provision
will not apply:
o for any breach of the director's duty of loyalty to CheckFree or
to our stockholders,
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o for the payment of a dividend or the payment for the purchase or
redemption of our stock in violation of Section 174 of the
General Corporation Law of the State of Delaware; or
o for any transaction from which the director derived an improper
personal benefit.
In essence, our stockholders could not seek to hold the directors, directly or
through a derivative action, personally liable for damages for breach of their
fiduciary duty involving negligent or gross negligent acts or omissions.
These provisions may have the effect of discouraging stockholders'
derivative actions against directors and officers. They do not, however, effect
a director's personal liability for violation of the federal securities laws. In
addition, these provisions do not affect our stockholder's ability to obtain
injunctive or other equitable relief from the courts concerning a transaction
that is the product of negligence. Nor would these provisions preclude a
stockholders' action for damages against the director for breach of the duty of
loyalty, failure to act in good faith, intentional misconduct, knowing violation
of law, payment of an unlawful dividend or approval of an unlawful stock
repurchase, or any transaction in which the director obtained personal benefit
or actions by third parties against us.
Our by-laws provide that we shall, to the fullest extent permitted by
applicable law as then in effect, indemnify any person who was or is involved in
any manner or was or is threatened to be made so involved in any threatened,
pending or completed investigation, claim, action, suit or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that he
is or was a director of CheckFree or is or was serving at our request as a
director or officer of another corporation or other enterprise against all
expenses, liability and loss actually and reasonably incurred by him in
connection with that proceeding. This right to indemnification includes the
right to receive payment of any expenses incurred by the indemnified party in
that proceeding in advance of the final disposition of the proceeding,
consistent with applicable law as then in effect. All rights to indemnification
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conferred in our by-laws, including rights to the advancement of expenses and
the evidentiary, procedural, and other provisions of our by-laws, shall be
contract rights. We may, by action of our board of directors, indemnify our
officers, employees, agents, attorneys and representatives to the same scope and
extent as provided for directors.
The right of indemnification, including the right to receive payment in
advance of expenses, conferred by our by-laws is not exclusive of any other
rights to which any person seeking indemnification may otherwise be entitled.
Our by-laws also specify specific procedures, presumptions and remedies that
apply to the right to indemnification and the advancement of expenses provided
for in our by-laws.
We have entered into separate indemnification agreements with each of
our directors and some of our executive officers, in which we agreed, among
other things:
o to indemnify them to the fullest extent permitted by Delaware
law, subject to limitations against various liabilities that they
actually and reasonably incur in any proceeding in which they are
a party that may arise because of their status as directors,
officers, employees or agents or that may arise because of their
serving in that capacity at our request for another entity;
o to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and
o to obtain directors' and officers' insurance if available at
reasonable terms.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of CheckFree for which indemnification is being sought,
nor are we aware of any pending or threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent,
other than as described in this information statement/prospectus.
We maintain directors' and officers' liability insurance.
DESCRIPTION OF NOTES
The notes were issued under an indenture between us and Fifth Third
Bank, as trustee, dated as of November 29, 1999, as supplemented by a
supplemental indenture dated as of November 29, 1999, among us, our subsidiaries
and the trustee. We refer to the indenture and the first supplemental together
as the indenture. The following summaries of specific provisions of the notes
and the indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the notes
and the indenture.
General
The notes are CheckFree Holdings' unsecured, subordinated obligations to
$172,500,000 aggregate principal amount and will mature on December 1, 2006. The
principal amount of each note is $1,000 and will be payable at the office of the
paying agent, which initially will be the trustee, or an office or agency
maintained by CheckFree Holdings for that purpose in the Borough of Manhattan,
New York, New York.
The notes bear interest at the rate of 6 1/2% per annum on the principal
amount from the date of issuance, or from the most recent date to which interest
has been paid or provided for until the notes are paid in full or funds are made
available for payment in full of the notes in accordance with the indenture.
Interest is payable at maturity, or earlier purchase, redemption or, in some
circumstances, conversion, and semiannually on June 1 and December 1 of each
year, commencing on June 1, 2000, to holders of record at the close of business
on May 15 or November 15 immediately preceding each interest payment date. Each
payment of interest on the notes will include interest accrued through the day
before the applicable interest payment date or the date of maturity, or earlier
purchase, redemption or, in some circumstances, conversion, as the case may be.
Any payment of principal and cash interest required to be made on any day that
is not a business day will be made on the next succeeding business day.
CheckFree Holdings currently expects to fund interest
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payments through our working capital. CheckFree Holdings cannot assure you
that its working capital will be adequate to fund the interest payments or that
alternative sources of financing will be available to fund the interest
payments.
In the event of the maturity, conversion, purchase by CheckFree
Holdings at the option of a holder or redemption of a note, interest will cease
to accrue on the note, under the terms and subject to the conditions of the
indenture. CheckFree Holdings may not reissue a note that has matured or been
converted, redeemed or otherwise cancelled.
You may present the notes for conversion at the office of the conversion
agent and for exchange or registration of transfer at the office of the
registrar. Each agent shall initially be the trustee.
Form, Denomination and Registration
CheckFree Holdings initially issued the notes in the form of global
notes. The global notes are deposited with, or on behalf of, the clearing agency
registered under the Securities Exchange Act of 1934 that is designated to act
as depositary for the notes and registered in the name of the depositary or its
nominee. The Depository Trust Company is the initial depositary.
Book Entry System
Upon the issuance of a global note, the depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the debt securities represented by the global note to the accounts of
institutions or persons, commonly known as participants, that have accounts with
the depositary or its nominee. The accounts to be credited will be designated by
the initial purchasers, dealers or agents. Ownership of beneficial interests in
a global note will be limited to participants or persons that may hold interests
through participants. Ownership of interests in the global note will be shown
on, and the transfer of those ownership interests will be effected only through,
records maintained by the depositary, with respect to participants' interests,
and the participants, with respect to the owners of beneficial interests in the
global note. The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer beneficial interests in a
global note.
So long as the depositary, or its nominee, is the registered holder and
owner of the global note, the depositary or its nominee, as the case may be,
will be considered the sole owner and holder for all purposes of the debt
securities and for all purposes under the indenture. Except as set forth below,
owners of beneficial interests in a global note will not be entitled to have the
notes registered in their names, will not receive or be entitled to receive
physical delivery of the notes in definitive form and will not be considered to
be the owners or holders of any notes or the global note. Accordingly, each
person owning a beneficial interest in a global note must rely on the procedures
of the depositary and, if the person is not a participant, on the procedures of
the participant through which the person owns its interest, to exercise any
rights of a holder of the notes. CheckFree Holdings understands that under
existing industry practice, in the event it requests any action of holders of
the notes or if an owner of a beneficial interest in a global note desires to
take any action that the depositary, as the holder of the global note, is
entitled to take, the depositary would authorize the participants to take that
action, and that the participants would authorize beneficial owners owning
through the participants to take the actions or would otherwise act upon the
instructions of beneficial owners owning through them.
Payments of principal of and premium, if any, and interest, if any, on
the notes represented by a global note will be made to the depositary or its
nominee, as the case may be, as the registered owner and holder of the global
note, against surrender of the notes at the principal corporate trust office of
the trustee. Interest payments will be made at the principal corporate trust
office of the trustee or by a check mailed to the holder at its registered
address.
CheckFree Holdings expects that the depositary, upon receipt of any
payment of principal, premium, if any, of interest, if any, in respect of a
global note, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the global note as shown on the records of the depositary. CheckFree
Holdings expects that payments by participants to owners of beneficial
interests in a global note held through the participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for accounts of customers in bearer-form or registered in
"street name," and will be the responsibility of the participant. Neither
CheckFree Holdings nor the trustee nor any of CheckFree Holdings' agents or the
trustee will have any responsibility or liability for any aspect of the records
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relating to, or payments made on account of, beneficial ownership interests in a
global note or for maintaining, supervising or reviewing any records relating to
the beneficial ownership interests or for any other aspect of the relationship
between the depositary and its participants or the relationship between the
participants and the owners of beneficial interests in the global note owning
through the participants.
Unless and until it is exchanged in whole or in part for the notes in
definitive form, a global note may not be transferred except as a whole by the
depositary to a nominee of the depositary or by a nominee of the depositary to
the depositary or another nominee of the depositary.
Notes represented by a global note will be exchangeable for the notes in
definitive form of like tenor as the global note in denominations of $1,000 and
in any greater amount that is an integral multiple thereof if:
o the depositary notifies us and the trustee that it is unwilling
or unable to continue as depositary for the global note or if at
any time the depositary ceases to be a clearing agency registered
under the Securities Exchange Act of 1934 and a successor
depositary is not appointed by CheckFree Holdings within 90
days;
o CheckFree Holdings, in our sole discretion, determine not to
have all of the notes represented by a global note and notify the
trustee thereof; or
o there shall have occurred and be continuing an event of default
or an event which, with the giving of notice or lapse of time, or
both, would constitute an event of default with respect to the
notes.
Any note that is exchangeable pursuant to the preceding sentence is
exchangeable for the notes registered in the names as the depositary shall
instruct the trustee. It is expected that these instructions may be based upon
directions received by the depositary from its participants with respect to
ownership of beneficial interests in the global note. Subject to the foregoing,
a global note is not exchangeable except for a global note or global notes of
the same aggregate denominations to be registered in the name of the depositary
or its nominee.
Subsidiary Guarantee
Each of CheckFree Holdings' subsidiaries, jointly and severally, has
fully and unconditionally guaranteed, on a subordinated basis, our obligations
under the notes. The subsidiary guarantee is subordinated to the prior payment
in full in cash or cash equivalents of all senior indebtedness of that
subsidiary. The subordination provisions applicable to the subsidiary guarantee
will be substantially similar to the subordination provisions applicable to the
notes. The obligations of each subsidiary under the subsidiary guarantee are
limited as necessary to seek to prevent that subsidiary guarantee from
constituting a fraudulent conveyance under applicable law. Additionally,
CheckFree Holdings' future subsidiaries may also be required to guarantee the
notes, including BlueGill and TransPoint upon completion of each of those
acquisitions.
A subsidiary guarantor may not sell or otherwise dispose of all or
substantially all of its assets, or consolidate with or merge with or into,
another person unless:
o immediately after giving effect to that transaction, no default
or event of default exists under the indenture; and
o the person acquiring the property in any similar sale or
disposition or the person formed by or surviving any similar
consolidation or merger assumes all the obligations of that
subsidiary guarantor pursuant to a supplemental indenture
satisfactory to the trustee.
A subsidiary will be released from the subsidiary guarantee:
o in connection with any sale or other disposition of all or
substantially all of the assets of that subsidiary, if the
disposition is to CheckFree Holdings or another subsidiary
guarantor; or
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o in connection with any sale of all of the capital stock of a
subsidiary guarantor, if the person acquiring the capital stock
assumes all the obligations of that subsidiary guarantor pursuant to a
supplemental indenture satisfactory to the trustee.
Since CheckFree Holdings has no assets separate from our investment in
our subsidiaries, except for an insignificant amount of cash, and no operations,
CheckFree Holdings has not included audited financial information of CheckFree
Holdings' subsidiary guarantors in this information statement/prospectus.
Subordination of the Notes
The notes and the subsidiary guarantee are unsecured obligations of
CheckFree Holdings and are subordinated in right of payment, as set forth in the
indenture, to the prior payment in full in cash or other payment satisfactory to
holders of senior indebtedness of all CheckFree Holdings existing and future
senior indebtedness and that of CheckFree Holdings' subsidiaries.
At December 31, 1999, CheckFree Holdings had no senior indebtedness
outstanding and CheckFree Holdings' subsidiaries had $10.5 million of senior
indebtedness outstanding. The indenture does not restrict the incurrence by
CheckFree Holdings or its subsidiaries of senior indebtedness or other
obligations.
The term "senior indebtedness" means:
(1) the principal, premium, if any, interest and all other amounts
owed in respect of all our indebtedness:
(a) for money borrowed, and
(b) evidenced by securities, debentures, bonds or other similar
instruments;
(2) all CheckFree Holdings' capital lease obligations;
(3) all CheckFree Holdings' obligations issued or assumed as the
deferred purchase price of property, all our conditional sale
obligations and all CheckFree Holdings' obligations under any
title retention agreement;
(4) all CheckFree Holdings' obligations for the reimbursement of any
letter of credit, banker's acceptance, security purchase facility
or similar credit transaction;
(5) all obligations of the type referred to in clauses (1) through
(4) above of other persons for the payment of which CheckFree
Holdings is responsible or liable as obligor, guarantor or
otherwise; and
(6) all obligations of the type referred to in clauses (1) through
(5) above of other persons secured by any lien on any property or
asset of CheckFree Holdings, whether or not this obligation is
assumed by CheckFree Holdings, except for:
(a) any indebtedness that is by its terms subordinated to or
pari passu with the notes; and
(b) any indebtedness between or among CheckFree Holdings or its
affiliates, including all other debt securities and
guarantees in respect of those debt securities issued to any
trust, or trustee of a trust, partnership or other entity
affiliated with CheckFree Holdings that is, directly or
indirectly, a financing vehicle of CheckFree Holdings in
connection with the issuance by a similar financing vehicle
of preferred securities or other securities that rank pari
passu with, or junior to, the notes or the subsidiary
guarantee.
The senior indebtedness shall continue to be senior indebtedness and
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of that senior indebtedness.
By reason of this subordination, in the event of dissolution,
insolvency, bankruptcy or other similar proceedings, upon any distribution of
CheckFree Holdings' assets:
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o the holders of the notes are required to pay over their share of that
distribution to the trustee in bankruptcy, receiver or other person
distributing our assets for application to the payment of all senior
indebtedness remaining unpaid, to the extent necessary to pay all
holders of senior indebtedness in full in cash or other payment
satisfactory to the holders of senior indebtedness; and
o unsecured creditors of CheckFree Holdings who are not holders of the
notes or holders of senior indebtedness of CheckFree Holdings may
recover less, ratably, than holders of senior indebtedness of
CheckFree Holdings and may recover more, ratably, than the holders of
the notes.
In addition, no payment of the principal amount, redemption price, change in
control purchase price or interest with respect to any of the notes may be made
by CheckFree Holdings, nor may we acquire any of the notes for cash or property,
except as set forth in the indenture, if:
o any payment default on any senior indebtedness has occurred and is
continuing beyond any applicable grace period; or
o any default, other than a payment default, with respect to senior
indebtedness occurs and is continuing that permits the acceleration of
the maturity thereof and the default is either the subject of judicial
proceedings or CheckFree Holdings receives a written senior
indebtedness default notice.
Notwithstanding the foregoing, payments with respect to the notes may resume and
CheckFree Holdings may acquire the notes for cash when:
o the default with respect to the senior indebtedness is cured or waived
or ceases to exist; or
o CheckFree Holdings receive a senior indebtedness default notice and
179 or more days pass after notice of the default is received by
CheckFree Holdings, provided that the terms of the Indenture otherwise
permit the payment or acquisition of the notes at that time.
If CheckFree Holdings receives a senior indebtedness default notice,
then a similar notice received within nine months thereafter relating to the
same default on the same issue of senior indebtedness shall not be effective to
prevent the payment or acquisition of the notes as provided above. In addition,
no payment may be made on the notes if any notes are declared due and payable
prior to their stated maturity by reason of the occurrence of an event of
default until the earlier of:
o 120 days after the date of the acceleration; or
o the payment in full of all senior indebtedness, but only if the
payment is then otherwise permitted under the terms of the indenture.
Upon any payment or distribution of CheckFree Holdings' assets or those
of CheckFree Holdings' subsidiaries to creditors upon any dissolution, winding
up, liquidation or reorganization of CheckFree Holdings, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other similar
proceedings, the holders of all senior indebtedness shall first be entitled to
receive payment in full, in cash or other payment satisfactory to the holders of
senior indebtedness, of all amounts due or to become due thereon, or payment of
the amounts shall have been provided for, before the holders of the notes shall
be entitled to receive any payment or distribution with respect to any of the
notes or the subsidiary guarantee.
Conversion Rights
A holder of a note is entitled to convert the note into shares of our
common stock at any time before the close of business on November 30, 2006;
provided, however, that if a note is called for redemption, the holder is
entitled to convert it at any time before the close of business on the
redemption date. A note in respect of which a holder has delivered a change in
control purchase notice exercising the holder's option to require us to purchase
the holder's note may be converted only if that notice is withdrawn by a written
notice of withdrawal delivered by the holder to the
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paying agent prior to the close of business on the change in control purchase
date, in accordance with the terms of the indenture.
The initial conversion rate for the notes is 13.6612 shares of our
common stock per $1,000 principal amount, or $73.20 per share of our common
stock, subject to adjustment upon the occurrence of specific events described
below. A holder otherwise entitled to a fractional share of our common stock
will receive cash in an amount equal to the market value of the fractional share
based on the closing sale price on the trading day immediately preceding the
conversion date. A holder may convert a portion of its notes so long as the
portion is $1,000 principal amount or an integral multiple thereof.
To convert a note, a holder must:
o complete and manually sign the conversion notice on the back of
the note and deliver the notice to the conversion agent, which
initially will be the trustee, at the office maintained by the
conversion agent for that purpose;
o surrender the note to the conversion agent;
o if required, furnish appropriate endorsements and transfer
documents; and
o if required, pay all transfer or similar taxes.
Pursuant to the indenture, the date on which all of the foregoing requirements
have been satisfied is the conversion date.
Upon conversion of a note, a holder will not receive, except as provided
below, any cash payment representing accrued interest thereon. CheckFree
Holdings' delivery to the holder of the fixed number of shares of its common
stock into which the note is convertible, together with the cash payment, if
any, in lieu of any fractional shares, will satisfy CheckFree Holdings'
obligation to pay the principal amount of the note, and the accrued and unpaid
interest to the conversion date. Thus, the accrued interest will be deemed to be
paid in full rather than cancelled, extinguished or forfeited. Notwithstanding
the foregoing, accrued but unpaid cash interest will be payable upon any
conversion of the notes at the option of the holder made concurrently with or
after acceleration of the notes following an event of default. The notes
surrendered for conversion during the period from the close of business on any
regular record date next preceding any interest payment date to the opening of
business on the interest payment date, except the notes to be redeemed on a date
within that period, must be accompanied by payment of an amount equal to the
interest thereon that the registered holder is to receive. Except where the
notes surrendered for conversion must be accompanied by payment as described
above, no interest on the converted notes will be payable by CheckFree Holdings
on any interest payment date subsequent to the date of conversion. The
conversion rate will not be adjusted at any time during the term of the notes
for accrued interest.
A certificate for the number of full shares of our common stock into
which any note is converted, and cash in lieu of any fractional shares, will be
delivered as soon as practicable, but in any event no later than the seventh
business day following the conversion date.
The conversion rate is subject to adjustment in some events, including:
o the issuance of shares of our common stock as a dividend or a
distribution with respect to our common stock;
o subdivisions, combinations and reclassification of our common
stock;
o the issuance to all holders of our common stock of rights or
warrants entitling them to subscribe for shares of our common
stock at less than the then market price of our common stock;
o the distribution to holders of our common stock of evidences of
our indebtedness, securities or capital stock, cash or assets;
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o the payment of dividends and other distributions on our common
stock paid exclusively in cash, excluding cash dividends if the
aggregate amount thereof, when taken together with:
(a) other all-cash distributions made within the preceding 12
months not triggering a conversion rate adjustment and
(b) any cash and the fair market value, as of the expiration of
the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange
offer by CheckFree Holdings or one of its subsidiaries for
its common stock concluded within the preceding 12 months
not triggering a conversion rate adjustment, does not exceed
10% of CheckFree Holdings' aggregate market capitalization,
the aggregate market capitalization being the product of the
current market price of our common stock as of the trading day
immediately preceding the date of declaration of the dividend
multiplied by the number of shares of our common stock then
outstanding, on the date of the distribution; and
o payment to holders of its common stock in respect of a tender or
exchange offer, other than an odd-lot offer, by CheckFree
Holdings or one of its subsidiaries for its common stock as of
the trading day next succeeding the last date tenders or
exchanges may be made pursuant to the tender or exchange offer
which involves an aggregate consideration that, together with
(a) any cash and the fair market value of other consideration
payable in respect of any tender or exchange offer by
CheckFree Holdings or one of its subsidiaries for its common
stock concluded within the preceding 12 months and
(b) the aggregate amount of any all-cash distributions to all
holders of our common stock made within the preceding 12
months, exceeds 10% of our aggregate market capitalization.
No adjustment, however, need be made if holders may participate in the
transactions otherwise giving rise to an adjustment on a basis and with notice
that our board of directors determines to be fair and appropriate, or in some
other cases specified in the indenture. In cases where the fair market value of
the portion of assets, debt securities or rights, warrants or options to
purchase CheckFree Holdings' securities applicable to one share of its common
stock distributed to stockholders exceeds the average sale price, as defined, in
the indenture per share of its common stock, or the average sale price exceeds
the fair market value of the portion of assets, debt securities or rights,
warrants or options so distributed by less than $1.00, rather than being
entitled to an adjustment in the conversion rate, the holder of a note upon
conversion thereof will be entitled to receive, in addition to the shares of its
common stock into which the note is convertible, the kind and amounts of assets,
debt securities or rights, options or warrants comprising the distribution that
the holder would have received if the holder had converted the note immediately
prior to the record date for determining the stockholders entitled to receive
the distribution. The indenture permits us to increase the conversion rate from
time to time.
In the event that we become a party to any transaction, including, and
with some exceptions:
o any recapitalization or reclassification of our common stock;
o any consolidation of us with, or merger of us into, any other
person, or any merger of another person into us;
o any sale, transfer or lease of all or substantially all of our
assets; or
o any compulsory share exchange,
pursuant to which our common stock is converted into the right to receive other
securities, cash or other property, then the holders of the notes then
outstanding will have the right to convert the notes into the kind and amount of
securities,
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cash or other property receivable upon the consummation of any
transaction by a holder of the number of shares of our common stock issuable
upon conversion of the notes immediately prior to the transaction.
In the case of a transaction, each note will become convertible into the
securities, cash or property receivable by a holder of the number of shares of
our common stock into which the note was convertible immediately prior to the
transaction. This change could substantially lessen or eliminate the value of
the conversion privilege associated with the notes in the future. For example,
if CheckFree Holdings was acquired in a cash merger, each note would become
convertible solely into cash and would no longer be convertible into securities
whose value would vary depending on CheckFree Holdings' future prospects and
other factors.
In the event of a taxable distribution to holders of CheckFree Holdings'
common stock which results in an adjustment of the conversion rate or in the
event the conversion rate is increased at CheckFree Holdings' discretion, the
holders of the notes may, in some circumstances, be deemed to have received a
distribution subject to United States Federal income tax as a dividend.
Moreover, in some other circumstances, the absence of an adjustment to the
conversion rate may result in a taxable dividend to holders of CheckFree
Holdings' common stock.
Redemption of the Notes at CheckFree Holdings' Option
No sinking fund is provided for the notes. Prior to December 1, 2002,
CheckFree Holdings will not be entitled at its option to redeem the notes. On
and after that date, CheckFree Holdings will be entitled to redeem the notes for
cash as a whole at any time, or from time to time in part, upon not less than 30
days' nor more than 60 days' notice of redemption given by mail to holders of
the notes, unless a shorter notice shall be satisfactory to the trustee, at the
redemption prices set forth below plus accrued cash interest to the redemption
date. Any redemption must be in integral multiples of $1,000 principal amount.
The table below shows redemption prices of a note per $1,000 principal
amount if redeemed during the twelve-month periods set forth below.
<TABLE>
<CAPTION>
Period Redemption Price
------ ----------------
<S> <C>
December 1, 2002 through November 30, 2003 ................ 103.71%
December 1, 2003 through November 30, 2004 ................ 102.79%
December 1, 2004 through November 30, 2005 ................ 101.86%
Thereafter ................................................ 100.93%
</TABLE>
If fewer than all of the notes are to be redeemed, the trustee will
select the notes to be redeemed in principal amounts at maturity of $1,000 or
integral multiples thereof by lot, pro rata or by another method the trustee
considers fair and appropriate. If a portion of a holder's notes is selected for
partial redemption and that holder converts a portion of those notes prior to
the redemption, the converted portion shall be deemed, solely for purposes of
determining the aggregate principal amount of the notes to be redeemed by
CheckFree Holdings, to be of the portion selected for redemption.
Change in Control Permits Purchase of the Notes at the Option of the
Holder
In the event of any change in control of CheckFree Holdings, each holder
of the notes will have the right, at the holder's option, subject to the terms
and conditions of the indenture, to require CheckFree Holdings to purchase all
or any part of the holder's notes on the change in control purchase date that is
30 business days after the occurrence of the change in control at a cash price
equal to 100% of the principal amount of the holder's notes plus accrued cash
interest to the change in control purchase date. This amount is called the
change in control purchase price.
Within 15 business days after the change in control, CheckFree Holdings
will mail to the trustee and to each holder a notice regarding the change in
control, which notice shall state, among other things:
o the date of the change in control and, briefly, the events
causing the change in control;
o the date of which the change in control purchase notice must be
given;
o the change in control purchase date;
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o the change in control purchase price;
o the name and address of the paying agent and the conversion
agent;
o The conversion rate and any adjustments thereto;
o the procedures that holders must follow to exercise these rights;
o the procedures for withdrawing a change in control purchase
notice;
o that holders who want to convert notes must satisfy the
requirements set forth in the notes; and
o briefly, the conversion rights of the holders of the notes.
CheckFree Holdings will cause a copy of this notice to be published in The Wall
Street Journal or another daily newspaper of national circulation.
To exercise the purchase right, the holder must deliver a written change
in control purchase notice of the exercise of the right to the paying agent in
the Borough of Manhattan, New York, New York, prior to the close of business, on
the change in control purchase date. Any change in control purchase notice must
provide:
o the certificate numbers of the notes to be delivered by the
holder thereof for purchase by CheckFree Holdings;
o the portion of the principal amount of the notes to be purchased,
which portion must be $1,000 or an integral multiple thereof; and
o that the notes are to be purchased by us pursuant to the
applicable provisions of the notes.
Any change in control purchase notice may be withdrawn by the holder by
a written notice of withdrawal delivered to the paying agent prior to the close
of business on the change in control purchase date. The notice of withdrawal
shall state the principal amount and the certificate numbers of the notes as to
which the withdrawal notice relates and the principal amount, if any, which
remains subject to a change in control purchase notice.
Payment of the change in control purchase price for a note for which a
change in control purchase notice has been delivered and not withdrawn is
conditioned upon delivery of the note to the paying agent or an office or agency
maintained by CheckFree Holdings for that purpose in the Borough of Manhattan,
New York, New York, at anytime after the delivery of a change in control
purchase notice. Payment of the change in control purchase price for the note
will be made promptly following the later of the business day following the
change in control purchase date and the time of delivery of the note. If the
paying agent holds, in accordance with the terms of the indenture, money
sufficient to pay the change in control purchase price of the note on the
business day following the change in control purchase date, then, immediately
after the change in control purchase date, the note will cease to be outstanding
and interest on the note will cease to accrue and will be deemed paid, whether
or not the note is delivered to the paying agent, and all other rights of the
holder shall terminate, other than the right to receive the change in control
purchase price upon delivery of the note.
Under the indenture, a "change in control" is deemed to have occurred
upon the occurrence of any of the following events:
o any "person" or "group," other than permitted holder, is or
becomes the beneficial owner, directly or indirectly, of more
than 40% of CheckFree Holdings' total outstanding voting stock;
o CheckFree Holdings consolidates with, or merges with or into
another person or conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any person,
or any person consolidates with or merges with or into CheckFree
Holdings, in any event pursuant to a transaction in which our
outstanding voting stock is converted into or exchanged for cash,
securities or other property, other than any transaction where:
(1) CheckFree Holdings' voting stock is not converted or
exchanged at all, except to the extent necessary to reflect
a change in its jurisdiction of incorporation, or in
converted into or exchanged for:
(a) voting stock, other than redeemable capital stock, of
the surviving or transferee corporation or
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(b) voting stock, other than redeemable capital stock, of
the surviving or transferee corporation, and
(2) immediately after the transaction, no "person" or "group"
is the beneficial owner, directly or indirectly, of more
than 40% of CheckFree Holdings' total outstanding voting
stock of the surviving or transferee corporation;
o during any consecutive two-year period, individuals who at the
beginning of that period constituted CheckFree Holdings' board of
directors, together with any new directors whose election to its board
of directors, or whose nomination for election by its stockholders,
was approved by a vote of 66-2/3% of the directors then still in
office who were either directors at the beginning of the period or
whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority of CheckFree Holdings'
board of directors then in office; or
o CheckFree Holdings is liquidated or dissolved or a special resolution
is passed by its stockholders approving the plan of liquidation or
dissolution other than in a transaction that complies with the
provisions described in the indenture.
"Redeemable capital stock" means any class or series of capital stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
stated maturity of the notes or is redeemable at the option of the holder
thereof at any time prior to the final stated maturity, or is convertible into
or exchangeable for debt securities at anytime prior to the final stated
maturity; provided, however, that redeemable capital stock shall not include any
of CheckFree Holdings' common stock the holder of which has a right to put to
CheckFree Holdings upon terminations of employment.
The indenture does not permit CheckFree Holdings' board of directors to
waive its obligation to purchase the notes at the option of a holder in the
event of a change in control.
CheckFree Holdings will comply with the tender offer rules under the
Securities Exchange Act of 1934 which may then be applicable, and will file a
Schedule 13E-4 or any other schedule required thereunder in connection with any
offer by CheckFree Holdings to purchase the notes at the option of the holders
thereof upon a change in control. In some circumstances, the change in control
purchase feature of the notes may make more difficult or discourage a takeover
of CheckFree Holdings and, thus, the removal of incumbent management. The change
in control purchase feature, however, is not the result of CheckFree Holdings'
knowledge of any specific effort to accumulate shares of its common stock or to
obtain control of CheckFree Holdings by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the change in control purchase feature is the
result from negotiations between CheckFree Holdings and the initial purchasers.
If a change in control were to occur, there can be no assurance that
CheckFree Holdings would have funds sufficient to pay the change in control
purchase price for all of the notes that might be delivered by holders seeking
to exercise the purchase right, because CheckFree Holdings or its subsidiaries
might also be required to prepay indebtedness or obligations having financial
covenants with change of control provisions in favor of the holders thereof. In
addition, CheckFree Holdings' other indebtedness may have cross-default
provisions that could be triggered by a default under the change in control
provisions thereby possibly accelerating the maturity of the indebtedness. In
that case, the holders of the notes would be subordinated to the prior claims of
the holders of the indebtedness. In addition, CheckFree Holdings' ability to
purchase the notes with cash may be limited by the terms of its then-existing
borrowing agreements. None of the notes may be purchased pursuant to the
provisions described above if there has occurred and is continuing an event of
default.
Consolidation, Merger and Sale or Lease of Assets
CheckFree Holdings, without the consent of any holders of the
outstanding notes, are entitled to consolidate with or merge into or transfer or
lease its assets substantially as an entirety to, any individual, corporation,
partnership, limited liability company, joint venture, association joint-stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof, each a person, and any person is entitled to
consolidate with or merge into, or transfer or lease its assets substantially as
an entirety to us, provided that:
o the person formed by the consolidation or into which we are merged or
the person which acquires or leases our assets substantially as an
entirety is a corporation, partnership, limited liability company or
trust organized
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and existing under the laws of any United States jurisdiction and
expressly assumes our obligations on the notes and under the
indenture;
o immediately after giving effect to the transaction, no event of
default, and no event which, after notice or lapse of time or both,
would become an event of default, happened and is continuing; and
o other conditions described in the indenture are met.
Events of Default; Notice and Waiver
The indenture provides that, if an event of default specified in the
indenture occurs and is continuing, either the trustee or the holders of not
less than 25% in aggregate principal amount of the notes then outstanding may
declare the principal amount of and accrued interest to the date of the
declaration of all the notes to be immediately due and payable. In the case of
some events of bankruptcy or insolvency, the principal amount of and accrued
interest on all the notes to the date of the occurrence of the event shall
automatically become and be immediately due and payable. Upon any acceleration,
the subordination provisions of the Indenture preclude any payment being made to
holders of the notes until the earlier of:
o 120 days or more after the date of the acceleration; and
o the payment in full of all senior indebtedness, but only if the
payment is then otherwise permitted under the terms of the indenture.
Under some circumstances, the holders of a majority in aggregate principal
amount of the outstanding notes may rescind any acceleration with respect to the
notes and its consequences. Interest shall accrue and be payable on demand upon
a default in the payment of principal interest when due, redemption price,
change in control purchase price or shares of CheckFree Holdings' common stock,
or cash in lieu of fractional shares to be delivered on conversion of the notes,
in each case to the extent that the payment of the interest shall be legally
enforceable.
Under the indenture, events of default include:
o default in payment of the principal amount, interest when due, if the
default in payment of interest shall continue for 31 days, redemption
price, or change in control purchase price with respect to any note,
when the same becomes due and payable;
o failure by CheckFree Holdings to deliver shares of its common stock
when our common stock is required to be delivered following the
conversion of a note and continuation of the default for 10 days;
o failure by CheckFree Holdings to comply with any of its other
agreements in the notes or the indenture upon CheckFree Holdings'
receipt of notice of its default from the trustee or from holders of
not less than 25% in aggregate principal amount of the notes then
outstanding and CheckFree Holdings' failure to cure the default within
90 days after its receipt of the notice;
o default under any bond, note or other evidence of indebtedness for
money borrowed by CheckFree Holdings having an aggregate outstanding
principal amount in excess of $10 million, which default shall have
resulted in the indebtedness being accelerated, without the
indebtedness being discharged or the acceleration having been
rescinded or annulled within 20 days after receipt of notice thereof
by CheckFree Holdings from the trustee or CheckFree Holdings and the
trustee from the holders of not less than 25% in aggregate principal
amount of the notes then outstanding; or
o some events of bankruptcy or insolvency.
The trustee will, within 90 days after the occurrence of any default,
mail to all holders of the notes notice of all defaults of which the trustee is
aware, unless the defaults have been cured or waived before the giving of the
notice; provided that the trustee may withhold the notice as to any default
other than the payment default, if it determines in good faith that withholding
the notice is in the interests of the holders.
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The holders of a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee, provided that the direction shall not be in
conflict with any law or the indenture and subject to some other limitations.
The trustee may refuse to perform any duty or exercise any right of power or
extend or risk its own funds or otherwise incur any financial liability unless
it receives indemnity satisfactory to it against any loss, liability or expense.
No holder of any note will have any right to pursue any remedy with respect to
the Indenture or the notes, unless:
o the holder shall have previously given the trustee written notice
of a continuing event of default;
o the holders of at least 25% in aggregate principal amount of the
outstanding notes shall have made written request to the trustee
to pursue the remedy;
o the holder or holders shall have offered to the trustee
reasonable security or indemnity against any loss, liability or
expense satisfactory to it;
o the trustee shall have failed to comply with the request within
60 days after receipt of the notice, request and offer of
security or indemnity; and
o the holders of a majority in aggregate principal amount of the
outstanding notes shall not have given the trustee a direction
inconsistent with the request within 60 days after receipt of the
request.
The right of any holder:
o to receive payment of principal, the redemption price, change in
control purchase price or interest in respect of the notes held
by the holder on or after the respective due dates expressed in
the notes,
o to convert the notes, or
o to bring suit for the enforcement of any payment on or after the
respective dates or the right to convert,
shall not be impaired or adversely affected without the holder's consent.
The holders of a majority in aggregate principal amount of the notes at
the time outstanding may waive any existing default and its consequences except:
o any default in any payment on the notes;
o any default with respect to the conversion of the notes; or
o any default in respect of some covenants or provisions in the
indenture that may not be modified without the consent of the
holder of each note.
When a default is waived, it is deemed cured and will cease to exist, but no
waiver shall extend to any subsequent or other default or impair any consequent
right.
CheckFree Holdings will be required to furnish to the trustee annually a
statement as to any default by CheckFree Holdings in the performance and
observance of its obligations under the Indenture. In addition, CheckFree
Holdings will be required to file with the trustee written notice of the
occurrence of any default or event of default within five business days of its
becoming aware of the default or event of default.
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Modification
The indenture or the notes may be modified or amended by CheckFree
Holdings and the trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the notes then outstanding. Without
the consent of each holder affected thereby, however, no amendment may, among
other things:
o reduce the principal amount, change in control purchase price or
redemption price with respect to any note, or extend the stated
maturity of any note or alter the manner of payment or rate of
interest or any note or make any note payable in money or
securities other than that stated in the note;
o make any reduction in the principal amount of notes whose holders
must consent to an amendment or any waiver under the indenture or
modify the indenture provisions relating to the amendments or
waivers;
o make any change that adversely affects the right of a holder to
convert any note;
o modify the provisions of the indenture relating to the ranking of
the notes in a manner adverse to the holders of the notes; or
o impair the right to institute suit for enforcement of any payment
with respect to, or conversion of, the notes.
Without the consent of any holder of notes, CheckFree Holdings and the
trustee may amend the indenture to:
o cure any ambiguity, defect or inconsistency; provided, however,
that the amendment does not materially adversely affect the
rights of any holder of the notes;
o provide for the assumption by a successor to CheckFree Holdings
of its obligations under the indenture;
o provide for uncertificated notes in addition to certificated
notes, as long as these uncertificated notes are in registered
form for United States Federal income tax purposes;
o make any change that does not adversely affect the rights of any
holder of the notes;
o make any change to comply with any requirement of the Commission
in connection with the qualification of the indenture under the
Trust Indenture Act of 1939; or
o add to CheckFree Holdings' covenants or obligations under the
indenture for the protection of the holders of the notes or
surrender any right, power or option conferred by the indenture
on it.
Discharge of the Indenture
CheckFree Holdings may satisfy and discharge its obligations under the
indenture by delivering to the trustee for cancellation all of the outstanding
notes or by depositing with the trustee, the paying agent or the conversion
agent, if applicable, after the notes have become due and payable, whether at
stated maturity, or any redemption date, or any purchase date, or a change in
control purchase date, or upon conversion or otherwise, cash sufficient to pay
all of the outstanding notes and paying all other sums payable under the
indenture by CheckFree Holdings.
No Recourse Against Others
The indenture provides that CheckFree Holdings' directors, officers,
employees, representatives, advisors or stockholders shall not have any
liability for any of its obligations under the notes or the indenture or for any
claim based on, in respect of or by reason of the obligations or their creation.
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Registration Rights
CheckFree Holdings and its subsidiaries have entered into a registration
rights agreement with the initial purchasers for the benefit of the holders of
the notes and our common stock issuable upon their conversion. The registration
rights agreement obligates CheckFree Holdings, at its sole expense, as follows:
o to file a shelf registration statement as soon as practicable,
but in no event more than 60 days after the closing of the issue
of the notes, covering resales of CheckFree Holdings'
registerable securities. We use the term "registerable
securities" to refer to all outstanding notes, and CheckFree
Holdings' common stock issuable upon conversion of the notes,
that have not been registered and sold pursuant to the shelf
registration statement, that have not been distributed to the
public pursuant to Rule 144 under the Securities Act of 1933 or
that are not saleable pursuant to Rule 144(k) under the
Securities Act of 1933 or successor provisions;
o to use its reasonable best efforts to cause the shelf
registration statement to be declared effective under the
Securities Act of 1933 within 120 days after the closing; and
o to use its reasonable best efforts to keep the shelf registration
statement effective and usable until the time that all the notes,
and CheckFree Holdings' common stock issuable upon conversion of
the notes, shall no longer qualify as registerable securities.
CheckFree Holdings will be permitted to suspend the use of the
shelf registration statement for limited periods of time under
some circumstances if it provides the holders of the registerable
securities with written notice of the suspension.
CheckFree Holdings will, when the shelf registration is filed:
o provide each holder of registerable securities with copies of the
prospectus that is part of the shelf registration statement;
o notify each holder when the shelf registration statement for the
registerable securities has become effective; and
o take other actions as are required to permit unrestricted resales
of the registerable securities.
A holder that sells registerable securities pursuant to a shelf
registration statement:
o will usually be required to be named as a selling security holder
in the related prospectus and to deliver the prospectus to the
purchasers;
o will be subject to some of the civil liability provisions of the
Securities Act of 1933 in connection with those sales; and
o will be bound by the provisions of the registration rights
agreement that are applicable to a holder, including
indemnification rights and obligations.
Holders who wish to sell registerable securities will be required to make
representations and to provide some information to CheckFree Holdings, as
described in the registration rights agreement.
If a registration default occurs, then additional cash interest will
accrue and become payable on the notes at a rate equal to 0.50% per annum, which
rate will be increased by an additional 0.25% per annum for each 90-day period
that the registration default has not been cured. The aggregate additional cash
interest shall in no event exceed one percent per annum. All additional interest
payments shall be paid to the holders of the registerable securities in the same
manner as regular interest payments on the notes on semi-annual payment dates
which correspond to interest payment dates on the notes. Following the cure of a
registration default, additional interest will no longer accrue in connection
with that registration default. We use the term "registration default" to mean
if:
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o the Commission has not declared the shelf registration statement
effective within 120 days of closing; or
o during the specified period, we fail to keep the shelf
registration statement that has been declared effective
continuously effective and usable, for more than 30 days during
any three-month period or 60 days during any twelve-month period.
Each registerable security will contain a legend to the effect that the
holder will be deemed to have agreed to be bound by the provisions of the
registration rights agreement.
CheckFree Acquisition
CheckFree Acquisition was incorporated in Delaware in December 1999 and
is a wholly owned subsidiary of CheckFree formed for the purpose of facilitating
the merger. Immediately after the merger is completed and effective as of the
effective time, CheckFree Acquisition will be merged with and into BlueGill,
BlueGill will survive the merger, and the separate existence of CheckFree
Acquisition will cease.
Currently the sole director of CheckFree Acquisition is Peter J. Kight.
Mr. Kight is also chairman of the board of directors and chief executive officer
of CheckFree.
The current executive officers of CheckFree Acquisition are as follows:
<TABLE>
<S> <C> <C>
Peter J. Kight - Chairman
Peter F. Sinisgalli - President
Mark A. Johnson - Vice President
Allen L. Shulman - Vice President
Keven M. Madsen - Treasurer
Curtis A. Loveland - Secretary
Robert J. Tannous - Assistant Secretary
</TABLE>
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BlueGill Technologies, Inc.
General
BlueGill provides software used for Internet billing and statement
delivery. BlueGill's products and services allow customers to:
o install and launch an electronic bill presentment product;
o send e-mail notifications and present electronic bills through
the Internet;
o connect to a variety of bill aggregators and payment methods; and
o establish an interactive on-line relationship with customers.
BlueGill currently has in excess of 50 entities that have chosen to rely
on Internet billing and statement services powered by BlueGill software. Its
products are available from the following resellers:
o IBM
o Xerox
o Lasercom
o Check Solutions, Inc.
o Ultradocs
o AST Group
o M&I Data Services
o BroadVision
o EDS
BlueGill currently markets its software products directly to individual
bill and statement providers, as well as to outsourcing companies that operate
its software to provide billing services for other institutions. These
outsourcing companies include traditional print and mail service bureaus,
Internet billing services and banks.
With respect to the individual billers, BlueGill's products are targeted
primarily at large corporate billers, including telephone companies, utilities,
and financial services institutions. BlueGill has in excess of 25 of these
customers.
BlueGill also has in excess of 10 customers that in turn provide
Internet billing and other document delivery services to over 30 of their own
customers.
ELECTRONIC COMMERCE INDUSTRY BACKGROUND
The majority of today's financial transactions are completed using
traditional paper-based methods. Many traditional financial transactions,
however, can now be completed electronically due to the emergence of new
communications, computing and security technologies. Many financial institutions
and businesses have invested in these technologies and are creating the
infrastructure for recording, reporting and executing electronic transactions.
BlueGill believes the broad impact of the Internet will increase the use of
electronic methods to execute financial transactions.
Persistence of Traditional Financial Transaction Processes
Many traditional methods of completing financial transactions still
persist, including:
o Paper Checks.
It is estimated that 65 billion checks were written in the U.S. in
1998. The use of checks imposes significant costs on financial institutions,
businesses and their customers. These costs include the writing, mailing,
recording and manual processing of checks.
o Paper Billing.
It is estimated that over 18 billion paper bills are produced each year,
with the cost of submitting a paper bill, including printing, postage and
billing inserts, as high as $3.00 per bill.
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o Conventional Banking.
Many financial transactions are conducted in person at banks. Banks
incur substantial expenses in providing personnel and physical locations, while
bank customers incur transportation costs and personal inconvenience when
traveling to a bank facility. Over 90% of the 80 million banking households in
the United States are still conducting most of their financial transactions
using conventional banking methods.
o Business-to-Business Payments.
While consumers bear costs and inconvenience receiving and paying paper
bills, businesses experience an even higher level of cost and inefficiency when
receiving and paying paper bills. For businesses, issues like discounts for
prompt payment, returns, allowances, disputed charges and other adjustments, as
well as reconciliation to the business' own records, increase the costs of
payment.
The Internet's Role in Driving Electronic Commerce
BlueGill believes the broad impact of the Internet is driving financial
institutions, businesses and consumers to adopt practices of electronic billing
and payment, banking and business-to-business payments. BlueGill expects that
the growth in these electronic commerce activities will increase the need for
services that support secure, reliable and cost-effective financial transactions
between and among these market participants. BlueGill believes the combination
of the following trends is driving adoption of electronic commerce:
o Expanding Personal Computer Ownership
Declining prices for personal computers and rapid growth in the number
of computer-literate consumers are driving increased penetration of personal
computers in United States homes;
o Increasing Internet Accessibility.
Reduced communications costs, improved web browsers and faster
connection speeds have made the Internet increasingly accessible to consumers
and to businesses offering products and services on-line. International Data
Corporation estimates that there were 52 million Internet users in the U.S. at
the end of 1998 and that this figure will grow to 136 million by the end of
2002;
o Increasing Acceptance of Electronic Commerce.
Consumers have grown increasingly comfortable with the security of
electronic commerce and are willing to conduct large transactions on-line.
International Data Corporation estimates that the total value of goods and
services purchased over the Internet in the United States will increase from
approximately $26 billion in 1998 to over $269 billion in 2002; and
o Emergence of New Industry Participants.
New businesses have emerged which use the broad adoption of the Internet
to compete with traditional businesses. Traditional financial institutions now
compete with Internet-based banks, brokerages and other financial services
companies. These companies do not offer consumers the possibility of
traditional, manual financial transactions and are driving further adoption of
electronic commerce.
The Electronic Solution
BlueGill believes that consumers and businesses will move their
financial transactions from traditional paper-based to electronic transactions
if they have an easy-to-access, easy-to-use, compelling, secure and
cost-effective product for receiving and paying their bills electronically.
BlueGill also believes that, compared with conventional paper-based
transactions, electronic transactions cost much less to complete, give rise to
far fewer errors and generate
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far fewer subscriber inquires. BlueGill believes that an electronic solution
should allow consumers and businesses at their access point of choice to:
o receive electronic bills through the Internet; and
o pay any bill--electronic or paper--to anyone.
BlueGill also believes that these functionalities must be delivered by a
product that:
o is scalable to accommodate future growth;
o is flexible to accommodate future functionality; and
o provides the highest level of security, availability and privacy.
Over the past three years, BlueGill has developed software that enables
electronic commerce solutions with these functionalities.
PRODUCTS
BlueGill customers have made investments in mainframe computers used to
print bills and other paper documents that are mailed to their customers. These
computers generate billing data in formats required by printing systems.
BlueGill software transforms this data into formats that allow the billing
information to be presented electronically. As a result, BlueGill customers are
able to deliver bills and other documents to their customers over the Internet
without having to replace their existing mainframe computer systems.
The BlueGill i-Series is a set of software products developed for
various industry segments. This product set includes i-Banker, i-Broker,
i-Biller, i-Telco, and i-Insurance. Each product includes an electronic billing
web site template that is unique to the specific industry segments. Using the
template as a sample design of their Internet billing site, BlueGill customers
spend less time developing and designing the look and feel of their Internet
billing sites, speeding the implementation process.
Each of the i-Series products may be used in conjunction with other
software modules and products that enhance the functionality of the i-Series
product. In addition, BlueGill and/or its value added resellers typically
provide implementation and customization services along with the licensing of
BlueGill software.
TECHNOLOGY
The strength of BlueGill's product derives from a powerful "Smart
Object" architecture that manages complex customer data using XML and an object
oriented database model. XML allows very complex data to be portable; object
architecture means that BlueGill's solution is inherently scalable with high
performance.
BlueGill's product includes a robust application programming interface
set that exposes the customer data to web development environments, data-mining
applications, payment methods, billing systems, customer service applications,
document archiving systems, and other critical business applications. These
application programming interfaces allow for rapid implementation in complex
environments.
The "alpha" version of BlueGill's software was tested in the fourth
quarter of 1996. "Beta" software was rolled out in March 1997 and tested by
several customers. The first commercial release was shipped in October 1997.
Version 2.0 was released April 20, 1999. Most customers are currently running
Version 2.0.
BlueGill software products are available on NT, AIX, HP-UX, and Solaris
operating systems.
COMPETITION
BlueGill competes in the market of providers of electronic bills and
statements.
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BlueGill's principal competitors consist of edocs, Just In Time
Solutions, Novazen, Oracle, Interface Systems, Netscape and @Works Technologies.
BlueGill is expanding into international markets where it may discover
new local competitors that have the advantage of existing relationship with
customers, local technical support staff, and local language support.
SALES, MARKETING AND DISTRIBUTION
BlueGill's sales, marketing and distribution efforts are designed to
maximize access to potential customers. BlueGill markets and supports its
products both directly and indirectly through a direct sales and technical sales
support force and, to achieve deeper market penetration, through select
distribution alliances with companies which provide value added services. In
order to foster a better understanding of the needs of its customers, and to
help respond to identified needs, BlueGill employs a number of account managers
assigned to specific customers and has organized its product marketing
organization with specialists in telecommunications, insurance, and banking
vertical segments.
RESEARCH AND DEVELOPMENT
BlueGill maintains a strong research and development group with a
long-term perspective of planning and developing new products and enhancements
for electronic document presentment applications. BlueGill Technologies Corp.,
an Ontario corporation that is wholly owned by BlueGill, is responsible for
BlueGill's research and development. BlueGill has established the following
guidelines for pursuing the development of new services:
o distinctive benefits to customers;
o ability to establish a leadership position in the market served;
o sustainable technological advantages; and
o first to market.
BlueGill spent approximately $480,000 in 1997, $895,000 in 1998 and
$2,123,000 in 1999 on research and development activities.
EMPLOYEES
BlueGill has approximately 125 employees principally located at its Ann
Arbor, Michigan headquarters and its development offices in Waterloo, Ontario.
BlueGill has recently commenced operations in Europe through a United Kingdom
branch office of its BlueGill Technologies International, Inc. subsidiary and is
in the process of establishing operations in the Far East.
TRADING OF BLUEGILL SECURITIES
There is no established public trading market for any BlueGill
securities. BlueGill has never paid dividends on any class or series of its
stock.
STOCK OWNERSHIP
As of January 31, 2000, there were 29 holders of record of the
12,503,301 outstanding shares of BlueGill Series A preferred stock, 15 holders
of record of the 12,825,651 outstanding shares of BlueGill Series B preferred
stock and 26 holders of record of the 6,207,834 outstanding shares of BlueGill
common stock.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BLUEGILL
The following discussion and analysis should be read in conjunction with
the BlueGill Consolidated Financial Statements and notes.
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General
BlueGill Technologies, Inc. was incorporated in Delaware on September
20, 1996. BlueGill is a provider of Internet bill and statement creation
software applications. BlueGill software transforms a customer's billing data
into XML and other formats appropriate for Internet applications.
BlueGill currently markets its software products directly to individual
bill and statement providers as well as to companies that deliver Internet
billing and other documents services for other institutions. BlueGill's software
products are targeted primarily at large corporate billers, including telephone
companies, utilities, and financial services institutions. BlueGill has in
excess of 25 customers delivering Internet bills and other documents to their
own customers and has in excess of 10 customers who deliver Internet bills and
other documents to over 30 customers of their own. BlueGill sells software
products through a combination of direct sales efforts and a network of
resellers, including IBM, Xerox, Lasercom, M&I Data Services, and Check
Solutions.
Pricing Strategy
List prices for BlueGill software licenses to customers range from
approximately $140,000 to $500,000 depending on the number of servers on the
customer site. A variety of add-on modules are available at additional cost.
Over the lifetime of a typical system, BlueGill will have the opportunity to
sell an additional 5 to 10 new modules. An annual maintenance fee applies to all
software.
List prices for BlueGill software licenses to customers who in turn
provide internet billing service for their own customers range from
approximately $75,000 to $250,000 depending on the number of servers at the
customer site. In addition, list prices also include additional fees for each
outsourcing partner's customer added to the system and incremental recurring
fees per statement viewed over the Internet.
Enterprise licenses are priced on a case-by-case basis.
BlueGill offers significant discounts to resellers off BlueGill's list
price.
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RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
The following table sets forth in thousands of dollars and as a
percentage of revenue, consolidated statements of operating data:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS
ENDING ENDING
DECEMBER 31, DECEMBER 31,
($ in thousands) 1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Software $ 816 $ 4,140 55.3% 76.7%
Services & Other 659 1,257 44.7% 23.3%
---------- ---------- ---------- ----------
Total Revenue 1,475 5,397 100.0% 100.0%
Cost of Sales 218 534 14.8% 9.9%
---------- ---------- ---------- ----------
Gross Profit 1,257 4,863 85.2% 90.1%
Expenses
Research & Development 895 2,124 60.7% 39.3%
Sales & Marketing 850 4,550 57.6% 84.3%
Service & Support 324 939 22.0% 17.4%
General & Administrative 1,212 4,599 82.2% 85.2%
Depreciation 31 201 2.1% 3.7%
---------- ---------- ---------- ----------
Total Expenses 3,312 12,413 224.5% 230.0%
Net Interest (Expense)/Income 112 453 7.6% 8.4%
---------- ---------- ---------- ----------
Loss Before Benefit for Income Taxes (1,943) (7,097) -131.7% -131.5%
Income Tax Expense/(Benefit) -- -- 0.0% 0.0%
---------- ---------- ---------- ----------
Net Loss ($ 1,943) ($ 7,097) -131.7% -131.5%
</TABLE>
Total Revenues increased by 266% from $1.5 million to $5.4 million for
the years ended December 31, 1998 and 1999 respectively. The increase in revenue
is primarily due to an increase in the number of customers that have purchased
software licenses, and the services associated with implementing the software
products. For the year ended December 31, 1998, 58.9% of software revenues came
from resellers compared to 75.6% in 1999. The increased percentage of revenues
from resellers was primarily because of the increased activity from IBM. New
customers that BlueGill added in the years 1998 and 1999 were 10 and 29,
respectively.
Services and other revenue is composed primarily of implementation,
maintenance, and training. Implementation revenue increased by 84% from $399,000
to $733,000 for the years ended December 31, 1998 and 1999, respectively.
Implementation revenue is generated from each customer after the sale of the
software license. Maintenance revenue
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increased by 3200% from $8,000 to $264,000 for the years ended December 31, 1998
and 1999 respectively. Maintenance revenue is generated from each customer 3
months after the sale of the software license and recognized in equal monthly
amounts over the life of the maintenance agreement. As BlueGill had very few
customers before December 1998, the maintenance revenue in 1999 was very small.
The increased implementation and maintenance revenue is entirely due to
increased software sales. Training revenue increased by 192% from $62,000 to
$181,000 for the years ended December 31, 1998 and 1999 respectively. The
increase in training revenue is primarily due to the increase in customers
during the same period.
Total Cost of Sales increased by 145% from $218,000 to $534,000 for the
years ended December 31, 1998 and 1999, respectively. Cost of sales is primarily
composed of different royalty payments for software licenses. The increase in
cost of sales is primarily due to the increase in software licenses during that
same period.
Research and Development expenses were $895,000 and $2.1 million or
60.7% and 39.3% of revenue for the years ended December 31, 1998 and 1999,
respectively. Total research and development headcount increased from 12 as of
December 31,1998 to 32 as of December 31, 1999, primarily to develop new
products. BlueGill also licensed parts of software code from two different
companies in 1999 in order to bring products to market quicker. This licensing
of software code cost $426,000 in the year ended December 31, 1999. BlueGill is
continuing to invest significantly in research and development in anticipation
and support of revenue growth.
Sales and Marketing expenses were $850,000 and $4.6 million, or 57.6%
and 84.3% of total revenue for the years ended December 31, 1998 and 1999,
respectively. Total sales and marketing headcount increased from 10 to 36 as of
December 31, 1998 and December 31, 1999, respectively. BlueGill hired a new
public relations agency in early 1999 to increase awareness in the market.
BlueGill also hired a telemarketing and pre-sales organization in 1999 to
generate increased revenues.
Service and support expenses were $324,000 and $939,000, or 22.0% and
17.4% of total revenue for the years ended December 31, 1998 and 1999,
respectively. Total service and support headcount increased from eight to 16 as
of December 31, 1998 and December 31, 1999, respectively. This year over year
increase in headcount and expenses was primarily to support the increase in
implementation and maintenance revenue.
General and Administrative expenses were $1.2 million and $4.6 million,
or 82.2% and 85.2% of total revenue for the years ended December 31, 1998 and
1999, respectively. Total general and administrative headcount increased from
five to 17 as of December 31, 1998 and December 31, 1999, respectively.
BlueGill's office space increased from about four thousand square feet to about
twenty three thousand square feet during the same period. Also, Human Resource
and Information Technology organizations were added in 1999. Legal and
professional expenses increased from $178,000 to $614,000 during the same period
as a consequence of a variety of legal and accounting matters. Recruiting
expenses increased from $176,000 to $490,000 for the years ended December 31,
1998 and 1999, respectively.
Depreciation expense was $31,000 and $201,000, or 2.1% and 3.7% of total
revenue for the years ended December 31, 1998 and 1999, respectively. The
increase in depreciation expenses is primarily attributable to an increase in
fixed assets from $309,000 to $1.5 million as of December 31, 1998 and December
31, 1999, respectively. The increase in assets was primarily to provide
equipment for the increase in headcount during this period.
Interest income increased from $112,000 to $453,000 for the years ended
December 31, 1998 and 1999, respectively. BlueGill raised $5.4 million in 1998
and $19.5 million in 1999 through the sale of preferred stock. The increase in
interest income is a result of the investment of funds raised by the sale of
BlueGill preferred stock, as well as the elimination of interest expense as a
result of the conversion of $539,000 in debt to preferred stock in 1998.
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
The following table sets forth in thousands of dollars and as a
percentage of revenue, consolidated statements of operating data:
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<PAGE> 158
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS
ENDING ENDING
DECEMBER 31, DECEMBER 31,
($ in thousands) 1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Software $ 265 $ 816 62.6% 55.3%
Services & Other 158 659 37.4% 44.7%
---------- ---------- ---------- ----------
Total Revenue 423 1,475 100.0% 100.0%
Cost of Revenues 74 218 17.5% 14.8%
---------- ---------- ---------- ----------
Gross Profit 349 1,257 82.5% 85.2%
Expenses
Research & Development 480 895 113.5% 60.7%
Sales & Marketing 295 850 69.7% 57.6%
Service & Support 247 324 58.4% 22.0%
General & Administrative 284 1,212 67.1% 82.2%
Depreciation 19 31 4.5% 2.1%
---------- ---------- ---------- ----------
Total Expenses 1,325 3,312 313.2% 224.5%
Net Interest (Expense)/Income (11) 112 -2.5% 7.6%
---------- ---------- ---------- ----------
Loss Before Benefit for Income Taxes (987) (1,943) -233.3% -131.7%
Income Tax Expense/(Benefit) -- -- 0.0% 0.0%
---------- ---------- ---------- ----------
Net Loss $ (987) $ (1,943) -233.3% -131.7%
</TABLE>
Total Revenues increased by 249% from $423,000 to $1.5 million for the
years ended December 31, 1997 and December 31, 1998, respectively. The increase
in revenue is primarily due to an increase in the number of customers that have
purchased software licenses, and the services associated with implementing the
software solution. For the year ended December 31, 1997, none of software
revenues came from resellers compared to 59% for the year ended December 31,
1998. BlueGill started signing agreements with resellers in late 1997, which
generated revenue commencing in 1998. For the years ended December 31, 1997 and
1998, BlueGill added 2 and 10 new customers, respectively.
Services and other revenue is composed primarily of implementation,
maintenance, and training revenue. Implementation revenue increased by 698% from
$50,000 to $399,000 for the years ended December 31, 1997 and 1998,
respectively. Implementation revenue is generated from each customer after the
sale of the software license. Maintenance revenue is generated from each
customer commencing three months after the sale of the software license and
recognized in equal monthly amounts over the life of the maintenance agreement.
Since BlueGill had very few customers before 1998, there was no maintenance
revenue in 1997. Maintenance revenue was $8,000 in 1998. The increased
implementation and maintenance revenue is entirely due to increased software
sales. Training revenue increased by 170% from $23,000 to $62,000 for the years
ended December 31, 1997 and 1998 respectively. The increase in training revenue
is primarily due to the increase in customers during the same period.
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Total Cost of Sales increased by 195% from $74,000 to $218,000 for the
years ended December 31, 1997 and 1998, respectively. Cost of sales is primarily
composed of different royalty payments for software licenses. The increase in
cost of sales is primarily due to the increase in software licenses sold during
that same period.
Research and Development expenses were $480,000 and $895,000 or 113.5%
and 60.7% of revenue for the years ended December 31, 1997 and 1998,
respectively. Total research and development headcount increased from six as of
December 31, 1997 to 12 as of December 31, 1998, primarily to fill out the
software product line. BlueGill is continuing to invest significantly in
research and development in anticipation and support of revenue growth.
Sales and Marketing expenses were $295,000 and $850,000, or 69.7% and
57.6% of total revenue for the years ended December 31, 1997 and 1998,
respectively. Total sales and marketing headcount increased from two to 10 as of
December 31, 1997 and December 31, 1998, respectively. BlueGill hired a new Vice
President of Marketing in 1999 to generate increased revenues.
Service and support expenses were $247,000 and $324,000, or 58.4% and
22.0% of total revenue, for the years ended December 31, 1997 and 1998,
respectively. Total service and support headcount increased from two to eight as
of December 31, 1997 and December 31, 1998, respectively. These increases in
headcount and expenses were primarily to support the increase in services
revenue.
General and Administrative expenses were $284,000 and $1.2 million, or
67.1% and 82.2% of total revenues for the years ended December 31, 1997 and
1998, respectively. Total general and administrative headcount increased from
three to five as of December 31, 1997 and 1998, respectively. BlueGill's office
space increased from approximately two thousand square feet at December 31, 1997
to approximately four thousand square feet at December 31, 1998. Legal expenses
increased from $10,000 to $178,000 for the years ended December 31, 1997 and
1998, respectively, as a consequence of a variety of legal matters. Recruiting
expenses increased from $0 to $156,000 for the years ended December 31, 1997 and
1998, respectively.
Depreciation expenses were $19,000 and $31,000, or 4.5% and 2.1% of
total revenues for the years ended December 31, 1997 and 1998, respectively. The
increase in depreciation expense is primarily attributable to an increase in
fixed assets from $35,000 at December 31, 1997 to $309,000 at December 31, 1998.
The increase in assets was primarily to provide equipment for the increase in
headcount during this period and to furnish the new office space in Ann Arbor.
BlueGill incurred net interest expense of $11,000 in 1997 and generated
net interest income of $112,000 in 1998. BlueGill raised $5.4 million in 1998
through the sale of preferred stock and converted $539,000 of long-term debt to
preferred stock. The increase in interest income is a result of the investment
of the funds raised by the sale of BlueGill redeemable preferred stock, as well
as the elimination of interest expense as a result of the debt conversion.
LIQUIDITY AND CAPITAL RESOURCES
BlueGill has financed its operations and growth primarily through
proceeds received from the issuance of redeemable preferred stock and bank
borrowing.
Cash flow used in investing activities was $240,000 and $1.2 million
for the years ended December 31, 1998 and 1999 respectively. The cash used in
investing activities was primarily used to purchase equipment for new employees
and to continue to fund growth.
Cash provided by financing activities was $6.1 million and $19.9 million
for the years ended December 31, 1998 and December 31, 1999, respectively. Cash
provided from financing activities resulted primarily from the sale of preferred
stock. BlueGill received $5.4 million from the sale of preferred stock and
converted $500,000 of debt to preferred stock in the year ended December 31,
1998. BlueGill received $19.5 million from the sale of preferred stock in the
year ended December 31, 1999.
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On October 28, 1998, BlueGill entered into a credit agreement with
Imperial Bank that provides for a $750,000 line of credit. As of December 31,
1999 $596,000 had been borrowed against this line. BlueGill is charged interest
of .25% over prime on the total amount borrowed against this line of credit.
BlueGill believes that its existing cash balance will be sufficient to
meet its requirements to fund its operations for the next six months. Prior to
its merger discussions with CheckFree, BlueGill had planned to raise additional
funds either through a private placement of its stock or through an initial
public offering of its common stock.
INFLATION
BlueGill believes the effects of inflation have not had a significant
impact on BlueGill's results of operations.
IMPACT OF YEAR 2000
BlueGill has followed a program to ensure that all systems and products
are ready for any date-based processing related to the millennium. All critical
products in use by BlueGill have been purchased since 1997. Purchases were made
only after getting confirmation from the vendor that their products were ready
for the Year 2000.
BlueGill has not experienced any adverse impact from any disruptions
caused by the Year 2000 date change. There have been no calls to BlueGill's
technical support center to report any problems caused by the Year 2000 date
change.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained in this information
statement/prospectus, the matters discussed in this Statement include certain
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, 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 BlueGill and its management, like the statements concerning
BlueGill's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed in this statement. Although BlueGill believes that
the assumptions underlying the forward-looking statements contained in this
information statement/prospectus are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included in this statement will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included in
this information statement/prospectus, the inclusion of this information should
not be regarded as a representation by BlueGill or any other person that the
objectives and plans of BlueGill will be achieved.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF CHECKFREE AND BLUEGILL
When the merger is completed, BlueGill's stockholders will become
stockholders of CheckFree. Therefore, their rights will no longer be governed
and defined by the BlueGill amended and restated certificate of incorporation
and by-laws. Rather, their rights will be defined and governed by our restated
certificate of incorporation and amended and restated by-laws, which provide
stockholders with different rights than those that BlueGill currently provides.
The discussion below summarizes these differences.
INTRODUCTION
When the merger is completed, holders of BlueGill stock will receive
shares of our common stock. Because both corporations are organized under
Delaware law, the statutory rights of the BlueGill stockholders will not change.
The rights of the BlueGill stockholders as established within the BlueGill
certificate of incorporation and the BlueGill by-laws will, however, be affected
by the merger. The following is a summary of the differences between your rights
as a BlueGill stockholder and your rights as a CheckFree stockholder following
the merger. This is not intended to be a comprehensive comparison of all rights
held by the stockholders. BlueGill currently has two series of preferred stock
outstanding. As shares of these two series of preferred stock will be exchanged
in the merger for our common stock, the rights, preferences and privileges of
these two series are not discussed in the comparison that follows.
VOTING RIGHTS GENERALLY
The BlueGill by-laws provide that each holder of BlueGill common stock
is entitled to one vote per share of common stock held and directors are elected
by a plurality of the vote cast at any election. When an action, other than
election of directors, is to be taken by a vote of the BlueGill stockholders,
the action shall be authorized by a majority of the votes cast by holders of
shares entitled to vote on the action, unless a greater plurality is required by
BlueGill's certificate of incorporation or Delaware law. BlueGill common
stockholders and preferred stockholders, voting on an as converted basis, vote
as a single class, except as otherwise provided in the BlueGill certificate of
incorporation or under Delaware law.
Our certificate of incorporation provides that each holder of common
stock shall be entitled to one vote per share of common stock and that the
holders of Series A Junior Participating Cumulative Preferred stock shall be
entitled to 100 votes per share of Series A Junior Preferred Stock and the
special voting rights as discussed below.
STOCKHOLDER MEETINGS
Delaware law states that annual meetings of stockholders shall be held
for the election of directors on a date and time and in the manner provided for
in the by-laws of the corporation. Delaware law also states that special
meetings of the stockholders may be called by the board of directors or by any
persons as authorized by the corporation's certificate of incorporation or
by-laws. The BlueGill by-laws provide that an annual meeting of stockholders is
to be held within 120 days after the end of BlueGill's preceding fiscal year.
The BlueGill by-laws also provide that special meetings of stockholders may be
called by the board of directors, the chairman of the board or the president and
shall be called by the president or secretary upon the written request of the
holders of a majority of the shares of BlueGill stock entitled to vote. The
notices for the annual and special meetings of stockholders shall be given no
less than 10 or more than 60 days before the date of the meeting. A quorum for a
meeting is a majority of the outstanding shares entitled to vote at the meeting,
unless the BlueGill certificate of incorporation or Delaware law requires a
greater or lesser number.
Our by-laws provide that annual meeting of the stockholders will be held
on the date and time as designated by our board of directors. Our by-laws
provide that the president may call for a special meeting of the stockholders
and require the president or secretary to call a special meeting at the written
request of two-thirds of our board of directors. The notice of any regular or
special meeting of the stockholders must be provided no less than 10 or more
than 60 days before the date of the meeting.
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BOARD OF DIRECTORS
The BlueGill certificate of incorporation provides that the board of
directors shall consist of six members. The BlueGill by-laws state that the
board of directors will consist of not less than 3 nor more than 7 directors as
determined from time to time by the board of directors. The BlueGill certificate
of incorporation provides that holders of common stock are entitled to elect two
directors to the board of directors, but only one of those directors may be an
employee of BlueGill. The holders of BlueGill common stock are also entitled,
voting together as a single class with the holders of preferred stock, voting on
an as converted basis, to elect an additional director. A director may be
removed, with or without cause, upon the affirmative vote of a majority of the
stockholders entitled to vote for the election of that director. A vacancy on
the board of directors occurring for any reason may be filled only by the vote
of the holders of a majority of the shares of the specified group of holders who
are entitled to elect the director to fill that vacancy.
Our by-laws provide that our board of directors shall consist of 3 to 15
members, as determined from time to time in our by-laws. The current number of
directors established in the CheckFree by-laws is 7. Each director must be
nominated in accordance with the procedures set forth in our by-laws before he
or she can be elected as a director, unless the person can be nominated by the
holders of our preferred stock.
Our certificate of incorporation provides for a staggered board that
means that only a portion of the directors are elected each year. Pursuant to
our certificate of incorporation, approximately one third of the directors are
elected each year to serve three-year terms. One or all of the member of the
board of directors may be removed for cause upon the affirmative vote of at
least 80% of the stockholders entitled to vote on the election of the directors
or upon the affirmative vote of a majority of the stockholders entitled to vote
on the election of the directors if at least 66-2/3% of the board of directors
recommend the removal of the directors to the stockholders.
LIMITATION OF DIRECTORS' LIABILITY
Pursuant to the BlueGill certificate of incorporation, a BlueGill
director shall not be personally liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director to the fullest
extent provided by Delaware law. Similarly, our certificate of incorporation
provides that a director shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty. This provision
does not eliminate or limit a director's liability for a breach of the
director's duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for any
transaction from which the director derived an improper personal benefit, or for
the payment of a dividend or payment for the purchase or redemption of stock in
violation of Delaware law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
BlueGill's certificate of incorporation provides that BlueGill may
indemnify any person to the fullest extent permitted by law by reason of the
person serving or having served as a director, officer or employee of BlueGill
or at the request of BlueGill any other corporation. BlueGill's by-laws provide
that BlueGill will indemnify its directors, officers, employees, or agents
against expenses, judgements, fines, or fees paid in settlement if the person is
a party or is threatened to be named as a party to any threatened, pending or
completed civil or criminal action, suit, or proceeding by reason of the fact
that the person is or was a director, officer, employee, or agent of BlueGill
or, at the request of BlueGill, of any other corporation or other entity,
provided the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal action or proceeding had no reasonable cause to
believe his or her conduct was lawful. In addition, BlueGill will indemnify its
directors, officers, employees or agents against expenses if the person is a
party or threatened to be named a party to any threatened, pending or completed
action or suit by or in the right of BlueGill to procure a judgment in its favor
by reason of the fact that the person is or was serving as a director, officer,
agent or employee of BlueGill or, at the request of BlueGill, of any other
corporation or other entity, provided the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of BlueGill or its stockholders; however, no indemnification shall be
made if the person shall be adjudged liable for negligence or misconduct in the
performance of his duty to BlueGill, except if the court where the action or
suit was brought determines that, despite the adjudication of liability but in
light of all the
161
<PAGE> 163
circumstances, the person is fairly and reasonably entitled to indemnity for
these expenses. A determination that indemnification of a person is proper in
the circumstances because the applicable standard of conduct was met shall be
made either by the board of directors by a majority vote of a quorum consisting
of directors who were not a party to the action, suit or proceeding, or if a
quorum is not obtainable or even if obtainable a quorum of disinterested
directors so directs by independent legal counsel in a written opinion or by the
stockholders. BlueGill may advance expenses incurred in defending any of this
type of action, suit or proceeding upon receipt of an undertaking by or on
behalf of the person involved to repay the amount unless it shall ultimately be
determined that the person is entitled to indemnification.
Our by-laws state that the corporation shall indemnify a person who is a
party to an action by reason of the fact that the person is or was a director of
CheckFree or was serving as a director or officer of another company at our
request. Indemnification may be provided to our officers, employees, agents,
representative, or attorneys upon the approval of the board of directors.
ACTION WITHOUT A MEETING
Under Delaware law, any action that may be taken by the stockholders of
a corporation may be taken without a meeting or prior notice if a written
consent to the action is signed by the holders of the minimum number of votes
required to take similar action. Additionally, Delaware law provides that any
action that may be taken by the board of directors may be taken without a
meeting if all members of the board consent to the action in writing and the
consent if filed with the corporate minutes.
The BlueGill by-laws provide that stockholders may take any stockholder
action without a meeting or prior notice if a written consent is signed by
stockholders holding the minimum number of votes that is required to take the
action at a meeting at which all shares entitled to vote were present and voted.
The BlueGill by-laws also provide that directors may take any director action
without a meeting or prior notice if all of the directors entitled to vote on
the matter sign a written consent to take this action.
Our by-laws allow the stockholders to take stockholder action without a
meeting if all of the holders of stock entitled to notice of the meeting sign a
written consent authorizing the action. Our by-laws also permit directors to
take action by written consent if all of the directors consent and the consent
is filed with the corporate minutes.
AMENDMENT OF CERTIFICATE OF INCORPORATION
Delaware law provides that a certificate of incorporation may be amended
upon the resolution the corporation's directors and the approval by the holders
of the majority of the corporation's stock and the holders of the majority of
the outstanding stock of each class entitled to vote on the amendment as a
class.
An amendment of the BlueGill certificate of incorporation requires the
vote set forth in the subsection entitled "Voting Rights Generally" above. In
addition, the BlueGill certificate of incorporation may require separate class
votes by holders of two-thirds of the outstanding shares of BlueGill Series A
Preferred Stock and by holders of up to three-quarters of the outstanding shares
of Series B Preferred Stock.
Our certificate of incorporation provides for amendments, alterations,
or repeals of the provisions regarding amendment of the certificate, nominations
of directors, amendment of our by-laws by our board of directors, the board of
director's response to an acquisition proposal, personal liability of a
director, or action taken by written consent may not be adopted without the
approval of the holders of at least 80% of our outstanding stock or the holders
of a majority of our outstanding stock if at least 66-2/3% of our board of
directors recommends the amendment.
AMENDMENT OF BY-LAWS
Under Delaware law, the by-laws of a corporation may not be amended,
altered, or repealed without stockholder approval unless the corporation's
certificate of incorporation provides that the directors of the corporation may
also amend the by-laws. The BlueGill certificate of incorporation does not
confer upon our board
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<PAGE> 164
of directors the right to amend, alter, or repeal the BlueGill by-laws. The
BlueGill by-laws provide that the by-laws may be amended by the stockholders or
the board of directors at any properly held meeting provided that the notice of
the meeting contains the proposed amendment, alteration, or repeal and provided
that the proposed amendment, alteration, or repeal does not affect the holders
of preferred stock. Any amendment of BlueGill's by-laws relative to BlueGill's
Series A Preferred Stock or relative to BlueGill's Series B Preferred Stock may
require a separate vote by each series.
Our certificate of incorporation expressly confers upon our board of
directors the right to amend the by-laws. Our by-laws provide that the by-laws
may generally be amended or repealed or new provisions adopted upon the vote by
the majority of the holders of record, however, amendments, alterations, or
repeals to some provisions regarding amendment to by-laws, meetings of
stockholders, nomination and number of directors, or the indemnification of
directors require the approval of holders of 80% of the outstanding stock
entitled to vote on the matter or the approval of the holders of a majority of
the outstanding stock entitled to vote on the matter if 66-2/3% of our board of
directors recommend to the stockholders the amendment.
BLANK CHECK PREFERRED STOCK
The BlueGill board of directors is not vested by the BlueGill
certificate of incorporation with the right to establish by resolution and
without stockholder approval a series of preferred stock, the number of shares
in that series, or the rights, preferences and privileges of that series.
We have 13,500,000 shares of authorized and undesignated preferred
stock. Our board of directors may by resolution, without the approval or consent
of any stockholders, establish one or more additional series from these
undesignated preferred shares and fix the designation, powers, preferences and
other rights or restrictions of each series.
DIVIDENDS AND RELATED RIGHTS
The holders of CheckFree Class A preferred stock shall be entitled to
receive dividends four times a year. If dividends on the Class A preferred stock
are not paid or declared in an amount equal to six quarterly dividends, the
Class A preferred stockholders shall have the right, voting as a class, to elect
one special director to our board of directors. The special voting for directors
by the Class A preferred stockholders shall continue until all dividends in
default shall be paid.
EXPERTS
The consolidated financial statements of CheckFree and TransPoint
included in this information statement/ prospectus have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing in this
information statement/prospectus, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of BlueGill included in this
information statement/prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in this information statement/prospectus in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
LEGAL MATTERS
We have engaged Porter, Wright, Morris & Arthur LLP to assist us with
legal matters concerning the merger. Partners of Porter, Wright, Morris & Arthur
LLP who participated in the preparation of this information statement/prospectus
beneficially own an aggregate of 26,507 shares of our common stock consisting of
a combination of stock and options exercisable within 60 days after the date of
this information statement/prospectus
163
<PAGE> 165
CHECKFREE HOLDINGS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Consolidated Financial Statements
Independent Auditors' Report.............................. 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
Unaudited Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets........... F-30
Unaudited Condensed Consolidated Statements of
Operations............................................. F-31
Unaudited Condensed Consolidated Statements of Cash
Flows.................................................. F-32
Notes to Interim Unaudited Condensed Consolidated
Financial Statements................................... F-33
</TABLE>
F-1
<PAGE> 166
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CheckFree Holdings Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CheckFree
Holdings Corporation (the "Company") and its subsidiaries as of June 30, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1997, 1998 and 1999. 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 the Company and its
subsidiaries at June 30, 1998 and 1999, and the results of their operations and
their cash flows for the years ended June 30, 1997, 1998 and 1999 in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
Deloitte & Touche LLP
Atlanta, Georgia
August 9, 1999
F-2
<PAGE> 167
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,535 $ 12,446
Investments............................................... 24,533 10,266
Accounts receivable, net.................................. 32,960 45,660
Assets held for sale...................................... 15,881 --
Note receivable........................................... 14,882 --
Prepaid expenses and other assets......................... 4,678 7,800
Deferred income taxes..................................... 7,231 6,513
--------- ---------
Total current assets.............................. 136,700 82,685
Property and equipment, net................................. 50,920 69,823
Other assets:
Capitalized software, net................................. 11,387 20,059
Goodwill, net............................................. 25,138 32,280
Other intangible assets, net.............................. 5,336 13,595
Investments............................................... 1,006 1,875
Deferred income taxes..................................... 12,889 21,920
Other noncurrent assets................................... 6,736 10,524
--------- ---------
Total other assets................................ 62,492 100,253
--------- ---------
$ 250,112 $ 252,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,536 $ 9,634
Accrued liabilities....................................... 25,160 26,971
Current portion of long-term obligations.................. 1,180 1,640
Deferred revenue.......................................... 19,710 20,195
Income taxes payable...................................... 3,876 --
--------- ---------
Total current liabilities......................... 58,462 58,440
Accrued rent and other...................................... 1,329 3,536
Obligations under capital leases -- less current portion.... 6,467 3,882
Commitments (Note 21)
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 56,364,839 and 57,305,659 shares,
respectively; outstanding 56,364,839 and 51,756,278
shares, respectively................................... 564 518
Additional paid-in-capital................................ 492,109 480,385
Less:
Treasury stock -- at cost; 963,295 shares, no shares,
respectively.......................................... (4,362) --
Accumulated deficit.................................... (304,457) (294,000)
--------- ---------
Total stockholders' equity........................ 183,854 186,903
--------- ---------
$ 250,112 $ 252,761
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 168
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues:
Processing and servicing.......................... $ 94,528 $ 159,255 $ 201,059
Merchant discount................................. 9,994 -- --
License fees...................................... 33,088 28,952 15,975
Maintenance fees.................................. 22,567 25,848 17,746
Other............................................. 16,268 19,809 15,351
----------- ----------- -----------
Total revenues............................ 176,445 233,864 250,131
Expenses:
Cost of processing, servicing and support......... 102,721 129,924 146,704
Research and development.......................... 32,869 36,265 21,085
Sales and marketing............................... 32,670 28,839 32,354
General and administrative........................ 18,707 20,677 31,466
Depreciation and amortization..................... 24,919 24,999 24,630
In-process research and development............... 140,000 719 2,201
Charge for stock warrants......................... -- 32,827 --
Exclusivity amortization.......................... 5,958 2,963 --
----------- ----------- -----------
Total expenses............................ 357,844 277,213 258,440
Net gain on dispositions of assets................ 6,250 36,173 4,576
----------- ----------- -----------
Loss from operations................................ (175,149) (7,176) (3,733)
Other:
Interest income................................... 2,153 3,464 2,799
Interest expense.................................. (834) (632) (618)
----------- ----------- -----------
Loss before income taxes............................ (173,830) (4,344) (1,552)
Income tax benefit.................................. (12,017) (641) (12,009)
----------- ----------- -----------
Net income (loss)................................... $ (161,813) $ (3,703) $ 10,457
=========== =========== ===========
Basic earnings (loss) per share:
Net income (loss) per common share................ $ (3.44) $ (0.07) $ 0.20
=========== =========== ===========
Equivalent number of shares....................... 46,988,225 55,086,742 52,444,375
=========== =========== ===========
Diluted earnings (loss) per share:
Net income (loss) per common share................ $ (3.44) $ (0.07) $ 0.18
=========== =========== ===========
Equivalent number of shares....................... 46,988,225 55,086,742 56,529,165
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 169
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL NUMBER OF TREASURY TOTAL
SHARES OF STOCK PAID-IN SHARES OF STOCK ACCUMULATED STOCKHOLDERS'
COMMON STOCK AT PAR CAPITAL TREASURY STOCK AT COST DEFICIT EQUITY
------------ ------ ---------- -------------- -------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- June 30, 1996..... 42,274,800 $423 $276,822 (757,536) $ (629) $(138,941) $ 137,675
Net loss................... -- -- -- -- -- (161,813) (161,813)
Stock options exercised.... 636,309 6 591 -- -- -- 597
Tax benefit associated with
exercise of stock
options.................. -- -- 887 -- -- -- 887
Issuance of common stock
and stock options
pursuant to
acquisitions............. 12,635,212 126 176,550 -- -- -- 176,676
Treasury stock acquired.... -- -- -- (284,016) (5,378) -- (5,378)
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1997..... 55,546,321 555 454,850 (1,041,552) (6,007) (300,754) 148,644
Net loss................... -- -- -- -- -- (3,703) (3,703)
Stock options exercised.... 708,661 8 2,204 -- (47) -- 2,165
Employee stock purchases... 109,857 1 1,572 -- -- -- 1,573
401(k) match............... -- -- -- 78,257 1,692 -- 1,692
Warrants issued............ -- -- 32,827 -- -- -- 32,827
Tax benefit associated with
exercise of stock
options.................. -- -- 656 -- -- -- 656
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1998..... 56,364,839 564 492,109 (963,295) (4,362) (304,457) 183,854
Net income................. -- -- -- -- -- 10,457 10,457
Stock options exercised.... 354,758 3 1,605 -- -- -- 1,608
Employee stock purchases... 48,748 1 968 48,631 1,070 -- 2,039
401(k) match............... -- -- -- 74,981 963 -- 963
Treasury stock acquired.... -- -- -- (4,709,698) (31,336) -- (31,336)
Treasury stock retired..... (5,549,381) (55) (33,610) 5,549,381 33,665 -- --
Issuance of common stock
pursuant to
acquisition.............. 537,314 5 17,995 -- -- -- 18,000
Tax benefit associated with
exercise of stock
options.................. -- -- 1,318 -- -- -- 1,318
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1999..... 51,756,278 $518 $480,385 -- $ -- $(294,000) $ 186,903
========== ==== ======== ========== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 170
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)......................................... $(161,813) $ (3,703) $ 10,457
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Write off of in-process research and development.......... 140,000 719 2,201
Write off of capitalized software......................... 3,619 -- --
Issuance of warrants...................................... -- 32,827 --
Exclusivity amortization.................................. 4,938 2,963 --
Depreciation and amortization............................. 24,919 24,999 24,630
Deferred income tax provision............................. (13,101) (5,499) 854
Net gain on dispositions of assets........................ (6,250) (36,173) (4,576)
Purchases of investments -- Trading....................... -- (28,799) (10,416)
Proceeds from maturities and sales of investments,
net -- Trading.......................................... -- 4,267 24,683
Change in certain assets and liabilities (net of
acquisitions and dispositions):
Accounts receivable..................................... (10,952) (5,095) (6,976)
Prepaid expenses and other.............................. (2,976) (1,834) 1,434
Accounts payable........................................ 1,249 1,492 988
Accrued liabilities..................................... 4,203 (568) (2,194)
Deferred revenue........................................ 7,509 239 1,739
Income tax accounts..................................... 183 2,492 (17,253)
--------- -------- --------
Net cash provided by (used in) operating
activities....................................... (8,472) (11,673) 25,571
Investing Activities:
Purchase of property and software......................... (9,114) (27,939) (40,444)
Proceeds from sale of assets.............................. 29,488 54,990 18,435
Purchase of note receivable............................... -- (14,882) --
Proceeds from repayment of note receivable................ -- -- 14,882
Proceeds from purchase price adjustment................... -- 8,889 --
Capitalization of software development costs.............. -- (731) (8,031)
Purchase of business, net of cash acquired................ (11,363) (11,000) (190)
Purchases of investments -- held to maturity.............. (3,000) (1,006) (1,875)
Proceeds from maturities and sales of investments -- held
to maturity............................................. -- -- 1,006
Purchases of investments -- available for sale............ -- (19,311) --
Proceeds from maturities and sales of
investments -- available for sale....................... 19,542 23,757 --
--------- -------- --------
Net cash provided by (used in) investing
activities....................................... 25,553 12,767 (16,217)
Financing Activities:
Repayment of notes payable and other debt
extinguishment.......................................... (69) (1,144) --
Principal payments under capital lease obligations........ (1,082) (931) (3,327)
Escrow deposit associated with capital lease obligation... -- -- (3,637)
Proceeds from stock options exercised, including related
tax benefits............................................ 597 2,165 2,926
Proceeds from employee stock purchase plan................ -- 1,573 1,931
Proceeds from employee 401(k) plan........................ -- 1,692 --
Purchase of treasury stock................................ (5,378) -- (31,336)
Payments on stockholder notes............................. (50) -- --
--------- -------- --------
Net cash provided by (used in) financing
activities....................................... (5,982) 3,355 (33,443)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 11,099 4,449 (24,089)
Cash and cash equivalents:
Beginning of period....................................... 20,987 32,086 36,535
--------- -------- --------
End of period............................................. $ 32,086 $ 36,535 $ 12,446
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 171
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- CheckFree Holdings Corporation (the "Company") is the
parent company of CheckFree Corporation ("CFC"), the principal operating company
of the business. CFC 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 19 for a description of the Company's business segments. Following a
number of acquisitions and divestitures, CFC reorganized its corporate structure
on December 22, 1997. In connection with the reorganization, holders of common
stock ("Common Stock") of CFC became holders of an identical number of shares of
Common Stock of the Company. The restructuring was effected by a merger
conducted pursuant to Section 251(g) of the Delaware General Corporation Law,
which provides for the formation of a holding company structure without a vote
of the stockholders of the Company.
Principles of Consolidation -- The accompanying consolidated financial
statements include the results of operations of the Company, its wholly-owned
subsidiaries, and CheckFree Management Corporation, of which the Company is the
majority owner. 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.
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 dates.
Transaction Processing -- In connection with the timing of the Company's
financial transaction 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 three months or less to be cash
equivalents. Substantially all cash and cash equivalents are on deposit with six
financial institutions.
Investments -- The Company's investments consist primarily of United States
government, government agency or state obligations. The Company classifies these
investments as available-for-sale, trading or held-to-maturity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities." Investments
classified as available-for-sale are carried at fair value, with unrealized
holding gains and losses reported as a separate component of stockholders'
equity. Trading securities are carried at market value and unrealized holding
gains and losses are included in income. Held-to-maturity securities are carried
at amortized cost.
Property and Equipment -- Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives as follows: land improvements, building and building
improvements, 15 to 30 years; computer equipment, software, and furniture, 3 to
7 years. Equipment under capital leases are amortized using the straight-line
method over the lesser of their estimated useful lives or the terms of the
leases. Leasehold improvements are amortized over the lesser of the estimated
useful lives or remaining lease periods.
F-7
<PAGE> 172
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalized 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 over three to five years, 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 $7,687,000, $5,198,000 and
$2,567,000, for the years ended June 30, 1997, 1998 and 1999, respectively.
Intangible Assets -- The costs of identified intangible assets are
generally amortized on a straight-line basis over periods from 8 months to 15
years. Goodwill is amortized on a straight-line basis over 10 to 15 years. The
company periodically reviews goodwill to evaluate whether changes have occurred
that would suggest that goodwill may be impaired based on the estimated
undiscounted cash flows of the assets to which goodwill relates over the
remaining amortization period. If this review indicates that the remaining
useful life of goodwill requires revision or that the goodwill is not
recoverable, the carrying amount of the goodwill is reduced by the estimated
shortfall of cash flows on a discounted basis. Other intangible assets are also
evaluated periodically for impairment using undiscounted cash flows over the
remaining useful life of the respective asset. If this review indicates that the
remaining useful life of the respective intangible asset requires revision, the
carrying amount of the asset is reduced by the estimated shortfall of cash flows
on a discounted basis.
Capital Stock -- The Company is authorized to issue up to 150,000,000
shares of $.01 par value Common Stock. In addition, the Company is authorized 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 of Directors may determine without further
stockholder approval. No preferred shares have been issued.
Basic and Diluted Earnings (Loss) Per Share -- The Company reports Basic
and Diluted Earnings (Loss) Per Share in accordance with the provisions of SFAS
128 "Earnings Per Share." Basic earnings (loss) per common share is determined
by dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding. Diluted per-common-share amounts
assume the issuance of common stock for all potentially dilutive equivalent
shares outstanding.
Impairment of Long-Lived Assets -- In accordance with SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," the Company periodically assesses the likelihood of recovering the cost of
long-lived assets based on its expectations of future profitability and
undiscounted cash flows of the related business operations. If such assets are
considered to be impaired, the carrying amount is reduced by the estimated
shortfall of cash flows on a discounted basis. During 1998, in conjunction with
the Company's platform integration efforts referred to as project Genesis, the
Company consolidated three processing centers from Chicago, Illinois, Austin,
Texas, and Columbus, Ohio, into one processing center located in Norcross,
Georgia. As a result of this consolidation and a physical inventory of fixed
assets at the related business units, all identified assets which were
determined to have no alternative use or value were written off. Of the total
write-off of $4.0 million, $3.0 million was recorded in the quarter ended
September 30, 1997 and the remaining $1.0 million in the quarter ended June 30,
1998.
Comprehensive Income -- On July 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." The Statement requires disclosure of total
non-shareowner changes in equity and its components. Total non-shareowner
changes in equity includes all changes in equity during a period except those
resulting
F-8
<PAGE> 173
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from investments by and distributions to shareowners. The only component of
other comprehensive income applicable to the Company would be unrealized holding
gains or losses on the Company's available-for-sale securities. There were no
available-for-sale securities held during the year ended June 30, 1999 and the
carrying value of available-for-sale securities held during the years ended June
30, 1998 and 1997 approximated market value. As a result, there were no reported
unrealized gains or losses on available-for-sale securities during the years
ending June 30, 1997, 1998 and 1999.
Business Segments -- On July 1, 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Statement defines 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 did not have a material impact on the
Company's financial statement disclosures.
Recent Accounting Pronouncements -- In March 1998, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. The Statement distinguishes accounting for the costs of computer software
developed or obtained for internal use from guidance under SFAS 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
The adoption of SOP 98-1 is not expected to have a material impact on the
Company's software capitalization policies or financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which will
require that all derivative financial instruments be recognized as either assets
or liabilities in the balance sheet. SFAS 133 will be effective for the
Company's first quarter of fiscal 2001. The Company is in the process of
evaluating the effects of this new statement.
Reclassifications -- Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1999 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, which are
generated from trust account balances not included on the Company's balance
sheet, are included in processing and servicing and totaled $3,228,000,
$9,676,000 and $11,846,000, for the years ended June 30, 1997, 1998 and 1999,
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 -- On July 1, 1998, the Company adopted SOP 97-2, "Software
Revenue Recognition." The Statement provides guidance for recognizing revenue
on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." In accordance with the provisions of SOP 97-2, the Company
recognizes revenue from software license agreements when there is persuasive
evidence that an arrangement exists, the fee is fixed and determinable,
collectibility is probable and the software has been shipped, provided that no
significant obligation remains under the contract.
- - Maintenance Fees -- Maintenance fee revenue is recognized ratably over the
term of the related contractual support period, generally 12 months.
F-9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- - Other -- Other revenue consists primarily of consulting and training services.
Consulting revenue is recognized principally on a percentage-of-completion
basis and training revenue is recognized upon delivery of the related service.
Estimated losses, if any, on contracts are provided for when probable.
Estimated loss provisions are based on excess costs over the revenues earned
from the contract. Credit losses, if any, are contemplated in the establishment
of our allowance for doubtful accounts.
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
Automated Clearinghouse transaction fees.
- - Research and Development -- Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel, and are reported net of applicable capitalized
development costs.
- - Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries and commissions of sales employees, public relations and advertising
costs, customer acquisition fees and royalties paid to distribution partners.
- - General and Administrative -- General and administrative expenses consist
primarily of salaries for administrative, executive, finance, and human
resource employees.
- - Depreciation and Amortization -- Depreciation and amortization on capitalized
assets is recorded on a straight-line basis over the appropriate useful lives.
- - In-process Research and Development -- In-process research and development
consists of charges resulting from acquisitions whereby the purchase price
allocated to in-process software development was based on the determination
that 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, or other internal use.
- - Charge for Stock Warrants -- Charge for stock warrants consists of noncash
charges for vested warrants issued to third parties under agreements whereby
issued warrants vest upon achievement of certain strategic objectives.
- - Exclusivity Amortization -- Exclusivity amortization consists of the
amortization of an intangible asset established in conjunction with a
marketing agreement with a strategic partner whereby the Company retains
certain exclusive rights to bill payment processing through the partner's
financial management software over a specific period of time.
2. ACQUISITIONS AND DISPOSITIONS
On March 8, 1999, the Company acquired Mobius Group, Inc. ("Mobius Group")
for a total of $19.1 million, consisting of 537,314 shares of common stock
valued at $18 million, $0.2 million of acquisition costs, and $0.9 million of
assumed debt. The acquisition was treated as a purchase for accounting purposes,
F-10
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and, accordingly, the assets and liabilities were recorded based on their fair
values at the date of the acquisition. The values ascribed to acquired
intangible assets and their respective useful lives are as follows:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
---------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill................................................... $10,392 15
Customer base.............................................. 4,429 15
Tradenames................................................. 3,709 10
Existing product technology................................ 1,864 5
Workforce.................................................. 940 5
</TABLE>
Amortization of intangible assets is on a straight line basis over the
assets' respective useful life. Mobius Group's operations are included in the
consolidated statements of operations from the date of acquisition.
At the acquisition date, Mobius Group had four products under development
that had not demonstrated technological or commercial feasibility. These
products included M-Plan Retirement & Estate Planning Modules, M-Plan Cash Flow,
Tax and Education Planning Modules, a new version of M-Search and a new version
of M-Vest. The in-process technology has no alternative use in the event that
the proposed products do not prove to be feasible. These development efforts
fall within the definition of In-Process Research and Development ("IPR&D")
contained in SFAS 2.
M-Plan Integrated Financial Planning System -- M-Plan will be a Windows
based integrated financial planning system for retirement and estate planning,
cash flow, tax and educational planning and capital needs analysis. It will
produce over 100 reports for retirement, new investments, estate planning, and
other analysis, as well as provide historical returns and standard deviations
for various asset allocations integrated with extensive modeling to provide
detailed and usable analysis. M-Plan's wizards will give users the ability to
produce and to analyze alternative scenarios quickly. M-Plan will consist of
five main disciplines: Retirement and Estate Planning, Cash Flow, Tax and
Education modules. M-Plan Retirement and Estate Planning are the core
disciplines; a user must own one of these two in order to add future
disciplines.
- M-Plan Retirement & Estate Planning Modules. Significant development is
required to convert trust and gift tax calculations from formulas to C++
programming language. Additionally, work must be performed to create
necessary database fields to capture a variety of user scenario analyses.
These modules will be used by sophisticated financial planners that will
be expected to produce reports for a variety of individuals with specific
circumstances and therefore, calculations must produce results under all
possible scenarios. In addition, there are over 100 reports to be
programmed and customized into usable and readable format and Mobius
Group does not currently have the ability to insert data into all of the
reports. Finally, developed technology is not in a modular format and, as
M-Plan will be sold in modules, additional work must be performed to
divide code into modules.
- Cash Flow, Tax and Education Planning Modules. Reports for the Cash Flow
Planning module have not yet been developed. Mobius Group had not yet
determined how it would integrate tax tables into its tax calculations,
as only tax rate calculations are currently available in the Tax Planning
module and significant work remains to complete reports and database
fields. There has been no significant data gathering for the Education
Planning module and therefore the code had not yet been written for the
calculations, the database fields and the reports.
The technology utilized in the M-Plan is based entirely on new technology.
Although the Company has been selling another comprehensive financial planning
program, it operated on a DOS platform and the new programs are being developed
in C++ for Windows.
M-Search Revision -- M-Search is Mobius Group's Investment Manager Database
System, containing comprehensive qualitative and quantitative data on over 1,300
investment management firms and 5,000
F-11
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
composites. In-process development is designed to allow the user to customize
reports based on selection criteria, which the current version does not offer.
This effort requires a rewrite of a significant portion of the source code.
Based on software engineers' estimates of the percentage of reuse of developed
technology within particular components of the product, 25% of its value is
attributable to core technology.
M-Vest Revision -- M-Vest is Mobius Group's 16-bit asset allocation system
that is under development to port the entire program over to 32-bit. This
development effort requires significant changes to the user interface, a
revision of most of the reports and changes to core algorithms. Management
estimates that it would have taken six man months to recreate the code from the
beginning and the entire porting would take 12 man months and as a result, 30%
of its value is attributable to core technology.
The following table presents information regarding the status of various
in-process research and development projects acquired in connection with the
Mobius Group acquisition:
<TABLE>
<CAPTION>
ESTIMATED STAGE EXPECTED EXPECTED COST
OF COMPLETION RELEASE TO COMPLETE VALUATION
--------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
M-Plan:
Retirement and Estate Planning
Module..................... 92% May 1999 $ 49 $ 693
Cash Flow, Tax and Education
Module..................... 64% December 1999 208 183
M-Search Revision............... 56% September 1999 176 1,218
M-Vest Revision................. 20% September 1999 220 107
---- ------
Total................. $653 $2,201
==== ======
</TABLE>
The method used to allocate the purchase consideration to IPR&D was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPR&D projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
- Analysis of the stage of completion of each project;
- Exclusion of value related to research and development yet-to-be
completed as part of the on-going IPR&D projects; and
- The contribution of existing products/technologies.
The projected revenues used in the income approach are based upon the
incremental revenues associated with a portion of the project related to Mobius
Group's technology likely to be generated upon completion of the project and the
beginning of commercial sales, as estimated by the Company's management. The
projections assume that the product will be successful and the products'
development and commercialization are as set forth by management. The discount
rate used in this analysis is an after-tax rate of 20%.
Certain risks and uncertainties are associated with the completion of the
development with a reasonable projected period of time. These risks include:
- The Retirement and Estate Planning module has been sent to a development
partner for testing and identification of errors. Due to the nature of
the product and the necessity that all calculations work correctly in
order for the product to be commercially viable and to function as
designed, this testing is considered a significant part of the
development effort.
F-12
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The cash flow module reports have not been developed. As the reports are
the only output seen by the end user, this represents a major development
effort.
- The Company has not yet determined how it will integrate tax tables into
its tax calculation in the tax module. Significant work remains to
complete reports and database fields.
- For the education module, significant data gathering had not occurred
and, therefore, the code had not yet been written for the calculations,
the database fields, and the reports.
- Significant risks still exist related to the completion and reintegration
of the M-Plan Modules (Retirement and Estate Planning and Cash Flow, Tax,
and Education Modules). For example, a user who borrows for education
purposes from his retirement fund should see his retirement decrease (in
the Retirement Module) and education investment increase (in the
Education Module).
- The M-Plan Modules are based entirely on new technology, since they are
written in C++ for a windows platform and utilize no existing technology.
- M-Vest is Mobius Group's current asset allocation system. There is an
on-going development program to migrate this program to run on 32-bit
hardware. This effort requires significant changes to interfaces, to
reports and some core algorithms.
- Each of the acquired IPR&D projects have not demonstrated their
technological or commercial feasibility as of the valuation date.
Significant risks exist because of uncertainties the Company may face in
the form of time and costs necessary to produce technologically feasible
products.
- If the proposed products fail to become viable, there is uncertainty that
the Company would be able to realize any value from the sale of the
technology to another party.
On October 3, 1997, the Company acquired certain assets of Advanced
Mortgage Technologies, Inc. ("AMTI") for cash of $1.0 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, $0.2 million was allocated to goodwill
and $0.1 million to other identifiable intangible assets. Additionally, $0.7
million was allocated to in-process research and development, which was charged
to operations at the time of the acquisition.
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 was amortized on a straight-line
basis over the contractual life of eight months. A 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.
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-13
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma results of operations of the Company for the years
ended June 30, 1998 and 1999, assuming the acquisitions occurred at the
beginning of each period are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Total revenues.............................................. $239,701 $255,427
Net income (loss)........................................... $ (3,417) $ 13,462
Basic earnings per share:
Net income (loss) per common share........................ $ (0.06) $ 0.25
======== ========
Equivalent number of shares............................... 55,624 52,815
======== ========
Diluted earnings per share:
Net income (loss) per common share........................ $ (0.06) $ 0.24
======== ========
Equivalent number of shares............................... 55,624 56,900
======== ========
</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 $2.2
million arising from the Mobius acquisition in 1999. Previous operations of AMTI
were insignificant and therefore, require no pro forma considerations. 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 October 1, 1998, the Company sold certain software and other assets
related to its imaging line of business for $0.8 million consisting of a note
receivable of $0.5 million and future services of $0.3 million. Loss on the sale
amounted to $2.9 million.
On September 11, 1998, the Company sold certain software and other assets
related to its mortgage line of business for $19.1 million, net of a working
capital adjustment. As part of the sales agreement, the Company retained
responsibility for certain customer obligations and agreed to subcontract with
the acquiring company to perform consulting services at retail hourly rates for
these retained obligations. The Company received cash of $15 million, net of
$4.0 million of prepaid subcontract services due the acquiring company. Net gain
on the sale amounted to $6.4 million.
On July 6, 1998, the Company divested itself of certain software related to
its leasing line of business. The Company paid the acquiring party $639,000 in
cash and agreed to five additional quarterly installments of $60,000 each.
Additionally, in conjunction with this transaction, the Company agreed to pay
$3.0 million to a customer to relieve the Company and acquiring party of further
obligations relating to a product related consulting agreement. The loss of $4.7
million was recorded in the fourth quarter of the year ended June 30, 1998.
On April 20, 1998, the Company sold certain software and related assets of
its wire transfer and cash management businesses for cash of $18.25 million
resulting in a net gain on the sale of $14.7 million.
On March 24, 1998, the Company sold certain software and related assets of
its item processing business for cash of $3.4 million resulting in a net gain on
the sale of $3.2 million.
On August 29, 1997, the Company sold certain software and related assets of
its recovery management business for cash of $33.5 million resulting in a net
gain on the sale of $28.2 million.
F-14
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $6.3 million.
The gain or loss on sale of assets described above is included in Net Gain
on Dispositions of Assets in the Company's Consolidated Statements of
Operations.
3. INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Held-to-Maturity-State Obligations.......................... $ 1,006 $ --
Held-to-Maturity-U.S. Government Agency Obligations......... -- 1,875
Trading..................................................... 24,533 10,266
------- -------
Total............................................. $25,539 $12,141
======= =======
</TABLE>
Held-to-Maturity -- The difference between the amortized cost and the
aggregate fair value of held-to-maturity investments at June 30, 1998 and 1999
was insignificant. The held-to-maturity investment at June 30, 1998 was sold to
provide funding for treasury stock purchases. The realized gain on the sale of
this investment was insignificant.
Trading -- Trading investments are classified as current assets and are
recorded at fair value.
Contractual maturities of debt securities classified as held-to-maturity at
June 30, 1999 are as follows:
<TABLE>
<S> <C>
Due after one year through five years....................... $1,875
======
</TABLE>
Expected maturities may differ from contractual maturities because debt
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Trade accounts receivable................................... $22,739 $31,366
Unbilled trade accounts receivable.......................... 10,654 16,334
Other receivables........................................... 3,037 2,390
------- -------
Total............................................. 36,430 50,090
Less allowance for doubtful accounts........................ 3,470 4,430
------- -------
Accounts receivable, net.......................... $32,960 $45,660
======= =======
</TABLE>
Trade accounts receivable represents amounts billed to customers. Unbilled
trade accounts receivable result from extended payment terms on software license
agreements or services agreements and are recorded at the time of contract
execution. Revenue is recognized and customers are billed under service
agreements as the services are performed. For software contracts, revenue is
recognized under the provisions of SOP 97-2 as described in Note 1, and unbilled
amounts under those software contracts are billed on specific dates according to
contractual terms. Other receivables are comprised primarily of amounts due from
employees for travel and other advances. The allowance for doubtful accounts
represents management's estimate of uncollectible accounts receivable.
F-15
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ASSETS HELD FOR SALE
In April 1998, the Company announced plans to divest several of its
software businesses through the sale of software and related assets. Assets of
the Company's mortgage, leasing, imaging, and safe box accounting businesses
totaling $15.9 million at June 30, 1998, were comprised of trade, unbilled, and
other accounts receivable (net of an allowance for doubtful accounts), property
and equipment dedicated to the businesses, capitalized software, and other
purchased intangible assets. Sales of all businesses, with the exception of safe
box accounting, were completed during the year ended June 30, 1999. The Company
decided not to divest the safe box accounting business and its assets are
therefore included with the Company's other operating assets at June 30, 1999.
6. NOTE RECEIVABLE
In May 1998, in anticipation of a tax-free exchange of property, the
Company loaned $14.9 million to a third party to purchase a building on its
behalf. Interest of 8% was earned monthly commencing in June 1998. In June 1999,
the Company completed its tax-free exchange and the note was paid in full. At
June 30, 1998, the estimated fair value of the note receivable approximated the
carrying value based on currently available instruments with similar interests
rates and remaining maturities.
7. 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.
The Company's income tax benefit consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ 3,795 $(10,555)
State and local.................................... 1,084 1,063 (2,308)
-------- ------- --------
Total current.............................. 1,084 4,858 (12,863)
Deferred federal and state........................... (13,101) (5,499) 854
-------- ------- --------
Total income tax benefit................... $(12,017) $ (641) $(12,009)
======== ======= ========
</TABLE>
F-16
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CHECKFREE HOLDINGS 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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit...................... $(60,844) $(1,520) $ (543)
Nondeductible in-process research and development of
acquired businesses................................ 49,000 252 770
Nondeductible intangible amortization................ 839 1,189 1,137
State and local taxes, net of federal income tax
benefits........................................... (553) 21 (1,741)
Loss from medical benefits subsidiary................ -- -- (10,665)
Other, net........................................... (459) (583) (967)
-------- ------- --------
Total income tax benefit................... $(12,017) $ (641) $(12,009)
======== ======= ========
</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,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Federal and state net operating loss carryforwards........ $ 1,155 $12,739
Federal and state tax credit carryforwards................ -- 2,145
Intangible assets......................................... 1,870 --
Allowance for bad debts and returns....................... 1,699 1,996
Accrued compensation and related items.................... 1,731 2,028
Stock warrants............................................ 12,964 12,964
Reserve accruals.......................................... 3,212 3,410
------- -------
Total deferred tax assets......................... 22,631 35,282
Deferred tax liabilities:
Capitalized software...................................... (1,926) (2,246)
Property and equipment.................................... (19) (2,327)
Deferred revenue.......................................... -- (128)
Intangible assets......................................... -- (1,354)
Prepaid expenses.......................................... (566) (794)
------- -------
Total deferred tax liabilities.................... (2,511) (6,849)
------- -------
Net deferred tax asset............................ $20,120 $28,433
======= =======
</TABLE>
At June 30, 1999, the Company has approximately $3,072,000 of state and
$9,667,000 of Federal net operating loss carryforwards available, expiring in
2009 to 2013 and 2009 to 2019, respectively. Additionally, at June 30, 1999, the
Company has approximately $306,000 of state and $1,839,000 of federal tax credit
carryforwards available, expiring in 2008 to 2009 and 2009 to 2019,
respectively. During the year ended June 30, 1999, the Company established a
subsidiary to administer the Company's employee medical benefits program. The
Company recognized a one-time combined federal and state tax benefit of $12.2
million arising from the creation of this subsidiary.
F-17
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
Land and land improvements.................................. $ 3,146 $ 4,341
Building and building improvements.......................... 16,692 31,226
Computer equipment and software licenses.................... 55,526 72,138
Furniture and equipment..................................... 9,002 11,404
------- --------
Total............................................. 84,366 119,109
Less accumulated depreciation and amortization.............. 33,446 49,286
------- --------
Property and equipment, net....................... $50,920 $ 69,823
======= ========
</TABLE>
9. OTHER INTANGIBLE ASSETS
The components of other intangible assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Workforce................................................... $ 5,179 $ 6,171
Tradenames.................................................. 815 4,568
Customer base............................................... 1,231 5,758
------- -------
Total............................................. 7,225 16,497
Less accumulated amortization............................... 1,889 2,902
------- -------
Other intangible assets, net...................... $ 5,336 $13,595
======= =======
</TABLE>
10. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Salaries and related costs.................................. $ 9,374 $10,307
Liabilities associated with contract and other losses....... 5,655 --
Processing fees............................................. 2,335 908
Reserve for returns and chargebacks......................... 1,944 1,664
Other....................................................... 5,852 14,092
------- -------
Total............................................. $25,160 $26,971
======= =======
</TABLE>
The liabilities associated with contract and other losses at June 30, 1998 is
comprised of $4.7 million related to an estimated loss from the sale of the
leasing business that occurred on July 7, 1998 (see Note 2, "Acquisitions and
Dispositions") and $1.0 million for accrued contract losses and related costs
which resulted from the decision to exit the Web Investor business.
F-18
<PAGE> 183
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LINE OF CREDIT
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 amounts were outstanding under the line at June 30, 1998 and 1999.
12. 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 had the option to purchase the land and building for
$1 at the termination of the lease and thus, the Company recorded the
transaction as a capital lease. In June 1999, the Company completed a tax-free
exchange of property involving the land and building under this capital lease.
In order to exercise its purchase option and complete the transaction, the
Company paid $2.5 million of principal obligations under the lease, and placed
an additional $3.6 million in escrow. The Company and the State of Ohio entered
into an escrow agreement whereby the funds deposited will be used to make
scheduled principal and interest payments through September 1, 2000, and retire
the remaining principal obligation at that date. The net gain resulting from the
sale of the property amounted to $1.1 million and is included in the Net Gain on
Dispositions of Assets in the Company's Consolidated Statement of Operations.
Amounts deposited with the escrow trustee and the related obligations are
included in current and noncurrent assets and liabilities, based on the
respective principal repayment dates, in the Company's June 30, 1999
Consolidated Balance Sheets.
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 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1998 1999
------- ------
<S> <C> <C>
Land and land improvements.................................. $ 3,146 $ --
Building and building improvements.......................... 4,526 --
Computer equipment and software licenses.................... 2,371 3,654
------- ------
Total............................................. 10,043 3,654
Less accumulated depreciation and amortization.............. 2,017 2,266
------- ------
Property and equipment, net....................... $ 8,026 $1,388
======= ======
</TABLE>
F-19
<PAGE> 184
CHECKFREE HOLDINGS 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 (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
- ---------------
<S> <C>
2000...................................................... $ 944
2001...................................................... 3,253
2002...................................................... 390
2003...................................................... 373
2004...................................................... 62
Thereafter................................................ --
------
Total future minimum lease payments............... 5,022
Less amount representing interest......................... 182
------
Net future minimum lease payments................. $4,840
======
</TABLE>
13. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that the
Company shall pay for insurance, taxes and maintenance. In addition, certain
leases include rent escalations throughout the terms of the leases. Total
expense under all operating lease agreements for the years ended June 30, 1997,
1998 and 1999, was $5,882,000, $5,800,000 and $8,492,000, respectively.
Minimum future rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
- ---------------
<S> <C>
2000...................................................... $11,464
2001...................................................... 10,922
2002...................................................... 8,966
2003...................................................... 5,650
2004...................................................... 3,837
Thereafter................................................ 16,271
-------
Net future minimum lease payments................. $57,110
=======
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Retirement Plan -- 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 the plan amounted to $1,862,000, $859,000 and $1,218,000,
for the years ended June 30, 1997, 1998 and 1999, respectively.
Deferred Compensation Plan -- In January 1999, the Company established a
deferred compensation plan (the "DCP") covering highly-compensated employees as
defined by the DCP. Under the plan, eligible employees may contribute a portion
of their salary on a pre-tax basis. The DCP is a non-qualified plan, therefore
the associated liabilities are included in the Company's June 30, 1999
Consolidated Balance Sheet. In addition, the Company has established a rabbi
trust to finance obligations under the DCP with corporate-owned life insurance
policies on participants. The cash surrender value of such policies is also
included in the
F-20
<PAGE> 185
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's June 30, 1999 Consolidated Balance Sheet. Total expense under the DCP
for the period ended June 30, 1999 amounted to $40,000.
Group Medical Plans -- 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. In
addition, the Company offers medical insurance coverage under managed care
health plans. Total expense for medical insurance coverage amounted to
$3,458,000, $3,752,000 and $4,430,000, for the years ended June 30, 1997, 1998
and 1999, respectively. Under the self-insurance plan, the Company expenses
amounts as claims are incurred and recognizes a liability for incurred but not
reported claims. At June 30, 1998 and 1999, the Company accrued $308,000 and
$315,000 respectively, as a liability for costs incurred but not paid under this
plan.
In December 1998, a subsidiary, CheckFree Management Corporation, was
created to administer the Company's employee medical benefits program. The
Company owns a controlling interest in the subsidiary, and therefore, the
accompanying consolidated financial statements include the subsidiary's results
of operations.
15. 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 either 33% or 20% per year from the dated of grant.
The 1995 Plan originally provided that the Company may grant options for not
more than 5,000,000 shares of common stock to certain key employees, officers
and directors. In November 1998, the 1995 Plan was amended by a vote of the
Company's shareholders to extend the maximum option grants to not more than
8,000,000 shares. 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, 1999, 2,920,684 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.
F-21
<PAGE> 186
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity from July 1, 1996 to
June 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- Beginning of
period............................ 2,908,218 $ 4.58 4,441,461 $ 9.59 4,365,562 $15.23
Granted............................. 2,282,056 14.32 1,377,334 25.60 1,575,057 36.40
Exercised........................... (636,309) 1.01 (708,661) 3.17 (354,758) 4.56
Cancelled........................... (112,504) 14.88 (744,572) 12.63 (389,261) 16.12
--------- --------- ---------
Outstanding -- End of period........ 4,441,461 $ 9.59 4,365,562 $15.23 5,196,600 $18.69
========= ====== ========= ====== ========= ======
Options exercisable at end of
period............................ 1,218,341 $ 1.17 1,352,516 $ 6.81 1,394,269 $ 9.00
========= ====== ========= ====== ========= ======
Weighted average per share fair
value of options granted during
the year.......................... $ 6.68 $10.77 $17.65
====== ====== ======
</TABLE>
The following table summarizes information about options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
--------------------------- --------------------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
- ----------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.85 - $10.00............................ 764,769 4.4 $ 1.17 672,427 $ 1.03
$10.01 - $20.00............................ 3,014,916 8.4 13.30 623,955 15.03
$20.01 - $30.00............................ 266,815 8.9 25.55 97,887 25.25
$30.01 - $40.00............................ 196,300 9.7 34.85 -- --
$40.01 - $50.00............................ 953,800 9.8 44.56 -- --
--------- ---------
5,196,600 $18.69 1,394,269 $ 9.00
========= ====== ========= ======
</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 years ended June 30, 1997, 1998 and 1999,
respectively: dividend yield of 0% in all periods; expected volatility of 47%,
48% and 49%; risk-free interest rates of 6.41%, 5.21%, and 5.87%; and expected
lives of 3 to 5 years.
Under the 1997 Associate Stock Purchase Plan, effective for the six-month
period beginning January 1, 1997, the Company is authorized to issue up to
1,000,000 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 withheld to purchase the
Company's Common Stock. The purchase price of the stock is 85% of the lower of
its beginning-of-period or end-of-period market price. Approximately 39% of
eligible employees participated in the Plan in the second half of the year ended
June 30, 1997, approximately 32% in the first half of fiscal 1998, approximately
49% in the second half of fiscal 1998, approximately 30% in the first half of
fiscal 1999 and approximately 31% in the second half of fiscal 1999. Under the
Plan, 53,013 shares were issued in July 1997, 56,844 in January 1998, 48,631 in
July 1998, 48,748 in January 1999 and 46,819 in July 1999 from employees' salary
withholdings from the respective previous six-month period. Following is a
summary of the weighted average fair market value of
F-22
<PAGE> 187
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
this look-back option estimated on the grant date using the Black-Scholes option
pricing model, and the related assumptions used:
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
---------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1997 1997 1998 1998 1999
--------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Fair value of options........ $3.93 $14.10 $9.68 $7.18 $5.51
Assumptions:
Risk-free interest rate.... 5.1% 5.0% 5.0% 4.9% 4.9%
Expected life.............. 3 months 3 months 3 months 3 months 3 months
Volatility................. 47.0% 48.0% 48.0% 49.0% 49.0%
Dividend yield............. 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees" 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 in accordance with the provisions of
SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
(loss) and net income (loss) per share would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1998 1999
--------- ------- ------
<S> <C> <C> <C>
Pro forma net income (loss)........................... $(164,089) $(9,521) $1,032
========= ======= ======
Pro forma net income (loss) per share;
Basic and Diluted................................... $ (3.49) $ (0.17) $ 0.02
========= ======= ======
</TABLE>
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
In September 1998, the Company offered an option repricing program to its
employees. Under the terms of the offer, employees had one week to decide
whether to return any outstanding option grant in its entirety and replace it on
a share-for-share basis with an option grant with an exercise price equal to the
fair market value of the Company's Common Stock at the new grant date. Only
those exchanges received within one day of the designated grant date were
accepted and any vested options in such returned grants were forfeited. The
lives of returned historical grants typically ranged from three to five years
with straight line vesting beginning one year from the original grant date. All
newly issued option grants had a life of five years and vesting occurs at 40%
beginning two years from the new grant date and 20% for each year thereafter. A
total of 1,418,403 options were returned and had the offer taken place at June
30, 1998, the options exercisable would have decreased by 95,614.
As described below, the Company has issued certain stock warrants to third
parties and has accounted for the issuance of such warrants in accordance with
the provisions of EITF 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
In January 1998, the Company entered into a 10-year processing agreement
with a strategic partner. Under the terms of the agreement, the partner acquired
10-year warrants exercisable at $20 15/16 for 10 million shares of the Company's
Common Stock. Three million warrants vested upon the execution of a related
processing outsourcing agreement on March 9, 1998, which resulted in the Company
recording a non-cash charge of $32.4 million. The charge was based on a
Black-Scholes option pricing model valuation of $10.80 per vested share using
the following assumptions: risk-free rate of 5.7%, expected life of 10 years,
and
F-23
<PAGE> 188
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
volatility rate of 56.4%. The remaining seven million warrants are to vest upon
achievement of specific performance targets set forth in the agreement. Any
shares acquired by the strategic partner under the terms of this agreement are
subject to certain transfer and other restrictions. In March 1997, the Company
entered into a consulting agreement with a third party. Under the terms of the
agreement the consultant acquired 5-year options exercisable at $13.00 for up to
50,000 shares of the Company's Common Stock. In June 1998, upon the execution of
a processing agreement with a key customer, 25,000 of the options vested, which
resulted in the Company recording a non-cash charge of $418,000. The charge was
based on a Black-Scholes option pricing model valuation of $16.73 per vested
share using the following assumptions: risk-free rate of 5.6%, expected life of
4 years, and volatility rate of 56.4%. The remaining 25,000 options are to vest
upon achievement of specific performance targets by key customers set forth in
the agreement. Any shares acquired by the consultant under the terms of the
agreement are subject to certain transfer restrictions. In accordance with the
terms of a joint marketing agreement, a strategic partner has warrants to
purchase up to 650,000 shares of the Company's Common Stock should the partner
attain certain customer acquisition targets.
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. The Company issued 78,257 shares in
September 1997 and 74,981 shares in August 1998 out of treasury to fund its
401(k) match that had accrued during the years ended June 30, 1997 and 1998,
respectively.
At June 30, 1996, certain stockholders had an option to sell up to 280,565
shares of common stock to the company at $19.00 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.
16. 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.
17. EARNINGS PER SHARE
The following table reconciles the differences in income and shares
outstanding between basic and dilutive for the periods indicated (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1998
--------------------------------------- ---------------------------------------
LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS............ $(161,813) 46,988 $(3.44) $(3,703) 55,087 $(0.07)
====== ======
Effect of dilutive
securities-options
and warrants....... -- -- -- --
--------- ------ ------- ------
Diluted EPS.......... $(161,813) 46,988 $(3.44) $(3,703) 55,087 $(0.07)
========= ====== ====== ======= ====== ======
<CAPTION>
YEAR ENDED JUNE 30, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS............ $10,457 52,444 $0.20
=====
Effect of dilutive
securities-options
and warrants....... -- 4,085
------- ------
Diluted EPS.......... $10,457 56,529 $0.18
======= ====== =====
</TABLE>
Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss periods. The
number of anti-dilutive equivalent shares excluded from the per share
calculations are 1,218,000 and 1,725,000 for the years ended June 30, 1997 and
1998, respectively.
F-24
<PAGE> 189
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
(IN THOUSANDS)
1997 1998 1999
-------- ------ -------
<S> <C> <C> <C>
Interest paid............................................... $ 585 $ 632 $ 618
======== ====== =======
Income taxes paid........................................... $ 1,147 $1,434 $ 1,688
======== ====== =======
Supplemental disclosure of non-cash investing and financing
activities:
Capital lease additions and purchase of other long-term
assets................................................. $ 1,914 $ 650 $ 3,379
======== ====== =======
Stock funding of 401(k) match............................. $ -- $ -- $ 963
======== ====== =======
Purchase price of business acquisitions................... $200,997 $1,000 $19,100
Less: Issuance of common stock and stock options pursuant
to acquisitions..................................... 177,188 -- 18,000
Liabilities assumed................................. 1,619 145 887
Net present value of future payment due............. 9,610 -- --
Cash acquired in acquisitions....................... 1,217 -- 23
-------- ------ -------
Net cash paid..................................... $ 11,363 $ 855 $ 190
======== ====== =======
</TABLE>
19. BUSINESS SEGMENTS
The Company operates in three business segments -- Electronic Commerce,
Software, and Investment Services. These reportable segments are strategic
business units that offer different products and services. A further description
of each business segment along with the Corporate services area follows:
- Electronic Commerce -- Electronic commerce includes electronic home
banking, electronic billing, electronic bill payment and business
payments. These services are primarily directed to financial institutions
and businesses and their customers.
- Software -- Software services includes end-to-end software products for
Automated Clearinghouse 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.
- Investment Services -- Investment services includes investment portfolio
management services and investment trading and reporting services. These
products and services are primarily directed to institutional investment
managers.
- Corporate -- Corporate services include human resources, legal,
accounting and various other of the Company's unallocated overhead
charges.
The accounting policies of the segments are the same as those described in
Note 1 "Summary of Significant Accounting Policies." The Company evaluates
performance based on revenues and operating income (loss) of the respective
segments. No single customer accounted for 10% or more of consolidated revenues
for the years ended June 30, 1997, 1998 and 1999. Foreign sales for the periods
presented are insignificant. There are no intersegment sales.
F-25
<PAGE> 190
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth certain financial information attributable to the
Company's business segments for the years ended June 30, 1997, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Electronic Commerce...................................... $ 85,926 $137,972 $169,443
Software................................................. 68,113 66,143 41,384
Investment Services...................................... 22,406 29,749 39,304
--------- -------- --------
Total............................................ $ 176,445 $233,864 $250,131
========= ======== ========
Operating income (loss):
Electronic Commerce -- including charge for acquired
in-process research and development of $140,000 in
1997.................................................. $(160,195) $(39,423) $ (5,490)
Software -- including charge for acquired in-process
research and development of $719 in 1998.............. 4,324 48,854 18,083
Investment Services -- including charge for acquired
in-process research and development of $2,201 in
1999.................................................. 2,171 5,040 5,892
Corporate................................................ (21,449) (21,647) (22,218)
--------- -------- --------
Total............................................ $(175,149) $ (7,176) $ (3,733)
========= ======== ========
Identifiable assets:
Electronic Commerce...................................... $ 59,265 $ 70,192 $ 80,223
Software................................................. 61,701 39,346 34,194
Investment Services...................................... 23,187 21,187 49,098
Corporate................................................ 79,683 119,387 89,246
--------- -------- --------
Total............................................ $ 223,836 $250,112 $252,761
========= ======== ========
Capital expenditures:
Electronic Commerce...................................... $ 3,182 $ 19,532 $ 9,258
Software................................................. 1,171 2,197 1,189
Investment Services...................................... 1,973 895 4,764
Corporate................................................ 2,788 5,315 25,233
--------- -------- --------
Total............................................ $ 9,114 $ 27,939 $ 40,444
========= ======== ========
Depreciation and amortization:
Electronic Commerce...................................... $ 2,094 $ 9,964 $ 14,214
Software................................................. 10,501 6,051 2,069
Investment Services...................................... 4,379 4,558 5,336
Corporate................................................ 7,945 4,426 3,011
--------- -------- --------
Total............................................ $ 24,919 $ 24,999 $ 24,630
========= ======== ========
</TABLE>
F-26
<PAGE> 191
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended June 30,
1998 and 1999 includes all adjustments necessary for a fair presentation of
quarterly results of operations: (In thousands except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1998:
Total revenue................................ $52,087 $56,515 $ 61,750 $63,512
Income (loss) from operations................ 17,187 (2,771) (29,223) 7,731
Net income (loss)............................ 9,771 (1,692) (17,540) 5,758
Basic earnings per share:
Net income (loss) per common share......... $ 0.17 $ (0.03) $ (0.32) $ 0.10
======= ======= ======== =======
Equivalent number of shares................ 56,703 55,028 55,281 55,376
======= ======= ======== =======
Diluted earnings per share:
Net income (loss) per common share......... $ 0.17 $ (0.03) $ (0.32) $ 0.10
======= ======= ======== =======
Equivalent number of shares................ 56,920 55,028 55,281 55,735
======= ======= ======== =======
Fiscal 1999:
Total revenue................................ $56,814 $59,605 $ 62,960 $70,752
Income (loss) from operations................ (3,462) (1,408) 349 788
Net income (loss)............................ (1,468) 11,375 (308) 858
Basic earnings per share:
Net income (loss) per common share......... $ (0.03) $ 0.22 $ (0.01) $ 0.02
======= ======= ======== =======
Equivalent number of shares................ 55,510 51,326 51,218 51,695
======= ======= ======== =======
Diluted earnings per share:
Net income (loss) per common share......... $ (0.03) $ 0.22 $ (0.01) $ 0.02
======= ======= ======== =======
Equivalent number of shares................ 55,510 52,553 51,218 56,839
======= ======= ======== =======
</TABLE>
The sum of the quarterly income (loss) per share does not equal the
year-to-date income (loss) per share for the respective fiscal periods, due to
changes in the number of shares outstanding at each quarter-end.
Significant Fourth Quarter Transactions -- During the week of April 26,
1999, the Company experienced a system error that led users of its electronic
billing and payment services to experience intermittent problems accessing and
using the system. As a result of this situation, the Company incurred charges of
$2,681,000, of which $800,000 is reflected as a reduction in processing and
servicing revenue and $1,881,000 as sales and marketing expense in the Company's
Consolidated Statements of Operations for the year ended June 30, 1999.
During the fourth quarter of 1999, the Company incurred $890,000 of costs
associated with a recalled secondary offering of stock. The costs are reflected
in general and administrative expense in the Consolidated Statements of
Operations for the year ended June 30, 1999.
In the fourth quarter of 1998, the Company recorded adjustments to reduce
its 401(k) match accrual by $2.4 million and its management incentive bonus
accrual by $1.7 million. Both incentive amounts had been provided for ratably
over the year in anticipation of achievement of financial results that would
have resulted in distribution of the amounts accrued in accordance with related
plan provisions.
F-27
<PAGE> 192
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. COMMITMENTS
In June 1999, the Company entered into a five-year agreement for software
to be used in conjunction with its electronic commerce business. The software is
to be licensed in incremental units over the term of the agreement to coincide
with the growth of the Company's business. Total commitments under the agreement
amount to $10 million over the five-year term.
F-28
<PAGE> 193
[This page left intentionally blank]
F-29
<PAGE> 194
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
----------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,446 $ 152,779
Investments............................................... 10,266 17,015
Accounts receivable, net.................................. 45,660 46,780
Prepaid expenses and other assets......................... 7,800 11,863
Deferred income taxes..................................... 6,513 8,324
--------- ---------
Total current assets................................. 82,685 236,761
Property and equipment, net................................. 69,823 80,416
Capitalized software, net................................... 20,059 21,584
Intangible assets, net...................................... 45,875 43,354
Investments................................................. 1,875 31,663
Deferred income taxes....................................... 21,920 31,095
Other noncurrent assets..................................... 10,524 12,855
--------- ---------
Total............................................. $ 252,761 $ 457,728
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,634 $ 8,679
Accrued liabilities....................................... 26,971 37,494
Current portion of long-term obligations.................. 1,640 5,069
Deferred revenue.......................................... 20,195 25,840
--------- ---------
Total current liabilities............................ 58,440 77,082
Accrued rent and other...................................... 3,536 4,862
Convertible subordinated notes.............................. -- 172,500
Obligations under capital leases -- less current portion.... 3,882 906
Commitments and contingencies...............................
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 57,305,659 and 57,971,003 shares,
respectively; outstanding 51,756,278 and 52,420,649
shares, respectively................................... 518 524
Additional paid-in-capital................................ 480,385 504,058
Other..................................................... -- (299)
Accumulated deficit....................................... (294,000) (301,905)
--------- ---------
Total stockholders' equity........................... 186,903 202,378
--------- ---------
Total............................................. $ 252,761 $ 457,728
========= =========
</TABLE>
See notes to interim unaudited condensed consolidated financial statements.
F-30
<PAGE> 195
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- --------------------
1998 1999 1998 1999
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing....................... $ 48,521 $62,627 $ 93,575 $120,931
License fees................................... 3,441 3,201 6,412 6,197
Maintenance fees............................... 4,238 4,518 9,202 8,956
Other.......................................... 3,405 2,623 7,230 5,905
-------- ------- -------- --------
Total revenues......................... 59,605 72,969 116,419 141,989
Expenses:
Cost of processing, servicing and support...... 34,368 43,906 71,457 86,899
Research and development....................... 5,579 8,286 12,157 15,110
Sales and marketing............................ 7,408 9,909 15,232 18,577
General and administrative..................... 7,625 9,363 14,358 19,287
Depreciation and amortization.................. 6,033 7,780 11,999 14,756
-------- ------- -------- --------
Total expenses......................... 61,013 79,244 125,203 154,629
Net gain on dispositions of assets............... -- -- 3,914 --
-------- ------- -------- --------
Loss from operations............................. (1,408) (6,275) (4,870) (12,640)
Interest, net.................................... 426 (102) 1,219 143
-------- ------- -------- --------
Loss before income taxes......................... (982) (6,377) (3,651) (12,497)
Income tax benefit............................... (12,357) (2,408) (13,558) (4,592)
-------- ------- -------- --------
Net income (loss)................................ $ 11,375 $(3,969) $ 9,907 $ (7,905)
======== ======= ======== ========
Basic earnings (loss) per share:
Net income (loss) per common share............. $ 0.22 $ (0.08) $ 0.19 $ (0.15)
======== ======= ======== ========
Equivalent number of shares.................... 51,326 52,200 53,419 52,023
======== ======= ======== ========
Diluted earnings (loss) per share:
Net income (loss) per common share............. $ 0.22 $ (0.08) $ 0.18 $ (0.15)
======== ======= ======== ========
Equivalent number of shares.................... 52,553 52,200 54,664 52,023
======== ======= ======== ========
</TABLE>
See notes to interim unaudited condensed consolidated financial statements.
F-31
<PAGE> 196
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 30,
---------------------
1998 1999
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ 9,907 $ (7,905)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 11,999 14,756
Deferred income tax provision........................... (11,554) (4,592)
Net gain on dispositions of assets...................... (3,914) --
Purchases of investments -- Trading..................... -- (10,563)
Proceeds from maturities and sales of investments,
net -- Trading........................................ 17,609 13,594
Change in certain assets and liabilities (net of
acquisitions and dispositions):
Accounts receivable.................................. 2,916 (1,120)
Prepaid expenses and other........................... 207 (831)
Other noncurrent assets.............................. -- (298)
Accounts payable..................................... (2,422) (955)
Accrued liabilities.................................. (2,321) 5,027
Deferred revenue..................................... (2,549) 5,645
Income tax accounts.................................. (4,541) 2
Accrued rent and other............................... (194) 538
-------- ---------
Net cash provided by operating activities.......... 15,143 13,298
Cash flows from investing activities:
Purchase of property and software......................... (16,750) (19,336)
Proceeds from sale of assets.............................. 11,421 --
Capitalization of software development costs.............. (2,776) (3,195)
Purchase of investments -- held to maturity............... -- (39,568)
Proceeds from maturities and sales of investments -- held
to maturity............................................. 1,006 --
-------- ---------
Net cash used in investing activities.............. (7,099) (62,099)
Cash flows from financing activities:
Principal payments under capital lease obligations........ (621) (312)
Proceeds from sale of stock and exercise of warrants...... -- 19,233
Proceeds from issuance of convertible subordinated
notes................................................... -- 166,921
Proceeds from stock options exercised, including related
tax benefits............................................ 536 1,976
Proceeds from employee stock purchase plan................ 1,070 1,316
Purchase of treasury stock................................ (31,161) --
-------- ---------
Net cash provided by (used in) financing
activities....................................... (30,176) 189,134
-------- ---------
Net increase (decrease) in cash and cash equivalents........ (22,132) 140,333
Cash and cash equivalents:
Beginning of period....................................... 36,535 12,446
-------- ---------
End of period............................................. $ 14,403 $ 152,779
======== =========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 349 $ 58
======== =========
Income taxes paid......................................... $ 2,353 $ 209
======== =========
Capital lease additions and purchase of other long-term
assets.................................................. $ 1,583 $ 1,753
======== =========
Stock funding of 401(k) match............................. $ 963 $ 1,059
======== =========
</TABLE>
See notes to interim unaudited condensed consolidated financial statements.
F-32
<PAGE> 197
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
1. The accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the six months
ended December 31, 1998 and 1999 are not necessarily indicative of the results
for the full year.
These financial statements should be read in conjunction with the financial
statements, accounting policies and financial notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. The following table reconciles the differences in income and shares
outstanding between basic and dilutive for the periods indicated (in thousands
except per share data):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------------ ------------------------------------
PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) DENOMINATOR AMOUNT (NUMERATOR) DENOMINATOR AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS...................... $ 9,907 53,419 $0.19 $(7,905) 52,023 $(0.15)
===== ======
Effect of dilutive securities:
Options and warrants........... -- 1,245 -- --
------- ------- ------- ------
Diluted EPS.................... $ 9,907 54,664 $0.18 $(7,905) 52,023 $(0.15)
======= ======= ===== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------------ ------------------------------------
PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) DENOMINATOR AMOUNT (NUMERATOR) DENOMINATOR AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS...................... $11,375 51,326 $0.22 $(3,969) 52,200 $(0.08)
===== ======
Effect of dilutive securities:
Options and warrants........... -- 1,227 -- --
------- ------- ------- ------
Diluted EPS.................... $11,375 52,553 $0.22 $(3,969) 52,200 $(0.08)
======= ======= ===== ======= ====== ======
</TABLE>
Basic earnings (loss) per common share amounts were computed by dividing
income (loss) available to shareholders by the weighted average number of shares
outstanding. Diluted per-common-share amounts assume the issuance of common
stock for all potentially dilutive equivalent shares outstanding except in loss
periods when such an adjustment would be anti-dilutive. During the quarter ended
December 31, 1999, the Company issued convertible subordinated notes. Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share",
requires that interest charges applicable to the convertible debt be added back
to income in computing diluted earnings per share, except in loss periods when
such an adjustment would be anti-dilutive. The impact of anti-dilutive interest
charges and equivalent shares excluded from the per share calculations were as
follows (in thousands):
F-33
<PAGE> 198
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------- ---------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) DENOMINATOR (NUMERATOR) DENOMINATOR
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Six Month Period Ended........................ $-- 4,198 $687 5,108
== ====== ==== ======
Three Month Period Ended...................... $-- 3,751 $687 6,381
== ====== ==== ======
</TABLE>
3. In the quarter ended September 30, 1999, the Company adopted Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Statement distinguishes accounting
for costs of computer software developed or obtained for internal use from
guidance under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed." The adoption of SOP 98-1 did not result in
a material impact on reported results.
4. In the quarter ended September 30, 1999, the Company issued 36,226
shares of common stock to fund its 401(k) match, the cost of which was accrued
during the year ended June 30, 1999.
5. In the quarter ended September 30, 1999, the Company issued 46,819
shares of common stock in conjunction with the employee stock purchase plan,
which was funded through employee payroll deductions accumulated in the
immediately preceding six-month period.
6. In the quarter ended September 30, 1999, the Company issued 13,000
shares of restricted stock to certain key employees. Shares issued were recorded
at their fair market value on the date of the grant with a corresponding charge
to stockholders' equity. The unearned portion is being amortized as compensation
expense on a straight-line basis over the related vesting periods. Sale of these
shares is restricted prior to the date of vesting.
7. In October 1999, the Company announced a new agreement with one of its
customers. Under the terms of the agreement, the customer purchased 250,000
shares of the Company's stock was granted unvested warrants on one million
shares and has the ability to earn warrants on up to two million additional
shares. All warrants are exercisable on September 15, 2002 contingent upon
achievement of various annual revenue targets and maintaining the continued
existence of the agreement through that date. Upon vesting of the warrants, the
Company will record a charge for the fair value of the warrants, based on a
Black-Scholes valuation which will take into consideration the market value of
our stock, the $39.25 strike price of the warrants, the volatility of our stock
and the applicable risk-free interest rate at that time.
8. On October 25, 1999, the Company executed an amendment to its working
capital line-of-credit agreement. The amendment extended the term of the line
through December 31, 1999, and changed certain financial covenants contained in
the agreement. In January 2000, the Company completed a new line-of-credit
agreement, which matures on December 30, 2002. The new agreement enables the
Company to borrow up to $30 million and contains certain financial and operating
covenants.
9. On November 29, 1999, the Company issued $172.5 million of 6.5%
convertible subordinated notes that are due on December 1, 2006. The Company
will pay interest on the notes on June 1 and December 1, of each year,
commencing June 1, 2000. The notes may be converted, at the holder's option,
into 13.6612 shares of common stock per note and the Company may redeem the
notes at any time on or after December 1, 2002. On January 14, 2000, the Company
filed a shelf registration statement to register the underlying shares. The
Company is using its reasonable best efforts to cause the shelf registration
statement to be declared effective by March 28, 2000.
10. On December 20, 1999, the Company entered into a definitive agreement
to purchase BlueGill Technologies, Inc. in exchange for approximately 3.5
million shares of the Company's common stock. The acquisition, which is expected
to close during the quarter ending March 31, 2000, will be accounted for under
F-34
<PAGE> 199
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
the purchase method of accounting and is expected to include a charge for
in-process research and development which is currently estimated at
approximately $7.6 million. BlueGill provides software that facilitates Web
based electronic billing and bill payment.
11. During the quarter ended December 31, 1999, the Company received
notification and payment for the exercise of warrants for 300,000 shares of the
Company's common stock at an exercise price of $20.9375. Of the 300,000 total
shares, 150,000 shares were not issued until February 2000, therefore, the
amount received is included in accrued liabilities in the Company's December 31,
1999 Condensed Consolidated Balance Sheets. The exercise of these warrants
resulted in an increase in deferred tax benefit and additional paid-in capital
as a result of the differences in the book versus tax accounting treatment of
these transactions.
12. In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which will
require that all derivative financial instruments be recognized as either assets
or liabilities in the balance sheet. SFAS 133 will be effective for the
Company's first quarter of fiscal 2001. The Company is in the process of
evaluating the effects of this new statement.
13. On February 15, 2000, the Company entered into a definitive agreement
to purchase MSFDC L.L.C. (TransPoint) in exchange for 17 million shares of the
Company's common stock. TransPoint is a joint venture between Microsoft, First
Data Corporation and Citibank. The acquisition, which is expected to close
within four to six months, will be accounted for under the purchase method of
accounting and is expected to include a charge for in-process research and
development. As part of the agreement, the selling parties will fund the joint
venture with $100 million of cash immediately prior to closing. A related
commercial agreement with Microsoft provides for specific monthly minimum
revenue guarantees totaling $120 million over the next five years in exchange
for CheckFree providing electronic billing and payment services to Microsoft's
Money Central customers at prevailing market rates for such services. CheckFree
will recognize revenue ratably over the life of the commercial agreement, taking
the minimum monthly revenue guarantee into consideration as it provides such
services. A related marketing agreement with First Data Corporation provides for
specific annual minimum revenue/cost reduction guarantees totaling $60 million
over the next five years in exchange for CheckFree providing electronic billing
and payment services to their customers at prevailing market rates for such
services, and/or utilizing First Data Corporation's payment services to reduce
CheckFree's payment processing costs. CheckFree will recognize revenue and/or
expense savings ratably over the life of the marketing agreement taking the
minimum monthly guarantees into consideration. The value of the commercial and
marketing agreements will be considered in determining the fair value of
intangible assets acquired in the acquisition. TransPoint provides electronic
billing and payment processing services.
14. Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
F-35
<PAGE> 200
[BLUEGILL TECHNOLOGIES LOGO]
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-36
<PAGE> 201
Report of Independent Public Accountants
To the Stockholders of
BlueGill Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of BLUEGILL
TECHNOLOGIES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BlueGill Technologies, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Ann Arbor, Michigan,
February 28, 2000.
F-37
<PAGE> 202
BLUEGILL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,111,200 $ 17,039,531
Accounts receivable, net of allowance for doubtful accounts of
$0 and $344,248 as of December 31, 1998 and 1999, respectively 484,235 1,804,302
Prepaid expenses and other 23,777 147,688
----------- ------------
Total current assets 4,619,212 18,991,521
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 260,423 1,020,211
Office furniture and equipment 29,630 244,132
Vehicles and other 19,080 267,884
----------- ------------
309,133 1,532,227
Less- Accumulated depreciation 64,392 267,274
----------- ------------
Net property and equipment 244,741 1,264,953
----------- ------------
OTHER ASSETS 3,099 2,066
----------- ------------
Total assets $ 4,867,052 $ 20,258,540
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 189,569 $ 555,856
Accounts payable 244,363 1,234,325
Accrued compensation and payroll taxes 22,739 396,869
Other accrued liabilities 61,870 570,781
Deferred revenue 21,209 672,467
----------- ------------
Total current liabilities 539,750 3,430,298
----------- ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Series A, convertible preferred stock, 12,503,301 shares outstanding 6,468,387 6,468,387
Series B, convertible preferred stock, 12,825,651 shares outstanding -- 19,495,000
----------- ------------
Total redeemable preferred stock 6,468,387 25,963,387
----------- ------------
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value, 41,000,000 shares authorized, 4,766,000 and
6,070,833 shares issued and outstanding at
December 31, 1998 and 1999, respectively 4,766 6,071
Additional paid-in capital 974,252 1,698,465
Deferred stock-based compensation (16,002) (634,094)
Accumulated deficit (3,109,930) (10,207,207)
Accumulated other comprehensive income 5,829 1,620
----------- ------------
Total stockholders' deficit (2,141,085) (9,135,145)
----------- ------------
Total liabilities and stockholders' deficit $ 4,867,052 $ 20,258,540
=========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-38
<PAGE> 203
BLUEGILL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES $ 422,500 $ 1,474,678 $ 5,396,967
COST OF REVENUES 74,000 218,095 533,965
----------- ----------- ------------
Gross profit 348,500 1,256,583 4,863,002
----------- ----------- ------------
OPERATING EXPENSES:
Research and development 479,938 894,944 2,123,192
Selling, general and administrative 845,198 2,416,938 10,290,279
----------- ----------- ------------
Total operating expenses 1,325,136 3,311,882 12,413,471
----------- ----------- ------------
Loss from operations (976,636) (2,055,299) (7,550,469)
INTEREST INCOME 11,471 148,167 482,650
INTEREST EXPENSE (22,177) (36,295) (29,458)
----------- ----------- ------------
Loss before benefit for income taxes (987,342) (1,943,427) (7,097,277)
BENEFIT FOR INCOME TAXES -- -- --
----------- ----------- ------------
NET LOSS $ (987,342) $(1,943,427) $ (7,097,277)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.22) $ (0.41) $ (1.43)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES 4,530,340 4,766,000 4,969,736
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-39
<PAGE> 204
BLUEGILL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------------- Paid-In Stock-based
Shares Amount Capital Compensation
--------- ------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 3,900,000 $ 3,900 $ 398,400 $ --
Issuance of common stock for cash 866,000 866 323,884 --
Compensation expense on stock option grants -- -- 168,300 --
Proceeds from issuance of common stock warrants -- -- 18,768 --
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------- ------- ----------- ---------
Comprehensive loss
BALANCE - DECEMBER 31, 1997 4,766,000 4,766 909,352 --
Issuance of common stock for cash 823,000 823 492,977 --
Issuance of redeemable preferred stock in exchange for common stock (823,000) (823) (492,977) --
Compensation related to stock option grants -- -- 64,900 (16,002)
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------- ------- ----------- ---------
Comprehensive loss
BALANCE - DECEMBER 31, 1998 4,766,000 4,766 974,252 (16,002)
Issuance of common stock upon exercise of stock options 1,304,833 1,305 21,926 --
Compensation related to stock option grants -- -- 702,287 (702,287)
Amortization of deferred stock compensation -- -- -- 84,195
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------- ------- ----------- ---------
Comprehensive loss
BALANCE - DECEMBER 31, 1999 6,070,833 $ 6,071 $ 1,698,465 $(634,094)
========= ======= =========== =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Other Stockholders'
Accumulated Comprehensive Equity
Deficit Income (Deficit)
------------ ------------- -------------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 $ (179,161) $ 42 $ 223,181
Issuance of common stock for cash -- -- 324,750
Compensation expense on stock option grants -- -- 168,300
Proceeds from issuance of common stock warrants -- -- 18,768
Net loss (987,342) -- (987,342)
Foreign currency translation adjustment -- 313 313
------------ -------- -----------
Comprehensive loss
BALANCE - DECEMBER 31, 1997 (1,166,503) 355 (252,030)
Issuance of common stock for cash -- -- 493,800
Issuance of redeemable preferred stock in exchange for common stock -- -- (493,800)
Compensation related to stock option grants -- -- 48,898
Net loss (1,943,427) -- (1,943,427)
Foreign currency translation adjustment -- 5,474 5,474
------------ -------- -----------
Comprehensive loss
BALANCE - DECEMBER 31, 1998 (3,109,930) 5,829 (2,141,085)
Issuance of common stock upon exercise of stock options -- -- 23,231
Compensation related to stock option grants -- -- --
Amortization of deferred stock compensation -- -- 84,195
Net loss (7,097,277) -- (7,097,277)
Foreign currency translation adjustment -- (4,209) (4,209)
------------ -------- -----------
Comprehensive loss
BALANCE - DECEMBER 31, 1999 $(10,207,207) $ 1,620 $(9,135,145)
============ ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
BALANCE - DECEMBER 31, 1996
Issuance of common stock for cash
Compensation expense on stock option grants
Proceeds from issuance of common stock warrants
Net loss $ (987,342)
Foreign currency translation adjustment 313
-----------
Comprehensive loss $ (987,029)
===========
BALANCE - DECEMBER 31, 1997
Issuance of common stock for cash
Issuance of redeemable preferred stock in exchange for common stock
Compensation related to stock option grants
Net loss $(1,943,427)
Foreign currency translation adjustment 5,474
-----------
Comprehensive loss $(1,937,953)
===========
BALANCE - DECEMBER 31, 1998
Issuance of common stock upon exercise of stock options
Compensation related to stock option grants
Amortization of deferred stock compensation
Net loss (7,097,277)
Foreign currency translation adjustment (4,209)
-----------
Comprehensive loss $(7,101,486)
===========
BALANCE - DECEMBER 31, 1999
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-40
<PAGE> 205
BLUEGILL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(987,342) $(1,943,427) $(7,097,277)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 18,711 47,128 202,301
Provision for losses on accounts receivable -- -- 344,248
Compensation expense on stock options 168,300 48,898 84,195
Amortization of discount on note payable 4,277 14,491 --
Interest expense on converted note payable 17,737 -- --
Increase (decrease) in cash resulting from changes in-
Accounts receivable (256,000) (228,235) (1,664,315)
Prepaid expenses and other -- (23,777) (123,911)
Other assets (5,635) -- --
Accounts payable 32,236 143,684 989,962
Accrued compensation and payroll taxes 12,188 (9,184) 374,130
Other accrued liabilities 61,242 57,238 508,911
Deferred revenue -- 21,209 651,258
--------- ----------- -----------
Net cash used in operating activities (934,286) (1,871,975) (5,730,498)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment (44,045) (239,634) (1,221,480)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock -- 5,435,045 19,495,000
Proceeds from issuance of common stock 324,750 493,800 23,231
Borrowings under note payable and line of credit 500,000 189,569 366,287
--------- ----------- -----------
Net cash provided by financing activities 824,750 6,118,414 19,884,518
--------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 601 5,867 (4,209)
--------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (152,980) 4,012,672 12,928,331
CASH AND CASH EQUIVALENTS:
Beginning of period 251,508 98,528 4,111,200
--------- ----------- -----------
End of period $ 98,528 $ 4,111,200 $17,039,531
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 163 $ 1,042 $ 29,458
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-41
<PAGE> 206
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BlueGill Technologies, Inc. ("BlueGill") and its wholly-owned
subsidiaries (collectively, the "Company") develop, market and
support electronic document transmission software technology. In
addition, the Company provides consulting, training and
maintenance services to customers.
The Company is in the early phases of implementing its operating
strategy. The Company's future success is subject to several
technical and business risks including customer acceptance,
availability and retention of key employees, competition and
technological changes. Since inception, the Company's revenues
have been derived from a limited number of customers located
primarily in the United States.
In December 1999, the Company signed an agreement and Plan of Merger
with Checkfree Acquisition Corporation III, a publicly held
Delaware corporation and a wholly-owned subsidiary of Checkfree
Holdings Corporation (the "Parent"). The merger agreement provides
for all of the outstanding capital shares of BlueGill
Technologies, Inc. to be exchanged for approximately 3,205,000
shares of the Parent's common stock, subject to adjustment,
depending on the average trading price of Parent's common stock
and the diluted number of shares of BlueGill common stock
outstanding.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of BlueGill and its wholly owned subsidiaries,
BlueGill Technologies Corporation (an Ontario, Canada
Corporation, "BlueGill Canada")and BlueGill Technologies
International, Inc. (a Michigan corporation, "BlueGill
International"). BlueGill Canada is a research and development
center that conducts development activities solely for
BlueGill. Prior to 1998, BlueGill owned a 49% interest in
BlueGill Canada. In 1998, the Company purchased the remaining
51% interest in BlueGill Canada for $51. A minority stockholder
of BlueGill held the 51% interest. BlueGill International
engages in sales and marketing efforts in Europe and Asia.
All significant intercompany balances and transactions have
been eliminated in the consolidation.
Foreign Currency Translation
The assets and liabilities of BlueGill Canada and BlueGill
International are translated using exchange rates in effect at
the balance sheet date. Revenues and expenses are translated at
average exchange rates during the period. The resulting foreign
currency translation adjustments are included in accumulated
other comprehensive income in the accompanying consolidated
financial statements.
Revenue Recognition
Revenue consists primarily of license fees for the Company's
software products. Revenue is recognized only when a customer
contract is fully executed, the software is delivered and no
significant remaining obligations to the customer exist.
F-42
<PAGE> 207
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue related to advance payments received under software
maintenance agreements is deferred and amortized over the terms
of the respective agreements. Revenue from other services is
recognized upon performance of the service.
Research and Development
Research and development expenses include all payroll costs
attributable to product development activities and an
allocation of overhead expenses incurred by the Company.
Product Development
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,"
capitalization of software development costs begins upon the
establishment of technological feasibility of the product
(defined as a working model). The ongoing assessment of the
recoverability of these costs require considerable judgment by
management with respect to certain external factors, including,
but not limited to, anticipated future gross product revenue,
estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized
under this Statement after consideration of the above factors
were immaterial, and therefore no software development costs
have been capitalized by the Company.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of
90 days or less to be cash equivalents.
Property and Equipment
Additions to property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over
the estimated useful lives of the respective assets generally
ranging from three to five years.
Stock-Based Compensation
The Company accounts for stock-based compensation using the
intrinsic value method prescribed under Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of the
Company's common stock at the date of the grant over the amount
the employee must pay to acquire the stock. As supplemental
information, the Company has provided pro forma disclosure of
the fair value at the date of grant of stock options granted
during 1997, 1998 and 1999 in Note 7, in accordance with the
requirements of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation."
F-43
<PAGE> 208
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive Loss
Comprehensive loss is the total of net loss and all other
non-owner changes in equity. The difference between net loss,
as reported in the accompanying consolidated statements of
operations, and comprehensive loss is the foreign currency
translation adjustment for the period.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting
standards for derivative instruments. The Company has not yet
quantified the impact of this statement on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition", which
provides guidance on when revenue should be recognized. This
bulletin did not have a material impact on the accompanying
financial statements.
Reclassifications
Certain amounts from the 1997 and 1998 financial statements have
been reclassified to conform with the 1999 presentation.
(3) LINE OF CREDIT
In 1998, the Company entered into a line-of-credit agreement with a
bank whereby the Company may borrow up to $750,000. Outstanding
borrowings bear interest at the bank's prime rate plus 0.25%
(effective rate of 8% and 8.75% as of December 31, 1998 and 1999,
respectively) which is payable monthly. Outstanding borrowings are
collateralized by substantially all assets of the Company. The
agreement expires on April 29, 2002.
F-44
<PAGE> 209
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1999
------- --------
<S> <C> <C>
Accrued Royalties $34,000 $ 62,300
Accrued Professional fees -- 221,252
Other 27,870 287,229
------- --------
Total $61,870 $570,781
======= ========
</TABLE>
(5) INCOME TAXES
The components of the benefit for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Tax benefit $(334,000) $(656,000) $(2,419,000)
Change in valuation Allowance 334,000 656,000 2,419,000
--------- --------- -----------
Total benefit $ -- $ -- $ --
========= ========= ===========
</TABLE>
The effective tax rate of zero differs from the Federal statutory
rate primarily due to providing a valuation allowance on future
tax benefits.
At December 31, 1998 and December 31, 1999, the Company had pre-tax
net operating loss carryforwards of approximately $3,100,000 and
$10,133,000, respectively, available for tax reporting purposes
which may be used to offset future taxable income. The loss
carryforwards expire between 2012 and 2019. The Company's ability
to utilize these loss carryforwards may be limited under Section
382 of the Internal Revenue Code. Due to the losses incurred since
inception, the deferred income tax asset is fully reserved by a
valuation allowance.
F-45
<PAGE> 210
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 1997, 1998 and 1999, the Company has a deferred
income tax asset prior to the valuation allowance totaling
$276,000, $1,054,000 and $3,445,000, respectively, consisting
primarily of the tax benefit of net operating loss carryforwards.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In June 1998, the Company amended its Certificate of Incorporation in
order to affect a 1000-to-1 common stock split and increased the
authorized shares of common stock to 30,000,000 from 12,000,000
(post-split). All information in the accompanying consolidated
financial statements has been restated to reflect the stock split.
Later in June 1998, the Company amended and restated its Certificate
of Incorporation pursuant to which it authorized 12,500,000 shares
of Series A convertible preferred stock.
In December 1998, the Company amended its Certificate of
Incorporation pursuant to which the Company increased the
authorized shares of Series A convertible preferred stock to
13,250,000 shares from 12,500,000. At various times during the
period from June 1, 1998 through December 31, 1998, the Company
issued an aggregate of 12,503,301 shares of Series A convertible
preferred stock at $0.5174 per share for cash and conversion of a
note payable. Certain holders of common stock were permitted to
exchange that stock for Series A convertible preferred stock.
In June 1999, the Company amended and its Certificate of
Incorporation pursuant to which the Company authorized 12,000,000
shares of Series B convertible preferred stock, authorized
12,000,000 shares of Series B-1 convertible preferred stock,
reduced the number of authorized shares of Series A convertible
preferred stock to 12,505,000 and increased the number of
authorized shares of common stock to 40,000,000 from 30,000,000.
In September 1999, the Company amended its Certificate of
Incorporation pursuant to which the Company increased the number
of authorized shares of Series B convertible preferred stock to
13,000,000 shares from 12,000,000 shares, Series B-1 convertible
preferred stock to 13,000,000, from 12,000,000 and common stock to
41,000,000 from 40,000,000.
At various times during the period from June 1, 1999 through
September 30, 1999, the Company issued an aggregate of 12,825,651
shares of Series B convertible preferred stock at $1.52 per share.
Common Stock
The Company and its founding stockholders (the "Founders") have
entered into agreements generally providing the Company the
right of first refusal to repurchase any shares of common stock
offered for sale by the Founders or upon termination of a
Founder's employment with the Company.
The holder of each outstanding share of common stock is entitled
to one voting right per share.
F-46
<PAGE> 211
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Common Stock Warrants
In June 1997, the Company received $500,000 from the issuance of
convertible notes with detachable warrants to purchase 300,000
shares of common stock at $0.375 per share. Accordingly, the
proceeds were allocated to the note and warrants based on their
relative fair values. The fair value of the warrants was
estimated using the Black-Scholes valuation model using the
following assumptions: estimated volatility of 0.70, risk-free
interest rate of 6.5%, no dividend yield and an expected life
of the warrants of three years. Based on the resulting fair
value of the warrants and their fair value relative to that of
the note, $18,768 of the proceeds was recorded for the warrants
as additional paid-in capital in the accompanying consolidated
balance sheets.
The balance of the proceeds of $481,232 was recorded as the
initial carrying value of the note. The resulting discount on
the note was being amortized using the effective interest
method through December 31, 1998. However, in June 1998 the
note and accrued interest converted into 1,042,794 shares of
Series A preferred stock. Concurrently, the unamortized
discount on the note of $8,769 was expensed. Total amortization
expense was $4,277 in 1997 and $14,491 in 1998 which is
included in interest expense in the accompanying consolidated
statements of operations. The note bore interest at a stated
rate of 15% and the effective interest rate was 18.19%.
The common stock warrants are exercisable at any time through the
earlier of July 24, 2002, or consummation of an initial public
offering. As of December 31, 1999, the warrants had not been
exercised.
Preferred Stock
The holders of Series A, Series B and Series B-1 convertible
preferred stock have certain rights, privileges and preferences
which include the following:
Dividends
The holders are entitled to receive dividends before any
dividend is declared or paid on shares of common stock. Such
dividends are payable only when declared by the Board of
Directors and are noncumulative. After payment of the
preferential dividends, no dividends are paid to common
stockholders unless an equivalent dividend is made on the
preferred stock.
Conversion
At the holder's option, each share of preferred stock is
convertible into shares of common stock. Each series of
preferred stock is automatically converted into common stock
upon a public offering of common stock of a certain size and
a specified percentage vote of holders of that series. The
preferred stock has antidilution protection for issuances
below the specified conversion prices, as defined, which is
initially equal to $0.5174 per share for the Series A
preferred stock and $1.52 for the Series B preferred stock.
F-47
<PAGE> 212
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Voting Rights
Except with respect to the election of the directors, the
holders of preferred stock (voting on an as-converted basis)
vote with the holders of common stock. Certain actions
require separate approvals by the holders of each series of
preferred stock, each voting separately as a class.
Redemption Rights
The holders of at least 75% of the outstanding shares of the
Series A convertible preferred stock and the holders of 75%
of the outstanding Series B convertible preferred stock may
each require the Company to repurchase such shares of that
series at any time after June 15, 2003. The redemption
prices for the Series A preferred stock and Series B
preferred stock are equal to $0.5174 and $1.52 per share,
respectively.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of
the Company, either voluntarily or involuntarily, the holder
of each share of Series A convertible preferred stock and
each share of Series B convertible preferred stock are
entitled to receive, prior to and in preference to any
distributions to the holders of common stock, an amount
equal to $0.5174 and $1.52 per share, respectively. The
liquidation preference of a particular series will not be
applicable if the Series A preferred stock will receive more
than $2.33 per share and the Series B preferred stock will
receive more than $3.04 per share.
Registration Rights
The holders of Series A and Series B convertible preferred
stock have demand "piggyback" registration rights.
(7) STOCK OPTION PLANS
1997 Stock Option Plan
In April 1997, the Company established a stock option plan (the
"1997 Plan") to increase its ability to attract and retain key
employees, consultants and directors. Options granted are
nonqualified stock options, which may be granted at less than
the fair market value of the common stock on the date of grant.
All options are granted at the discretion of the Board of
Directors. The maximum number of shares that may be granted
under the 1997 Plan is 3,200,000, except that upon
establishment of the 1998 Stock Option Plan (see below), the
remaining 525,000 ungranted options under the 1997 Plan can no
longer be granted. Options granted generally become exercisable
over a period of two years from the date of grant except that
450,000 options granted vested immediately. Outstanding options
expire ten years after the date of grant.
F-48
<PAGE> 213
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 1998, the Company cancelled and re-granted 1,125,000
options for which the exercise price of the options being
cancelled were significantly in excess of the estimated fair
value of the underlying common stock. The replacement options
were granted with an exercise price equal to the estimated fair
value of the underlying common stock.
In June 1998, the Company also extended the vesting period for
1,100,000 options that were fully vested with an exercise price
of $0.001 per share. Under the new vesting schedule, one-third
of the options vested immediately, one-third vested on
September 30, 1998, and one-third will vest on June 30, 2000.
The Company accounted for this event as a cancellation and
re-grant of these options. The Company recorded deferred
compensation expense totaling $64,900 for the difference
between the exercise price and the estimated fair value of the
underlying common stock which is being amortized over the
revised vesting period. As a result, the Company recorded
compensation expense of approximately $48,898 in 1998 and
$10,669 in 1999 related to these options.
1998 Stock Option Plan
In June 1998, the Company established a stock option plan (the
"1998 Plan") to increase its ability to attract and retain key
employees, consultants and directors. Options granted may be
either incentive stock options, which are granted at not less
than the fair market value of the common stock on the date of
grant (as determined under the plan), or nonqualified stock
options, which may be granted at less than the fair market
value of the common stock on the date of grant. All options are
granted at the discretion of the Board of Directors. The
maximum number of shares that may be granted under the 1998
Plan is 6,000,000. Options granted generally become exercisable
over a period of five years from the date of grant except that
200,000 options granted vest over two years and 650,000 options
granted vest over four years. Outstanding options expire ten
years after the date of grant.
F-49
<PAGE> 214
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other information concerning all stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Price Average
Number of per Exercise Expiration
Shares Share Price Date
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Plan Inception - April 1997 -- -- -- --
Options granted 2,450,000 $0.001-0.06 $0.02 2007-2008
Options exercised --
Options cancelled --
----------
Outstanding - December 31, 1997 2,450,000 $0.001-0.06 $0.02
Options granted 4,787,000 $0.001-0.06 $0.04 2007-2008
Options exercised --
Options cancelled (2,265,000) $0.001-0.06 $0.16
----------
Outstanding - December 31, 1998 4,972,000 $0.001-0.06 $0.04 2007-2008
Options granted 1,906,500 $0.06-0.56 $0.24 2009
Options exercised (1,186,834) $0.06 $0.014
Options cancelled (578,500) $0.001-0.32 $0.05
----------
Outstanding - December 31, 1999 5,113,166 $0.12 2007-2009
==========
Exercisable - December 31, 1999 1,946,041
==========
</TABLE>
Stock-Based Compensation
Using the intrinsic value method under APB 25, compensation
related to stock options granted to employees with exercise
prices at less than the deemed fair value for financial
reporting purposes totaled $112,200, $64,900 and $344,612 in
1997, 1998 and 1999, respectively. Compensation expense
recognized on these stock options totaled $112,200, $48,898 and
$7,952 in 1997, 1998 and 1999, respectively, and is included in
selling, general and administrative expenses in the
accompanying consolidated statements of operations. The
unamortized balance of compensation related to these stock
options totaling $16,002 and $341,993 at December 31, 1998 and
1999, respectively, is included as a separate component of
stockholders' equity in the accompanying consolidated balance
sheets.
F-50
<PAGE> 215
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company accounts for stock options granted to non-employees
under SFAS No. 123 and Emerging Issues Task Force ("EITF") No.
96-18. In January 1999, the Company granted 50,000 options to
an outside consultant in exchange for services to be rendered
over a five-year period. The options are exercisable at $0.06
per share and vest 20% on March 31, 1999, 20% on April 26, 2000
and 5% each quarter thereafter. The Company initially measured
the estimated fair value of these options at the grant date
using the Black-Scholes valuation model with the following
assumptions--risk-free interest rate of 5.25%, estimated
volatility of 0.89, no dividend yield and an expected life of
five years. Under SFAS No. 123 and EITF 96-18, the Company
accounts for these options as a variable award and re-measures
the estimated fair value of these stock options at each balance
sheet date. Accordingly, compensation expense is adjusted at
each balance sheet date for any change in the estimated fair
value of the stock options. At December 31, 1999, compensation
related to this stock option grant totaled $357,675.
Compensation expense recognized on these stock options totaled
$65,574 in 1999 and is included in selling, general and
administrative expenses in the accompanying consolidated
statements of operations. The unamortized balance of
compensation related to these stock options totaling $292,101
at December 31, 1999, is included as a separate component of
stockholders' equity in the accompanying consolidated balance
sheets. The estimated fair value of these options at the date
of grant was $0.04 per share.
In June 1997, the Company granted an aggregate of 150,000 stock
options to two outside consultants in exchange for past
services rendered and for services to be rendered through
September 1997. The options are exercisable at $0.001 per share
and vested immediately upon issuance. The Company initially
measured the estimated fair value of these options at the grant
date using the Black-Scholes valuation model with the following
assumptions--risk-free interest rate of 6.52%, estimated
volatility of 0.70, no dividend yield and an expected life of
three years. Under SFAS No. 123 and EITF 96-18, the Company
accounted for these options as a variable award and re-measured
the estimated fair value of these stock options upon completion
of the services in September 1997. Compensation expense
recognized on these stock options totaled $56,100 in 1997 and
is included in selling, general and administrative expenses in
the accompanying consolidated statements of operations. The
estimated fair value of these options at the date of grant was
$0.374 per share.
Had compensation expense for all stock option grants been
determined based on the fair value at the date of grant
consistent with SFAS 123, the reported net loss would have
increased by $122, $7,378 and $35,454 in 1997, 1998 and 1999,
respectively. The reported net loss per share would not have
changed in 1998 but would have increased to $(1.44) in 1999.
This pro forma compensation expense may not be representative
of that to be expected in future years.
The pro forma fair value of options was estimated at the date of
grant using the minimum value option valuation method under
SFAS 123 with the following assumptions: Weighted average
risk-free interest rate of 5.12%; dividend yield of 0%; and
expected life of options of five years. Option valuation models
require the input of highly subjective assumptions. Because
changes in subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of
the fair value of the Company's stock options.
F-51
<PAGE> 216
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8) RELATED PARTY TRANSACTIONS
The holder of the note payable, who subsequently became a stockholder
of the Company in 1998, provided consulting services to the
Company in 1998. Payments for these consulting services totaled
approximately $35,000 in 1998.
(9) COMMITMENTS
The Company leases its office space under operating lease agreements,
which expire at various dates through July 2001. Total rent
expense was approximately $12,000, $33,000 and $423,000 in 1997,
1998 and 1999, respectively. Minimum future rental payments under
noncancellable operating lease agreements as of December 31, 1999,
are as follows:
<TABLE>
<S> <C>
2000 $ 436,786
2001 442,198
2002 430,466
2003 431,664
Thereafter 107,916
----------
$1,849,030
==========
</TABLE>
F-52
<PAGE> 217
INDEPENDENT AUDITORS' REPORT
MSFDC, L.L.C.
Redmond, Washington
We have audited the accompanying consolidated balance sheets of MSFDC, L.L.C.
and subsidiaries, a development stage company (the Company), as of July 2, 1999,
and July 3, 1998, and the related consolidated statements of operations,
members' capital deficiency, and cash flows for the year ended July 2, 1999, and
the periods from June 18, 1997 (inception) to July 3, 1998, and from June 18,
1997 (inception) to July 2, 1999. 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 audits 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 the Company as of July 2, 1999, and
July 3, 1998, and the results of its operations and its cash flows for the year
ended July 2, 1999, and for the periods from June 18, 1997 (inception) to July
3, 1998, and from June 18, 1997 (inception) to July 2, 1999, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 22, 1999 (February 15, 2000, as to Note 4)
F-53
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MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, July 2, July 3,
ASSETS 1999 1999 1998
- ------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 19,837,565 $ 51,113,749 $ --
PROPERTY AND EQUIPMENT:
Equipment 4,679,620 3,924,418 2,004,261
Accumulated depreciation (3,234,582) (2,213,876) (343,409)
------------ ------------ ------------
Total property and equipment 1,445,038 1,710,542 1,660,852
CAPITALIZED SOFTWARE 9,438,708
------------ ------------ ------------
TOTAL $ 30,721,311 $ 52,824,291 $ 1,660,852
============ ============ ============
LIABILITIES AND MEMBERS'
CAPITAL DEFICIENCY
------------------
LIABILITIES:
Checks drawn in excess of bank balances $ -- $ -- $ 57,830
Accounts payable (See Note 3) 12,180,931 16,289,271 6,095,216
Accrued liabilities 1,246,504 592,192 361,261
Unearned revenue 250,000
------------ ------------ ------------
13,677,435 16,881,463 6,514,307
MINORITY INTEREST 43,060,952 45,936,458
MEMBERS' CAPITAL DEFICIENCY:
Membership interest - MS member (13,008,538) (4,996,815) (2,426,694)
Membership interest - FDC member (13,008,538) (4,996,815) (2,426,761)
------------ ------------ ------------
Total members' capital deficiency (26,017,076) (9,993,630) (4,853,455)
------------ ------------ ------------
TOTAL $ 30,721,311 $ 52,824,291 $ 1,660,852
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 219
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months Six months
ended ended Inception to
Year ended Inception to Inception to December 31, December 31, December 31,
July 2, 1999 July 3, 1998 July 2, 1999 1999 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ -- $ -- $ -- $ 3,060 $ -- $ 3,060
OPERATING EXPENSES:
Product development (See Note 3) 26,559,520 10,032,522 36,592,042 1,520,976 11,901,143 38,113,018
Selling, general, and
administrative (See Note 3) 18,637,762 5,839,118 24,476,880 18,292,485 7,282,878 42,769,365
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 45,197,282 15,871,640 61,068,922 19,813,461 19,184,021 80,882,383
OTHER EXPENSE (463,632) (18,118) (481,750) (911,449) (22,832) (1,393,199)
------------ ------------ ------------ ------------ ------------ ------------
Loss before minority interest 44,733,650 15,853,522 60,587,172 18,898,952 19,161,189 79,486,124
MINORITY INTEREST (2,063,542) (2,063,542) (2,875,506) (4,939,048)
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ 42,670,108 $ 15,853,522 $ 58,523,630 $ 16,023,446 $ 19,161,189 $ 74,547,076
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL DEFICIENCY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MS member FDC member Total
--------- ---------- -----
<S> <C> <C> <C>
Capital contributions $ 5,500,067 $ 5,500,000 $ 11,000,067
Net loss (7,926,761) (7,926,761) (15,853,522)
------------ ------------- -------------
Balance, July 3, 1998 (2,426,694) (2,426,761) (4,853,455)
Capital contributions 18,764,933 18,765,000 37,529,933
Net loss (21,335,054) (21,335,054) (42,670,108)
------------ ------------- -------------
Balance, July 2, 1999 (4,996,815) (4,996,815) (9,993,630)
Capital contributions (unaudited)
Net loss (unaudited) (8,011,723) (8,011,723) (16,023,446)
------------ ------------- -------------
Balance, December 31, 1999 (unaudited) $(13,008,538) $(13,008,538) $(26,017,076)
============ ============ ============
Inception to July 2, 1999
- -------------------------
Capital contributions $ 24,265,000 $ 24,265,000 $ 48,530,000
Net loss (29,261,815) (29,261,815) (58,523,630)
------------ ------------- -------------
Balance, July 2, 1999 $ (4,996,815) $ (4,996,815) $ (9,993,630)
============ ============ ============
Inception to December 31, 1999
- -------------------------------
Capital contributions (unaudited) $ 24,265,000 $ 24,265,000 $ 48,530,000
Net loss (unaudited) (37,273,538) (37,273,538) (74,547,076)
------------ ------------- -------------
Balance, December 31, 1999 (unaudited) $(13,008,538) $(13,008,538) $(26,017,076)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months Six months Inception
ended ended to
Year ended Inception to Inception to December 31, December 31, December 31,
July 2, 1999 July 3, 1998 July 2, 1999 1999 1998 1999
------------ ----------- ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(42,670,108) $(15,853,522) $(58,523,630) $(16,023,446) $(19,161,189) $(74,547,076)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,870,467 343,409 2,213,876 1,020,706 785,507 3,234,582
Minority interest share of loss (2,063,542) (2,063,542) (2,875,506) (4,939,048)
Cash provided (used) by changes in
operating assets and liabilities:
Checks drawn in excess of
bank balance (57,830) 57,830 (57,830)
Accounts payable and accrued
liabilities 10,424,986 6,456,477 16,881,463 (3,454,028) 3,065,303 13,427,435
Unearned revenue 250,000 250,000
------------ ----------- ------------ ------------ ------------ ------------
Net cash used by operating activities (32,496,027) (8,995,806) (41,491,833) (21,082,274) (15,368,209) (62,574,107)
INVESTING ACTIVITIES:
Acquisition of equipment (1,920,157) (2,004,261) (3,924,418) (755,202) (639,964) (4,679,620)
Capitalized software (9,438,708) (9,438,708)
------------ ----------- ------------ ------------ ------------ ------------
Net cash used by investing activities (1,920,157) (2,004,261) (3,924,418) (10,193,910) (639,964) (14,118,328)
FINANCING ACTIVITIES:
Member capital contributions 37,529,933 11,000,067 48,530,000 16,579,933 48,530,000
Capital contribution from minority
interest 48,000,000 48,000,000 48,000,000
------------ ----------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities 85,529,933 11,000,067 96,530,000 16,579,933 96,530,000
------------ ----------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 51,113,749 51,113,749 (31,276,184) 571,760 19,837,565
CASH AND CASH EQUIVALENTS:
Beginning of period 51,113,749
------------ ----------- ------------ ------------ ------------ ------------
End of period $ 51,113,749 $ -- $ 51,113,749 $ 19,837,565 $ 571,760 $ 19,837,565
============ =========== ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-57
<PAGE> 222
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS: The purpose of the business is to provide
electronic statement presentment and electronic remittance services to
consumers and businesses using the Internet. The business has been in
the development stage and commenced commercial operations in July 1999.
ORGANIZATION: MSFDC, L.L.C. is a Delaware limited liability company and
was formed pursuant to the Limited Liability Company Agreement of
MSFDC, L.L.C. dated as of June 18, 1997 (inception) (the LLC
Agreement). The members of MSFDC, L.L.C. are MS II, L.L.C., a Delaware
limited liability company (the MS member), and First Data L.L.C., a
Delaware limited liability company (the FDC member). The MS member is a
wholly owned subsidiary of Microsoft Corporation (MS). The FDC member
is a wholly owned subsidiary of First Data Corporation (FDC).
In September 1998, MSFDC, L.L.C. entered into an arrangement whereby
the electronic bill presentment and payment service business in the
United States previously under development by MSFDC, L.L.C. was
contributed to a newly formed entity, Newco L.L.C. (TransPoint). The
members of TransPoint are MSFDC, L.L.C. and Citicorp Electronic
Commerce Inc. (the Citicorp member). The Citicorp member of TransPoint
is a wholly owned subsidiary of Citicorp. In connection with this new
arrangement, two additional entities were formed: New MSFDC, L.L.C.
(TransPoint Technologies and Services) and Jointco L.L.C. (TransPoint
Accounting). The Citicorp member interest in TransPoint Technologies
and Services and TransPoint is 25% and 5%, respectively, with MSFDC,
L.L.C. holding the remaining interests. TransPoint Technologies and
Services and TransPoint each hold 50% capital interests in TransPoint
Accounting. These three new entities are collectively referred to as
the TransPoint limited liability companies.
The TransPoint limited liability companies collectively have rights to
all future domestic revenues generated by the electronic bill
presentment and payment service previously under development by MSFDC,
L.L.C. The MS and FDC members have established a new limited
partnership, MSFDC International L.P., to account for the future
international revenues and related costs.
CONTRIBUTIONS: Upon formation of MSFDC, L.L.C. in 1997, the MS member
contributed $50,000 in cash. First Data Resources, Inc. contributed
$40,000 in cash, and Integrated Payment Systems, Inc. contributed
$10,000 as initial capital contributions. Immediately following the
initial capital contribution, Integrated Payment Systems, Inc.
transferred its membership interest to First Data Resources, Inc. These
interests were then transferred to First Data L.L.C.
In connection with the formation of the new TransPoint limited
liability companies, Citicorp contributed $48,000,000 in cash as its
initial contribution and MSFDC, L.L.C. contributed $37,529,933. MSFDC,
L.L.C. and the Citicorp member also made nonmonetary contributions to
the TransPoint limited liability companies with a stated value of
$446,250,000 and $30,750,000, respectively. The MSFDC, L.L.C.
nonmonetary contribution was in the form of software development,
goodwill, and tangible and intangible assets. The Citicorp member
nonmonetary contribution represented an option to obtain a license of
software and intangible assets and no value has been ascribed to this
contribution in the accompanying consolidated financial statements.
F-58
<PAGE> 223
LOSS AND CASH FLOW ALLOCATIONS: The allocation of profit and loss and
cash flow of MSFDC, L.L.C. and the TransPoint limited liability
companies is defined in the respective limited liability company
agreements. These agreements generally result in a sharing of ongoing
capital contribution requirements and profit and loss based on initial
membership interests. Cash distributions are to be made annually in an
amount equal to the assumed tax liability of the entities, or if
greater, excess cash flow. For financial reporting purposes, losses
from the TransPoint limited liability companies have been allocated to
MSFDC, L.L.C. and the Citicorp member based on their respective capital
account interests of 85% and 15%, respectively. Citicorp loss
allocations commenced upon the date of their capital contribution in
April 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim financial
information contained herein is unaudited but, in the opinion of
management, reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the periods presented. All such adjustments are of a normal,
recurring nature. Results of operations for interim periods presented
herein are not necessarily indicative of results of operations for the
entire year.
The unaudited interim financial statements of MSFDC L.L.C. include the
accounts of MSFDC International, L.P., which was formed in April 1999.
The accounts of MSFDC International, L.P. have been combined with
those of MSFDC L.L.C. due to common ownership, and because the entity
is being acquired under the same transaction as MSFDC L.L.C. (See
Note 4).
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The financial statements include all majority and wholly
owned subsidiaries (collectively, the Company). Intercompany balances
and transactions have been eliminated in consolidation.
MINORITY INTEREST: Citicorp's capital contributions and share of losses
in the TransPoint limited liability companies has been recorded as a
minority interest.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and
related disclosures. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost, less
accumulated depreciation, and consists primarily of computers and
related technical equipment. Depreciation is provided utilizing the
straight-line method over the estimated useful lives of the assets,
which range from one year to 3 years.
The carrying value of equipment is reviewed periodically for
impairment. If the carrying amount of the asset is not recoverable, the
asset is considered to be impaired and the value is adjusted to the
estimated fair value.
INCOME TAXES: As a limited liability company, the Company is treated as
a partnership for federal and state income tax purposes and its income
or loss is taxable directly to its members. Accordingly, the
accompanying financial statements do not include any income tax
provisions.
PRODUCT DEVELOPMENT: Product development costs are expensed as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, does not materially affect the Company.
RECENT ACCOUNTING PRONOUNCEMENT: In March 1998, the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, Accounting for the Cost of Computer Software Developed of
Obtained for Internal Use. SOP 98-1 requires capitalization and
amortization of costs relating to internal-use software, and was
adopted by the Company beginning July 3, 1999. The adoption of SOP
98-1 resulted in the capitalization of approximately $9.4 million in
costs through December 31, 2000 (unaudited). Capitalized costs include
direct labor and related overhead for software developed by the Company
and the cost of software purchased from third parties.
As of December 31, 2000, the Company has not yet commenced amortization
of any of its capitalized software costs as the software is not ready
for its intended use. Amortization of capitalized software costs will
be calculated using the straight-line method commencing when the
software is ready for its intended use. Quarterly, the Company reviews
and measures any impairment in accordance with the provisions of SFAS
No. 121, Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of.
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<PAGE> 224
NOTE 3: RELATED PARTY TRANSACTIONS AND COMMITMENTS
OPERATING COSTS AND REIMBURSEMENTS: The MS member and the FDC member
provide certain operational services, some of which are reimbursed by
the Company. Selling, general, and administrative expenses related to
these services provided by the MS member and the FDC member for the
year ended July 2, 1999, totaled $2,248,000 and $11,601,000,
respectively, and $7,338,000 and $7,080,000, respectively, for the
period from June 18, 1997 (inception) to July 3, 1998.
Services related to selling, general, and administrative expenses for
the six-month periods ended December 31, 1999 and 1998 (unaudited)
totaled $10,461,000 and $895,000, respectively, for the MS member and
$2,798,000 and $5,809,000, respectively, for the FDC member.
RESEARCH AND DEVELOPMENT COSTS AND REIMBURSEMENTS: The MS member and
the FDC member perform certain research and development activities,
some of which are reimbursed by the Company. Research and development
expenses related to these activities performed by the MS member and the
FDC member for the year ended July 2, 1999, and the period from June
18, 1997 (inception) to July 3, 1998, totaled $18,886,000 and
$4,279,000, respectively, and $6,502,000 and $3,155,000, respectively.
Research and development costs for the six-month periods ended December
31, 1999 and 1998 (unaudited) totaled $10,522,000 and $-0-,
respectively, for the MS member and $8,422,000 and $2,022,000,
respectively, for the FDC member. Of research and development costs
incurred during the six-month period ended December 31, 1999,
$9,439,000 (unaudited) was capitalized under SOP 98-1 as software
developed for internal use.
ACCOUNTS PAYABLE: Accounts payable includes $11,722,000 and $4,407,000
to the MS member and the FDC member, respectively, as of July 2, 1999,
and $2,569,000 and $2,582,000 to the MS member and the FDC member,
respectively, as of July 3, 1998.
Accounts payable as of December 31, 1999 (unaudited) includes
$11,352,000 and $956,000 for the MS member and FDC member,
respectively.
NOTE 4: SUBSEQUENT EVENT
On February 15, 2000, the Company entered into an agreement to be
acquired. Under the terms of the agreement, the members have agreed to
fund the Company with $100 million in cash before the closing of the
transaction.
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<PAGE> 225
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Article IX of the Registrant's By-Laws (the "By-Laws") provides that
the Registrant shall, to the fullest extent permitted by applicable law as then
in effect, indemnify any person who is or was involved or threatened to be made
so involved in any action by reason of the fact that he is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another entity. The right to indemnification
includes the right to receive payment of expenses in advance of the final
disposition of the proceeding. All indemnification rights in Article IX are
contract rights. The Registrant also may provide indemnification for employees,
agents, attorneys and representatives of the Registrant by action of its board
of directors. Article IX expressly states that no amendment to the By-Laws or
the Certificate of Incorporation shall adversely affect any right to
indemnification for acts occurring prior to that amendment. The right of
indemnification is not exclusive of any other rights of indemnification that may
be available.
In determining the right to indemnification under Article IX, the
Registrant has the burden of proof that the indemnitee has not met the
applicable standard of conduct. If successful in whole or in part in such a
proceeding, the indemnitee is entitled to be indemnified for expenses incurred
in connection with such proceeding. All reasonable expenses incurred by an
indemnitee in connection with any proceeding shall be advanced by the Registrant
after receipt of a statement from the indemnitee requesting such advance.
Article IX provides that the Registrant may purchase and maintain insurance
in connection with any expenses, liability or loss relating to any proceeding,
whether or not the Registrant would have the power to indemnify the officer,
director, employee, agent, attorney, trustee or representative. The Registrant
also may enter into indemnification contracts with any of the foregoing persons,
which contracts are deemed specifically approved and authorized by the
stockholders and not subject to invalidity by reason of any interested
directors.
If any provision of Article IX is held invalid, illegal or unenforceable,
the remaining provisions of Article IX shall not be affected. An indemnitee also
may elect, as an alternative to the Article IX procedures, to follow procedures
authorized by applicable corporate law or statute. Article IX sets forth
specific procedures for the advancement of expenses and for the determination of
entitlement to indemnification. Entitlement to indemnification shall be
determined by a majority vote of disinterested directors, by a written opinion
of independent counsel under specific circumstances or by the Registrant's
stockholders if a majority of the disinterested directors determines the issue
should be submitted to the stockholders, or, if none of the persons empowered to
make a determination have been appointed and have made a determination within 60
days after the receipt of a request for indemnification, the indemnitee is
deemed to be entitled to indemnification unless the indemnitee misrepresented or
omitted a material fact in making or supporting his request for indemnification
or the indemnification is prohibited by law. The termination of an action by
judgment, order, settlement or conviction or upon a plea of nolo contendere does
not adversely affect the right of an indemnitee to indemnification or create any
presumption with respect to any standard of conduct. An indemnitee is entitled
to indemnification for expenses if he is successful on the merits, if the action
is terminated without a determination of liability on the part of the indemnitee
or if the indemnitee was not a party to the action. An indemnitee who is
determined not to be entitled to indemnification may appeal such determination
either through the courts or by arbitration.
(b) Under Section 145 of the Delaware General Corporation Law,
indemnification of any person who is or was a party or threatened to be made so
in any action by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or was serving as such for another
corporation or enterprise at the request of the corporation is permitted against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the indemnified person in such
proceeding where the indemnified person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
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<PAGE> 226
corporation, and in criminal actions, where he had no reasonable cause to
believe his conduct was unlawful. Indemnification is also permitted in lawsuits
brought by or on behalf of the corporation if the standards of conduct described
above are met, except that no indemnification is permitted in respect to any
matter in which the person is adjudged to be liable to the corporation unless a
court shall determine that indemnification is fair and reasonable in view of all
the circumstances of the case. Indemnification against expenses (including
attorneys' fees) actually and reasonably incurred by directors, officers,
employees and agents is required under Section 145 of the Delaware Law in those
cases where the person to be indemnified has been successful on the merits or
otherwise in defense of a proceeding of the type described above. In cases where
indemnification is permissive, a determination as to whether the person met the
applicable standard of conduct must be made (unless ordered by a court) by
majority vote of the disinterested directors, by a committee of the
disinterested directors designated by a majority vote of such directors, even
though less than a quorum, by independent legal counsel, or by the stockholders.
Such indemnification rights are specifically not deemed to be exclusive of other
rights of indemnification by agreement or otherwise and the corporation is
authorized to advance expenses incurred prior to the final disposition of a
matter upon receipt of an undertaking to repay such amounts on a determination
that indemnification was not permitted in the circumstances of the case.
(c) Under Section 145 of the Delaware Law and Article IX of the By-Laws,
the Registrant may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, or agent of the Registrant, or who,
while serving in such capacity, is or was at the request of the Registrant, a
director, officer, employee or agent of another corporation or other enterprise,
against liability asserted against or incurred by such person in any such
capacity whether or not the Registrant would have the power to provide indemnity
under Section 145 or the By-Laws. The Registrant has obtained insurance which,
subject to specific exceptions, insures the directors and officers of the
Registrant and its subsidiaries
(d) The Registrant has entered into indemnification contracts with its
directors and some officers which provides that such directors and officers will
be indemnified to the fullest extent provided by Section 145 of the Delaware Law
(or such other future statutory provision authorizing or permitting
indemnification) against all expenses (including attorneys' fees), judgments,
fines and settlement amounts, actually and reasonably paid or incurred by them
in any action or proceeding, including any action by or in the right of the
Registrant, by reason of the fact that they were a director, officer, employee
or agent of the Registrant, or were serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
No indemnity will be provided under such indemnification contracts (i)
except to the extent that the aggregate losses to be indemnified pursuant
thereto exceed the amount for which the indemnitee is indemnified pursuant to
any directors and officers liability insurance purchased and maintained by the
Registrant; (ii) in respect to remuneration paid to an indemnitee if it shall be
determined by a final judgment that such remuneration was in violation of law;
(iii) on account of any suit in which judgment is rendered against an indemnitee
for an accounting of profits made from the purchase or sale by indemnitee of
securities of the Registrant pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions of
any federal, state or local statutory law; (iv) on account of the indemnitee's
act or omission being finally adjudged to have been not in good faith or
involving intentional misconduct or a knowing violation of law; or (v) if a
final decision by a court having jurisdiction in the matter shall determine that
such indemnification is not lawful.
(e) Article EIGHTH of the Registrant's Restated Certificate of
Incorporation provides that a director of the Registrant shall not be personally
liable to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any unlawful payment of a dividend or
unlawful stock purchase or redemption; or (iv) for any transaction from which
the director derived any improper personal benefit.
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<PAGE> 227
The above discussion of the Registrant's By-Laws, Restated Certificate of
Incorporation, indemnification agreements, and of Section 145 of the Delaware
Law is not intended to be exhaustive and is respectively qualified in its
entirety by such By-Laws, Restated Certificate of Incorporation and statutes.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
2(a) Agreement and Plan of Merger, dated as of December 20, 1999,
among CheckFree Holdings Corporation, CheckFree Acquisition
Corporation IV, and BlueGill Technologies, Inc.
(Incorporated by reference to Appendix A of Form S-4
Registration Statement (333-32644)).
2(b) Agreement and Plan Merger and Contribution Agreement, dated
as of February 15, 2000, among Microsoft Corporation, First
Data Corporation, Citibank, N.A., MS II, LLC, First Data,
L.L.C., H & B Finance, Inc., First Data International
Partner, Inc., MSFDC International, Inc., Citicorp
Electronic Commerce, Inc., CheckFree Holdings Corporation,
Chopper Merger Corporation, and CheckFree Corporation
(Attached as Appendix A to the Proxy Statement/Prospectus
that is part of this Registration Statement.)
3(a) * Certificate of Incorporation of CheckFree Corporation.
3(b) * By-Laws of CheckFree Corporation.
3(c) * Form of Specimen Stock Certificate.
3(d) Form of Restated Certificate of Incorporation of CheckFree
Corporation (included as Appendix C to the proxy
statement/prospectus forming a part of this registration
statement).
3(e) Form of Restated By-Laws of CheckFree Corporation (included
as Appendix D to the proxy statement/prospectus forming a
part of this registration statement).
3(f) Restated Certificate of Incorporation of CheckFree Holdings
Corporation. (Reference is made to Exhibit 3(a) to the
Current Report on Form 8-K, dated December 22, 1997, filed
with the Securities and Exchange Commission on December 30,
1997, and incorporated herein by reference.)
3(g) By-Laws of CheckFree Holdings Corporation. (Reference is
made to Exhibit 3(b) to the Current Report on Form 8-K,
dated December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and incorporated
herein by reference.)
3(h) Form of Specimen Stock Certificate of CheckFree Holdings
Corporation. (Reference is made to Exhibit 3(c) to the
Current Report on Form 8-K, dated December 22, 1997, filed
with the Securities and Exchange Commission on December 30,
1997, and incorporated herein by reference.)
4(a) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH
of CheckFree Corporation's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(d) hereto)
and Articles II, III, IV, VI and VIII of CheckFree
Corporation's By-Laws (contained in the Company's By-Laws
filed as Exhibit 3(e) hereto).
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4(b) * Form of Rights Agreement, dated as of [ ], 2000, by and
between the CheckFree Corporation and The Fifth Third Bank,
as Rights Agent.
4(c) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH
of CheckFree Holdings Corporation's Restated Certificate of
Incorporation (contained in CheckFree Holdings Corporation's
Restated Certificate of Incorporation filed as Exhibit 3(f)
hereto) and Articles II, III, IV, VI and VIII of CheckFree
Holdings Corporation's By-Laws (contained in CheckFree
Holdings' By-Laws filed as Exhibit 3(g) hereto).
4(d) Rights Agreement, dated as of December 16, 1997, by and
between CheckFree Holdings Corporation and The Fifth Third
Bank, as Rights Agent. (Reference is made to Exhibit 4.1 to
Amendment No. 1 to Registration Statement on Form 8-A, filed
with the Securities and Exchange Commission on May 12, 1999,
and incorporated herein by reference.)
5 * Opinion of Porter, Wright, Morris & Arthur LLP regarding
legality.
10(a) CheckFree Holdings Corporation Amended and Restated
Associate Stock Purchase Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8, as
amended (Registration No. 333-21795), filed with the
Securities and Exchange Commission on January 14, 1998, and
incorporated herein by reference.)
10(b) CheckFree Holdings Corporation Amended and Restated 1995
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended
(Registration No. 33-98446), filed with the Securities and
Exchange Commission on January 9, 1998, and incorporated
herein by reference.)
10(c) CheckFree Holdings Corporation Amended and Restated 1993
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended
(Registration No. 33-98442), filed with the Securities and
Exchange Commission on January 9, 1998, and incorporated
herein by reference.)
10(d) CheckFree Holdings Corporation Amended and Restated 1983
Non-Statutory Stock Option Plan. (Reference is made to
Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98440), filed with the
Securities and Exchange Commission on January 9, 1998, and
incorporated herein by reference.)
10(e) CheckFree Holdings Corporation Second Amended and Restated
1983 Incentive Stock Option Plan. (Reference is made to
Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98444), filed with the
Securities and Exchange Commission on January 9, 1998, and
incorporated herein by reference.)
10(f) Form of 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).
(Reference is made to Exhibit 10(g) to CheckFree Holdings
Corporation's Form 10-K for the year ended June 30, 1997,
filed with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by reference.)
10(h) Noncompete, Nondisclosure, and Assignment Agreement, dated
February 1, 1990, between Peter J. Kight and CheckFree
Holdings Corporation. (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 CheckFree
Holdings Corporation. (Reference is made to Exhibit 10(j) to
Registration Statement on Form S-1, as amended (Registration
No. 33-
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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 CheckFree Holdings Corporation 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 CheckFree Holdings
Corporation 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) Automated Clearinghouse Operations Agreement, dated April 1,
1994, between CheckFree Holdings Corporation 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
CheckFree Holdings Corporation 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 CheckFree Holdings
Corporation 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 CheckFree
Holdings Corporation 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 CheckFree
Holdings Corporation. (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
CheckFree Holdings Corporation, 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 CheckFree Holdings
Corporation as mortgagor and Society National Bank as
mortgagee. (Reference is made to Exhibit 10(vv) to
Registration Statement on Form S-1, as amended (Registration
No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)
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<PAGE> 230
10(s) Loan and Security Agreement, dated August 25, 1993, between
CheckFree Holdings Corporation 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
CheckFree Holdings Corporation. (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
CheckFree Holdings Corporation 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 CheckFree
Holdings Corporation and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to CheckFree Holdings
Corporation'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 CheckFree Holdings Corporation
and Electronic Data Systems Corporation. (Reference is made
to Exhibit 10(eee) to CheckFree Holdings Corporation'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
CheckFree Holdings Corporation and Fiserv, Inc. (Reference
is made to Exhibit 10(fff) to CheckFree Holdings
Corporation'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 CheckFree
Holdings Corporation 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 CheckFree Holdings
Corporation and Peter J. Kight. (Reference is made to
Exhibit 10(z) to CheckFree Holdings Corporation's Form 10-K
for the year ended June 30, 1997, filed with the Securities
and Exchange Commission on September 26, 1997, and
incorporated herein by reference.)
10(aa) Executive Employment Agreement between CheckFree Holdings
Corporation 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(bb) Agreement for Automated Clearinghouse Services between
CheckFree Holdings Corporation 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(cc) Loan and Security Agreement, dated as of May 13, 1997, among
KeyBank National Association, CheckFree Holdings
Corporation, CheckFree Software Solutions, Inc., CheckFree
Services Corporation, Security APL, Inc., Servantis Systems,
Inc., and
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<PAGE> 231
Servantis Services, Inc. (Reference is made to Exhibit
10(ee) to CheckFree Holdings Corporation's Form 10-K for the
year ended June 30, 1997, filed with the Securities and
Exchange Commission on September 26, 1997, and incorporated
herein by reference.)
10(dd) First Amendment to Loan and Security Agreement by and
between KeyBank National Association, as Lender, and
CheckFree Corporation, as Borrower, dated as of December 9,
1998. (Reference is made to Exhibit 10.1 to CheckFree
Holdings Corporation's Form 10-Q for the quarter ended March
31, 1999, filed with the Securities and Exchange Commission
on May 17, 1999, and incorporated herein by reference.)
10(ee) CheckFree Corporation Incentive Compensation Plan.
(Reference is made to Exhibit 10(ff) to CheckFree Holdings
Corporation's Form 10-K for the year ended June 30, 1997,
filed with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by reference.)
10(ff)*** Form of Commercial Alliance Agreement to be entered into
between CheckFree Corporation and Microsoft Corporation.****
10(gg)*** Form of Marketing Agreement to be entered into between
CheckFree Corporation and First Data Corporation.****
21(a) * Subsidiaries of CheckFree Corporation.
21(b) Subsidiaries of CheckFree Holdings Corporation. (Reference
is made to Exhibit 21 of CheckFree Holdings Corporation's
Form 10-K for the year ended June 30, 1999, filed with the
Securities and Exchange Commission on September 27, 1999,
and incorporated herein by reference).
23(a) Consent of Porter, Wright, Morris & Arthur LLP (included in
Exhibit 5).
23(b)*** Consent of Deloitte & Touche LLP.
23(c)*** Consent of Deloitte & Touche LLP.
23(d)*** Consent of Arthur Andersen LLP.
24 * Powers of Attorney.
------------------------
* Previously filed with this report.
** Portions of this Exhibit have been given confidential treatment
by the Commission.
*** Filed with this report.
**** We have requested that the Securities and Exchange Commission
give confidential treatment to portions of this Exhibit.
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ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of the Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Registration Statement, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norcross,
State of Georgia, on April 17, 2000.
CHECKFREE CORPORATION
By: /S/ ALLEN L. SHULMAN
------------------------------------
Allen L. Shulman, Vice President,
Treasurer, and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 17th day of April, 2000.
Signature Title
*PETER J. KIGHT President, Chief Executive Officer
- -------------------------------- and Director
Peter J. Kight (Principal Executive Officer)
/S/ALLEN L. SHULMAN Vice President and Treasurer
- -------------------------------- (Principal Financial and Accounting Officer)
Allen L. Shulman
*By: /S/ CURTIS A. LOVELAND
- --------------------------------
Curtis A. Loveland, Attorney-in-Fact
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Exhibit 10(ff)
CONFIDENTIAL TREATMENT - Asterisked material has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
Note: this draft may be restated by agreement of the parties to correct typos
and other minor errors.
MICROSOFT COMMERCIAL ALLIANCE AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into by and between
CHECKFREE CORPORATION ("CHECKFREE"), a Delaware corporation, and MICROSOFT
CORPORATION ("MICROSOFT"), a Washington, U.S.A. corporation. The "Effective
Date" of this Agreement shall be immediately after the Effective Time of the
Merger Agreement (defined below).
RECITALS
i. CHECKFREE is a provider of consumer electronic payment services.
ii. MICROSOFT is a provider of software for personal computers, and has
an online presence through its MSN network.
iii. CHECKFREE, MICROSOFT, and other entities are parties to that
certain Agreement and Plan of Merger and Contribution Agreement dated February
15, 2000 (the "Merger Agreement"). Effective upon consummation of the
transactions contemplated by the Merger Agreement, CHECKFREE and MICROSOFT
desire to enter into a long-term relationship, the terms of which are set forth
in this Agreement.
AGREEMENT
For good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Automated Clearinghouse" shall mean automated clearing house.
1.2 "API" shall have the meaning set forth in Section 2.3.
1.3 "Applicant" shall have the meaning set forth in Exhibit 2.
1.4 "Arbitration Panel" shall have the meaning set forth in Exhibit 2.
1.5 "Banking Business Day" shall have the meaning set forth in Exhibit
3.
1.6 "Bill Presentment and Payment" or "BPP" shall mean an Interactive
Service (i) by which the user is presented with a bill [(including amount due,
biller name, due date, user's account number with payee if any) for goods or
services together with a means to pay or order payment of that bill pursuant to
payment instructions entered by the user including amount of payment, date and
source account, and (ii) which Interactive Service provides bills from two or
more separate sources.
1.7 "Business Day" shall have the meaning set forth in Exhibit 2.
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1.8 "Businesses" shall mean small businesses, sole proprietorships,
partnerships, corporations, limited liability companies, or other such entities.
1.9 "Capital Stock" shall the meaning set forth in Section 12.1(b) of
the Merger Agreement.
1.10 "Change of Control" shall have the meaning set forth in Section
18.4.
1.11 "CheckFree Error" shall have the meaning set forth in Exhibit 3.
1.12 "CHECKFREE Indemnified Claims" shall have the meaning set forth in
Section 15.2(a).
1.13 "CHECKFREE PA and BPP Services" shall mean the back end services
for Pay Anyone and Bill Presentment and Payment that CHECKFREE offers to
Internet portal providers or to other providers of interactive services as of
the Effective Date of this Agreement, and for which wholesale pricing is listed
in Exhibit 1 hereto. CHECKFREE PA and BPP Services shall also include improved
versions thereof released by CHECKFREE during the Term, but shall specifically
exclude any new services added after the Effective Date. For example (but
without limitation), future versions of CHECKFREE PA and BPP Services relating
to Pay Anyone shall be deemed CHECKFREE PA and BPP Services despite changes to
such services to improve the speed of paper check production, but CHECKFREE PA
and BPP Services shall not include back end support for person-to-person
electronic payments because CHECKFREE does not offer such services as of the
Effective Date. CHECKFREE PA and BPP Services shall include support services
delivered in connection therewith as set forth in Exhibit 1.
1.14 "CHECKFREE Patents" shall mean any and all patents owned or
licensable by CHECKFREE during the Term of this Agreement.
1.15 "CHECKFREE Services" shall mean the CHECKFREE PA and BPP Services,
plus any future back end DDA to DDA payment services delivered by CHECKFREE to
MICROSOFT that may be agreed upon by the parties pursuant to this Agreement.
1.16 "Confidential Information" shall have the meaning set forth in
Exhibit 4.
1.17 "Consumers" shall mean individual persons, and shall not include
small businesses, sole proprietorships, partnerships, corporations, limited
liability companies, or other such entities.
1.18 "CSP" shall have the meaning set forth in Section 9.2.
1.19 "DDA" shall mean a demand deposit account with a financial
institution.
1.20 "Designated Group" shall have the meaning set forth in Section
12.1(d) of the Merger Agreement.
1.21 "Dispute" shall have the meaning set forth in Exhibit 2.
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1.22 "Exclusive Services" shall mean CHECKFREE PA and BPP Services,
excluding the services that MICROSOFT may procure from third parties (or itself
provide) pursuant to the exceptions referenced and/or included in Section 3.
1.23 "First Tier Support" shall have the meaning set forth in Exhibit 1
hereto.
1.24 "First Version" shall have the meaning set forth in Section 9.1.
1.25 "Hosting" shall have the meaning set forth in Section 3(d).
1.26 "Included Services" shall have the meaning set forth in Exhibit 1
hereto.
1.27 "Indemnified Party" shall have the meaning set forth in Section
15.3.
1.28 "Indemnifying Party" shall have the meaning set forth in Section
15.3.
1.29 "Intellectual Property Arbitrator" shall have the meaning set
forth in Exhibit 2.
1.30 "Interactive Service" shall mean a service accessed with
electronic devices (whether now known or hereafter developed) which devices
allow the user to view information and respond with additional information,
whether during a single session or at additional future sessions. Such devices
shall include, without limitation, computers, personal digital assistants,
automated teller machines, screen telephones, mobile screen telephones, and
Internet-enabled televisions.
1.31 "Knowledge" shall have the meaning set forth in Section 12.1(h) of
the Merger Agreement.
1.32 "License Agreement" shall have the meaning set forth in the Merger
Agreement.
1.33 "MICROSOFT Customer Information" shall have the meaning set forth
in Section 12.1.
1.34 "MICROSOFT Indemnified Claims" shall have the meaning set forth in
Section 15.1(a).
1.35 "MICROSOFT Platforms" shall have the meaning as set forth in
Section 9.2 herein.
1.36 "MICROSOFT Services" shall mean any and all services and products
offered by MICROSOFT, or by third parties pursuant to an agreement with
MICROSOFT, that utilize CHECKFREE Services.
1.37 "MSN Payment Service" shall have the meaning set forth in Section
2.1 herein.
1.38 "Pay Anyone" or "PA" shall mean an Interactive Service through
which the user may make payment(s) from the user's DDA to any other person
without the need for the electronic presentment of a bill in connection with
such payment, where the user enters payment instructions including payment
amount, source account, date of payment, payee, account number of payee (if
any), and the Interactive Service accepts and completes the payment per the
instructions.
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1.39 "Payment Research Case" shall have the meaning set forth in
Exhibit 3.
1.40 "Penalties" shall have the meaning set forth in Exhibit 7.
1.41 "Preferred Platform" shall have the meaning as set forth in
Section 9.1 herein.
1.42 "Preferred Supplier" shall mean a supplying party that has a
ninety (90) day exclusive negotiation period in which to execute an agreement
with the receiving party to provide a given service to a receiving party,
provided that the receiving party shall have the ultimate discretion to select
its supplier (and/or to provide such services itself). Such 90 day period shall
be conducted as in the following example: if the receiving party desires
services or products for which the supplying party is the Preferred Supplier
pursuant to the terms of this Agreement, the receiving party shall notify the
supplying party thereof in writing setting forth in reasonable detail the
particular services or products desired, and the parties shall have a 90 day
exclusive negotiation period thereafter in which to reach agreement.
1.43 "Second Tier Support" shall have the meaning set forth in Exhibit
1 hereto.
1.44 "Subsidiary" shall mean any corporation, partnership, joint
venture or other entity in which a party (i) owns, directly or indirectly,
greater than fifty percent (50%) of the outstanding voting securities or equity
interests, or (ii) is a general partner. "Subsidiary" shall not include any
entity that would otherwise be a Subsidiary, but such entity is registered under
the Securities Exchange Act of 1934, as amended, and such entity is operated as
a separate company (e.g., Expedia, Inc. is operated by MICROSOFT as a separate
company), unless such entity is a successor to MICROSOFT, or unless such entity
is MSN or a successor to all or substantially all of the business of MSN.
1.45 "[*] Credit" shall have the meaning set forth in Section
7.3(a).
1.46 "Term" shall have the meaning set forth in Section 18.1.
1.47 "Year 1", "Year 2" etc. shall have the meaning set forth in
Section 7.2.
1.48 All other initially capitalized terms (except capitalized proper
names) shall have the meanings assigned to them in this Agreement.
2. MICROSOFT'S INTEGRATION AND USE OF CHECKFREE SERVICES
2.1 MSN Payment Service. MICROSOFT shall create and implement a
Web-based payment service targeted at Consumers to be offered by MICROSOFT
within the MoneyCentral area of MSN that utilizes the CHECKFREE PA and BPP
Services (the "MSN Payment Service"). MICROSOFT shall offer the MSN Payment
Service directly to Consumers on MSN, and may distribute and/or offer the MSN
Payment Service to or through any third party intermediaries, either under the
MSN brand, other MICROSOFT brand(s), and/or third party brands. In addition,
MICROSOFT may (but shall not be required to) integrate or utilize the CHECKFREE
PA and BPP Services with other services on MSN, and with such other products and
services as determined by MICROSOFT.
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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2.2 Passport. MICROSOFT shall utilize its Passport service for
authentication of users of the MSN Payment Service as offered on MSN. Users, at
their option, may elect to provide the additional authentication information
required to access payment applications and services. MICROSOFT shall use all
commercially reasonable efforts to promote the availability of the MSN Payment
Service as a benefit of providing the additional authentication information. The
parties acknowledge that use of Passport's support of the CHECKFREE PA and BPP
Services is non-exclusive, and that third party applications or services that
include payment functionality (which payment functionality may include, without
limitation, credit cards and merchant-provided payment such as "one click
shopping") may also request that users provide additional authentication
information which will be stored and accessed via Passport.
2.3 Hotmail. MICROSOFT anticipates that the Hotmail electronic mail
system may be used for secure delivery and payment of bills in future versions
of the MSN Payment Service. MICROSOFT agrees that the MSN Payment Service will
be the exclusive Pay Anyone and Bill Presentment and Payment service it promotes
as a feature of Hotmail. The parties acknowledge and agree that except as to
promotions, there is no exclusivity with respect to Hotmail, and further that
such exclusive promotion obligation shall not include any obligation to place
any restrictions on a user's Hotmail account relating to receiving and paying
bills from any source. Further, MICROSOFT shall not be restricted from
implementing an open applications programming interface ("API") or other open
system for secure email that may be used by third party providers of Pay Anyone
and/or Bill Presentment and Payment as long as MICROSOFT does not promote as a
feature of Hotmail any third party Pay Anyone and/or Bill Presentment and
Payment service that uses such API or other open system as a feature of Hotmail.
2.4 bCentral and Business Services. With respect to Pay Anyone and/or
Bill Presentment and Payment services targeted at Businesses that may be offered
by MICROSOFT (including without limitation on its "bCentral" site), MICROSOFT
agrees that CHECKFREE shall be its Preferred Supplier of CHECKFREE Services for
such solutions (but, for the avoidance of doubt, not its exclusive supplier).
The parties acknowledge that in connection with such service MICROSOFT may offer
an array of biller services, including without limitation (i) services to allow
a business to pay invoices or bills it has received and make other payments from
its DDA, and (ii) services to allow a business to issue its own invoices and
bills.
2.5 Transition Plan. The parties acknowledge that, as of the Effective
Date, MICROSOFT has various existing plans, agreements, and strategies in place
relating to Pay Anyone and Bill Presentment and Payment services that do not
contemplate the relationship with CHECKFREE created by this Agreement. In
connection with such transition, CHECKFREE shall support retention and transfer
of user names, Automated Clearinghouse enrollments, and biller lists. On or
before thirty (30) days after the Effective Date of this Agreement, MICROSOFT
shall deliver to CHECKFREE a written transition plan detailing how MICROSOFT
shall transition within a commercially reasonable time from its current
strategies to meet its obligations under this Agreement. Notwithstanding
anything to the contrary herein, MICROSOFT's obligations under this Agreement
shall be subject to such transition plan, with the exception of MICROSOFT's
revenue obligations as set forth in Section 7 herein (which obligations
MICROSOFT shall meet regardless of the transition plan).
2.6 Covenant Not to Sue For CHECKFREE Patents. CHECKFREE hereby
covenants not to sue or otherwise bring or assert any claim against MICROSOFT
that any MICROSOFT Services infringe any CHECKFREE Patent. In addition,
CHECKFREE represents and warrants that no entity controlled by CHECKFREE shall
sue or otherwise bring or assert any claim against MICROSOFT that any MICROSOFT
Services infringe any CHECKFREE Patent.
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2.7 Business Judgment. Subject only to Section 2.8 below, MICROSOFT may
determine in its sole discretion (i) the design, features, and functionality of
the MSN Payment System and all other MICROSOFT Services, and (ii) the nature and
levels of development, implementation, integration, marketing, positioning, and
commercial exploitation of the MSN Payment System and all other MICROSOFT
Services.
2.8 Prominence of MSN Payment System. MICROSOFT shall cause the MSN
Payment System to be displayed equally or more prominently on MSN than any other
competing Pay Anyone and/or Bill Presentment and Payment system(s) that may be
hosted, distributed, or otherwise featured on MSN; provided, however, that such
obligation shall not apply to banner advertisements, advertising sponsorships,
and other such promotional placement opportunities of the type that MICROSOFT
offers to third parties.
3. EXCLUSIVITY
During the term of this Agreement, MICROSOFT shall use the CHECKFREE PA
and BPP Services on an exclusive basis in connection with any and all Pay Anyone
and/or Bill Presentment and Payment services offered by MICROSOFT (or offered by
a third party but branded by MICROSOFT), subject to the limitations set forth in
Sections 2.2, 2.3, 2.4, and 2.5 above, and the following exceptions:
(a) If bills from a particular biller are not available from
CHECKFREE, then nothing herein shall restrict MICROSOFT from acquiring and
utilizing such bills from any available source. If such bills are delivered with
accompanying payment functionality, MICROSOFT shall restrict such functionality
to payment of the delivered bills to the extent feasible. If such bills are not
delivered with accompanying payment functionality, MICROSOFT shall use the
CHECKFREE PA and BPP Services for the payment of such bills to the extent
possible.
(b) Nothing herein shall restrict MICROSOFT from developing,
selling, and/or licensing tools, operating systems, applications, client-server
platforms, and other services and technologies that may be used by licensees in
connection with Pay Anyone and/or Bill Presentment and Payment services that
such licensees develop or offer, but which products have not been designed
specifically for such purpose. For example (but without limitation), Passport,
BackOffice, and FrontPage are examples of technologies of this type.
(c) Subject to Section 5 herein, nothing herein shall restrict
MICROSOFT from developing, selling, and/or licensing computer software products,
including without limitation, operating systems, applications, client-server
platforms, and networking products (e.g., MICROSOFT's Site Server Commerce
Edition and BizTalk Server), that incorporate any functionality, including
without limitation payment, invoicing, and/or bill presentment functionality.
For example (but without limitation), nothing herein shall restrict MICROSOFT
from developing, selling, and/or licensing a version of Site Server that
contains payment functionality (although pursuant to Section 5, such product may
need to integrate or otherwise interoperate with the CHECKFREE PA and BPP
Services pursuant to the provisions of that section).
(d) Subject only to Sections 2.3 and 2.8, nothing herein shall
restrict MICROSOFT from Hosting, distributing, advertising, or cross-promoting
the Pay Anyone and/or Bill Presentment and Payment services of a third party,
via distribution or transmission of
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computer software and/or informational content of such third party, where such
Hosting, distributing, advertising, or cross-promotional activities are
generally conducted for other parties and the fee or consideration arrangements
therefor are arms' length transactions of the type generally made. As used
herein, "Hosting" means the transmission or publication of another's products or
services, which may be accomplished through use of the Hosting party's equipment
and facilities, where the Hosting party does not create or control the hosted
products or services, but rather is acting as a transmitter or publisher of such
products or services. Examples of such Hosting, distributing, advertising, or
cross-promotion include, without limitation, MICROSOFT's distribution of client
software for online services such as AOL in MICROSOFT Windows, MICROSOFT's
arrangement of cross-promotional access to products and services such as the
Wall Street Journal, cross-promotions in connection with Internet Explorer, MSN
banner advertisements and content sponsorships, and MICROSOFT's Hosting on The
MICROSOFT Network (MSN) of independently produced Web sites.
(e) Nothing herein shall restrict MICROSOFT from providing a
service or product where the Bill Presentment and Payment system is an ancillary
feature of an electronic merchandising business offered, operated or supported
by MICROSOFT (e.g., an online shopping mall, etc.); or using a Bill Presentment
and Payment system to provide bills to MICROSOFT's own customers for the product
or service sold or provided by MICROSOFT or its Subsidiaries to such customers.
(f) Nothing herein shall restrict MICROSOFT from providing
consulting services to any party in the ordinary course of its MICROSOFT
Consulting Services business. The ordinary course of business for MICROSOFT
Consulting Services involves implementation of MICROSOFT commercial software
products, and does not include consulting on the overall design or overall
development of a BPP or PA service.
(g) Nothing herein shall restrict MICROSOFT from fulfilling
the obligations of any contract entered into prior to the Effective Date of this
Agreement; provided, however, that MICROSOFT shall not make any discretionary
renewal of any such prior contract that would otherwise violate the exclusivity
provisions of this Agreement.
(h) Nothing here shall restrict MICROSOFT from acquiring any
third party services or products for any MICROSOFT service or product that uses
for its back end payment service requirements the CHECKFREE PA and BPP Services
pursuant to this Agreement.
(i) Notwithstanding anything to the contrary herein, this
Section 3 shall be subject to the provisions of Section 18.6 (Performance
Remedies).
4. FUTURE SERVICES
4.1 Future Services. Sections 2 and 3 herein set forth the agreement of
the parties with respect to how MICROSOFT will use the CHECKFREE PA and BPP
Services. This Section 4 sets forth the agreement of the parties with respect to
whether and how MICROSOFT will use certain future CHECKFREE Services other than
the CHECKFREE PA and BPP Services.
4.2 Services Unavailable from CHECKFREE. MICROSOFT shall not be
restricted from performing or securing any services from any third party
provider if such services are unavailable from CHECKFREE. As used herein,
services shall be deemed to be "unavailable
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from CHECKFREE" if, in response to MICROSOFT's request, CHECKFREE is not able to
make a legally binding offer to perform such services to MICROSOFT's
requirements at pricing specified by CHECKFREE, which offer commits CHECKFREE to
deliver such services to MICROSOFT within ninety (90) days of MICROSOFT's
request. Section 4.3 below sets forth the restriction in the event that such
services are not unavailable from CHOPPPER.
4.3 Services Available from CHECKFREE. MICROSOFT hereby agrees that
CHECKFREE shall be the Preferred Supplier to the MSN Payment Service of
CHECKFREE Services (other than CHECKFREE PA and BPP Services), if such services
are available from CHECKFREE. As used herein, services shall be deemed to be
"available from CHECKFREE" if, in response to MICROSOFT's request, CHECKFREE is
able to make a legally binding offer to perform such services to MICROSOFT's
requirements at pricing specified by CHECKFREE, which offer commits CHECKFREE to
deliver such services to MICROSOFT within ninety (90) days of MICROSOFT's
request. The following example illustrates this procedure: if MICROSOFT
implements a feature of the MSN Payment System that requires back end DDA to DDA
payment services (and CHECKFREE does not already exclusively provide such
service as part of the CHECKFREE PA and BPP Services), then MICROSOFT shall
notify CHECKFREE of its requirements in writing setting forth in reasonable
detail the particular services desired, and CHECKFREE shall promptly respond
whether such services are available from CHECKFREE. If they are, then the
parties shall have the 90 day exclusive negotiation period in which to come to a
written service level agreement therefor. If the parties agree thereon, then
CHECKFREE shall supply such services to MICROSOFT pursuant to the terms of the
service level agreement, which shall be executed as an addendum to this
Agreement.
4.4 Cooperation On Other Payment Capabilities. With respect to back end
services other than for DDA to DDA payments, CHECKFREE and MICROSOFT agree to
cooperate wherever commercially reasonable on jointly developing such new
payment capabilities (e.g., "person to person" electronic payments, or forms of
payment other than via the Automated Clearinghouse from a user's DDA) and making
such new capabilities available for MICROSOFT Platforms and Web services. The
parties must agree in writing prior to commencing any joint development work.
All such cooperation is on a non-exclusive basis for both parties, unless
otherwise agreed upon in writing for a particular project. In the event that the
parties' agreed upon joint development results in services that CHECKFREE
desires to sell to other customers, MICROSOFT agrees to cooperate wherever
commercially reasonable with CHECKFREE to develop licensing terms which enable
CHECKFREE to offer the MICROSOFT-developed portions as part of the product or
service CHECKFREE sells to others.
4.5 Annual PA and BPP Services Meetings. At least once per year, or by
the request of either party twice per year, the parties shall meet to discuss
MICROSOFT's anticipated needs for new PA and BPP services in the coming period,
and CHECKFREE's plans to make new PA and BPP back end services available in that
period. MICROSOFT shall in good faith disclose its plans to add PA and BPP
services. After such meeting, CHECKFREE shall have the opportunity to implement
commercial versions of such service(s) in light of MICROSOFT's plans, and, if
CHECKFREE does implement such versions, Section 4.3 shall pertain as applicable.
4.6 New CHECKFREE Features and Functionality. During the term of this
Agreement, CHECKFREE shall offer to MICROSOFT all new services, features, and
functionality that CHECKFREE makes available to any third party. Pricing and
other material terms for such new services, features, and functionality shall be
as set by CHECKFREE, subject to the provisions of Section 8.2.
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5. MICROSOFT PLATFORM INTEGRATION OF CHECKFREE SERVICES
To the extent that MICROSOFT provides payment, invoicing, and/or bill
presentment functionality in any generally available MICROSOFT Internet and
electronic commerce platforms and tools (e.g., MICROSOFT's Site Server Commerce
Edition and BizTalk Server), and that functionality integrates or interoperates
with third party services equivalent to the CHECKFREE PA and BPP Services, then
MICROSOFT shall integrate or otherwise provide for interoperability with
CHECKFREE PA and BPP Services on a non-exclusive basis, provided that: (i)
CHECKFREE provides an Internet-based protocol for such purpose reasonably
suitable to MICROSOFT's requirements, (ii) CHECKFREE utilizes a Windows NT-based
re-distributable module with suitable APIs, or (iii) MICROSOFT and CHECKFREE
agree on another method of interoperability.
6. CHECKFREE PROTOCOLS
CHECKFREE shall provide and maintain during the term of this Agreement
suitable protocols as agreed upon by CHECKFREE and MICROSOFT, to enable
MICROSOFT to develop, implement, and operate the MSN Payment Service, including
without limitation protocols to communicate payment requests, access bill data,
and submit bill data, etc. Except as otherwise agreed by the parties in writing,
CHECKFREE shall grant to MICROSOFT functional access to the same protocol and/or
functionality that it makes available to any third party, and make available to
MICROSOFT all information related to such protocol no later than it makes such
access and information available to any third party.
7. FEES AND REVENUE GUARANTEE
7.1 Fees. Actual fees owed by MICROSOFT for CHECKFREE PA and BPP
Services shall be calculated according to the prices referenced in Section 8
herein, or as subsequently agreed in writing by the parties with respect to the
CHECKFREE Services other than the CHECKFREE PA and BPP Services.
7.2 Revenue Guarantee Amount. MICROSOFT guarantees minimum revenues to
CHECKFREE from MICROSOFT's use of all CHECKFREE services in the total amount of
One Hundred Twenty Million Dollars (US$120,000,000.00), with monthly guarantee
amounts as follows:
Year 1 $1.0 million per month
Year 2 $1.5 million per month
Year 3 $2.0 million per month
Year 4 $2.5 million per month
Year 5 $3.0 million per month
"Year 1" shall mean a one year period commencing on the earlier of general
public availability of the MSN Payment Services or one hundred twenty (120) days
after the Effective Date, "Year 2" shall mean the one year period immediately
following Year 1, and so forth.
7.3 Minimum Guarantee Payments. The following shall apply in
calculating amounts payable to CHECKFREE:
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(a) [*] Credit. MICROSOFT shall receive a credit during any
month for revenue earned by CHECKFREE for bill presentment services in the
amount of [*] for each bill that is delivered during such month to a MICROSOFT
Services customer where CHECKFREE Services are used in paying that bill (the
"[*] Credit"). In each month after the general public availability of the MSN
Payment Services, the [*] Credit shall be applied to reduce the amount that
would otherwise be owed to CHECKFREE attributable to such month.
(b) Carry Forward of Surpluses. To the extent that actual fees
paid by MICROSOFT to CHECKFREE in any month exceed the applicable monthly
revenue guarantee amount (without giving any effect to the application of the
[*] Credit), MICROSOFT shall be entitled to apply the surplus amount to reduce
the minimum guarantee amount in any future month.
(c) "Carry Back" or Shortfall Credit. To the extent that in
any month MICROSOFT is required hereunder to pay to CHECKFREE any shortfall
between actual fees payable and the applicable monthly revenue guarantee (after
all adjustments allowed hereby, including application of the [*] Credit), such
shortfall amounts may be applied by MICROSOFT as a credit against amounts
payable in excess of the applicable monthly guarantee amount in any future
month; provided, however, that no such credit shall be used more than 12 months
after it accrued.
7.4 Reports and Payments. As soon as practicable after the end
of each month, but in no event later than thirty (30) days after the end of each
month, CHECKFREE shall deliver in writing to MICROSOFT (i) an invoice for actual
fees payable for CHECKFREE services for that month, and (ii) a report to
MICROSOFT detailing the total number of bills that CHECKFREE delivered in that
month to users of MICROSOFT Services. The amount payable from MICROSOFT to
CHECKFREE, if any, shall be the shortfall, if any, between the amount of actual
fees payable for CHECKFREE Services during such month and the amount of the
revenue guarantee for such month, reduced by the [*] Credit, if applicable.
MICROSOFT shall calculate the amount payable to CHECKFREE for each month, but
MICROSOFT shall pay CHECKFREE therefor on a calendar quarterly basis, with
payments due net 30 days after the end of each calendar quarter.
7.5 Conditions. MICROSOFT's obligation to make payments for shortfalls
to CHECKFREE pursuant to Section 7.4 herein is conditioned on: (i) CHECKFREE
performing all of its obligations under this Agreement in good faith; and (ii)
CHECKFREE not taking any action that materially interferes with MICROSOFT's
ability to commercially exploit the CHECKFREE PA and BPP Services; provided,
however, that in the event of failure of any of conditions (i) or (ii) above,
MICROSOFT shall be relieved of its obligation only to the extent that such
actions or occurrences result in lower revenues generated than would otherwise
have been the case but for such actions or occurrences. With respect to
condition (ii) of this Section 7.5, MICROSOFT acknowledges that CHECKFREE will
be in the business of providing payment services to customers in competition
with the MICROSOFT Services, among others, and that such business activities
conducted in the normal course shall not be considered actions that materially
interfere with MICROSOFT's ability to commercially exploit the CHECKFREE PA and
BPP Services. In the event MICROSOFT ceases or decreases such payments pursuant
to an alleged violation of (i) or (ii), CHECKFREE may refer the matter as a
Dispute under Section 21.11.
*Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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8. PRICING
8.1 Wholesale Pricing. CHECKFREE shall supply to MICROSOFT the
CHECKFREE PA and BPP Services at the wholesale pricing set forth in Exhibit 1 to
this Agreement. As part of the CHECKFREE PA and BPP Services, CHECKFREE shall
supply to MICROSOFT the Included Services (including customer support services)
set forth in Exhibit 1.
8.2 [*]
9. CHECKFREE SUPPORT OF MICROSOFT PLATFORMS
9.1 Biller Premises Software. CHECKFREE shall offer its biller premises
software with Windows NT and SQL Server as its "Preferred Platform." "Preferred
Platform" means that the version of CHECKFREE's biller premises software for
Windows NT and SQL Server is (i) the most favorable version in terms of price,
functionality, and performance characteristics (including functional
capabilities) versus other versions that CHECKFREE may offer, and (ii) the First
Version that CHECKFREE offers in the market (but only where such platform is
available from MICROSOFT sufficiently in advance to give CHECKFREE a
commercially reasonable opportunity to develop its products for such platform).
"First Version" means that, subject to the limitations of this Section 9.1,
CHECKFREE shall commercially release its biller premises software for Windows NT
and SQL Server at least ninety (90) days in advance of commercially releasing
any version of such software for any other platform. CHECKFREE's obligation
under Section 9.1 shall be excused in regard to particular functionality and
performance characteristics to the extent they are beyond CHECKFREE's reasonable
control and are dictated by the corresponding functionality and performance in
the Windows NT and SQL Server platform being sub-optimal as compared to
competing operating system and database platforms.
9.2 Bill Presentment and CSP Interface. CHECKFREE shall base a portion
of its bill presentment or Consumer Services Provider ("CSP") interface (at its
option) data center software on the following MICROSOFT platforms ("MICROSOFT
Platforms"): Windows NT (including Windows 2000, which is the successor thereto
for all purposes under this Agreement), SQL Server, COM (and other components of
Windows 2000), and the BackOffice line of products.
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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9.3 Enhanced CSP Offerings. CHECKFREE and MICROSOFT agree to cooperate
on developing and offering enhanced CSP capabilities to CHECKFREE customers,
such as entering bill due dates in user's online calendar, delivering reminder
notices and/or bills via email, managing user authentication via Passport, and
other such capabilities as may be made generally available in MICROSOFT platform
products or service offerings.
9.4 Passport. MICROSOFT shall be CHECKFREE's Preferred Supplier for
enhanced user authentication credential services (i.e., Passport), for use as a
single sign-on authentication to access CHECKFREE services, to such CHECKFREE
customers that wish to support user authentication usable by their customers at
multiple Web sites in addition to or as an alternative to user authentication
only honored at a single site.
9.5 Access to Technical Information and Marketing Materials. MICROSOFT
shall make available to CHECKFREE all reasonable technical information and
marketing materials for the MICROSOFT Platforms to assist CHECKFREE in its
development and market efforts. In addition, MICROSOFT shall allow CHECKFREE to
participate in all technical and marketing programs for the MICROSOFT Platforms
that are offered to MICROSOFT's best similarly-situated customers.
10. NON-COMPETE
10.1 Non-Compete. During the period beginning on the Effective Date and
ending on the fifth anniversary of the Effective Date, and subject to the
limitations set forth in Sections 2.2, 2.3, 2.4, and 2.5, MICROSOFT shall not,
and shall ensure that its Subsidiaries do not:
(a) engage in any Exclusive Service;
(b) license any trademarks or trade names of MICROSOFT or its
Subsidiaries for use, or permit any of trademarks or trade names of MICROSOFT or
its Subsidiaries to be used in connection with any Exclusive Service;
(c) hold or acquire Capital Stock in any Person that is
engaged in any Exclusive Service pursuant to the Agreement.
10.2 Exceptions. Notwithstanding Section 10.1 herein, nothing herein
shall restrict MICROSOFT from:
(a) owning solely as a passive investment not in excess of
five percent (5%) in the aggregate of any class of Capital Stock of any
corporation if such stock is publicly traded and listed on any national or
regional stock exchange or quoted on the NASDAQ National Market, regardless of
whether or not such corporation is engaging in Exclusive Services; or
(b) either: (i) owning not in excess of twenty percent (20%)
in the aggregate of any class of Capital Stock of any Person, provided that not
more than twenty-five percent (25%) of such Person's consolidated revenues for
its most recently completed fiscal year are derived from or directly supported
by Exclusive Services, up to a limit of $25 million; or (ii) owning not in
excess of ten percent (10%) in the aggregate of any class of Capital Stock of
any Person, provided that not more than twenty-five percent (25%) of such
Person's consolidated revenues for its most recently completed fiscal year are
derived from or directly supported by
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Exclusive Services (without dollar amount limit). In the event that the limits
in (i) or (ii) of this Section 10.2(b) are exceeded, then within one hundred
eighty (180) days after publication of such Person's financial statement for
such fiscal year, MICROSOFT shall divest its interest in such Person; or
(c) purchasing and, following such purchase actively engaging
in, any business that has a subsidiary, division, group, franchise or segment
that is engaged in Exclusive Services so long as on the date of such purchase:
(i) not more than twenty-five percent (25%) of the consolidated revenues of such
business are derived from Exclusive Services and (ii) MICROSOFT divests itself
of the Exclusive Services within twelve (12) months after the date of such
purchase;
(d) fulfilling the obligations of any contract entered into
prior to the Effective Date of this Agreement; provided, however, that: (i)
Exhibit 5 sets forth the names of the contracts that would conflict with Section
3 (Exclusivity) or Section 10 (Non-Compete) but for this Section 10.2(d), to the
Knowledge of the MICROSOFT members of the Designated Group (as that term is
defined in the Merger Agreement); and (ii) in the event that after entering into
this Agreement MICROSOFT discovers contracts that so conflict, MICROSOFT agrees
that it shall not make any discretionary renewal of any such prior contract; or
(e) engaging in any activity in connection with a service or
product that uses for its back end payment service requirements the CHECKFREE PA
and BPP Services pursuant to this Agreement.
10.3 Injunctive Relief. MICROSOFT acknowledges that monetary damages
may not be a sufficient remedy for breach of this Section 10 and that CHECKFREE
shall be entitled, without waiving any other rights or remedies, to seek
injunctive or equitable relief from the arbitrator pursuant to Section 21.11.
10.4 Performance Remedies. Notwithstanding anything to the contrary
herein, this Section 10 shall be subject to the provisions of Section 18.6
(Performance Remedies).
11. BRANDING
11.1 MICROSOFT Branding. MICROSOFT, in its sole discretion, shall brand
and market the MICROSOFT Services.
11.2 No Trademark License. Nothing herein shall constitute a license to
use the other party's trademarks or trade names. Neither party shall use any
trademark or trade name owned by the other party in a manner prohibited by
applicable law without the other party's prior written consent.
12. MICROSOFT CUSTOMER INFORMATION
12.1 MICROSOFT Customer Information. As between MICROSOFT and
CHECKFREE, MICROSOFT is the sole owner of the names, identities, account
information, transaction information, and all other information relating in any
way to the end users of the MICROSOFT Services ("MICROSOFT Customer
Information"). CHECKFREE agrees that it
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shall use the MICROSOFT Customer Information for the sole purpose of providing
the CHECKFREE Services, and for no other purposes whatsoever. CHECKFREE agrees
that it shall not send electronic mail to end users of the MICROSOFT Services as
part of providing the CHECKFREE Services, except as is required by this
Agreement or as may be consented to by MICROSOFT. CHECKFREE shall not sell,
license, rent, disclose, or otherwise transfer any MICROSOFT Customer
Information except to the extent actually necessary to perform the CHECKFREE
Services and to comply with all applicable laws and regulations. CHECKFREE shall
provide all reasonable assistance to MICROSOFT in complying with and enforcing
MICROSOFT's then-current privacy policy(ies) for the MICROSOFT Services.
12.2 Return Upon Termination. Upon termination of this Agreement for
any reason, upon request from MICROSOFT, CHECKFREE shall promptly deliver to
MICROSOFT or destroy (at MICROSOFT's election) all MICROSOFT Customer
Information, and certify in writing to MICROSOFT that CHECKFREE has not retained
any such information except as required to comply with applicable laws and
regulations. Upon the termination of this Agreement for any reason, at
MICROSOFT's request, CHECKFREE shall use commercially reasonable efforts to
enable the transition of MICROSOFT customers to MICROSOFT or MICROSOFT's
designee.
13. GEOGRAPHIC SCOPE
13.1 General. Except for the obligations set forth in Sections 9 and 10
(which shall be worldwide in scope), all obligations under this Agreement shall
apply only to the provision of services primarily targeted at users in (a) the
United States (with respect to Pay Anyone and BPP services), (b) Canada (with
respect to BPP services but not Pay Anyone services), and (c) Australia and New
Zealand (with respect to BPP services but not Pay Anyone services).
13.2 Platform Support and Noncompete. The obligations of each party
under Sections 9 and 10 shall apply to the provision of services to users
worldwide.
14. REPRESENTATIONS AND WARRANTIES
14.1 MICROSOFT Representations and Warranties. MICROSOFT hereby
represents and warrants as follows:
(a) MICROSOFT is duly organized and validly existing under the
laws of the state of its incorporation and has full corporate power and
authority to enter into this Agreement and to carry out the provisions hereof.
(b) MICROSOFT is duly authorized to execute and deliver this
Agreement and to perform its obligations hereunder.
(c) This Agreement is a legal and valid obligation binding
upon MICROSOFT and enforceable according to its terms. The execution, delivery
and performance of this Agreement according to its terms by MICROSOFT does not
conflict with any agreement, instrument or understanding, oral or written, to
which MICROSOFT is a party or by which MICROSOFT may be bound, nor violate any
law or regulation of any court, governmental body or administrative or other
agency having jurisdiction over it.
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(d) Any information, materials, software or services furnished
by MICROSOFT to CHECKFREE pursuant to this Agreement are on an "as is" basis,
and MICROSOFT MAKES NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO
ANY MATTER INCLUDING, BUT NOT LIMITED TO, A WARRANTY OF FITNESS FOR PURPOSE OR
OF MERCHANTABILITY, OR OF RESULTS OBTAINED BY A PARTY'S USE OF ANY INTELLECTUAL
PROPERTY DEVELOPED OR LICENSED UNDER THIS AGREEMENT.
14.2 CHECKFREE Representations and Warranties. CHECKFREE hereby
represents and warrants as follows:
(a) CHECKFREE is duly organized and validly existing under the
laws of the state of its incorporation and has full corporate power and
authority to enter into this Agreement and to carry out the provisions hereof.
(b) CHECKFREE is duly authorized to execute and deliver this
Agreement and to perform its obligations hereunder.
(c) This Agreement is a legal and valid obligation binding
upon CHECKFREE and enforceable according to its terms. The execution, delivery
and performance of this Agreement according to its terms by CHECKFREE does not
conflict with any agreement, instrument or understanding, oral or written, to
which CHECKFREE is a party or by which CHECKFREE may be bound, nor violate any
law or regulation of any court, governmental body or administrative or other
agency having jurisdiction over it.
(d) CHECKFREE warrants the CHECKFREE PA and BPP Services as
set forth in Exhibit 3. The CHECKFREE warranties of the CHECKFREE Services other
than the CHECKFREE PA and BPP Services shall be as agreed by the parties.
(e) Except as provided in Section 14.2(d) herein, any
information, materials, software or services furnished by CHECKFREE to MICROSOFT
pursuant to this Agreement are on an "as is" basis, and CHECKFREE MAKES NO
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER INCLUDING,
BUT NOT LIMITED TO, A WARRANTY OF FITNESS FOR PURPOSE OR OF MERCHANTABILITY, OR
OF RESULTS OBTAINED BY A PARTY'S USE OF ANY INTELLECTUAL PROPERTY DEVELOPED OR
LICENSED UNDER THIS AGREEMENT.
15. INDEMNIFICATION
15.1 Intellectual Property Indemnification by MICROSOFT.
(a) MICROSOFT agrees to defend CHECKFREE against, and pay the
amount of any adverse final judgment or settlement to which MICROSOFT consents
resulting from, any third party claim(s) ("MICROSOFT Indemnified Claims") that
any MICROSOFT Services, or any portion thereof, infringes any third party
patent, copyright, trademark or trade secret right; provided that MICROSOFT is
notified promptly in writing of the MICROSOFT Indemnified Claim and has sole
control over its defense and settlement, and CHECKFREE provides reasonable
assistance in the defense and/or settlement of such claim.
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<PAGE> 16
(b) Notwithstanding Section 15.1(a) or 15.2(b), MICROSOFT
shall have no liability for any intellectual property infringement claim
(including a MICROSOFT Indemnified Claim) that arises as a result of (i)
CHECKFREE's use of MICROSOFT Services after a reasonable time from MICROSOFT's
written notice that CHECKFREE should cease such use due to such a claim; or (ii)
CHECKFREE's combination of MICROSOFT Services with non-MICROSOFT intellectual
property, to the extent such claim results from such combination; or (iii)
CHECKFREE's adaptation or modification of any MICROSOFT Services. For all claims
described in subsections (i)-(iii) of this Section 15.1(b), CHECKFREE agrees to
defend MICROSOFT against, and pay the amount of any adverse final judgment or
settlement to which CHECKFREE consents resulting from, such claims, provided
that CHECKFREE is notified promptly in writing of such a claim and CHECKFREE has
sole control over its defense or settlement, and MICROSOFT provides reasonable
assistance in the defense and/or settlement of such claim.
(c) In the event MICROSOFT receives information concerning an
intellectual property infringement claim (including a MICROSOFT Indemnified
Claim) related to MICROSOFT Services, MICROSOFT may at its expense, without
obligation to do so, either (i) procure for CHECKFREE the right to continue to
use the alleged infringing portion thereof, or (ii) replace or modify the
MICROSOFT Services so as to make them non-infringing, and in which case,
CHECKFREE shall thereupon cease use of the alleged infringing version of the
MICROSOFT Services.
(d) This Section 15.1 shall have no application to any claim
against CHECKFREE arising out of or in any way connected with any use or
sublicense by CHECKFREE of technology and intellectual property licensed by
MICROSOFT to CHECKFREE pursuant to the License Agreement (as defined in the
Merger Agreement) to which MICROSOFT is a party.
15.2 Intellectual Property Indemnification by CHECKFREE.
(a) CHECKFREE agrees to defend MICROSOFT against, and pay the
amount of any adverse final judgment or settlement to which CHECKFREE consents
resulting from, any third party claim(s) ("CHECKFREE Indemnified Claims") that
any CHECKFREE Services, or any portion thereof, infringes any third party
patent, copyright, trademark or trade secret right; provided that CHECKFREE is
notified promptly in writing of the CHECKFREE Indemnified Claim and has sole
control over its defense and settlement, and MICROSOFT provides reasonable
assistance in the defense and/or settlement of such claim.
(b) Notwithstanding Section 15.2(a) or 15.1(b), CHECKFREE
shall have no liability for any intellectual property infringement claim
(including a CHECKFREE Indemnified Claim) that arises as a result of (i)
MICROSOFT's use of CHECKFREE Services after a reasonable time from CHECKFREE's
written notice that MICROSOFT should cease such use due to such a claim; or (ii)
MICROSOFT's combination of CHECKFREE Services with non-CHECKFREE intellectual
property; or (iii) MICROSOFT's adaptation or modification of any CHECKFREE
Services. For all claims described in subsections (i)-(iii) of this Section
15.2(b), MICROSOFT agrees to defend CHECKFREE against, and pay the amount of any
adverse final judgment or settlement to which MICROSOFT consents resulting from,
such claims, provided that MICROSOFT is notified promptly in writing of such a
claim and MICROSOFT has sole control over its defense or settlement, and
CHECKFREE provides reasonable assistance in the defense and/or settlement of
such claim.
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(c) In the event CHECKFREE receives information concerning an
intellectual property infringement claim (including a CHECKFREE Indemnified
Claim) related to CHECKFREE Services, CHECKFREE may at its expense, without
obligation to do so, either (i) procure for MICROSOFT the right to continue to
use the alleged infringing portion thereof, or (ii) replace or modify the
CHECKFREE Services so as to make them non-infringing, and in which case,
MICROSOFT shall thereupon cease use of the alleged infringing version of the
CHECKFREE Services.
15.3 General Indemnification. Except with respect to any third party
claims addressed by Sections 15.1 or 15.2 (Intellectual Property
Indemnification), each party (the "Indemnifying Party") shall indemnify and hold
harmless the other party (the "Indemnified Party") against all losses,
liabilities, damages, claims, suits, costs, or expenses (including reasonable
outside attorney's fees) for third party claims arising out of the Indemnifying
Party's products and services performed pursuant to this Agreement, except to
the extent that such claims arise from the gross negligence or willful
misconduct of the Indemnified Party.
16. LIMITATION OF LIABILITY
Notwithstanding anything to the contrary contained in this Agreement,
the following limitations of liability shall apply to this Agreement:
(a) Except for MICROSOFT's liability to CHECKFREE pursuant to
Section 15 (Indemnification) herein, liability to CHECKFREE for breach of
Sections 3 (Exclusivity) and 10 (Non-Compete), and except for actual amounts
payable by MICROSOFT to CHECKFREE pursuant to Section 7 (Fees and Revenue
Guarantee), MICROSOFT's liability to CHECKFREE arising out of this Agreement or
any transaction contemplated hereby, regardless of whether such claim is made on
the basis of contract, tort, or other theory, shall be limited to [*].
(b) Except for CHECKFREE's liability to MICROSOFT pursuant to
Section 15 (Indemnification) herein, CHECKFREE's liability to MICROSOFT arising
out of this Agreement or any transaction contemplated hereby, regardless of
whether such claim is made on the basis of contract, tort, or other theory,
shall be limited to the greater of [*] or [*] percent ([*]%) of total amounts
paid by MICROSOFT under this Agreement.
(c) MICROSOFT's aggregate liability to CHECKFREE for claims
covered by Section 15 (Indemnification) shall be limited as follows: (i)
liability for copyright claims shall be limited to [*] (ii) liability for patent
claims shall be limited to [*] and (iii) liability for all other claims shall be
limited to [*].
(d) CHECKFREE's aggregate liability to MICROSOFT for claims
covered by Section 15 (Indemnification) shall be limited as follows: (i)
liability for copyright claims shall be limited to [*] (ii) liability for patent
claims shall be limited to the greater of [*] or [*] percent ([*]%) of total
amounts paid by MICROSOFT under this Agreement; and (iii) liability for all
other claims shall be limited to the greater of [*] or [*] percent ([*]%) of
total amounts paid by MICROSOFT under this Agreement.
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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(e) MICROSOFT's aggregate liability to CHECKFREE for breach of
Sections 3 (Exclusivity) and 10 (Non-Compete) shall be limited as follows:
(i) MICROSOFT shall not be liable for any breach of
Sections 3 (Exclusivity) and 10 (Non-Compete) that is cured within six
(6) months of CHECKFREE's notice to MICROSOFT thereof;
(ii) MICROSOFT shall not be liable for any breach of
Sections 3 (Exclusivity) or 10 (Non-Compete) unless CHECKFREE's damages
resulting from any and all such breaches exceed [*] and then only to
the extent of such excess, subject to Section 16(e)(iii).
(iii) In no event shall MICROSOFT's aggregate
liability for breaches of Sections 3 (Exclusivity) and 10 (Non-Compete)
[*].
(f) Each Indemnified Party releases each Indemnifying Party
from all obligations, liability, claims or demands in excess of the applicable
limitation. The parties acknowledge that other parts of this Agreement rely upon
the inclusion of this Section 16. EXCEPT (i) WITH RESPECT TO BREACHES OF SECTION
17.3, AND (ii) FOR lost profits (but no other consequential, incidental, or
special damages) RESULTING FROM MICROSOFT's BREACH OF SECTIONS 3 (EXCLUSIVITY)
AND 10 (NON-COMPETE), To the maximum extent permitted by law, neither party
shall be liable to the other for any indirect, special, consequential, or
punitive damages of any nature, even if advised of the possibility thereof.
(g) Where commercially reasonable, each party shall use good
faith efforts to notify the other in the event of liabilities that would exceed
the liability limits of this Section 16. Each party shall use reasonable efforts
to mitigate damages for which the other party is responsible.
17. PUBLIC ANNOUNCEMENTS, AND NON-DISCLOSURE
17.1 Joint Announcement on Agreement. The parties agree that any
announcement concerning the execution of the Agreement shall be a mutually
agreed upon joint announcement.
17.2 Legally Required Announcements. Either of the parties may at any
time make announcements which are required by applicable law, regulatory bodies,
or stock exchange or stock association rules, so long as the party so required
to make the announcement, promptly upon learning of such requirement, notifies
the other party of such requirement and discusses with the other party in good
faith the exact wording of any such announcement.
17.3 Non-Disclosure Agreement. MICROSOFT and Checkfree Corporation have
entered into a Non-Disclosure Agreement dated November 2, 1999 (attached as
Exhibit 4). The terms of such non-disclosure agreement (other than Sections 4(f)
and 4(g)) shall be deemed to apply to the parties to this Agreement and
incorporated herein, and all terms and conditions of this Agreement shall be
deemed Confidential Information as defined therein. The terms of this Agreement
shall control over any conflicting terms of the Non-Disclosure Agreement.
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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18. TERM, RENEWAL, TERMINATION, CHANGE OF CONTROL, SURVIVAL, AND
PERFORMANCE REMEDIES
18.1 Term. The Agreement shall commence on the Effective Date, and
shall continue until after the earlier of (a) five (5) years after the general
public availability of the MSN Payment Services, or (b) five (5) years and one
hundred twenty (120) days after the Effective Date (the "Term").
18.2 Renewal. This Agreement may be renewed by the mutual written
agreement of the parties.
18.3 Termination for Cause. In the event either party shall materially
fail to perform or comply with this Agreement or any provision thereof, the
other party may give notice of default to the breaching party, in which case the
parties shall immediately confer in good faith to discuss resolution of the
default. If, however, the breaching party fails to remedy the default within
sixty (60) days after the receipt of notice thereof, then the other party shall
have the right, at its sole option and upon written notice to the defaulting
party, to terminate this Agreement. Any notice of default hereunder shall be
prominently labeled "NOTICE OF DEFAULT," and delivered as required by Section
21.5 herein. The rights and remedies provided in this section shall not be
exclusive and are in addition to any other rights and remedies provided by law
or this Agreement.
18.4 Change of Control. MICROSOFT shall have the right (but not the
obligation) to terminate this Agreement in the event of a Change of Control of
CHECKFREE. "Change of Control" shall mean any of the following with respect to
CHECKFREE or any of its Subsidiaries: (i) the acquisition either directly or
indirectly, by any third person other than the entities named in Exhibit 6
hereto or successors thereto, of more than thirty percent (30%) of the Capital
Stock regularly entitled to vote on all matters subject to stockholder vote;
(ii) any merger or consolidation with a third person other than the entities
named in Exhibit 6 hereto or successors thereto whereby the stockholders of
CHECKFREE or any of its Subsidiaries, as applicable, as of the Effective Date,
cease to own at least seventy percent (70%) of the Capital Stock of the
surviving entity regularly entitled to vote on all matters subject to
stockholder vote; (iii) the acquisition either directly or indirectly, by any
entity named in Exhibit 6 hereto or successors thereto, of more than twenty
percent (20%) of the Capital Stock regularly entitled to vote on all matters
subject to stockholder vote; (iv) any merger or consolidation with an entity
named in Exhibit 6 hereto or successors thereto whereby the stockholders of
CHECKFREE or any of its Subsidiaries, as applicable, as of the Effective Date,
cease to own at least eighty percent (80%) of the Capital Stock of the surviving
entity regularly entitled to vote on all matters subject to stockholder vote; or
(v) the transfer (or attempted transfer) to any third person of this Agreement,
or of all, or substantially all, of the assets of CHECKFREE or any of its
Subsidiaries, as applicable. In the event that MICROSOFT elects to terminate the
Agreement pursuant to this Section 18.4, MICROSOFT shall pay to CHECKFREE fifty
percent (50%) of the then-remaining revenue guarantee amounts, payable within
sixty (60) days of the effective date of such termination.
18.5 Survival. The following sections shall survive any expiration or
termination of this Agreement: 12, 15, 16, 17.3, 18.4, 19, 20 (with respect to
fees occurring prior to expiration or termination), and 21. To the extent any
fees payable to CHECKFREE under Section 7 have accrued prior to such expiration
or termination, such fees shall remain due and payable to CHECKFREE after such
expiration or termination.
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18.6 Performance Remedies. In addition to all other rights and remedies
in this Agreement, MICROSOFT shall be entitled to the performance remedies set
forth in Exhibit 7.
19. RIGHTS AND OBLIGATIONS ON EXPIRATION
Upon expiration of this Agreement at the end of the Term, the following
provision shall apply: in order to assure reasonable continuity of service for
consumers, MICROSOFT shall be entitled to at least 180 days notice from
CHECKFREE (i) prior to the end of the Term if CHECKFREE does not intend to renew
this Agreement, or (ii) prior to any termination of the CHECKFREE Services,
beginning on the date that CHECKFREE notifies MICROSOFT thereof. If CHECKFREE
fails to provide such 180 day notice, then CHECKFREE shall continue to provide
the CHECKFREE Services for a period after the expiration of the Term or the
termination of this Agreement equal to the difference between 180 days and the
number of days prior to such expiration or termination that CHECKFREE in fact
gave notice to MICROSOFT.
20. AUDITS
20.1 Records. MICROSOFT agrees to keep proper records and books of
account and all proper entries therein relating to fees due CHECKFREE for the
CHECKFREE Services. CHECKFREE agrees to keep proper records and books of account
and all proper entries therein relating to the number of bills attributable to
MICROSOFT users pursuant to Section 7.4 herein.
20.2 Audits of MICROSOFT. CHECKFREE may cause an audit to be made, at
CHECKFREE's expense, of MICROSOFT's applicable records in order to verify
statements rendered hereunder. Any such audit shall be conducted only by a third
party independent certified public accountant (other than on a contingency fee
basis) after prior written notice to MICROSOFT, and shall be conducted during
regular business hours at MICROSOFT's offices and in such a manner as not to
interfere with MICROSOFT's normal business activities. In no event shall an
audit with respect to any statement commence later than eighteen (18) months
from the date of the statement involved, nor shall the audits be made hereunder
more frequently than once annually, nor shall the records supporting any
statements be audited more than once. The results of any such audit shall be
subject to the nondisclosure obligations set forth in this Agreement. In the
event that CHECKFREE makes any claim against MICROSOFT with respect to such
audit, CHECKFREE hereby agrees to make available to MICROSOFT, upon request, the
detailed results of the audit as prepared for CHECKFREE by its accountant.
20.3 Audits of CHECKFREE. MICROSOFT may cause an audit to be made, at
MICROSOFT's expense, of CHECKFREE's applicable records in order to verify
statements rendered hereunder. Any such audit shall be conducted only by a third
party independent certified public accountant (other than on a contingency fee
basis) after prior written notice to CHECKFREE, and shall be conducted during
regular business hours at CHECKFREE's offices and in such a manner as not to
interfere with CHECKFREE's normal business activities. In no event shall an
audit with respect to any statement commence later than eighteen (18) months
from the date of the statement involved, nor shall the audits be made hereunder
more frequently than once annually, nor shall the records supporting any
statements be audited more than once. The results of any such audit shall be
subject to the nondisclosure obligations set forth in this Agreement. In the
event that MICROSOFT makes any claim against CHECKFREE with respect
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to such audit, MICROSOFT hereby agrees to make available to CHECKFREE, upon
request, the detailed results of the audit as prepared for MICROSOFT by its
accountant.
21. GENERAL
21.1 Compliance with Laws. Each party shall bear the obligation of its
own compliance with applicable laws and regulations, provided that each party
shall communicate to the other any relevant legal issues of which it becomes
aware.
21.2 Applicability To Subsidiaries. Each of MICROSOFT and CHECKFREE
shall cause its Subsidiaries to comply with all of the terms of this Agreement,
subject to all geographic and scope limitations as set forth herein.
21.3 Governing Law. This Agreement shall be construed and controlled by
the laws of the State of New York.
21.4 Attorneys' Fees. If either MICROSOFT or CHECKFREE employs
attorneys to enforce any rights arising out of or relating to this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees and
costs, including expert witness fees.
21.5 Notices and Requests. All notices and requests in connection with
this Agreement shall be deemed given as of the day they are sent by overnight
courier, charges prepaid, with a confirming fax; and addressed as follows:
CHECKFREE: CHECKFREE CORPORATION
411 E Jones Bridge Road
Norcross, GA 30092
Attention: Chief Executive Officer
Fax: (678) 375-3010
Phone: (678) 375-1600
With a cc to: General Counsel
Fax: (678) 375-3633
Phone: (678) 375-3632
With a cc to: SIMPSON THACHER & BARLETT
3373 Hillview Avenue
Suite 250
Palo Alto, CA 94304
Attn: Daniel Clivner
Rich Capelouto
Fax: (650) 251-5002
Phone: (650) 251-5000
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MICROSOFT: MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399
Attention: Senior VP, Consumer Group
with a cc to: MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399
Attention: Law & Corporate Affairs Department
Product Development and Marketing Group
Fax: (425) 936-7329
or to such other address as the party to receive the notice or request so
designates by written notice to the other.
21.6 No Assignment. Neither MICROSOFT nor CHECKFREE may assign this
Agreement, or any portion thereof, to any third party unless the other party
expressly consents to such assignment in writing. Any attempted assignment
without such consent shall give the non-assigning party the right to terminate
this Agreement effective upon written notice. Notwithstanding the foregoing, but
subject to termination pursuant to Section to 18.4, either party hereto may
assign this Agreement to a third party successor as part of the merger with,
sale to, or transfer of substantially all of the assets of the assigning party
to such third party. Subject to the provisions of this Section 21.6, this
Agreement shall be binding upon and will inure to the benefit of any successor
entity that carries on the business that is the subject of this Agreement.
21.7 Legal Relationship. The parties to this Agreement are independent
contractors, and no partnership, joint venture, employment, agency, franchise,
or other form of agreement or relationship is intended.
21.8 Severability. In the event that any provision of this Agreement is
found invalid or unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable according to its
terms. The parties intend that the provisions of this Agreement be enforced to
the fullest extent permitted by applicable law. Accordingly, the parties agree
that if any provisions are deemed not enforceable, they shall be deemed modified
to the extent necessary to make them enforceable.
21.9 Entire Agreement, Modifications, No Offer. The parties hereto
agree that this Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and merges all prior and
contemporaneous communications. It shall not be modified except by a written
agreement dated subsequent hereto and signed on behalf of CHECKFREE and
MICROSOFT by their duly authorized representatives. Neither this Agreement nor
any written or oral statements related hereto constitute an offer, and this
Agreement shall not be legally binding until executed by both parties hereto.
21.10 Binding Effect. Subject to the limitations herein before
expressed, this Agreement shall inure to the benefit of and be binding upon the
parties, their successors, administrators, heirs, and permitted assigns.
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21.11 Dispute Resolution. The parties shall resolve all Disputes
according to the provisions as set forth in Exhibit 2 hereto.
21.12 Force Majeure. If either party to this Agreement is effectively
prevented from performing any of its obligations as a result of an event or
circumstance, other than economic factors, that is beyond its reasonable control
(including without limitation fire, flood, earthquake, elements of nature, acts
of God, acts of war, terrorism, riots, civil disorders, rebellions, and power
outages) and which event or circumstance was either (i) unforeseeable, or (ii)
foreseeable, but could not have been avoided, prevented or overcome through the
exercise of reasonable diligence, then those obligations so affected shall be
suspended for the duration of such contingency, but in no event longer than
ninety (90) days.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the Effective Date.
MICROSOFT CORPORATION CHECKFREE CORPORATION
- ----------------------------- ------------------------------------
By (sign) By (sign)
- ----------------------------- ------------------------------------
Name (Print) Name (Print)
- ----------------------------- ------------------------------------
Title Title
- ----------------------------- ------------------------------------
Date Date
23
<PAGE> 1
Exhibit 10(gg)
CONFIDENTIAL TREATMENT - Asterisked material has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
MARKETING AGREEMENT
THIS MARKETING AGREEMENT (the "Agreement") by and between Chopper
Corporation, a Delaware corporation, and First Data Corporation, a Delaware
corporation, is made this ___ day of , ____.
BACKGROUND
WHEREAS, FDC, Chopper and certain other Persons are parties to an
Agreement and Plan of Merger and Contribution Agreement, dated as of February
15, 2000 (the "Merger Agreement"), and upon the consummation of the transactions
contemplated by the Merger Agreement, including the contribution of the Tank
Entities (as defined in the Merger Agreement) to Chopper pursuant to the Tank
Contributions (as defined in the Merger Agreement), Chopper and FDC desire to
begin a long term relationship through which the parties, INTER ALIA, leverage
their existing assets and relationships to provide products and services to each
other and to cross market and cross promote each other's products and services,
all upon the terms and conditions set forth herein; and
WHEREAS, FDC has previously entered into a covenant not to compete with
the Tank Entities and Chopper and FDC desire to amend, restate and confirm FDC's
pre-existing covenant not to compete with the Tank Entities.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions. For the purposes of this Agreement, the following terms
shall have the definitions indicated below, and shall be equally
applicable to the singular and plural forms. Any agreement (including
this Agreement) referred to herein shall mean such agreement as
amended, supplemented and modified from time to time to the extent
permitted by the applicable provisions thereof. When a reference is
made in this Agreement to an article, section, schedule or exhibit,
such reference shall be to an article, section, schedule or exhibit of
this Agreement unless otherwise indicated. Whenever the words
"include," "includes," or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation."
1.1 "AAA" shall have the meaning set forth in Exhibit 13.9(a).
1.2 "Active Consumer" shall mean, with respect to an Aggregation Service
Company, a Consumer who pays at least one Household Bill during the
applicable calendar month using such Aggregation Service Company;
provided, however, that such Consumer shall not be considered an Active
Consumer in any calendar month if the sole Household Bill paid by the
Consumer during the applicable month is a Household Bill paid to an
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<PAGE> 2
Affiliate of the Aggregation Service Company (such excluded Consumer
being an "Excepted Consumer").
1.3 "Affiliate" of a Person shall mean any corporation, partnership, joint
venture, limited liability company or other entity in which such Person
(a) Beneficially Owns, directly or indirectly, 50% or more of the
outstanding voting securities or equity interests, only so long as such
Beneficial Ownership continues, (b) is a general partner, only so long
as such Person remains a general partner or (c) is a managing member,
only so long as such Person remains a managing member.
1.4 "Agreement" shall have the meaning set forth in the first paragraph of
this Agreement.
1.5 "Aggregation Service Company" shall have the meaning set forth in
Section 3.1.
1.6 "Alliance" shall mean any venture (in any form, including in corporate,
partnership or limited liability company form) or contractual alliance
now or hereafter entered into between FDC (or any of its Affiliates)
and one or more third parties pursuant to which the third party
venturer has the contractual or other legal right to block major
business and/or corporate actions by such venture.
1.7 "Beneficially Own" shall have the meaning set forth in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended, except that a Person
shall be deemed to "Beneficially Own" all securities that such Person
has a right to acquire, whether such right is exercisable immediately
or only after the passage of time (and without any additional
condition) (and such ownership may be referred to herein as "Beneficial
Ownership").
1.8 "Bill" shall mean a bill presented to a Consumer for products sold,
leased, rented or licensed or services rendered.
1.9 "Bill Presentment and Payment Service" shall mean an Interactive
Service by which the user is presented with a bill for goods or
services together with a means to pay or order payment of that bill.
1.10 "Change of Control" shall mean any of the following with respect to
Chopper: (a) the acquisition either directly or indirectly, by any
third Person of the Beneficial Ownership of more than thirty percent
(30%) of the capital stock regularly entitled to vote on all matters
subject to stockholder vote (the foregoing shall not include a
transaction in which a holding company is used and the stockholders of
the original company own at least 70% of the stock of the holding
company after such transaction); (b) any merger, consolidation or other
business combination or transaction whereby the stockholders of Chopper
immediately prior to the effective date of such merger, consolidation
or other business combination or transaction cease to own at least
seventy percent (70%) of the capital stock of the surviving entity (or
its 100% controlling parent) regularly entitled to vote on all matters
subject to stockholder vote following such merger, consolidation or
other business combination or transaction; or (c) the transfer to any
Person who is not a party to
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<PAGE> 3
this Agreement of all or substantially all of the assets of Chopper or
any of its Affiliates, as applicable.
1.11 "Chopper" shall mean Chopper Corporation, a Delaware corporation, and
its permitted successors and permitted assigns.
1.12 "Chopper Indemnified Persons" shall have the meaning set forth in
Section 9.2.
1.13 "Client" means clients of FDC and its Affiliates and other third
Persons, excluding the Top Billers.
1.14 "Chopper Patents" shall mean any and all patents that Chopper or any
of its Affiliates has rights to assert during the term of this
Agreement.
1.15 "Confidential Information" shall have the meaning set forth in
Section 7.1.
1.16 "Consumer" shall have the meaning set forth in Section 3.1.
1.17 "DDA" shall mean a demand deposit account with a financial
institution.
1.18 "Dispute" shall mean any and all disputes, controversies and claims
between the parties arising from or in connection with this Agreement
or the relationship of the parties under this Agreement, whether based
on contract, tort, common law, equity, statute, regulation, order or
otherwise.
1.19 "Effective Date" shall mean the date of the consummation of the
transactions contemplated by the Merger Agreement.
1.20 "Existing Alliance" shall mean an Alliance of FDC or any of its
Affiliates existing on the date hereof.
1.21 "Expense Savings" shall mean the savings realized or achieved by
Chopper and its Affiliates (i) that result from its use of FDC's or its
Affiliates' products and services and (ii) that result from its use of
products and services used or resold by FDC or its Affiliates and
provided by third party vendors or suppliers, which products or
services are purchased by, through or through arrangements made by, FDC
or its Affiliates. It being understood that notwithstanding the
foregoing, Expense Savings include any relative reduction in costs
associated with payment processing, customer service and exemption
processing/handling.
1.22 "Fees" shall have the meaning set forth in Section 3.2(a).
1.23 "Fifth Year Monthly Minimum" shall have the meaning set forth in
Section 3.2(e).
1.24 "First Year Minimum" shall have the meaning set forth in
Section 3.2(a).
1.25 "Fourth Year Monthly Minimum" shall have the meaning set forth in
Section 3.2(d).
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1.26 "FDC" shall mean First Data Corporation, a Delaware corporation, and
its permitted successors and permitted assigns.
1.27 "FDC Business Services" shall have the meaning set forth in
Section 3.1.
1.28 "FDC Indemnified Persons" shall have the meaning set forth in
Section 9.1.
1.29 "Future Alliance" shall mean an Alliance of FDC or any of its
Affiliates entered into after the date hereof.
1.30 "Household Bills" shall have the meaning set forth in Section 3.1.
1.31 "Infringement Claims" shall have the meaning set forth in
Section 9.1(a).
1.32 "Integrated Interactive Bill Payment System" shall have the meaning
set forth in Section 3.1.
1.33 "Interactive Service" means a service accessed with electronic devices
(whether now known or hereafter developed) that devices allow the user
to view information and respond with additional information. Such
devices include, without limitation, computers, personal digital
assistants, "screen" telephones, and Internet-enabled televisions.
1.34 "Internet Site" means a Uniform Resource Locator (URL), or group of
URLs which are designed to be perceived by the user as being operated
by, or on behalf of, a single commercial business entity.
1.35 "Losses" shall have the meaning set forth in Section 9.1 .
1.36 "Losses and Expenses" shall have the meaning set forth in
Section 10.1.
1.37 "Merchant Acquiring Services" shall mean the provision of any of the
following services or products, directly or indirectly, to merchants in
respect of Transaction Cards: (i) the authorization and capture of
transactions, (ii) the submission of such transactions for interchange
settlement or other settlement, (iii) the preparation of statements or
reports based on such transactions, chargebacks and other exception
items (including by electronic access), (iv) the provision of customer
service or other back office services in respect of any of such
transactions, (v) the sale, lease or rental of point of sale (POS)
hardware relating to any of the foregoing and (vi) clearing and
settlement services.
1.38 "Merger Agreement" shall have the meaning set forth in the second
paragraph of this Agreement.
1.39 "Minimums" shall mean the First Year Minimum, Second Year Monthly
Minimum, Third Year Monthly Minimum, Fourth Year Monthly Minimum or
Fifth Year Monthly Minimum, as the case may be.
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1.40 "Monthly Consumer Bill Payment Ratio" shall mean, with respect to any
Aggregation Service Company in a calendar month, an amount equal to (A)
the total number of Household Bills paid by FDC and its Affiliates for
such Aggregation Service Company excluding any Household Bills paid for
Excepted Consumers, utilizing an Integrated Interactive Bill Payment
System owned or operated by FDC or its Affiliates, using an Interactive
Service during the applicable calendar month; divided by (B) the
aggregate number of Active Consumers for such Aggregation Service
Company during the applicable calendar month. For purposes of
calculating the total number of Household Bills paid by FDC and its
Affiliates, all of a Consumer's Household Bills paid in a single
payment to a Single Payee shall count as a single Household Bill.
1.41 "Pay Anyone Service" shall mean an Interactive Service through which
the user may make payment(s) from the user's DDA to any other Person
without the need for the electronic presentment of a bill in connection
with such payment, where the user enters the payment instructions
including payment amount, source account, date of payment, payee,
account number of payee (if any), and the Interactive Service accepts
and completes the payment per the instructions.
1.42 "Payment Processing" shall mean the processing of any method a Person
may now or hereafter use to pay an obligation, including Transaction
Card, electronic check, Internet check, paper check, EFT, Automated
Clearinghouse or wallet technology.
1.43 "Payee" shall have the meaning set forth in Section 3.1.
1.44 "Person" shall mean an individual, partnership, corporation, limited
liability company, trust, joint stock company, association, joint
venture, or any other entity or organization, including a government or
political subdivision or any agency or instrumentality thereof.
1.45 "Restricted Activity" shall have the meaning set forth in Section 3.1.
1.46 "Revenue Shortage" shall mean the amount by which the First Year
Minimum, Second Year Monthly Minimum, Third Year Monthly Minimum,
Fourth Year Monthly Minimum or Fifth Year Monthly Minimum (as
applicable) is greater than the sum of the Fees and Expense Savings
during the applicable monthly or twelve (12) month period.
1.47 "Second Year Monthly Minimum" shall have the meaning set forth in
Section 3.2(b).
1.48 "Specified Processors" shall mean those entities identified in
Schedule 1.48 and their Affiliates and their respective successors
and assigns.
1.49 "Sponsor" shall have the meaning set forth in Section 3.1.
1.50 "Statement" shall mean a statement of account presented to a Consumer
containing information about the Consumer's account.
1.51 "Term" shall have the meaning set forth in Section 5.
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1.52 "Third Year Monthly Minimum" shall have the meaning set forth in
Section 3.2(c).
1.53 "Top Billers" shall mean each of the entities set forth in
Schedule 1.37.
1.54 "Voting Stock" shall mean securities of a Person having the ordinary
power to vote in the election of members of the board of directors or
board of managers or equivalent governing body.
2. Chopper Obligations. As of the Effective Date and during the Term:
2.1 Payment Processing.
(a) Chopper shall use and shall cause its Affiliates to use FDC and
its Affiliates to provide all Payment Processing used by Chopper
and its Affiliates; provided, however, that neither Chopper nor
any of its Affiliates shall be required to use FDC and its
Affiliates to provide Payment Processing if, in the reasonable
business judgment of Chopper, Chopper or its Affiliates, as
applicable, can obtain substantially similar Payment Processing
on substantially the same terms offered by FDC and its Affiliates
at an overall economic cost that is less than the overall
economic cost FDC and its Affiliates offered to provide the same
to Chopper and its Affiliates; provided, however, that
"reasonable business judgment" may take into consideration the
fact that FDC or its Affiliates offers a directly competing
product or service offered by Chopper or any of its Affiliates
and the use of FDC's or its Affiliates' product or service by
Chopper or its Affiliates would either (i) allow FDC or its
Affiliates to achieve substantial competitive benefits due to
increased volume or (ii) provide FDC or its Affiliates with
proprietary technology of Chopper and its Affiliates that
provides FDC or its Affiliates with a substantial competitive
advantage.
(b) Notwithstanding Section 2.1(a), if Chopper or any of its
Affiliates are able to obtain from a third Person substantially
similar Payment Processing on substantially the same terms
offered by FDC or its Affiliates at an overall economic cost that
is less than the overall economic cost that FDC and its
Affiliates offered to provide such Payment Processing to Chopper
and its Affiliates, Chopper shall permit and shall cause its
Affiliates to permit FDC and its Affiliates to provide such
Payment Processing to Chopper and its Affiliates on overall terms
that are at least as favorable as those offered by such third
Person, in which case Chopper or its Affiliate, as applicable,
shall obtain such services from FDC and its Affiliates.
(c) FDC and its Affiliates shall offer to provide to Chopper and its
Affiliates, in connection with the services Chopper is then
offering to Aggregation Service Companies, Payment Processing of
the type FDC and its Affiliates is then offering generally in the
marketplace. In determining the price, level of service and other
specific terms of the Payment Processing to be offered to Chopper
and its Affiliates, FDC shall take into account (i) its then
current equity interest in
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Chopper, (ii) the anticipated volumes, any exclusivity
arrangements and minimum revenue commitments either of the
parties or their respective Affiliates are bound by, the
marketing commitments involved and (iii) the terms and conditions
of the current form of customer contract. If either Chopper or
its Affiliates chooses to purchase such Payment Processing from
FDC or its Affiliates, it shall execute FDC's current form of
customer contract with appropriate terms and conditions.
(d) To facilitate the provision of Payment Processing by FDC and its
Affiliates to Chopper and its Affiliates, within 60 days
following the Effective Date, and thereafter as FDC may
reasonably request (but at least annually), Chopper and its
Affiliates shall provide FDC and its Affiliates with such
information as FDC may reasonably request relating to the then
current and anticipated use of Payment Processing by Chopper and
its Affiliates, including the specific terms of existing
third-party contracts relating to Payment Processing (subject to
any existing confidentiality requirements).
(e) If Chopper shall breach this Section 2.1, the parties agree that
FDC shall be entitled to 200% of any lost profits of FDC and its
Affiliates.
2.2 Official Check. When commercially reasonable, Chopper and its
Affiliates shall use FDC's product commonly known as Official Check in
connection with the Pay Anyone Service. In connection therewith,
Chopper shall enter into a customary processing agreement relating to
the use of the Official Check product. For purposes of this Section
2.2, it shall be deemed commercially reasonable for Chopper and its
Affiliates to use FDC's product commonly known as Official Check when,
in the reasonable business judgement of Chopper, services of equal or
superior quality as compared to the offerings of third Persons may be
thereby obtained at an equal or lesser overall economic cost from FDC
or its Affiliates than such third Person; provided, however, that
"reasonable business judgment" may take into consideration the fact
that FDC or its Affiliates offers a directly competing product or
service offered by Chopper or any of its Affiliates and the use of
FDC's or its Affiliates' product or service by Chopper or its
Affiliates would either (i) allow FDC or its Affiliates to achieve
substantial competitive benefits due to increased volume or (ii)
provide FDC or its Affiliates with proprietary technology of Chopper
and its Affiliates that provides FDC or its Affiliates with a
substantial competitive advantage.
2.3 Covenant Not to Sue For Chopper Patents. Chopper hereby covenants not
to sue or otherwise bring or assert any claim against FDC or any of its
Affiliates that any service or product offered by FDC or any of its
Affiliates infringe any Chopper Patent which is based upon or utilizes
any intellectual property constituting works derivative of intellectual
property licensed pursuant to the [Technology and Intellectual Property
License Agreements], dated the date hereof, between FDC and Chopper and
Missile and Chopper.
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3. FDC Obligations. As of the Effective Date and during the Term (except
as provided in Section 3.1):
3.1 Noncompete.
(a) Subject to the exceptions set forth below, FDC agrees that,
subject to Section 6, beginning on the Effective Date and for
a period ending on the fifth anniversary of the Effective
Date, (1) in no month will the Monthly Consumer Bill Payment
Ratio of any Aggregation Service Company (including an
Aggregation Service Company owned or operated by FDC), to
which FDC or its Affiliates provides an Integrated Interactive
Bill Payment System using an Interactive Service anywhere in
the world, exceed three (the "Restricted Activity") or (2)
neither FDC or its Affiliates shall acquire the Voting Stock
of any Person conducting Restricted Activities.
(b) An "Integrated Interactive Bill Payment System" is a
combination of applications, databases and processing
infrastructure which together, coupled with connectivity,
provide the necessary intelligence to receive and convert
Consumer payment instructions for online bill payments into
credits (to a Payee DDA), debits (from a Consumer DDA) and
exceptions, and which can be amended and corrected on a
transaction-by-transaction basis as exceptions are processed
and remediated. In order to be an Integrated Interactive Bill
Payment System, the system also must have all of the following
features:
(1) A database utilized by FDC or its Affiliates in
connection with an Integrated Interactive Bill
Payment System that contains files with information
regarding Sponsors. A "Sponsor" is a financial
institution, personal financial management software
provider, or internet site operator which offers
electronic bill delivery and payment, or bill
payment, electronically to its customers or patrons.
A Sponsor file is consulted to determine
connectivity, communications windows, or business
rules influencing debit method with respect to a
Sponsor.
(2) A database utilized by FDC or its Affiliates in
connection with an Integrated Interactive Bill
Payment System that contains a database of files with
information regarding Payees. A "Payee" is the
receiver of payments, including both funds and
remittance information. A Payee file must contain all
of the following fields: (i) name; (ii) telephone
numbers; (iii) preferred remittance method; (iv) bank
account information; and (v) risk-related
information.
(3) A database utilized by FDC or its Affiliates in
connection with an Integrated Interactive Bill
Payment System that contains files with information
regarding Consumers. A "Consumer" is an individual
person (and shall not include small businesses, sole
proprietorships, partnerships, corporations, limited
liability companies, or other such entities) that is
the
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holder of one or more bank accounts from which bills
are to be paid through the system. A Consumer file must
contain all of the following fields: (i) name; (ii)
address; (iii) unique alphanumeric identifier; (iv)
bank account information; and (v) Payee files,
including account numbers.
(4) A system for recognizing disparities or anomalies in
Payee account information submitted by and automatically
makes appropriate corrections or changes;
(5) A system for programmatically choosing a method of
debit, among Automated Clearing House debit, or
paper draft on the Consumer's account, through an
arrangement with a Sponsor, and not as a result of
choice by the Consumer, to obtain good funds, or
other debit method, influenced by business rules and
information contained in Sponsor, Payee, or Consumer
files;
(6) A system for programmatically choosing a method of
credit, including both funds transfer and remittance
information transmission among Automated Clearinghouse,
e-Pay, RPS, Direct Send, Managed or Unmanaged paper
check, paper draft, or other method, depending upon
information contained in Consumer, Sponsor, or Payee
files;
(7) A system for determining the format of and formatting
remittance information in a manner consistent with
information contained in Payee files; and
(8) A system for updating information contained in Payee,
Sponsor, and Consumer files as a result of a payment
which is initially rejected or returned, and
reprocessing the payment.
The parties recognize that activities that include one or
more, but not all, of the foregoing components do not constitute an
Integrated Interactive Bill Payment System, and that the provision of
all the components set forth in (1) through (8) are required in order
for a system to be considered an Integrated Interactive Bill Payment
System.
(c) "Household Bills" are defined as only those bills which have
customarily been received at home by a Consumer through the
United States Postal Service which seek payment for services or
goods which have been provided in the past, or will be provided
in the future, usually as part of an ongoing relationship between
the Payee and the Consumer, or, as in the case of a credit card
statement, as part of a credit relationship established in the
past. Examples of Household Bills are utility bills, credit card
bills, insurance bills, loan payments, magazine or newspaper
subscriptions, and recurring home delivery of milk, bottled
water, or other products or services such as gardening, home
maintenance, or snow removal. Household Bills do not include
requests for payment made in connection with a
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non-recurring purchase of goods or services, such as purchases
made over the Internet, through mail order or telephone order,
nor do they include requests for payment which are made at a
location which is open to the general public or which is a place
of public accommodation. The term Household Bills does not
include payments made to an individual from an individual other
than in furtherance of a regularly-conducted business, trade, or
profession by either of them (Person-to-Person Payments).
(d) An "Aggregation Service Company" is an entity which itself
provides to Consumers, or through an intermediary provides to
Consumers, a service whereby electronic bills presented by more
than three Single Payees may be accessed and paid at a single
Internet Site, or through personal financial management client
software used principally for accounting, investing, budgeting,
maintaining or monitoring a Consumer's personal finances, with a
single authentication procedure. An entity which provides an
Internet Site which provides hyperlinks to multiple Internet
Sites or URLs each operated by, hosted by, or established for, a
Single Payee shall not be considered to be an Aggregation Service
Company provided that payment is effectuated through the same
initiation method and process as would be applied to payments
effectuated on behalf of users who access the hyperlinked
Internet Site or URL directly; provided, however, that solely
with respect to hyperlinked URLs, such hyperlinked URLs do not
appear to the Consumer to be under the same sponsor. A "Single
Payee" is a business entity which (a) controls, is controlled by,
or under common control of the entity represented at the site or
(b) payees which voluntarily (or pursuant to governmental
requirement) combine in a single Bill or Statement, Bills or
Statements from one or more sources that are to be discharged by
a single payment (e.g., a phone bill or credit card bill). FDC
and its Affiliates shall be free to offer electronic billing and
Payment Processing through Internet Sites and URLs offering
billing from, or payment to, a Single Payee.
(e) Notwithstanding the foregoing, nothing herein shall be
construed as to prohibit FDC from offering
business-to-business Payment Processing, or person-to-person
Payment Processing whether through an Integrated Interactive
Bill Payment System or otherwise.
(f) FDC and its Affiliates may conduct Restricted Activities,
provided, that:
(1) FDC and its Affiliates limit the gross revenues derived
solely from all such Restricted Activities to
$50,000,000 per calendar year;
(2) Except as provided in Sections (h)(4), (h)(5),
(h)(6) and (h)(13), FDC pays to Chopper 25% of all
gross revenues derived solely from the Restricted
Activities, which payment shall be counted as Fees
for purposes of Section 3.2; provided, however, that
the maximum amount of any such payments which can be
counted as Fees in any calendar year
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cannot exceed 50% of the sum of the Minimums required
to be generated for such year; and
(3) FDC gives notice to Chopper and Chopper as soon as
practicable after signing an agreement to engage in
such activities.
(g) Under no circumstances, however, shall FDC agree to construct
or cause to be constructed, or operate, an Integrated
Interactive Bill Payment System for [*].
(h) Nothing contained herein shall be interpreted to prohibit:
(1) the development, sale, or licensing of stand-alone
tools, productivity applications and/or client or
server platforms, that can be used to facilitate
aggregation by client software of Bills, Statements
or payments;
(2) providing electronic Bills or Statements to any Person;
(3) owning (i) not in excess of 20% in the aggregate of the
Voting Stock of any Person (including a Person engaged
in a Restricted Activity, but excluding any Existing
Alliance or Future Alliance covered in Section
3.1(h)(6) or (h)(13)); or (ii) owning Voting Stock of
Chopper; provided, however, that, with respect to
clause (i), if the investment represents in excess of
10% of the Voting Stock of any such Person, then an
amount equal to (A) FDC's or its Affiliates' percentage
of Voting Stock, multiplied by (B) the gross revenues
derived solely from the Restricted Activities of such
investment, shall be included in gross revenues for
purposes of clause (f)(1) of Section 3.1 (but none of
such gross revenues shall be counted for purposes of
calculating gross revenues for purposes of clause
(f)(2) of Section 3.1);
(4) acquiring, and following such acquisition, actively
engaging in, any business that has a subsidiary,
division, group, franchise or segment that is engaged
in any Restricted Activity ("Competing Unit"), so long
as on the date of such acquisition, not more than the
lesser of 20% or $50,000,000 of the annual consolidated
revenues of such business are derived solely from
Restricted Activities; provided, however, that if FDC
or any of its Affiliates acquire a Competing Unit, then
the gross revenues derived solely from the Restricted
Activities conducted by the Competing Unit shall be
included in gross revenues for purposes of clause (f)
of Section 3.1; provided, further, that if FDC or its
Affiliates agree to divest of such Competing Unit in
the manner set forth in clause (h)(5) of Section 3.1,
then only 15% of the gross revenues derived solely from
the Restricted Activities of the Competing Unit shall
be included in gross revenues for purposes of clause
(f)(2) of Section 3.1 for so long as FDC and its
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
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Affiliates are complying with clause (h)(5) of Section
3.1 (but none of such gross revenues shall be counted
for purposes of calculating gross revenues for purposes
of clause (f)(1) of Section 3.1);
(5) acquiring and, following such acquisition, actively
engaging in, any business that has a Competing Unit if
on the date of such purchase more than the lesser of
20% or $50,000,000 of the consolidated revenues of such
business are derived from a Restricted Activity so long
as such business divests itself of the Competing Unit
promptly after the date of such acquisition, and in no
case greater than two years, accompanied by public
announcement of the requirement to divest, so that on
the date of such divestiture not more than the lesser
of 20% or $50,000,000 of the consolidated revenues of
such business are derived from Restricted Activities;
provided, however, that with respect to any purchase
intended to be treated for federal income tax purposes
as a tax-free reorganization, no such divestiture shall
be required until, in the reasonable opinion of FDC,
such divestiture would no longer endanger the treatment
for federal income tax purposes of such acquisition as
a tax-free reorganization; provided, further, that for
so long as FDC or any of its Affiliates holds a
Competing Unit it is required to divest, then 15% of
the gross revenues derived solely from the Restricted
Activities conducted by the Competing Unit shall be
included in gross revenues for purposes of clause
(f)(2) of Section 3.1 (but none of such gross revenues
shall be counted for purposes of calculating gross
revenues for purposes of clause (f)(1) of Section 3.1).
(6) engaging in a Future Alliance, provided, that, subject
to any applicable fiduciary obligation, FDC shall, and
shall cause its Affiliates to, vote against, not
support and oppose any proposal on the part of any
Future Alliance to (A) acquire or invest in the Voting
Stock of a business performing Restricted Activities,
or (B) otherwise enter into a contract, arrangement or
understanding with a Person engaged in Restricted
Activities to engage in Restricted Activities, which,
in the case of the Restricted Activities referred to in
(A) and (B), FDC would be prohibited from engaging in
pursuant to this Section 3.1 during the applicable
non-compete period; provided, however, that 15% of
FDC's allocable share (which allocable share shall
equal FDC's percentage ownership interest in the Future
Alliance) of the gross revenues derived solely from the
Restricted Activities conducted by such Alliance shall
be included in gross revenues for purposes of clause
(f)(2) of Section 3.1 (but none of such gross revenues
shall be included for purposes of calculating gross
revenues for purposes of clause (f)(1) of Section 3.1);
(7) performing any services pursuant to this Agreement or
any other agreement entered into in connection with the
performance of this Agreement;
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(8) providing a service or product where the electronic
payment and presentment system is an ancillary feature
of an electronic merchandising business offered,
operated or supported by FDC or any of its Affiliates
(e.g., an on-line shopping mall, etc.); provided that
FDC or its Affiliates provide such payment and/or
presentment services to purchasers only with respect to
the services or products offered by such electronic
merchandising business;
(9) providing a service or product whereby payment and/or
presentment can only be made at a physical location
which is open to the general public or a place of
public accommodation (e.g., grocery stores, check
cashing locations or the post office);
(10) providing a service or product for payment or
presentment of taxes and fees to government entities;
(11) providing an Interactive Service which is designed and
marketed to provide for the last minute or emergency
payment of Bills or Statements;
(12) providing a payment gateway using proprietary software
that enables the transmission of payment transaction
information via the Internet for a Payee conducting
business on the Internet or through mail
order-telephone order, thereby allowing the Payee to
process transactions electronically;
(13) providing any service which FDC or its Affiliates is
contractually obligated to provide to an Existing
Alliance; provided, however, that 15% of FDC's
allocable share (which allocable share shall equal
FDC's percentage ownership interest in the Existing
Alliance) of the gross revenues derived solely from the
Restricted Activities conducted by such Alliance shall
be included in gross revenues for purposes of clause
(f)(2) of Section 3.1 (but none of such gross revenues
shall be included for purposes of calculating gross
revenues for purposes of clause (f)(1) of Section 3.1);
(14) providing an Integrated Interactive Bill Payment System
that involves an interchange system (not created
specifically for the aggregation and payment of
Household Bills) of any kind to effectuate payment; and
(15) providing payment related services in connection with
an electronic wallet or password management product or
service, including interfaces to any client software.
Except as specifically set forth in this clause (h), none of
the gross revenues generated from activities described in
clauses (1) through (15) above shall be
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counted as gross revenues from Restricted Activities for
purposes of clause (f) of Section 3.1.
(i) Nothing in this Agreement, including without limitation, this
Section 3.1, shall be construed to prohibit FDC or any Affiliate
of FDC from providing any FDC Business Services, including
through Interactive Service, and none of the FDC Business
Services shall be construed to constitute Restricted Activities.
"FDC Business Services" means providing any of the following
services (including any services supportive or ancillary to
Restricted Activities):
(1) issuing or processing of debit card, credit card, bank card,
payment card, electronic benefit payment card, smart card,
stored value card or other similar card (including an
electronic equivalent) ("Transaction Cards") transactions
and related products, services and systems, loan processing
services and line-of-credit services;
(2) issuing, origination, reconciliation, payment, processing,
clearing, verification, guarantee, scoring or collection of
any check (including electronic versions thereof), credit,
debit and draft transactions, ATM transactions, Automated
Clearinghouse transactions, electronic funds transfer
transactions, Transaction Card transactions and recurring
payment transactions, including any payment transaction
branded by VISA, MasterCard, Discover, NOVUS, American
Express or regional EFT network;
(3) providing processing and other services in connection with
electronic and/or paper bill, invoice, statement or notice
presentment and payment services;
(4) official checks and money orders services;
(5) money transfer services as presently constituted (including
Western Union and Orlandi Valuta);
(6) remittance processing, tax payment, payment instrument
services and cash management services;
(7) in store and other off-site retail location facility
installments and related consulting services;
(8) list services (including sale, licensing and list rental),
database marketing services (including housing, storing,
sorting, maintaining, enhancing and updating data), data
processing services (including provision of merge/purge,
address hygiene and data append services) and database
information services (including provision of market
segmentation, consumer profiling, modeling and demographic
information services);
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(9) preparation and mailing (or other form of delivery,
including electronic delivery) of bills, invoices,
statements or notices;
(10) messaging services, including the preparation, printing,
facsimile or electronic transmission and/or mailing of
letters or other communications and the preparation and
telephonic delivery of pre-recorded voice messages;
(11) automated voice response and call center services;
(12) telephone check drafting, Automated Clearinghouse
origination or electronic funds transfer services whether
originated or authorized over or through a telephone, the
Internet or web-based connection (including through a
virtual POS or other payment authorization interface) and
the enrollment, authorization and confirmation services
provided in connection therewith;
(13) provision (whether by batch or transactional) of credit and
collection services, analytic modeling and metric products
or services (including various "scoring" products and
services) relating to payment transactions (including by
check and Transaction Card), credit worthiness,
householding, profitability, customer services, collection
effectiveness, retention, fraud, bankruptcy, settlement,
payment and related services, transaction, account or
performance and the provision of credit reports and other
credit bureau services, account screening services and other
credit reporting applications and check and Transaction Card
acceptance, guarantee, scoring and collection services;
(14) any activities seeking collection of amounts owed by a
debtor, including telephone calls and written and other
communications to a debtor;
(15) processing of debit or credit transactions for deposit
accounts;
(16) employment screening, customer acquisition and address
management services; and
(17) Merchant Acquiring Services and services offered to
merchants, including in connection with the establishment of
Internet-based commerce.
(j) Nothing in this Section 3.1 shall prohibit the incidental or
occasional use of any product or service offered or sold by
FDC or any of its Affiliates for use in a Restricted Activity
provided such product or service has not been designed or
marketed for the purpose of engaging in a Restricted Activity.
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3.2 Minimum Revenues.
(a) If the fees (excluding installation fees) paid to Chopper and its
Affiliates by FDC and its Affiliates (the "Fees") and Expense
Savings during the first full twelve (12) calendar months after
the Effective Date is less than $6,000,000 (the "First Year
Minimum"), then within thirty (30) days after the end of such
twelve (12) calendar month period, FDC shall pay to Chopper the
difference between the First Year Minimum and the total of the
Fees and Expense Savings during such twelve (12) calendar month
period.
(b) If the Fees and Expense Savings during any of the twelve (12)
full calendar months after the first anniversary of the Effective
Date is less than $750,000 (the "Second Year Monthly Minimum"),
then within thirty (30) days after the end of any month in which
there is a Revenue Shortage, FDC shall pay to Chopper the
difference between the Second Year Monthly Minimum and the total
of the Fees and Expense Savings during such month.
(c) If the Fees and Expense Savings during any of the twelve (12)
full calendar months after the second anniversary of the
Effective Date is less than $1,000,000 (the "Third Year Monthly
Minimum"), then within thirty (30) days after the end of any
month in which there is a Revenue Shortage, FDC shall pay to
Chopper the difference between the Third Year Monthly Minimum and
the total of the Fees and Expense Savings during such month.
(d) If the Fees and Expense Savings during any of the twelve (12)
full calendar months after the third anniversary of the Effective
Date is less than $1,250,000 (the "Fourth Year Monthly Minimum"),
then within thirty (30) days after the end of any month in which
there is a Revenue Shortage, FDC shall pay to Chopper the
difference between the Fourth Year Monthly Minimum and the total
of the Fees and Expense Savings during such month.
(e) If the Fees and Expense Savings during any of the twelve (12)
full calendar months after the fourth anniversary of the
Effective Date is less than $1,500,000 (the "Fifth Year Monthly
Minimum"), then within thirty (30) days after the end of any
month in which there is a Revenue Shortage, FDC shall pay to
Chopper the difference between the Fifth Year Monthly Minimum and
the total of the Fees and Expense Savings during such month.
(f) Any fees (excluding installation fees) paid to Chopper or any of
its Affiliates received from billers (other than Top Billers) (i)
that FDC or any of its Affiliates resells any services or
products of Chopper or its Affiliates to, (ii) that FDC or any of
its Affiliates has referred or introduced to Chopper or any of
its Affiliates or (iii) that FDC or its Affiliates actively
market Chopper's services or products to, shall be counted as
"Fees" for purposes of this Section 3.2. In addition, any fees
(excluding installation fees) received, directly or indirectly,
by Chopper or its
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Affiliates from consumer transactions occurring on any
Internet site owned, maintained or hosted by FDC or any of
its Affiliates shall be counted as "Fees" for purposes of
this Section 3.2. Chopper shall promptly (but in any event
no longer than fifteen (15) days after each month end)
provide FDC with any such information reasonably necessary
for FDC to calculate the Fee's generated by Persons that are
not Affiliates of FDC.
3.3 Notwithstanding Section 3.2, FDC shall be under no obligation to meet
any monthly minimum identified in Section 3.2 to the extent and only to
the extent that:
(a) Chopper or any of its Affiliates fails to make available any Bill
Presentment and Payment Service, Pay Anyone Service or Payment
Processing service;
(b) the means by which Chopper or any of its Affiliates makes
available any Bill Presentment and Payment Service, Pay Anyone
Service or Payment Processing service are unavailable due to
technical failure or otherwise;
(c) Chopper changes the nature of its business in a material way so
as to have a material adverse effect on FDC's and its Affiliates'
ability to meet the monthly payment minimums set forth in Section
3.2; or
(d) Chopper or any of its Affiliates takes any action that materially
interferes with FDC or its Affiliates ability to commercially
exploit any Bill Presentment and Payment Service, Pay Anyone
Service or Payment Processing service of Chopper and its
Affiliates.
3.4 Pay Anyone. When commercially reasonable, and if FDC or any of its
Affiliates chooses to offer a Pay Anyone Service of such kind, FDC and
its Affiliates shall use Chopper's Pay Anyone Service, subject to such
terms and conditions as the parties may agree. For purposes of this
Section 3.5, it shall be deemed commercially reasonable for FDC and its
Affiliates to use Chopper's Pay Anyone Service when, in the reasonable
business judgment of FDC, services of equal or superior quality as
compared to a third Person may thereby be obtained at an equal or
lesser overall economic cost from Chopper then from such third Person.
3.5 CSP. Nothing herein shall restrict FDC or its Affiliates from hosting a
site providing or offering Pay Anyone and/or Bill Presentment and
Payment Services of a third party via distribution or transmission of
computer software and/or informational content of such third party,
where such hosting activities are generally conducted for other parties
and the fee or consideration arrangements therefore are arms' length
transactions of the type generally made; provided, however, that if the
site is hosted by and for FDC or any of its Affiliates, FDC and its
Affiliates will be required to comply with the other provisions of this
Agreement; provided, further, that FDC or its Affiliates will not host
a site for a third Person offering an FDC branded Pay Anyone or Bill
Presentment and Payment product or service which would otherwise
violate the terms of this Agreement. As used herein, "hosting" means
the transmission or publication of another's products or services,
which
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may be accomplished through use of the hosting party's equipment and
facilities, where the hosting party does not create or control the
hosted products or services, but rather is acting as a transmitter or
publisher of such products or services.
3.6 Bill Service Provider. If FDC or any of its Affiliates acts as a bill
service provider for a specific Payee, FDC and its Affiliates will use
its reasonable commercial efforts, determined in the sole judgment of
FDC, to encourage such Payee to make available its Household Bills
through the Bill Presentment and Payment System operated by Chopper and
any of its Affiliates, provided that (1) such Payee has entered into a
contract with Chopper or a reseller (including FDC) agreeing to make
available Household Bills on the Bill Presentment and Payment System
operated by Chopper and any of its Affiliates and (2) such Payee or
Chopper agrees to pay all costs and expenses (including installation
fees) associated with the presentment of any Household Bills on the
Bill Presentment and Payment System operated by Chopper or its
Affiliates.
4. Chopper and FDC Joint Obligations.
4.1 Development. Whenever commercially reasonable, Chopper and FDC shall
cooperate with each other in developing electronic invoicing and
payment services and products for clients and prospective clients of
FDC and its Affiliates. Any such joint development shall only be
undertaken after execution of a written joint development agreement.
The parties must agree in writing prior to commencing any joint
development work. All such cooperation is on a non-exclusive basis for
both parties, unless otherwise agreed upon in writing for a particular
project.
4.2 Expense Savings. Within sixty (60) days after the Effective Date,
Chopper and FDC shall determine an appropriate mechanism to calculate
the Expense Savings. Notwithstanding the foregoing sentence, commencing
on the first full calendar month after the Effective Date and ending
sixty full calendar months later, Chopper shall deliver to FDC, not
less than fifteen (15) days after the end of each calendar month, a
detailed statement calculating the Fees and Expense Savings for the
most recently completed calendar month.
4.3 Reseller Agreement.
(a) Contemporaneously with the execution of this Agreement, the
parties shall enter into a non-exclusive reseller agreement
substantially in the form attached hereto as Schedule 4.3(a)
relating to the resale by FDC and its Affiliates of the Bill
Presentment and Payment Service, Pay Anyone Service and Payment
Processing Service of Chopper and its Affiliates to Clients.
(b) Pricing. The initial pricing structure for the Bill Presentment
and Payment Service, Pay Anyone Service or Payment Processing
Service of Chopper and its Affiliates to be resold by FDC and its
Affiliates are set forth in Schedule 4.3(b). At least sixty (60)
days prior to the commencement of any renewal of this Agreement,
the parties shall in good faith renegotiate the pricing
structure, and
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such structure shall replace the structure then set forth on any
Schedule 4.3(b). Chopper represents and warrants that the pricing
for the Bill Presentment and Payment Service, Pay Anyone Service
or Payment Processing Service to be resold by FDC are at least as
favorable as the terms granted by Chopper or any of its
Affiliates to any other Person. If Chopper or any of its
Affiliates enters into any subsequent or renewal agreement with
any other Person during the Term that provides for pricing more
favorable than the pricing provided to FDC, FDC shall be deemed
to receive the more favorable terms. Chopper shall notify FDC
promptly of the existence of such more favorable pricing or
benefits and FDC shall have the right to receive the same
immediately. [note: the pricing schedule may be folded into the
reseller agreement to be executed by the parties.]
(c) Consumer Pricing. If FDC or any of its Affiliates offers any of
the Bill Presentment and Payment Service, Pay Anyone Service or
Payment Processing Service provided by Chopper or its Affiliates
to consumers, Chopper shall offer to provide FDC and its
Affiliates such Bill Presentment and Payment Service, Pay Anyone
Service or Payment Processing Service on at least as favorable
terms as those provided by Chopper or any its Affiliates to any
Person reselling or receiving a comparable service. In
determining the price, level of service and other terms of the
Bill Presentment and Payment Service, Pay Anyone Service or
Payment Processing Service to be provided to FDC and its
Affiliates, Chopper shall take into account (i) the anticipated
volumes, (ii) the service support levels to be provided, (iii)
the marketing commitments involved and (iv) any exclusivity
arrangements and minimum revenue commitments either of the
parties or their respective Affiliates are bound by.
5. Term. This Agreement shall be effective on the Effective Date and
shall continue for a period of five (5) years (the "Term"), unless
earlier terminated as set forth herein or otherwise extended by
agreement of the parties.
6. Termination.
6.1 Change of Control. FDC may immediately terminate this Agreement if
Chopper or any of its Affiliates enters into a transaction with a
Specified Processor or any of its Affiliates which results in the
Specified Processor or any of its Affiliates acquiring Chopper in
connection with a Change of Control (a "Chopper Acquisition");
provided, however, that in the event FDC elects to terminate this
Agreement pursuant to this Section 6.1, then FDC shall be required to
pay promptly 50% of the sum of all future Minimums payable pursuant to
Section 3.2. Notwithstanding the foregoing, in the event of a Chopper
Acquisition, Section 3.1 shall immediately terminate.
6.2 Acquisition. FDC may terminate this Agreement if Chopper or any of its
Affiliates enters into a transaction with a Specified Processor or any
of its Affiliates that results in Chopper or any of its Affiliates
owning fifty percent (50%) or more of the Voting Stock of the Specified
Processor or fifty percent (50%) or more of the consolidated assets of
the Specified Processor (any such transactions being a "Specified
Processor Acquisition");
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provided, however, that in the event FDC elects to terminate this
Agreement pursuant to this Section 6.2, then FDC shall be required to
pay promptly 50% of the sum of all future Minimums payable pursuant to
Section 3.1. Notwithstanding the foregoing, in the event of a
Specified Processor Acquisition, Section 3.1 shall immediately
terminate.
6.3 Consequences. The following provisions shall survive the termination of
this Agreement: Sections 7, 8, 9, 10, 11, and 13, and any payment
obligations set forth in Section 3.2 arising prior to the effective
date of any such termination.
7. Confidentiality.
7.1 Definition of Confidential Information. "Confidential Information"
shall mean any information or materials that could reasonably be
considered confidential and disclosed by either party in any form or
medium and whether or not designated either orally, visually or in
writing as confidential (or like designation) at the time of
disclosure, including any data or information that is competitively
sensitive material, and not generally known to the public, including
products, planning information, marketing strategies, plans, finance,
operations, customer relationships, customer profiles, sales estimates,
business plans, and internal performance results relating to the past,
present or future business activities of a party, their respective
Affiliates and the customers, clients and suppliers of any of the
foregoing, and the nature and terms of this Agreement.
7.2 Non-Disclosure Obligation. Each party to this Agreement shall:
(a) safeguard the confidentiality of the disclosing party's
Confidential Information, exercising at least the same degree of
care as it would with its own Confidential Information of a
similar nature, but never less than reasonable care;
(b) hold in confidence, and not disclose or reveal to any Person, any
Confidential Information disclosed under this Agreement without
the clear and express prior written consent of a duly authorized
representative of the disclosing party; and
(c) not use or disclose any of the Confidential Information for any
purpose at any time, other than for the limited purpose of
performance under this Agreement; and
(d) upon the expiration or termination of this Agreement for any
reason, promptly return to the disclosing party all Confidential
Information (and any copies thereof) in its possession.
7.3 Exclusions. Notwithstanding the foregoing Section 7.2, the parties'
obligations respecting confidentiality shall not apply to any
particular information of a party that the other party can demonstrate:
(a) was, at the time of disclosure to it, in the public domain;
(b) after disclosure to it, is published or otherwise becomes part of
the public domain through no fault of the receiving party and no
known fault of the third party;
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(c) was in the possession of the receiving party at the time of
disclosure to it without being subject to another confidentiality
agreement;
(d) was received after disclosure to it from a third party who had a
lawful right to disclose such information to it;
(e) was independently developed by the receiving party without
reference to Confidential Information of the furnishing party;
(f) was required to be disclosed to any regulatory body having
jurisdiction over FDC or Chopper or any of their respective
clients; or
(g) that disclosure is necessary by reason of legal, accounting or
regulatory requirements beyond the reasonable control of the
receiving party.
7.4 In the case of any disclosure pursuant to Section 7.3(f) or 7.3(g), to
the extent practicable, the disclosing party shall give prior notice to
the other party of the required disclosure and shall use commercially
reasonable efforts to obtain a protective order or an appropriate
confidentiality agreement covering such disclosure. If such a
protective order is obtained, such information shall continue to be
deemed to be Confidential Information.
7.5 Irreparable Harm. Each party acknowledges that if it breaches (or
threatens to breach) its obligations under this Section 7, the other
party will suffer immediate and irreparable harm, it being acknowledged
that legal remedies are inadequate. Accordingly, if a court of
competent jurisdiction should find that a party has breached (or
threatened to breach) any such obligations, such party shall not oppose
the entry of an appropriate order compelling performance by such party
and restraining it from any further breaches (or threatened breaches).
8. Representations, Warranties and Covenants.
8.1 By Chopper. Chopper represents, warrants and covenants to FDC as
follows:
(a) Chopper is a corporation, duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(b) Chopper has full power and authority to execute, deliver and
perform this Agreement;
(c) this Agreement has been duly authorized, executed and delivered
by Chopper and is the legal, valid and binding obligation of
Chopper in accordance with its terms; and
(d) Chopper shall perform all of its obligations set forth herein in
a professional and workmanlike manner in accordance with the
highest applicable industry standards.
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8.2 By FDC. FDC represents, warrants and covenants to Chopper as follows:
(a) FDC is a corporation, duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(b) FDC has full power and authority to execute, deliver and perform
this Agreement;
(c) this Agreement has been duly authorized, executed and delivered
by FDC and is the legal, valid and binding obligation of FDC in
accordance with its terms; and
(d) FDC shall perform all of its obligations set forth herein in a
professional and workmanlike manner in accordance with the
highest applicable industry standards.
9. Indemnification.
9.1 By Chopper. Chopper shall indemnify, defend and hold FDC, its
Affiliates and their respective directors, officers, employees and
agents (collectively, the "FDC Indemnified Persons") harmless from and
against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and
deficiencies, including interest, penalties, court costs and attorneys'
fees (collectively, "Losses"), that any FDC Indemnified Person shall
incur or suffer, that arise, result from, or relate to:
(a) any infringement, misappropriation or violation of any issued
United States patent or any copyright, trade secret or other
intellectual property rights (collectively, "Infringement
Claims") asserted by any third Person against any FDC Indemnified
Person relating to the services or products provided by Chopper
or its Affiliates pursuant to this Agreement; and
(b) any claim by any third Person relating to the services or
products provided by Chopper or its Affiliates pursuant to this
Agreement, unless, and to the extent that, such claim arises, or
is attributable to, the negligence, breach of contract, or
unlawful act of FDC or its Affiliates.
9.2 By FDC. FDC shall indemnify, defend and hold Chopper, its Affiliates
and their respective directors, officers, employees and agents
(collectively, the "Chopper Indemnified Persons") harmless from and
against and in respect of any and all Losses that any of Chopper
Indemnified Persons shall incur or suffer, that arise, result from, or
relate to:
(a) any Infringement Claim asserted by any third Person against any
Chopper Indemnified Person relating to the services or products
provided by FDC to Chopper or its Affiliates pursuant to this
Agreement; and
(b) any claim by any third Person relating to the services or
products provided by FDC and its Affiliates pursuant to this
Agreement, unless, and to the extent that,
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such claim arises, or is attributable to, the negligence, breach
of contract, or unlawful act of Chopper or its Affiliates.
9.3 Third Party. If any indemnifiable claim by a third Person is made
against any indemnified Person, such indemnified Person shall promptly
provide written notice, as applicable, to Chopper or FDC of such claim;
provided that the failure to give such notice shall not affect any
rights of such indemnified Person hereunder except to the extent
Chopper or FDC, as applicable, is materially prejudiced by such failure
to give notice. By delivering written notice to such indemnified Person
within 15 days after receipt of such indemnified Person's notice,
Chopper, or FDC may, as applicable, or upon written request of such
indemnified Person shall, assume the defense and/or settlement of such
claim at its sole expense through counsel reasonably satisfactory to
such indemnified Person, provided that:
(a) Chopper or FDC, as applicable, shall not permit any lien,
encumbrance or other adverse charge upon any asset of such
indemnified Person;
(b) Chopper or FDC, as applicable, shall permit such indemnified
Person to participate in such settlement or defense through
counsel selected by such indemnified Person at such indemnified
Person's expense; and
(c) Chopper or FDC, as applicable, shall agree to promptly reimburse
such indemnified Person for the full amount of its liability
after final determination to the claimant provided such liability
is indemnifiable under Section 9.
(d) If Chopper or FDC, as applicable, shall not have employed counsel
to defend such claim or if such indemnified Person shall have
reasonably concluded (with the written advice of counsel) that
the position of such indemnified Person and Chopper or FDC, as
applicable, may be in conflict, Chopper or FDC, as applicable,
shall not have the right to direct the defense of any such claim
on behalf of such indemnified Person and the reasonable legal and
other expenses incurred by such indemnified Person shall be borne
by Chopper or FDC, as applicable. No settlement of a claim that
involves a remedy other than the payment of money by Chopper or
FDC, as applicable, shall be entered into by Chopper or FDC, as
applicable, without the prior written consent of the indemnified
Party, which consent shall not be unreasonably withheld or
delayed.
10. Limitation of Liability.
10.1 A party's liability to the other party or any other Person for damages,
injuries, losses, costs or expenses of any kind, however caused, based
on or arising from or in connection with this Agreement, any
termination hereof, the subject matter hereof, the performance (or
non-performance) of any service or obligation hereunder, whether
arising in contract or tort (including as a result of negligence or
strict liability), and whether or not such party shall have been
informed, or might have anticipated the possibility of any such damage,
loss, cost or expense (collectively, "Losses and Expenses"), shall be
limited to the direct
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damages actually incurred by such party or Person and consequential
damages and lost profits incurred by either party to the extent
provided for pursuant to Section 11; provided that the aggregate
amount required to be paid by a party hereto for all such Losses and
Expenses shall not exceed $100,000,000. The foregoing limitations
shall not apply to:
(a) payment obligations of the parties; or
(b) a breach of Section 7.
10.2 Mitigation. Each party shall use reasonable efforts to mitigate
damages for which the other party is responsible.
10.3 Limitation of Actions . Neither party may assert any cause of action
against the other party (other than third party claims) under this
Agreement that accrued more than one (1) year prior to:
(a) the filing of a suit (unless arbitration proceedings based on the
same factual allegation of facts were commenced within one year
of the accrual of such cause of action); or
(b) the commencement of arbitration proceedings alleging such cause
of action.
10.4 Express Allocation of Risks. The parties expressly acknowledge that the
limitations contained in this Agreement represent the express agreement
of the parties with respect to the allocation of risks between the
parties. The parties acknowledge that but for the limitations contained
in this Agreement, the parties would not have entered into this
Agreement.
11. Exclusion of Damages. NOTWITHSTANDING ANY OTHER PROVISION TO THE
CONTRARY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY,
ANY OF THEIR AFFILIATES OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES OR AGENTS BE LIABLE UNDER ANY THEORY OF TORT, CONTRACT,
STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY LOST
PROFITS, EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR
CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF
THE PARTIES REGARDLESS OF WHETHER OR NOT EITHER PARTY OR ANY OTHER SUCH
ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
NOTWITHSTANDING THE FOREGOING, RECOVERY MAY BE MADE OF: (I) LOST PROFIT
AND CONSEQUENTIAL DAMAGES INCURRED BY EITHER PARTY AS A RESULT OF A
BREACH OF SECTION 7; AND (II) LOST PROFITS ONLY FOR
BREACHES OF SECTIONS 2.1 AND 3.1.
12. Compliance with Laws. Each party shall comply with all applicable laws
and regulations in its performance under this Agreement and have
obtained all permits or licenses or registrations required to perform
hereunder.
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13. Miscellaneous Terms.
13.1 Further Assurances. Each party hereto agrees to cooperate with the
other party, at such other party's request and at such other party's
expense, to execute any and all documents or instruments, or to obtain
any consents, in order to assign, transfer, perfect, record, maintain,
enforce or otherwise carry out the intent of the terms of this
Agreement.
13.2 Delays and Omissions. Except with respect to Section 10.2, no delay or
omission to exercise any right, power or remedy accruing to a party
upon any breach or default of a party under this Agreement shall impair
any such right, power or remedy of any such party nor shall it be
construed to be a waiver of any such breach or default, or an
acquiescence therein, or of any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any
kind or character on the part of any such holder of any provisions or
conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing.
All remedies, under this Agreement shall be cumulative and not
alternative.
13.3 Amendments. Except as otherwise expressly provided herein, the
provisions of this Agreement may be amended only by a writing signed
by the parties hereto.
13.4 Successors and Assigns. Except as otherwise expressly provided herein,
all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit
of the respective successors and permitted assigns of the parties
hereto, whether so expressed or not.
13.5 Final Agreement. This Agreement, together with those documents which
are schedules and exhibits hereto, constitute the final agreement of
the parties concerning the matters referred to herein and therein, and
supersedes all prior and contemporaneous agreements and understandings
concerning the matters referred to herein and therein.
13.6 Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of this Agreement.
13.7 Descriptive Heading. The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a
part of this Agreement.
13.8 Notices. Any notices required, desired or permitted to be given
hereunder, shall be delivered personally or sent by overnight courier
to the following addresses (or to such other address as each party may
specify in a notice given hereunder) or transmitted by facsimile
transmission (with such transmission promptly confirmed by writing
delivered personally or by overnight courier) and shall be deemed to
have been received on the day
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of personal delivery, one business day after delivery to the overnight
courier service or, in the case of facsimile transmission, when
confirmation of such facsimile is received other than by automatic
means:
If to FDC:
First Data Corporation
5660 New Northside Drive
Suite 1400
Atlanta, GA 30328
Attention: Chairman
Facsimile: (770) 857-0405
with a copy to:
First Data Corporation
5660 New Northside Drive
Suite 1400
Atlanta, GA 30328
Attention: General Counsel
Facsimile: (770) 857-0405
with an additional copy to:
Sidley & Austin
Bank One Plaza
Chicago, Illinois 60603
Attention: Frederick C. Lowinger
Michael A. Gordon
Facsimile: (312) 853-7036
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If to Chopper:
Chopper Corporation
4411 E. Jones Bridge Road
Norcross, GA 30092
Attention: Peter J. Kight
Phone: (678) 375-1600
Facsimile: (678) 375-3010
Email: [email protected]
with a copy to:
Chopper Corporation
4411 E. Jones Bridge Road
Norcross, GA 30092
Attention: Allen L. Shulman
Phone: (678) 375-3632
Facsimile: (678) 375-3633
Email: [email protected]
with an additional copy to:
Simpson Thacher & Bartlett
3373 Hillview Ave.
Suite 250
Palo Alto, CA 94304
Attention: Daniel Clivner
Richard Capelouto
Facsimile: (650) 251-5002
13.9 Dispute Resolution.
(a) In the event of a Dispute, the parties shall resolve the same in
accordance with the terms set forth in Exhibit 13.9(a).
(b) Notwithstanding anything to the contrary set forth herein,
neither party shall be required to submit any dispute or
disagreement regarding the interpretation of any provision of
this Agreement, the performance by either party of such party's
obligations under this Agreement or a default hereunder to the
mechanisms set forth in Section 13.9(a), if such submission would
solely be seeking equitable relief. Any such judicial proceeding
seeking equitable relief shall be brought only in a federal or
state court located in Delaware.
(c) Except as necessary in a court proceeding to enforce the
arbitration provision in Section 13.9(a) or to confirm, vacate,
modify or correct an award rendered
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thereunder, neither a party nor an arbitrator may disclose the
existence, content, or results of any arbitration held pursuant
to Section 13.9(a) without the prior written consent of all
parties to this Agreement. In any judicial proceeding brought
pursuant to Section 13.9(a) or 13.9(b), each party shall seek
orders from the court that would seal or otherwise protect the
confidentiality of the judicial and arbitration proceedings to
the maximum extent possible.
13.10 Governing Law. THE VALIDITY, MEANING AND EFFECT OF THIS AGREEMENT SHALL
BE DETERMINED IN ACCORDANCE WITH THE LAWS OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE.
13.11 Execution in Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
13.12 Assignment and Change of Control. This Agreement may not be assigned or
transferred by either party without the other party's prior written
consent, which consent shall not be unreasonably withheld or delayed,
except that, subject to Sections 6.1 and 6.2, this Agreement may be
assigned by operation of law pursuant to a merger or consolidation.
13.13 Independent Contractor. The relationship of the parties shall be
solely that of independent contractor and not that of a joint venture,
partnership, or any other joint relationship.
13.14 Press Release; Public Announcements. Neither party or their respective
Affiliates shall make any reference to the other party or its
Affiliates directly or indirectly in any press release or public
announcement without such other party's prior written consent, which
consent shall not be unreasonably withheld or delayed.
13.15 Audits. (a) Audits of FDC. Chopper may cause an audit to be made, at
Chopper's expense, of FDC's applicable records in order to verify the
performance of any provision contained herein. Any such audit shall be
conducted only by a third party independent certified public accountant
(other than on a contingency fee basis) after prior written notice to
FDC, and shall be conducted during regular business hours at FDC's
offices and in such a manner as not to interfere with FDC's normal
business activities. In no event shall an audit be made hereunder more
frequently than once annually. The results of any such audit shall be
subject to the nondisclosure obligations set forth in this Agreement.
In the event that Chopper makes any claim against FDC with respect to
such audit, Chopper hereby agrees to make available to FDC, upon
request, the detailed results of the audit as prepared for Chopper by
its accountant.
(b) Audits of Chopper. FDC may cause an audit to be made, at FDC's
expense, of Chopper's applicable records in order to verify the
performance of any provision contained herein. Any such audit shall be
conducted only by a third party independent certified public accountant
(other than on a contingency fee basis) after prior written
Page 28
<PAGE> 29
notice to Chopper, and shall be conducted during regular business
hours at Chopper's offices and in such a manner as not to interfere
with Chopper's normal business activities. In no event shall the
audits be made hereunder more frequently than once annually. The
results of any such audit shall be subject to the nondisclosure
obligations set forth in this Agreement. In the event that FDC makes
any claim against Chopper with respect to such audit, FDC hereby
agrees to make available to Chopper, upon request, the detailed
results of the audit as prepared for FDC by its accountant.
[REMAINDER LEFT INTENTIONALLY BLANK]
Page 29
<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
CHOPPER CORPORATION
By:
----------------------------------------------
Name:
Title:
FIRST DATA CORPORATION
By:
----------------------------------------------
Name:
Title:
Page 30
<PAGE> 31
EXHIBIT 13.9(a)
---------------
DISPUTE RESOLUTION PROCEDURES
Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, except claims for equitable relief, shall be settled by
arbitration in the State of Delaware The arbitration shall be administered by
the American Arbitration Association ("AAA") in accordance with its Commercial
Arbitration Rules, and shall be heard by a panel of three (3) arbitrators
selected in accordance with these Rules. After a demand for arbitration is made,
each party may conduct two (2) party and two (2) non-party depositions and may
further request discovery through up to thirty (30) document requests, twenty
(20) written interrogatories, and ten (10) requests for admission, and/or such
other further discovery as permitted by the arbitration panel upon request and
for good cause shown. The arbitrators may awarded damages, except the
arbitrators will have no authority to award punitive or other damages not
measured by the prevailing party's actual damages unless required by statute.
Each party shall be responsible for its own costs and expenses, except that the
arbitrators' compensation shall be taxed against the losing party. Judgment on
the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. Any judicial proceeding to enforce these Dispute
Resolution Procedures or to confirm, vacate, modify or correct an award rendered
hereunder, shall be brought in a federal or state court located in the State of
Delaware.
Page 31
<PAGE> 1
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 Registration Statement No.
333-32644 of CheckFree Holdings Corporation on Form S-4 of our report dated
August 9, 1999, appearing in the Information Statement/Prospectus, which is part
of this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Information Statement/Prospectus.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
April 17, 2000
<PAGE> 1
Exhibit 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-32644 of CheckFree Holdings Corporation on Form
S-4 of our report dated October 22, 1999, (February 15, 2000 as to Note 4), on
the consolidated financial statements of MSFDC, L.L.C. and subsidiaries, a
development stage company, as of July 2, 1999, and July 3, 1998, and the related
consolidated statements of operations, members' capital deficiency and cash
flows for the year ended July 2, 1999, and the periods from June 18, 1997
(inception) to July 3, 1998, and from June 18, 1997 (inception) to July 2, 1999,
appearing in the Information Statement/Prospectus, and to the reference to us
under the heading "Experts" in the Information Statement/Prospectus, which is
part of the Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
April 17, 2000
<PAGE> 1
Exhibit 23(d)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of CheckFree Holdings Corporation of our report dated
February 28, 2000, covering the financial statements of BlueGill Technologies,
Inc., appearing in this Information Statement/Prospectus, which is a part of the
Registration Statement and to all references to our Firm included in the
Registration Statement.
/s/ Arthur Andersen LLP
- --------------------------------
Ann Arbor, Michigan
April 17, 2000
