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As filed with the Securities and Exchange Commission on March 16, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CHECKFREE HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
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<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. [ ]
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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
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Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Unit* Price* Registration Fee*
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<S> <C> <C> <C> <C>
Common stock, $.01 par
value............ 3,205,128 $78.00 $250,000,000 $11,506
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</TABLE>
* 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.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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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. Following the merger, the BlueGill
stockholders will collectively own less than 1% of the CheckFree common stock.
In the merger, each share of your BlueGill common stock or BlueGill
preferred stock will be exchanged for approximately 0.09286 shares of CheckFree
common stock. 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 $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 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 $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.
CheckFree common stock is listed on the Nasdaq National Market under the
trading symbol "CKFR." On March 15, 2000, CheckFree common stock closed at
$81.63 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 $308,200,000.
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.
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 March 16, 2000.
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TABLE OF CONTENTS
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PAGE
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Table of Contents................................ 2
Questions and Answers About the Merger........... 4
Summary.......................................... 6
Recent Developments.............................. 11
Risk Factors..................................... 12
Forward-Looking Statements....................... 22
Where You Can Find More Information.............. 23
Comparative Per Share Information................ 24
Market Price Data; Dividend Policy............... 26
Selected Historical Consolidated Financial
Data of CheckFree............................. 27
Selected Historical Consolidated Financial
Data of BlueGill.............................. 29
Selected Historical Consolidated Financial
Data of TransPoint............................ 30
Unaudited Pro Forma Combining Financial Data of
Checkfree Holdings, BlueGill and TransPoint.... 31
Unaudited Pro Forma Condensed Combining
Financial Information ........................ 33
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes to
CheckFree, BlueGill and TransPoint............ 34
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes
to CheckFree and BlueGill..................... 41
Unaudited Pro Forma Condensed Combining Balance
Sheet, Statements of Operations and Notes to
CheckFree and TransPoint...................... 51
The Merger....................................... 58
Background of the Merger...................... 58
Approval by BlueGill Stockholders............. 59
BlueGill's Reasons for the Merger;
Recommendation of BlueGill's
Board of Directors.......................... 61
Report of BlueGill's Financial Advisor........ 63
The Merger Agreement.......................... 65
Exchange of Certificates...................... 69
Appraisal Rights.............................. 69
Interests of Directors and Officers of
BlueGill in the Merger...................... 72
Nasdaq Listing................................ 73
Regulatory Approvals.......................... 73
Accounting Treatment.......................... 73
Income Tax Consequences....................... 73
U.S. Federal Income Tax....................... 73
Canadian Federal Income Tax................... 74
Resales by Affiliates......................... 74
CheckFree Holdings Corporation................... 75
General....................................... 75
Electronic Commerce Industry Background....... 76
The Electronic Solution....................... 78
The CheckFree Advantage....................... 78
Our Business Strategy......................... 79
Products and Services......................... 81
Competition................................... 84
Sales, Marketing and Distribution............. 84
Customer Care and Technical Support........... 85
Remittances................................... 86
Technology.................................... 87
Research and Development...................... 88
Government Regulation......................... 88
Proprietary Rights............................ 89
Employees..................................... 90
Management.................................... 90
Committees of the Board of Directors.......... 95
Director Compensation......................... 95
Executive Compensation........................ 95
Compensation Committee Interlocks
and Insider Participation................... 97
Stock Option Plans............................ 97
Security Ownership of Principal Stockholders
and Management..............................102
Certain Relationships and Related
Transactions................................104
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...............................105
Description of CheckFree Securities...........125
CheckFree Acquisition.........................143
BlueGill Technologies, Inc.......................144
General.......................................144
Electronic Commerce Industry Background.......144
The Electronic Solution.......................145
Products......................................146
Technology....................................146
Competition...................................146
Sales, Marketing and Distribution.............147
Research and Development......................147
Employees.....................................147
Trading of BlueGill Securities................147
Stock Ownership...............................147
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...............................147
Comparison of Rights of CheckFree
Stockholders and BlueGill Stockholders........154
Experts..........................................157
Legal Maters.....................................157
CheckFree Financial Statements...................F-1
BlueGill Financial Statements....................F-36
TransPoint Financial Statements..................F-53
</TABLE>
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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>
3
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE THE COMPANIES PROPOSING THE MERGER?
A. The merger will result in BlueGill stockholders becoming stockholders of
CheckFree through the exchange of their BlueGill common stock and BlueGill
preferred stock for CheckFree common stock on what the BlueGill board of
directors believes are favorable terms. By combining with CheckFree,
BlueGill can benefit from CheckFree's market leadership and growth
potential, as well as the ability to offer its customers a wider range of
billing and payment services.
Q. WHAT WILL I RECEIVE IN THE MERGER?
A. If the merger is completed, you will receive approximately 0.09286 shares
of CheckFree common stock for each share of BlueGill common stock or
BlueGill preferred stock you own. 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. This fraction is referred to as the "exchange ratio."
The 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 CheckFree's 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 CheckFree 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.
Example: On March 15, 2000, the most recent practicable date prior to the
filing of this information statement/prospectus, you would be entitled to
receive 0.09286 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.
If you would like an updated exchange ratio for the merger, you can call
(800) 964-4552.
10% of the shares of the CheckFree common stock that you will receive in
the merger will be held in escrow by an escrow agent to pay indemnification
claims under the merger agreement. 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 of the merged companies and CheckFree's filing
of its 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 addition, instead of issuing any fractional shares of its common stock,
CheckFree will pay you cash 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.
Q. WHAT ARE THE FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES OF THE MERGER?
A. In general, you will not be required to pay any federal or Canadian income
tax as a result of the merger, except for taxes on cash you receive for
fractional shares. The merger will be tax-free to you for federal and
Canadian income tax purposes.
Q. DO I HAVE APPRAISAL RIGHTS?
A. Yes. 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, CheckFree is 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.
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<PAGE> 6
Q. WHAT DO I NEED TO DO NOW?
A. 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.
Q. CAN I REVOKE MY CONSENT?
A. Yes. 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 at the above address a signed and dated revocation.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. 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.
Q. WHO IS THE EXCHANGE AGENT AND ESCROW AGENT FOR THE MERGER?
A. Fifth Third Bank is the exchange agent and escrow agent.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We are working to complete the merger as quickly as possible. We expect to
complete the merger within three business days after the receipt of the
necessary consents.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. 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
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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 23.
All references to "we," "us," "our" or "CheckFree" in this information
statement/prospectus mean CheckFree Holdings Corporation and all entities owned
or controlled by CheckFree Holdings Corporation, except where it is made clear
that the term only means the parent company. All references to "CheckFree
Acquisition" refer to CheckFree Acquisition Corporation IV, our wholly owned
subsidiary. All references to "BlueGill" refer to BlueGill Technologies, Inc.
and all entities owned by BlueGill Technologies, Inc.
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 any bill--electronic or paper--to anyone; and
o Perform customary 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. We
design, market, license and support the following software applications, among
others:
o Electronic Funds Transfer; and
o Reconciliation.
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 is a provider of Internet billing and statement creation
software. BlueGill has developed proprietary software designed to provide a
platform for electronic billing and payment that allows customers to view their
bills and other documents on the web.
BlueGill currently markets its products directly to individual bill and
other document providers as well as to companies that deliver Internet bills and
other documents on behalf of other institutions. 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 25 customers delivering Internet bills and other
documents on their own behalf. BlueGill also has in excess of 10 customers that
in turn provide Internet billing and other document delivery services to over 30
customers
6
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of their own. 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 number of shares of our common stock that we will issue to
you as merger consideration will be based on:
o 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; and
o 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 $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 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 $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.
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 fully
diluted common stock to be exchanged in the merger:
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3-DAY AVERAGE STOCK PRICE EXCHANGE RATIO
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$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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If the merger is completed, 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. 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 March 15, 2000, the most recent practicable date prior to the filing of this
information statement/ prospectus, you would have been entitled to receive
0.09286 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
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<S> <C> <C>
$125.63 $55.77 $87.28
</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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o BlueGill will be able to offer its customers a wider range of billing
and payment services.
The BlueGill board 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.
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 material condition to the merger, it will then consider
resoliciting stockholder approval of the merger. The decision to resolicit
stockholder approval will depend upon whether a stockholder could reasonably be
expected to consider the waiver of the condition to be important in deciding how
to vote on 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.
INTERESTS OF DIRECTORS AND OFFICERS OF BLUEGILL 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, members of BlueGill's senior management will be designated as officers
of the combined company. 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.
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, to
remove ambiguity, the BlueGill board of directors will also seek approval by
written consent of its preferred stockholders not to treat the merger as a
liquidation. Even if the merger were treated as a liquidation, BlueGill believes
that the merger consideration paid to each BlueGill stockholder would not
change. BlueGill intends to proceed with the merger even if this preferred
stockholder consent is not obtained.
Under the merger agreement, CheckFree's and CheckFree Acquisition's
obligation 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.
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 common stock of CheckFree. 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.
The proposed TransPoint acquisition will be accounted for as a purchase,
and is expected to be final in four to six months, subject to approval by our
stockholders and customary filings and regulatory approvals. The transaction is
not expected to be reflected in our financial statements for the current fiscal
year ending June 30, 2000.
As part of the transaction, we will receive an exclusive five-year contract
with Microsoft to provide electronic billing and payment technology used in
applications and services Microsoft develops. During that time, Microsoft will
guarantee a minimum of $120 million in revenue to CheckFree.
First Data also will enter into a five-year contract with us, during which
time First Data and CheckFree will market and use each other's products and
services. First Data will provide at least $60 million in revenue and/or cost
savings to CheckFree. First Data will sell our electronic billing and payment
services to its customers. To further improve operating costs, we will use First
Data's electronic biller connections and range of electronic payment products
and services.
Immediately prior to closing of the transaction, which is subject to
necessary regulatory approval, Microsoft, First Data and Citibank will,
collectively, contribute $100 million to TransPoint. These funds will be
transferred to CheckFree at the closing of the TransPoint acquisition. Microsoft
and First Data will each gain a seat on our board of directors.
Upon becoming holders of our common stock, the BlueGill stockholders will
have the opportunity to vote on the TransPoint merger unless they do not become
stockholders of record of CheckFree prior to the record date for the special
meeting of stockholders called to vote on the TransPoint acquisition.
OVERVIEW OF TRANSPOINT BUSINESS
TransPoint, established in June 1997, is a joint venture of Microsoft and
First Data, with Citicorp as a minority equity investor. TransPoint operates
an Internet based electronic bill presentment and payment service. This service
allows businesses such as, utility companies, credit card issuers, mortgage
banks, etc. that have traditionally mailed their customers paper bills and/or
statements, to contract with TransPoint to replace their paper bills and/or
statements with electronic bills and/or statements delivered via the Internet.
TransPoint integrates its e-bill service with the ability for consumers to make
payments to virtually anyone in the United States.
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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 $55.77 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 fully 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.
We have entered into a merger and contribution agreement with TransPoint
pursuant to which each of CheckFree and TransPoint would become wholly owned
subsidiaries of a new parent company named "CheckFree Corporation." In that
transaction, subject to the terms and conditions of the merger and contribution
agreement with TransPoint, each share of our common stock will be converted into
one share of CheckFree Corporation common stock, and the ownership interests in
TransPoint would be exchanged for 17 million shares of CheckFree Corporation
common stock or approximately 23% of CheckFree Corporation's outstanding common
stock. If both our merger and the transaction with TransPoint occur, you will
become a stockholder of CheckFree Corporation, whose business will consist of
the current businesses of CheckFree, BlueGill and TransPoint.
The transaction with TransPoint is subject to a number of conditions, and
we expect to complete our merger with BlueGill before our transaction with
TransPoint. There can be no assurance that the transaction with TransPoint will
occur or, if it does occur, of what effect it will have on the stock price,
results of operations or financial condition of CheckFree or CheckFree
Corporation.
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, some of the
BlueGill stockholders who are employees of BlueGill will continue to be employed
by BlueGill 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.
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.
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 $308,205,000, and
approximately $804,003,165 over a period of five years or $160,800,633 per year
in connection with the TransPoint acquisition, assuming a purchase price of
$1,251,408,000. 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.
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.
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 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. We intend to continue to make significant
investments of several million dollars in our research and development, sales
and marketing and customer care operations. 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.
Additionally, we have not consistently operated profitably to date. 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.
OUR FUTURE PROFITABILITY IS DEPENDENT UPON 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 money 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.
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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.
The electronic commerce market 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 market share, 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. 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 is not operational to date. 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 discussed, we have entered into an agreement to acquire
TransPoint and its operations. We also face increased competition from new
competitors offering billing and payment services utilizing scan and pay
technology. These 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 of through an electronic transfer of funds. We cannot
assure you that we will be able to compete effectively against financial
institutions, Spectrum, TransPoint, scan and pay companies or other current and
future electronic commerce competitors.
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 significant market share, it could
have a material adverse effect on our business, financial condition and results
of operations.
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 utilizing our products and services. If 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 Market share, 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. In the event that 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 IS DEPENDENT UPON 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. 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.
Although we completed the initial migration of 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 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. 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.
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.
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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, there can be no assurance that these
measures will be successful in limiting our liability.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND MAY NOT ACCURATELY PREDICT OUR
FUTURE PERFORMANCE.
Our quarterly results of operations have varied significantly and probably
will continue to do so in the future as a result of a variety of factors, many
of which are outside our control. The following table shows our percentage of
total revenues realized in each quarter of fiscal 1998, fiscal 1999 and, to
date, fiscal 2000:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------
<S> <C>
FISCAL 1998:
First quarter....... 22.2%
Second quarter...... 24.2%
Third quarter....... 26.4%
Fourth quarter...... 27.2%
FISCAL 1999:
First quarter....... 22.7%
Second quarter...... 23.8%
Third quarter....... 25.2%
Fourth quarter...... 28.3%
FISCAL 2000:
First quarter....... 48.6%
Second quarter...... 51.4%
</TABLE>
The factors that affect our results of operations include:
o Changes in our pricing policies or those of our competitors;
o Relative rates of acquisition of new customers;
o Seasonal patterns for computer and software purchases; and
o Delays in the introduction of new or enhanced services, software and
related products by us or our competitors or market acceptance of
these products and services.
As a result, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and you should not rely on them as an
indication of our future performance. In addition, our operating results in a
future quarter or quarters may fall below expectations of securities analysts or
investors and, as a result, the price of our common stock may fluctuate.
18
<PAGE> 20
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING
RESULTS TO FLUCTUATE.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. 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 in our markets are 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 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.
19
<PAGE> 21
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 and
the holders of the remaining 18,103,409 shares were entitled to resell them only
pursuant to 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 which could be available for
future sale comprised of:
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.
Intuit Inc., which holds 10,175,000 shares of our common stock, Integrion
Financial Network, L.L.C., its members and former members, which collectively
hold warrants to purchase up to 9,700,000 shares of our common stock, of which
warrants for 2,700,000 shares are fully vested and exercisable, and Bank One,
which holds warrants to purchase 1,000,000 shares of our common stock and may be
entitled to receive warrants to purchase up to an additional 2,000,000 of our
common stock, none of which are currently vested or exercisable, are entitled
registration rights subject to specified conditions and restrictions. 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.
After the consummation of the TransPoint acquisition, we have agreed
pursuant to registration rights agreements with Microsoft, First Data and
Citibank to file a shelf registration statement that would allow continuous
resales of the shares that they 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, especially
after the one year anniversary of the consummation of the acquisition. 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.
20
<PAGE> 22
We have also 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 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.
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. 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 ACH through a bank. If the Federal Reserve rules were to change to
further restrict our access to the ACH or limit our ability to provide ACH
transaction processing services, it could have a material adverse effect on our
business, financial condition and results of operations.
21
<PAGE> 23
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.
22
<PAGE> 24
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.
23
<PAGE> 25
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) $ (5.22) $ (2.62)
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>
24
<PAGE> 26
<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) TransPoint is an LLC. Under the terms of the LLC, 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.
25
<PAGE> 27
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 (through March 15, 2000) .... $ 125.63 $ 55.77
</TABLE>
On March 15, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $81.63 per share. As of March 15, 2000, there were
approximately 553 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.
26
<PAGE> 28
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)
========= ========= ========= ========= ========= =========
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)
========= ========= =========
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>
27
<PAGE> 29
<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.
28
<PAGE> 30
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>
29
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF TRANSPOINT
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 ......................... 1,550,852 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>
30
<PAGE> 32
UNAUDITED PRO FORMA COMBINING FINANCIAL DATA OF CHECKFREE HOLDINGS CORPORATION,
BLUEGILL TECHNOLOGIES, INC. AND TRANSPOINT
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) (483,777) (230,581)
Income (loss) before income taxes ......... (1,552) (12,497) (479,938) (229,130)
COMMON SHARE DATA:
Basic income (loss) per common share ...... $ 0.20 $ (0.15) $ (5.22) $ (2.62)
Basic equivalent number of shares
outstanding ............................. 52,444 52,023 72,649 72,228
Diluted income (loss) per common share .... $ 0.18 $ (0.15) $ (5.22) $ (2.62)
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 2,432,981
Current liabilities ........................ 58,440 77,082 185,786
Long-term obligations, less current portion. 7,418 178,268 178,268
Total stockholders' equity ................. 86,903 202,378 1,847,046
</TABLE>
31
<PAGE> 33
<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>
STATEMENT OF OPERATIONS DATA:
Operating revenues ........................ $ 253,621 $ 145,066 $ 250,131 $ 141,992
Income (loss) from operations ............. (80,851) (46,907) (407,531) (197,250)
Income (loss) before income taxes ......... (78,476) (46,367) (404,886) (196,196)
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 2,116,013
Current liabilities ............................. 90,789 171,879
Long-term obligations, less current portion ..... 178,268 178,268
Total stockholders' equity ...................... 497,638 1,551,786
</TABLE>
32
<PAGE> 34
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.
33
<PAGE> 35
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH BLUEGILL AND TRANSPOINT
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 -- -- 1,057,312 (1) 1,087,871
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 $ 1,924,273 $ 2,432,981
=========== =========== =========== =========== ===========
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 1,855 (1) 42,764
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 91,396 185,786
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 56,738 270,416 585,935
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 $ 1,924,273 $ 2,432,981
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
34
<PAGE> 36
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND TRANSPOINT
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 1,870 430,441 (4) 457,047
In-process research and development ........... 2,201 -- -- -- 2,201
--------- --------- --------- --------- ---------
Total expenses ........................... 258,440 6,895 45,198 430,441 740,974
Net gain on dispositions of assets ............ 4,576 -- -- -- 4,576
--------- --------- --------- --------- ---------
Loss from operations ............................. (3,733) (3,405) (45,198) (430,441) (483,777)
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) (432,505) (479,938)
Income tax benefit ............................... (12,009) -- (88,341) (4) (100,350)
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ 10,457 $ (3,211) $ (42,670) $(344,164) $(379,588)
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ 0.20 $ (5.22)
========= =========
Equivalent number of shares ................... 52,444 20,205 (1) 72,649
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ 0.18 $ (5.22)
========= =========
Equivalent number of shares ................... 56,529 16,120 (6) 72,649
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
35
<PAGE> 37
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND TRANSPOINT
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 1,610 192,721 (4) 209,234
In-process research and development ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Total expenses ........................... 154,629 8,487 19,813 192,721 375,650
Net gain on dispositions of assets ............ -- -- -- --
--------- --------- --------- --------- ---------
Loss from operations ............................. (12,640) (5,410) (19,810) (192,721) (230,581)
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) (195,597) (229,130)
Income tax benefit ............................... (4,592) -- -- (35,170) (4) (39,762)
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (7,905) $ (5,013) $ (16,023) $(160,427) $(189,368)
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (2.62)
========= =========
Equivalent number of shares ................... 52,023 20,205 (1) 72,228
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share ............ $ (0.15) $ (2.62)
========= =========
Equivalent number of shares ................... 52,023 20,205 (1) 72,228
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
36
<PAGE> 38
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH BLUEGILL AND TRANSPOINT
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 elimination of TransPoint's
capitalized software costs, 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.................................... 1,057,312
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................ 1,855
----------- -----------
Totals........................................... $ 2,006,901 $ 2,006,901
=========== ===========
</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 1,325 1,855
----------- ----------- -----------
Total estimated purchase price .... $ 308,215 $ 1,251,408 $ 1,559,623
=========== =========== ===========
</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.
37
<PAGE> 39
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 ................................ 253,309 804,003 1,057,312
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 $ 1,251,408 $ 1,559,623
=========== =========== ===========
</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 44 and
CheckFree and TransPoint on page 54.
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 46 and CheckFree and
TransPoint on page 56 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>
38
<PAGE> 40
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 $ 356,728 $ 430,441
Current deferred income tax liability .. 9,221 79,120 88,341
Capitalized software, net .......... 4,145 61,667 $ 65,812
Goodwill, net ...................... 50,662 158,928 209,590
Other intangible assets, net ....... 18,906 136,133 155,039
Income tax benefit ................. 9,221 79,120 88,341
---------- ----------
Total .................................. $ 518,782 $ 518,782
========== ==========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization .......... $ 28,857 $ 163,864 $ 192,721
Current deferred income tax liability .. 1,410 33,760 35,170
Capitalized software, net .......... 1,453 30,833 $ 32,286
Goodwill, net ...................... 25,331 79,464 104,795
Other intangible assets, net ....... 2,073 53,567 55,640
Income tax benefit ................. 1,410 33,760 35,170
---------- ----------
Total .................................. $ 227,891 $ 227,891
========== ==========
</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.
39
<PAGE> 41
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 D. 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
$1,325,000 of direct acquisition costs. The total purchase price of
$1,297,705,000 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
46 and Note B for TransPoint on page 56.
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.
40
<PAGE> 42
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)
Accumulated deficit ........................ (301,905) (10,207) (11,900)(2) (313,805)
--------- --------- --------- ---------
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
41
<PAGE> 43
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
42
<PAGE> 44
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) (5,411) (28,857) (46,907)
Other:
Interest, net ................................. 143 397 -- 540
---------- ---------- ---------- ----------
Loss before income taxes ......................... (12,497) (5,014) (28,857) (46,367)
Income tax benefit ............................... (4,592) -- (1,410)(4) (6,002)
---------- ---------- ---------- ----------
Net income (loss) ................................ $ (7,905) $ (5,014) $ (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
43
<PAGE> 45
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:
44
<PAGE> 46
<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.
45
<PAGE> 47
<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.
46
<PAGE> 48
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.
47
<PAGE> 49
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:
48
<PAGE> 50
<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
49
<PAGE> 51
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.
50
<PAGE> 52
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH TRANSPOINT
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 -- 804,003 (1) 834,562
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 $ 1,627,564 $ 2,116,013
=========== =========== =========== ===========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable ................................... $ 8,679 $ 12,181 $ -- $ 20,860
Accrued liabilities ................................ 37,494 1,246 1,325 (1) 40,740
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 81,120 171,879
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 56,738 252,139 564,227
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 $ 1,627,564 $ 2,116,013
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
51
<PAGE> 53
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH TRANSPOINT
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 1,870 358,601 (3) 385,101
In-process research and development ........... 2,201 -- -- 2,201
--------- --------- --------- ---------
Total expenses ........................... 258,440 45,197 358,601 662,238
Net gain on dispositions of assets ............ 4,576 -- -- 4,576
--------- --------- --------- ---------
Loss from operations ............................. (3,733) (45,197) (358,601) (407,531)
Other:
Minority interest ............................. -- 2,063 (2,063)(4) --
Interest, net ................................. 2,181 464 -- 2,645
--------- --------- --------- ---------
Loss before income taxes ......................... (1,552) (42,670) (360,664) (404,886)
Income tax benefit ............................... (12,009) -- (79,120)(3) (91,129)
--------- --------- --------- ---------
Net income (loss) ................................ $ 10,457 $ (42,670) $(281,544) $(313,757)
========= ========= ========= =========
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
52
<PAGE> 54
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH TRANSPOINT
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 1,610 164,800 (3) 181,166
In-process research and development ........... -- -- -- --
--------- --------- --------- ---------
Total expenses ........................... 154,629 19,813 164,800 339,242
Net gain on dispositions of assets ............ -- -- -- --
--------- --------- --------- ---------
Loss from operations ............................. (12,640) (19,810) (164,800) (197,250)
Other:
Minority interest ............................. -- 2,876 (2,876)(4) --
Interest, net ................................. 143 911 -- 1,054
--------- --------- --------- ---------
Loss before income taxes ......................... (12,497) (16,023) (167,676) (196,196)
Income tax benefit ............................... (4,592) -- (33,760)(3) (38,352)
--------- --------- --------- ---------
Net income (loss) ................................ $ (7,905) $ (16,023) $(133,916) $(157,844)
========= ========= ========= =========
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
53
<PAGE> 55
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH TRANSPOINT
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 elimination of TransPoint's capitalized software costs,
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 ......................................... 804,003
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 .................. 1,325
------------ ------------
Totals ................................................ $ 1,670,625 $ 1,670,625
============ ============
</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 ..... 1,325
-----------
Total estimated purchase price .... $ 1,251,408
===========
</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:
54
<PAGE> 56
<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)........ 804,003
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....................................................................$ 1,251,408
===========
</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>
55
<PAGE> 57
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 ........... $ 358,601
Current deferred income tax liability ... 79,120
Capitalized software, net ........... $ 61,667
Goodwill, net ....................... 160,801
Other intangible assets, net ........ 136,133
Income tax benefit................... 79,120
----------- -----------
Total ................................... $ 437,721 $ 437,721
=========== ===========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization ........... $ 164,800
Current deferred income tax liability ... 33,760
Capitalized software, net ........... $ 30,833
Goodwill, net ....................... 80,400
Other intangible assets, net ........ 53,567
Income tax benefit .................. 33,760
----------- -----------
Total ................................... $ 198,560 $ 198,560
=========== ===========
</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 $1.3 million of direct
acquisition costs. The total purchase price of $1,251,408,000 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
56
<PAGE> 58
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.
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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.
We and BlueGill believe that the merger of BlueGill and our subsidiary,
CheckFree Acquisition, will result in a compelling end-to-end solution for
billers, thus simplifying the decision process for billers and speeding the
adoption of electronic billing and payment initiatives by billers. The companies
also expect the combination will enable the merged company to reach a wider
customer base both domestically and internationally and thus strengthen
CheckFree's position in the electronic commerce market.
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 in order to achieve the true benefits of the Bluegill
technology, an acquisition was more appealing than an investment.
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 through
December 12, 1999. In determining the fair consideration for the transaction,
CheckFree considered valuations of similar public companies as well as
discussions with BlueGill management regarding recent valuations of Bluegill
provided by third parties in preparation for a possible initial public offering.
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 had
engaged Broadview Associates for financial advisory services and Pepper Hamilton
LLP as legal counsel on the transaction. CheckFree had engaged Porter, Wright,
Morris & Arthur LLP as legal counsel on the transaction. Negotiations and due
diligence continued through Monday, December 20, 1999, when we reached agreement
on the definitive terms and conditions of the merger agreement and related
agreements. 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.
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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 March __, 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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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 $.05174 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
remaining assets pro rata.
In a deemed liquidation, 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
in the merger or in a deemed liquidation. An
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alternative interpretation is that BlueGill should be valued, creditors paid and
the remaining value should be the consideration available to be distributed in a
deemed liquidation to preferred stockholders. In a deemed liquidation, BlueGill
preferred stockholders should not have appraisal rights. In order to remove any
uncertainty, BlueGill is requesting that its preferred stockholders consent not
to treat the merger as a deemed liquidation. 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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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 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; and
o Some BlueGill customers and potential customers may not wish to do
business with BlueGill to the extent they consider CheckFree a
competitor.
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
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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.
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>
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<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 by the respective stock exchanges were
accurate representations of each company's actual stock price.
Broadview also applied a private company discount 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.
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.
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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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 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 $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.
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.
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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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 us 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 material condition to the merger, it will then
consider resoliciting stockholder approval of the merger. The decision to
resolicit stockholder approval will depend upon whether a stockholder could
reasonably be expected to consider the waiver of the condition to be important
in deciding how to vote on 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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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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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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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 his appraisal rights or who wishes to preserve his 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 HIS APPRAISAL RIGHTS MUST DELIVER A
WRITTEN DEMAND FOR APPRAISAL OF HIS SHARES TO BLUEGILL NO LATER THAN 20 DAYS
AFTER THE NOTICE DESCRIBED ABOVE IS MAILED. In addition, a holder of shares
wishing to exercise his 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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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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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.
INTERESTS 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. Some of the BlueGill stockholders who are also employees of
BlueGill will continue to be employed by BlueGill following the merger. These
employees 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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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 Yahoo!, a leading Internet portal;
o WingspanBank.com, a leading Internet-based full-service bank;
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 or by paper
check. Our patented bill payment processing system in Norcross, Georgia
determines the preferred method of payment to balance processing costs,
operational efficiencies and risk of loss. If we are willing to assume the risk
for the funds and 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 DTC
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 or PEP+ software,
we offer an online, real-time system providing an operational
interface for originating and receiving payments through the Automated
Clearing House or ACH.
o Reconciliation.
Through our ReconPlus software, we provide U.S. 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 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.
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 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.
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 U.S. 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 PC Ownership.
Declining prices for PCs and rapid growth in the number of
computer-literate consumers are driving increased penetration of PCs
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, or IDC, 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. IDC estimates that the total value of goods and services
purchased over the Internet in the U.S. 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 a fully integrated
data processing system that was designed by our in-house engineers.
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 U.S. 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 U.S. banks;
o 8 of the top 10 U.S. brokerage firms;
o Yahoo!, a leading Internet portal;
o WingspanBank.com, a leading Internet-based full-service bank;
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 or PFM 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. Some of the financial
institutions and Internet portals we serve include:
o Bank of America; o Merrill Lynch & Co.;
o Bank One; o NationsBank;
o Charles Schwab & Co.; o Wells Fargo;
o Chase Manhattan Bank; o WingspanBank.com;
o First Union; o U.S. Bancorp.; and
o KeyCorp; o Yahoo!
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 PCs 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 U.S. 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 PC 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 ACH 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 ACH 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.
ACH. The ACH 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 ACH network acts as the clearing facility for routing
electronic funds transfer entries between financial institutions. All ACH
transfers are handled in a standard format established through the National
Automated Clearing House Association. More than 15,000 financial institutions
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participate in the ACH 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, or PEP+, the
most widely used, comprehensive ACH processing system in the United States. PEP+
is an on-line, real-time system providing an operational interface for
originating and receiving electronic payments through the ACH.
Reconciliation. Our reconciliation products provide U.S. banks,
international banks and corporate treasury operations with automated check and
non-check reconciliations in high volume, multi-location environments. These
systems are often tailored so that banks and multi-bank holding companies may
deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. 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, ATM transactions, ACH transfers and securities transactions.
Our Account Reconciliation Package, or ARP, is one of the most widely
used account reconciliation systems in the U.S. banking industry. The
ARP/Service Management System, or ARP/SMS, developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that enables banks to immediately process their customer transactions to
produce accurate, timely reconciliations while streamlining back-office
processes. ARP/SMS also groups accounts across banks within bank holding
companies and allows banks to streamline their operations by reconciling their
intra-bank transactions.
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. 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. 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 discussed, 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 ACH processing. We also face increased
competition from new competitors offering billing and payment services utilizing
scan and pay technology. 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 ACH for electronic funds transfers,
and the conventional paper check clearing systems for settlement of payments by
check or draft. Like other users of these payment clearance systems, 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."
ACH. The ACH is used by banks, corporations and governmental entities
for electronic settlement of transactions, direct deposits of payroll and
government benefits and payment of bills like mortgages, utility payments and
loans. We use the ACH to execute some of our customers' payment instructions.
Like other users of the ACH, 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 ATM
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 ACH 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 PCs 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 OCC, 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
OCC, 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 ACH through a bank. If the
Federal Reserve rules were to change to further restrict our access to the ACH
or limit our ability to provide ACH 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 ................. 43 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
Sean E. Feeney ................. 41 Executive Vice President, EC Sales
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. ............. 42 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.
Sean E. Feeney has served as our Executive Vice President since December
1997. He has also as Executive Vice President, EC Sales of CheckFree Corporation
since May 1998. From May 1998 to January 2000, Mr. Feeney also served as
President, Software Division of CheckFree Corporation. From February 1997 to May
1998, he served as Executive Vice President, Software Solutions of CheckFree
Corporation. During 1996, Mr. Feeney served as Vice President, North America
Channels and General Manager for Dun & Bradstreet Software. From 1990 to 1995,
Mr. Feeney held various sales positions with Dun & Bradstreet.
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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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> 96
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 $44.4375 per share.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
during our fiscal years ended June 30, 1997, 1998 and 1999 to our chief
executive officer and each of our four other highest compensated executive
officers.
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<PAGE> 97
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-----------------
AWARDS
-----------------
SECURITIES
UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(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 $92,400 for Mr. Sinisgalli over and above the
fiscal 2000 bonus that they may earn will be paid only if we hit our
performance targets for fiscal 2000.
(3) Mr. Sinisgalli was employed by us effective November 3, 1996.
(4) Includes options granted in fiscal 1999 due to Repricing of options granted
in fiscal years 1998 and 1997 as reflected in the Ten Year Option Repricing
Section on pages 13 and 14.
(5) Mr. Feeney was employed by us effective February 15, 1997.
(6) Mr. Polashock was employed by us effective May 28, 1997.
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<PAGE> 98
The following table provides information regarding the number and value
of stock options held by our Named Executive Officers at June 30, 1999.
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
(#) FISCAL YEAR-END ($)(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> 99
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:
98
<PAGE> 100
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> 101
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> 102
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> 103
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> 104
(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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<PAGE> 105
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.
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 ACH 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 ACH 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. Unless the context suggests otherwise, references in this
"Description of Notes" to "we" or "us" refer to CheckFree Holdings Corporation
and not to our subsidiaries.
General
The notes are our 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
us 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. We
currently expect to fund interest
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payments through our working capital. We cannot assure you that our 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 us 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. We 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
We 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, commonly known as DTC, 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. We understand that under existing industry
practice, in the event we request 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.
We expect 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. We expect 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 we nor the trustee nor any of our 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 us within 90 days;
o We, 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
All of our subsidiaries have jointly and severally 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.
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 us 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 we have no assets separate from our investment in our
subsidiaries, except for an insignificant amount of cash, and no operations, we
have not included audited financial information of our subsidiary guarantors in
this information statement/prospectus.
Subordination of the Notes
The notes and the subsidiary guarantee are unsecured obligations of
CheckFree 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 our existing and future senior
indebtedness and that of our subsidiaries.
At December 31, 1999, we had no senior indebtedness outstanding and our
subsidiaries had $10.5 million of senior indebtedness outstanding. The indenture
does not restrict the incurrence by CheckFree or our 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 our capital lease obligations;
(3) All our obligations issued or assumed as the deferred purchase
price of property, all our conditional sale obligations and all
our obligations under any title retention agreement;
(4) All our 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 we are
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 ours, whether or not this obligation is assumed by us,
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 us or our 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 us that is, directly or indirectly, a financing vehicle
of ours 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
our 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 ours who are not holders of the notes or
holders of senior indebtedness of ours may recover less, ratably, than
holders of senior indebtedness of ours 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 us, 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 we receive a written senior indebtedness default
notice.
Notwithstanding the foregoing, payments with respect to the notes may resume and
we 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 We receive a senior indebtedness default notice and 179 or more days
pass after notice of the default is received by us, provided that the
terms of the Indenture otherwise permit the payment or acquisition of
the notes at that time.
If we receive 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 our assets or those of our
subsidiaries to creditors upon any dissolution, winding up, liquidation or
reorganization of us, 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. Our delivery to
the holder of the fixed number of shares of our common stock into which the note
is convertible, together with the cash payment, if any, in lieu of any
fractional shares, will satisfy our 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 us 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 us or one of our subsidiaries for our common stock
concluded within the preceding 12 months not triggering a
conversion rate adjustment, does not exceed 10% of our
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 our common stock in respect of a tender or
exchange offer, other than an odd-lot offer, by us or one of our
subsidiaries for our 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 us or
one of our subsidiaries for our 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 our securities applicable to one share of our common stock distributed
to stockholders exceeds the average sale price, as defined, in the indenture per
share of our 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 our 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 we were 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 our future prospects and other factors.
In the event of a taxable distribution to holders of our common stock
which results in an adjustment of the conversion rate or in the event the
conversion rate is increased at our 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 our common stock.
Redemption of the Notes at Our Option
No sinking fund is provided for the notes. Prior to December 1, 2002, we
will not be entitled at our option to redeem the notes. On and after that date,
we 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 us, 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, 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 us 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, we 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.
We 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 us;
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 us 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 our total outstanding voting stock;
o We consolidate with, or merge with or into another person or
convey, transfer, lease or otherwise dispose of all or
substantially all of our assets to any person, or any person
consolidates with or merges with or into us, 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) Our voting stock is not converted or exchanged at all,
except to the extent necessary to reflect a change in our
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 our 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 our board of directors, together
with any new directors whose election to our board of directors, or
whose nomination for election by our 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 our board of directors then in
office; or
o We are liquidated or dissolved or a special resolution is passed by
our 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 our common stock the holder of which has a right to put to us upon
terminations of employment.
The indenture does not permit our board of directors to waive our
obligation to purchase the notes at the option of a holder in the event of a
change in control.
We will comply with the tender offer rules under the Securities Exchange
Act of 1934 which may then be applicable, and will file Schedule 13E-4 or any
other schedule required thereunder in connection with any offer by us 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 us and, thus, the
removal of incumbent management. The change in control purchase feature,
however, is not the result of our knowledge of any specific effort to accumulate
shares of our common stock or to obtain control of us 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 us and the initial
purchasers.
If a change in control were to occur, there can be no assurance that we
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 we or our 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, our 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, our ability to
purchase the notes with cash may be limited by the terms of our 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
We, 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 our 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 us to deliver shares of our 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 us to comply with any of our other agreements in the notes
or the indenture upon our receipt of notice of our default from the
trustee or from holders of not less than 25% in aggregate principal
amount of the notes then outstanding and our failure to cure the
default within 90 days after our receipt of the notice;
o Default under any bond, note or other evidence of indebtedness for
money borrowed by us having an aggregate outstanding principal amount
of in excess $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 us from the trustee
or us 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.
We will be required to furnish to the trustee annually a statement as to
any default by us in the performance and observance of our obligations under the
Indenture. In addition, we 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 our 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 us 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.
o Without the consent of any holder of notes, we 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 us of our
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 our 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 us.
Discharge of the Indenture
We may satisfy and discharge our 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
us.
No Recourse Against Others
The indenture provides that our directors, officers, employees,
representatives, advisors or stockholders shall not have any liability for any
of our 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
We and our 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 us, at our 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 our registerable securities. We
use the term "registerable securities" to refer to all
outstanding notes, and our 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 our 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 our reasonable best efforts to keep the shelf registration
statement effective and usable until the time that all the notes,
and our common stock issuable upon conversion of the notes, shall
no longer qualify as registerable securities. We will be
permitted to suspend the use of the shelf registration statement
for limited periods of time under some circumstances if we
provide the holders of the registerable securities with written
notice of the suspension.
We 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 us, 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 electronic bill presentment software. BlueGill's
products and services allow billers to:
o Install and launch an electronic bill presentment product;
o Send e-mail notifications and present electronic bills through
the Internet; and
o Connect to a variety of bill aggregators and payment methods.
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 U.S. 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 PC Ownership
Declining prices for PCs and rapid growth in the number of
computer-literate consumers are driving increased penetration of PCs 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, or IDC, 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. IDC
estimates that the total value of goods and services purchased over the Internet
in the U.S. 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,
or API, 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 API's 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
other documents.
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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 100 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 $539,000 in debt to preferred stock in 1998.
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
The following table sets forth in thousands of dollars and as a
percentage of revenue, consolidated statements of operating data:
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<PAGE> 152
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS
ENDING ENDING
DECEMBER 31, DECEMBER 31,
($ 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
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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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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
157
<PAGE> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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
<PAGE> 168
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
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 ACH
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. Unbilled amounts are billed on specified dates according to
contractual terms or as services are provided. 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
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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> 178
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> 179
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> 180
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> 181
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> 182
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> 183
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
ACH processing, account reconciliation, wire transfer, mortgage loan
origination and servicing, lease accounting and debt recovery. These
products and services are primarily directed to financial institutions
and large corporations.
- 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> 184
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> 185
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> 186
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> 187
[This page left intentionally blank]
F-29
<PAGE> 188
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> 189
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> 190
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> 191
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> 192
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> 193
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. Additionally, a
related commercial agreement with Microsoft provides for a revenue guarantee of
$120 million over the next five years and a related marketing agreement with
First Data Corporation provides for a revenue and/or expense savings guarantee
of $60 million over the next five years. 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> 194
[BLUEGILL TECHNOLOGIES LOGO]
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-36
<PAGE> 195
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> 196
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> 197
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> 198
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> 199
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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
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> 209
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> 210
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> 211
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-51
<PAGE> 212
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.
F-52
<PAGE> 213
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.
F-53
<PAGE> 214
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.
F-54
<PAGE> 215
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-55
<PAGE> 216
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-56
<PAGE> 217
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.
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, which include
development costs for software to be used for internal use, are
expensed as incurred.
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 or
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.
F-57
<PAGE> 218
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.
F-58
<PAGE> 219
APPENDIX A
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
CHECKFREE HOLDINGS CORPORATION
CHECKFREE ACQUISITION CORPORATION IV
AND
BLUEGILL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
Dated as of December 20, 1999
A-1
<PAGE> 220
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
ARTICLE I
THE MERGER
SECTION 1.01 The Merger...............................................................A-6
SECTION 1.02 Effect of the Merger.....................................................A-7
SECTION 1.03 Consummation of the Merger ..............................................A-7
SECTION 1.04 Charter; By-Laws; Directors and Officers.................................A-7
SECTION 1.05 Further Assurances.......................................................A-7
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01 Conversion of Securities of BlueGill.....................................A-8
SECTION 2.02 Release of Escrow Shares................................................A-10
SECTION 2.03 Conversion of Acquisition Common Stock..................................A-10
SECTION 2.04 Conversion of Warrants and Options......................................A-10
SECTION 2.05 Surrender and Exchange of Shares........................................A-11
SECTION 2.06 Closing of Stock Transfer Books.........................................A-12
SECTION 2.07 Closing.................................................................A-12
SECTION 2.08 Tax-Free Reorganization.................................................A-12
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Representations and Warranties of BlueGill..............................A-12
SECTION 3.02 Representations and Warranties of Parent................................A-27
SECTION 3.03 Representations and Warranties of Acquisition...........................A-31
ARTICLE IV
COVENANTS
SECTION 4.01 Conduct of BlueGill's Business..........................................A-33
SECTION 4.02 Registration Statement; Stockholder Approval; Etc.......................A-36
SECTION 4.03 Access to Information...................................................A-38
SECTION 4.04 Further Assurances......................................................A-39
SECTION 4.05 Inquiries and Negotiations..............................................A-39
SECTION 4.06 Indemnification; Directors' and Officers' Insurance.....................A-40
SECTION 4.07 Notification of Certain Matters.........................................A-41
SECTION 4.08 Compliance with the Securities Act......................................A-41
</TABLE>
A-2
<PAGE> 221
<TABLE>
<CAPTION>
<S> <C>
SECTION 4.09 Conversion of Warrants and Stock Options................................A-42
SECTION 4.10 Parent Indemnity........................................................A-42
SECTION 4.11 Bring-Down of Representations and Warranties............................A-42
SECTION 4.12 Agreements Executed.....................................................A-43
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 Conditions to Each Party's Obligation to Effect the Merger..............A-43
SECTION 5.02 Conditions to the Obligation of BlueGill to Effect the Merger...........A-44
SECTION 5.03 Conditions to the Obligation of Parent and Acquisition
to Effect the Merger....................................................A-44
ARTICLE VI
TERMINATION AND ABANDONMENT
SECTION 6.01 Termination and Abandonment.............................................A-45
SECTION 6.02 Effect of Termination...................................................A-46
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 Indemnification by BlueGill.............................................A-47
SECTION 7.02 Claims..................................................................A-48
SECTION 7.03 Notice and Defense of Third-Party Claims................................A-48
SECTION 7.04 Settlement or Compromise................................................A-48
SECTION 7.05 Limitations on Indemnification..........................................A-48
SECTION 7.06 Remedies for Fraud......................................................A-49
SECTION 7.07 Changes in Capitalization...............................................A-49
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Survival of Representations and Warranties..............................A-50
SECTION 8.02 Interpretation of Representations and Warranties........................A-50
SECTION 8.03 Reliance................................................................A-50
SECTION 8.04 Expenses, Etc...........................................................A-50
SECTION 8.05 Publicity; Confidentiality..............................................A-51
SECTION 8.06 Execution in Counterparts...............................................A-51
SECTION 8.07 Notices.................................................................A-51
SECTION 8.08 Waivers.................................................................A-52
SECTION 8.09 Amendments, Supplements, Etc............................................A-53
</TABLE>
A-3
<PAGE> 222
<TABLE>
<CAPTION>
<S> <C>
SECTION 8.10 Entire Agreement........................................................A-53
SECTION 8.11 Applicable Law..........................................................A-53
SECTION 8.12 Binding Effect, Benefits................................................A-53
SECTION 8.13 Assignability...........................................................A-53
SECTION 8.14 Parent Stockholder Approval.............................................A-53
SECTION 8.15 Knowledge Qualification.................................................A-53
SECTION 8.16 Severability............................................................A-54
SECTION 8.15 Variation and Amendment.................................................A-54
INDEX TO SCHEDULES AND EXHIBITS
BlueGill
Schedules Description
- --------- -----------
3.01(b) Subsidiaries
3.01(c)(i) Capitalization - Subscription, Options and Warrants
3.01(c)(ii) Capitalization - Redemption
3.01(c)(iii) Capitalization - Stockholders
3.01(e) Non-Contravention
3.01(f) Consents
3.01(g) Financial Statements
3.01(h) Certain Changes or Events
3.01(j) Actions Pending
3.01(k) Liens and Encumbrances
3.01(l) Real Property Interests
3.01(m) Intellectual Property Rights
3.01(n) Labor Matters
3.01(o) Severance Arrangements
3.01(p) Taxes
3.01(q) Permits
3.01(r) Employee Benefit Plans
3.01(s) Environmental Matters
3.01(u) Material Contracts
3.01(v) Insurance
3.01(x) Claims Against Officers and Directors
3.01(y) Customers; Suppliers, etc.
3.01(z) Improper Payments
3.01(aa) Brokers
</TABLE>
A-4
<PAGE> 223
Parent
Schedules Description
- --------- -----------
3.02(b) Subsidiaries
3.02(c) Capitalization
3.02(f) Consents
3.02(j) Registration Rights
3.02(k) Brokers
General
Schedules Description
- --------- -----------
4.01 Permitted Agreements Not Requiring Consent of Parent
8.04 Expenses
8.15 Designated Individuals with Knowledge
Exhibits Description
- -------- -----------
Exhibit A Parent Tax Representation Certificate
Exhibit B Escrow Agreement
Exhibit C Stock Restriction Agreement
A-5
<PAGE> 224
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 20, 1999 (the
"EFFECTIVE DATE"), among CHECKFREE HOLDINGS CORPORATION, a Delaware corporation
("PARENT"), CHECKFREE ACQUISITION CORPORATION IV , a Delaware corporation and a
wholly owned subsidiary of Parent ("ACQUISITION"), and BLUEGILL TECHNOLOGIES,
INC., a Delaware corporation ("BLUEGILL"). BlueGill and Acquisition are
hereinafter sometimes collectively referred to as the "CONSTITUENT CORPORATIONS"
and BlueGill is hereinafter sometimes referred to as the "SURVIVING
CORPORATION."
WHEREAS, Parent, Acquisition and BlueGill desire that Acquisition merge
with and into BlueGill (the "MERGER"), upon the terms and conditions set forth
herein and in accordance with the General Corporation Law of the State of
Delaware (the "DELAWARE GCL") with the result that BlueGill shall continue as
the surviving corporation and the separate existence of Acquisition shall cease;
and
WHEREAS, Parent, Acquisition and BlueGill desire that at the Effective
Time (as hereinafter defined), all outstanding shares of the capital stock of
BlueGill be converted into the right to receive fully paid and nonassessable
shares of Common Stock, $.01 par value, of Parent ("PARENT COMMON STOCK"), as
hereinafter provided; and
WHEREAS, Parent, Acquisition and BlueGill desire that, immediately
after the Effective Time and solely as a result of the Merger, Parent will own
all the issued and outstanding shares of the capital stock of the Surviving
Corporation; and
WHEREAS, for Federal income tax purposes, it is intended that the
Merger qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE CODE"); and
WHEREAS, the respective Boards of Directors of Parent, Acquisition and
BlueGill have approved the Merger;
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time, in accordance with this Agreement and the
Delaware GCL, Acquisition shall be merged with and into BlueGill, the separate
existence of Acquisition shall cease, and BlueGill
A-6
<PAGE> 225
shall continue as the Surviving Corporation under the corporate name of
"BLUEGILL TECHNOLOGIES, INC."
SECTION 1.02 EFFECT OF THE MERGER. Upon the effectiveness of the
Merger, the Surviving Corporation shall succeed to, and assume all the rights
and obligations of, BlueGill and Acquisition in accordance with the Delaware GCL
and the Merger shall otherwise have the effects set forth in Section 251 of the
Delaware GCL.
SECTION 1.03 CONSUMMATION OF THE MERGER. At the Closing (as defined in
Section 2.07 hereof), the parties hereto will cause the Merger to be consummated
by filing with the Secretary of State of the State of Delaware a properly
executed certificate of merger in accordance with the Delaware GCL (the time of
such filing being referred to herein as the "EFFECTIVE TIME").
SECTION 1.04 CHARTER; BY-LAWS; DIRECTORS AND OFFICERS. The Certificate
of Incorporation of the Surviving Corporation from and after the Effective Time
shall be the Certificate of Incorporation of Acquisition as in effect
immediately prior to the Effective Time, until thereafter amended in accordance
with the provisions thereof and as provided by the Delaware GCL, except that, at
the Effective Time, Article I thereof shall be amended to read as follows: "The
name of the Corporation is BLUEGILL TECHNOLOGIES, INC." The By-Laws of the
Surviving Corporation from and after the Effective Time shall be the By-Laws of
Acquisition as in effect immediately prior to the Effective Time, continuing
until thereafter amended in accordance with the provisions thereof and the
provisions of the Certificate of Incorporation of the Surviving Corporation and
as provided by the Delaware GCL. The initial directors and officers of the
Surviving Corporation shall be the directors and officers, respectively, of
Acquisition immediately prior to the Effective Time, in each case until their
removal or until their respective successors are duly elected and qualified.
SECTION 1.05 FURTHER ASSURANCES. If at any time after the Effective
Time the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (i) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation, its right, title or interest in, to or
under any of the rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (ii) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of either of the Constituent Corporations, all such
deeds, bills of sale, assignments and assurances and do, in the name and on
behalf of such Constituent Corporation, all such other acts and things
necessary, desirable or proper to vest, perfect or confirm its right, title or
interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of such Constituent Corporation and otherwise to carry out
the purposes of this Agreement.
A-7
<PAGE> 226
ARTICLE II
CONVERSION OF SECURITIES
Section 2.01 CONVERSION OF SECURITIES OF BLUEGILL.
(a) At the Effective Time, each share of common stock, $.001
par value, of BlueGill (the "BLUEGILL COMMON STOCK"), each share of Series A
Preferred Stock, $.001 par value, of BlueGill (the "BLUEGILL SERIES A PREFERRED
STOCK"), and each share of Series B Preferred Stock, $.001 par value, of
BlueGill (the "BLUEGILL SERIES B PREFERRED STOCK"), and together with the
BlueGill Series A Preferred Stock, the "BLUEGILL PREFERRED STOCK"), issued and
outstanding immediately prior to the Effective Time (exclusive of Dissenting
Shares (as defined herein) and treasury shares, if any, which shall be cancelled
in accordance with Section 2.01(b)) shall be converted into the right to receive
the following (the "Merger Consideration"):
(i) The quotient of the applicable amount of the Parent
Consideration determined in accordance with clause (1) below divided by the
Diluted Share Number as defined in clause (2) below (such quotient being
hereinafter referred to as the "Exchange Ratio"):
(1) The number of shares of Parent Common Stock (which
when issued will be validly issued, fully-paid and non-assessable) determined as
follows (the "Parent Consideration"):
(A) If the Parent Average Trading Price (as defined
below) is greater than or equal to $78.00 per share and less than or equal to
$101.40 per share, the Parent Consideration shall equal 3,205,128 shares.
(B) If the Parent Average Trading Price is greater
than $101.40 per share, the Parent Consideration shall equal $325,000,000
divided by the Parent Average Trading Price.
(C) If the Parent Average Trading Price is greater
than or equal to $50.00 per share and less than $78.00 per share, the Parent
Consideration shall equal $250,000,000 divided by the Parent Average Trading
Price.
(D) If the Parent Average Trading Price is less than
$50.00 per share and Parent provides a termination notice to BlueGill under
Section 6.01(g) because the Parent Average Closing Price is less than $50.00,
and thereafter BlueGill provides to Parent a Reinstatement Notice (as defined in
Section 6.01(g)) in accordance with Section 6.01(g), the Parent Consideration
shall equal 5,000,000 shares.
(E) If the Parent Average Trading Price is less than
$50.00 per share and Parent does not provide a termination notice to BlueGill
under Section 6.01(g), the Parent Consideration shall equal $250,000,000 divided
by the Parent Average Trading Price.
A-8
<PAGE> 227
(F) "Parent Average Trading Price" is defined as the
weighted average intraday trading price of Parent Common Stock on the Nasdaq
National Market ("NASDAQ NM") during the three days immediately preceding the
Closing Date (as defined in Section 2.07), as reported by Bloomberg.
(2) At the Effective Time, the number of diluted shares
of BlueGill Common Stock outstanding computed based on the treasury method of
accounting, modified, giving effect to the conversion of all BlueGill Preferred
Stock and the exercise of all warrants and all vested options, but excluding all
Unvested Common Stock (as defined below) and excluding all unvested options (the
"DILUTED SHARE NUMBER").
(ii) 10% of the Merger Consideration issuable to each of the
BlueGill Shareholders (as defined in Section 3.01(c) below) (the "ESCROW
SHARES") shall be deposited with the escrow agent pursuant to that certain
Escrow Agreement (the "Escrow Agreement") to be entered into by and among
Parent, the Surviving Corporation and the BlueGill Shareholders in substantially
the form attached hereto as EXHIBIT B, and will be held by such escrow agent
pursuant to the Escrow Agreement, subject to Section 2.02 below. The parties
agree that BlueGill shall have the right, with the consent of Parent which will
not be unreasonably withheld, to modify the form of the Escrow Agreement prior
to its execution and delivery at the Closing in order to effect changes dealing
with the rights and obligations as among the BlueGill Shareholders and the
Shareholders' Agent, provided that such changes do not materially impact any
rights or obligations of Parent thereunder.
(iii) DISSENTING SHARES. BlueGill Common Stock and BlueGill
Preferred Stock issued and outstanding immediately prior to the Effective Time
and held by a BlueGill Shareholder who has not voted in favor of the Merger or
consented thereto in writing and who has demanded payment of the fair value for
such holder's BlueGill Common Stock or BlueGill Preferred Stock, as the case may
be, as determined by appraisal for stock in accordance with the Delaware GCL
prior to the Effective Time ("DISSENTING SHARES") shall not be converted into,
or be exchangeable for, a right to receive the Merger Consideration, unless and
until such holder shall have failed to perfect or shall have withdrawn or
otherwise lost such holder's right to appraisal. If after the Effective Time
such holder shall have failed to perfect or shall have withdrawn or lost such
holder's right to appraisal, such BlueGill Common Stock or BlueGill Preferred
Stock, as the case may be, shall be treated as if they had been converted as of
the Effective Time into a right to receive the Merger Consideration.
(iv) If any shares of BlueGill Common Stock outstanding immediately
prior to the Effective Time are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with BlueGill ("UNVESTED COMMON STOCK"),
then the shares of Parent Common Stock issued in exchange for such shares of
BlueGill Common Stock will also be unvested and subject to the same repurchase
option, risk of forfeiture or other condition, and the certificates representing
such shares of Parent Common Stock may accordingly be marked with appropriate
legends.
(v) If, prior to the Effective Time, Parent effects a
subdivision of its outstanding shares into a greater number of shares, or a
combination of its outstanding shares
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into a lesser number of shares, or reorganizes, reclassifies, recapitalizes or
otherwise changes its outstanding shares into the same or a different number of
shares of other classes or series, or declares a dividend on its outstanding
shares payable in shares of its capital stock or securities convertible into
shares of its capital stock, or if Parent declares any cash dividend or other
distribution of cash or property payable to its stockholders of record as of any
date prior to the Effective Time (each such event being herein referred to as a
"CAPITAL CHANGE"), then the Exchange Ratio shall be adjusted to appropriately
and equitably reflect each such Capital Change.
(b) TREASURY STOCK. At the Effective Time, each share of capital
stock of BlueGill that is then held in the treasury of BlueGill (if any) shall
be canceled and retired and no capital stock of Parent and no cash or other
consideration shall be paid or delivered in exchange therefor.
SECTION 2.02 RELEASE OF ESCROW SHARES. The Escrow Shares shall be
released from escrow and delivered to BlueGill Shareholders upon the earlier to
occur of: (a) one (1) year after the Closing Date or (b) the completion of an
audit on the merged companies and the filing by Parent of its Annual Report on
Form 10-K with the Securities and Exchange Commission ("SEC") relating to the
first fiscal year of Parent ending after the Closing, in either event subject to
the terms of the Escrow Agreement (such earlier date being hereinafter sometimes
referred to as the "ESCROW RELEASE DATE"), subject to any withholding of Escrow
Shares beyond the Escrow Release Date by the escrow agent under the Escrow
Agreement pending the resolution of any claims made in accordance with the
Escrow Agreement.
SECTION 2.03 CONVERSION OF ACQUISITION COMMON STOCK. At the Effective
Time, each share of common stock, $.01 par value, of Acquisition that is issued
and outstanding immediately prior to the Effective Time shall remain outstanding
and, by virtue of the Merger, automatically and without the need for any action
on the part of the holder thereof, shall be converted into and become one (1)
validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation.
SECTION 2.04 ASSUMPTION OF WARRANTS AND OPTIONS. At the Effective Time,
all warrants and options to purchase BlueGill Common Stock outstanding as of the
date hereof or issued after the date of this Agreement in compliance with
Section 4.01 and the other provisions of this Agreement (the "BLUEGILL OPTIONS
AND WARRANTS"), to the extent not exercised or canceled prior to the Effective
Time, will be assumed by Parent and will, following the Effective Time,
represent warrants or options, respectively, to purchase Parent Common Stock in
accordance with Section 4.09 hereof. For purposes of this Agreement, the term
"BLUEGILL SECURITYHOLDERS" shall mean the holders of the BlueGill Options and
Warrants to the extent vested as of the Effective Date and the BlueGill
Shareholders.
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SECTION 2.05 SURRENDER AND EXCHANGE OF SHARES.
(a) At the Effective Time, each holder of an outstanding
certificate or certificates that immediately prior thereto represented shares of
the capital stock of BlueGill shall surrender the same to Parent or its agent,
and each such holder shall be entitled upon such surrender and upon submission
to Parent or its agent of a copy of the Escrow Agreement executed by such
holder, to receive in exchange for such shares, without cost to it, a
certificate representing 90% of the number of shares of Parent Common Stock into
which the shares theretofore represented by the certificate so surrendered shall
have been converted as provided in Section 2.01 hereof, 10% of such Parent
Common Stock shall be deposited with the escrow agent pursuant to the Escrow
Agreement, and the certificate or certificates so surrendered in exchange for
such consideration shall forthwith be canceled by Parent. A BlueGill Shareholder
who has so surrendered certificates at the Effective Time shall be a record
holder of Parent Common Stock at the Effective Time. BlueGill Shareholders who
are Affiliates (as defined in Section 4.08) shall be required to execute and
deliver to Parent a letter in form and substance customary in stock-for-stock
merger transactions, pursuant to which such Affiliates will agree to transfer
their shares of Parent Common Stock subject to the limitations of Rule 145 under
the Securities Act of 1933, as amended (the "SECURITIES ACT").
(b) If a certificate representing shares of the capital stock of
BlueGill has been lost, stolen or destroyed, the holder of such certificate
shall submit an affidavit describing the lost, stolen or destroyed certificate,
the number of shares evidenced thereby and affirming the status of that
certificate in lieu of surrendering such certificate to Parent, which shall deem
such certificate canceled; provided that Parent may require the holder of such
certificate to provide Parent with a bond in such amount as Parent may direct as
a condition to paying any consideration hereunder. Until so surrendered, the
outstanding certificates that, prior to the Effective Time, represented shares
of the capital stock of BlueGill that shall have been converted as aforesaid
shall be deemed for all corporate purposes, except as hereinafter provided, to
evidence the ownership of the Merger Consideration into which such shares have
been so converted.
(c) No certificates or scrip representing fractional shares of
Parent Common Stock shall be issued upon the surrender for exchange of
certificates held by stockholders of BlueGill (or in the case of a lost, stolen
or destroyed certificate, upon delivery of an affidavit (and bond, if required)
in the manner provided in paragraph (b) above), and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of Parent. Each holder of shares of the capital stock of BlueGill
who would otherwise have been entitled to receive in the Merger a fraction of a
share of Parent Common Stock (after taking into account all certificates
surrendered by such holder) shall be entitled to receive from Parent at the
Effective Time, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Parent Common Stock multiplied by the Parent
Average Closing Price. It is understood (i) that the payment of cash in lieu of
fractional shares of Parent Common Stock is solely for the purpose of avoiding
the expense and inconvenience to Parent of issuing fractional shares and does
not represent separately bargained-for consideration; and (ii) that no holder of
shares of BlueGill capital stock will receive cash in lieu of fractional shares
of Parent Common Stock in an amount greater than the value of one full share of
Parent Common Stock.
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SECTION 2.06 CLOSING OF STOCK TRANSFER BOOKS. On and after the
Effective Time, there shall be no transfers on the stock transfer books of
BlueGill or Parent of shares of capital stock of BlueGill that were issued and
outstanding immediately prior to the Effective Time.
SECTION 2.07 CLOSING. The closing (the "CLOSING") shall be scheduled to
occur at the offices of Parent at 10:00 a.m. local time, on a date as soon as
practicable (but in any event not later than the third business day, unless
otherwise agreed) after the satisfaction or waiver of the conditions to the
obligations of the parties to effect the Merger set forth herein, provided that
this Agreement has not previously been terminated in accordance with the
provisions of Section 6.01 hereof. The Closing, and all transactions to occur at
the Closing, shall be deemed to have taken place at, and shall be effective as
of, the close of business on the date of closing (the "CLOSING DATE").
SECTION 2.08 TAX-FREE REORGANIZATION. The parties intend to adopt this
Agreement as a plan of reorganization and to consummate the Merger in accordance
with the provisions of Section 368(a)(1)(A) of the Internal Revenue Code by
virtue of the provisions of Section 368(a)(2)(E) of the Internal Revenue Code,
and the parties will not take a position on any tax returns that is inconsistent
with the treatment of the Merger as a reorganization described in such Sections.
Concurrently herewith (dated as of the Effective Date), and again at the Closing
(dated as of the Closing Date), Parent shall execute and deliver to BlueGill
Securityholders a certificate substantially in the form of EXHIBIT A (the
"PARENT TAX REPRESENTATION CERTIFICATE").
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF BLUEGILL. BlueGill
represents and warrants to Parent and Acquisition, except as set forth in: (i)
as of the date hereof, the BlueGill Disclosure Letter dated of even date
herewith that is being delivered to Parent concurrently herewith (the "BLUEGILL
DISCLOSURE LETTER"), or (ii) as of the Closing Date, the Closing BlueGill
Disclosure Letter (as defined in Section 4.11), as follows:
(a) ORGANIZATION AND QUALIFICATION. BlueGill is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own or lease and
operate its properties and assets and to carry on its business as it is now
being conducted. BlueGill is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a BlueGill Material Adverse Effect (as hereinafter defined). As used in
this Agreement, the term "BLUEGILL MATERIAL ADVERSE EFFECT" shall mean a
material adverse effect on the properties, assets, financial condition,
operating results or business of BlueGill and its subsidiaries, taken as a
whole; PROVIDED, HOWEVER, that the term "BlueGill Material Adverse Effect" shall
not include any such material adverse effect to the extent it directly or
indirectly relates to or results from:
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(i) changes, developments or circumstances in
worldwide or national conditions (political, economic, or regulatory) that
adversely affect generally the markets where BlueGill or any of its subsidiaries
operates or affect generally industries engaged in the business in which
BlueGill or any of its subsidiaries operates (including proposed legislation or
regulation by any governmental or regulatory body or the introduction of any
technological changes in the industry), or adversely affect a broad group of
industries generally;
(ii) changes, developments or circumstances in U.S.
or international securities markets in general; or
(iii) any matter disclosed in the BlueGill Disclosure
Letter or the Closing BlueGill Disclosure Letter.
(b) SUBSIDIARIES. Except as set forth on Schedule 3.01(b),
BlueGill does not have any subsidiaries or ownership of any equity interest in
any corporation, partnership, joint venture, or other business entity.
For purposes of this Agreement, the term "SUBSIDIARY," when
used with respect to BlueGill, shall mean any corporation or other business
entity a majority of whose outstanding equity securities is at the time owned,
directly or indirectly, by BlueGill and/or one or more of its subsidiaries.
(c) CAPITALIZATION. The authorized capital stock of BlueGill
consists of 41,000,000 shares of BlueGill Common Stock, $.001 par value per
share and 38,505,000 shares of Preferred Stock, $.001 par value per share, of
which 12,505,000 are designated Series A Preferred Stock, 13,000,000 are
designated Series B Preferred Stock and 13,000,000 are designated Series B-1
Preferred Stock. A total of 6,094,833 shares of BlueGill Common Stock,
12,503,301 shares of BlueGill A Preferred Stock, 12,825,651 shares of BlueGill
Series B Preferred Stock and no shares of BlueGill Series B-1 Preferred Stock
are issued and outstanding, all of which issued and outstanding shares were duly
authorized and validly issued and are fully paid and nonassessable. Except as
disclosed on Schedule 3.01(c)(i), no subscription, warrant, option, call,
commitment, convertible security (other than preferred stock, stock appreciation
or other right (contingent or other) to purchase or acquire any shares of any
class of capital stock of BlueGill is authorized or outstanding and there is not
any commitment of BlueGill to issue any shares, warrants, options, or other such
rights or to distribute to holders of any class of its capital stock any
evidences of indebtedness or assets. Except as set forth on Schedule
3.01(c)(ii), BlueGill does not have any obligation (contingent or other) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof. Schedule 3.01(c)(iii) sets forth a complete and correct list of
the holders of record of BlueGill Common Stock, BlueGill Series A Preferred
Stock and BlueGill Series B Preferred Stock ("BLUEGILL SHAREHOLDERS") and the
holders of all options, warrants or other rights, if any, to purchase BlueGill
Common Stock, including by name of the holder and the number of shares or the
number of shares obtainable on exercise of options or rights held.
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(d) AUTHORITY RELATIVE TO AGREEMENT. BlueGill has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement by BlueGill and the consummation by it of the transactions
contemplated hereby have been duly authorized by BlueGill's Board of Directors
and no other corporate approvals or proceedings on the part of BlueGill are
necessary to authorize this Agreement and the transactions contemplated hereby,
other than the approval and adoption of this Agreement by the BlueGill
Shareholders as required by the Delaware GCL. This Agreement has been duly
executed and delivered by BlueGill and, subject to obtaining such stockholder
approval, constitutes the legal, valid and binding obligation of BlueGill,
enforceable against BlueGill in accordance with its terms, subject to the
effect, if any, of (a) applicable bankruptcy and other similar laws affecting
the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies, and (c) the
limitations imposed by public policy on the enforceability of provisions
requiring indemnification in connection with the offering, issuance or sale of
securities. BlueGill's Board of Directors has by the requisite vote (i)
determined that this Agreement and the Merger is advisable and fair and in the
best interests of BlueGill and the BlueGill Shareholders and (ii) resolved to
recommend the approval of this Agreement and the Merger by the BlueGill
Shareholders and to submit this Agreement and the Merger to the BlueGill
Shareholders for their consideration and approval when BlueGill is permitted to
do so by applicable law. The affirmative vote of the holders of two-thirds of
the outstanding BlueGill Series A Preferred Stock, either holders of
three-fourths of the outstanding BlueGill Series B Preferred Stock or holders of
a majority of the outstanding BlueGill Series B Preferred Stock (including at
least one "Series B Institutional Investor" as that term is defined in the
Certificate of Incorporation of BlueGill) and a majority of the outstanding
BlueGill Common Stock and BlueGill Preferred Stock (voting on an as if converted
to Common Stock basis), voting together as a single class, are the only votes of
the holders of any class or series of BlueGill's capital stock necessary to
approve this Agreement, the Merger and the transactions contemplated hereby and
thereby.
(e) NON-CONTRAVENTION. The execution and delivery of this Agreement
by BlueGill and the consummation by BlueGill of the transactions contemplated
hereby will not (i) violate or conflict with any provision of the Certificate of
Incorporation or By-Laws of BlueGill or (ii) except as set forth on Schedule
3.01(e) hereof, result in any violation of, conflict with, or default (or an
event which with notice or lapse of time or both would constitute a default) or
loss of a benefit under, or permit the termination of or the acceleration of any
obligation under, any material mortgage, indenture, lease, agreement or other
instrument to which BlueGill is a party or by which its assets are bound,
permit, concession, grant, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to the business conducted by
BlueGill (the "BUSINESS") or to BlueGill or their respective properties, or
(iii) result in the creation or imposition of any liens, claims, charges,
restrictions, rights of others, security interests, prior assignments or other
encumbrances (collectively, "CLAIMS") in favor of any third person or entity
upon any of the assets of BlueGill, other than any such violation, conflict,
default, loss, termination or acceleration that would not have a BlueGill
Material Adverse Effect.
(f) CONSENTS. Except as set forth on Schedule 3.01(f), no consent,
approval, order or authorization of, or registration, declaration or filing
with, any Federal, state, local or foreign governmental or regulatory authority
is required to be made or obtained by BlueGill in
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connection with the execution and delivery of this Agreement by BlueGill or the
consummation by BlueGill of the transactions contemplated hereby, except for (i)
compliance by BlueGill with the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR ACT"), (ii) the filing of a certificate of merger with the
Secretary of State of the State of Delaware in accordance with the Delaware GCL
and (iii) such consents, approvals, orders or authorizations which if not
obtained, or registrations, declarations or filings which if not made, would not
have a BlueGill Material Adverse Effect or materially adversely affect the
ability of BlueGill to consummate the transactions contemplated hereby or the
ability of the Surviving Corporation or any of its subsidiaries to conduct the
Business after the Effective Time.
(g) FINANCIAL STATEMENTS, ETC. BlueGill has furnished to Parent the
audited consolidated balance sheet of BlueGill as of December 31, 1998 and the
related audited consolidated statement of operations for the year then ended and
an unaudited consolidated balance sheet as of September 30, 1999 and the related
consolidated unaudited statement of operations for the nine month period then
ended, with the unaudited balance sheet and unaudited statement of operations
certified by the principal financial officer of BlueGill. The foregoing audited
and unaudited financial statements of BlueGill, together with any additional
financial statements of BlueGill provided by BlueGill pursuant to Section
4.02(a), shall be collectively referred to as the "FINANCIAL STATEMENTS." The
Financial Statements for fiscal year 1998 were (and, if delivered pursuant to
Section 4.02(a), the Financial Statements for fiscal year 1999 will be) prepared
in accordance with GAAP (as hereinafter defined). The Financial Statements
(including any related schedules and/or notes, if any) have been prepared in a
consistent manner with prior periods, except that the unaudited Financial
Statements are subject to year end adjustments (which consist of normal
recurring accruals) and do not contain footnote disclosures. The Financial
Statements' balance sheets fairly present in all material respects the financial
position of BlueGill as of their respective dates, and the Financial Statements'
statements of operations fairly present in all material respects the results of
operations of BlueGill for the respective periods then ended, subject in the
case of the unaudited statement to normal year-end adjustments and the absence
of footnote disclosures.
Except as and to the extent (i) reflected on the audited balance
sheet of BlueGill as at December 31, 1998 or the unaudited balance sheet of
BlueGill as at September 30, 1999 referred to above (or, if delivered pursuant
to Section 4.02(a), the audited balance sheet of BlueGill as at December 31,
1999 (the "1999 BALANCE SHEET")), (ii) incurred from September 30, 1999 through
the Effective Date in the ordinary course of business consistent with past
practice or subsequent to the Effective Date in accordance with Section 4.01, or
(iii) set forth on Schedule 3.01(g) hereto, BlueGill does not have as of the
Effective Date (and will not have as of December 31, 1999, if the 1999 Balance
Sheet is delivered pursuant to Section 4.02(a)), any material liabilities or
obligations of any kind or nature, whether known or unknown or secured or
unsecured (whether absolute, accrued, contingent or otherwise, and whether due
or to become due) that would be required to be reflected on a balance sheet, or
the notes thereto, prepared in accordance with GAAP.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 3.01(h) hereto, or as otherwise disclosed in the Financial Statements
of BlueGill since September 30, 1999, BlueGill has not (i) issued any stock,
bonds or other corporate securities, (ii) borrowed
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or refinanced any amount or incurred any liabilities (absolute or contingent) in
excess of $10,000, other than trade payables incurred in the ordinary course of
business consistent with past practice, (iii) discharged or satisfied any claim
in excess of $10,000 or incurred or paid any obligation or liability (absolute
or contingent) other than current liabilities shown on the balance sheet of
BlueGill as of September 30, 1999 and current liabilities incurred since the
date of such balance sheet in the ordinary course of business consistent with
past practice, (iv) declared or made any payment or distribution to stockholders
or purchased or redeemed any shares of its capital stock or other securities,
(v) mortgaged, pledged or subjected to lien any of its assets, tangible or
intangible, other than liens for current real property taxes not yet due and
payable, (vi) sold, assigned or transferred any of its tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practice or as otherwise contemplated hereby, (vii) sold,
assigned or transferred any Intellectual Property Rights or other intangible
assets, other than licensing of BlueGill Software (as defined in Section
3.01(m)) in the ordinary course of business, (viii) waived any rights of
substantial value, whether or not in the ordinary course of business, (ix)
entered into, adopted, amended or terminated any bonus, profit sharing,
compensation, termination, stock option, stock appreciation right, restricted
stock, performance unit, pension, retirement, deferred compensation, employment,
severance or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit of any director, officer or employee of BlueGill, or
increased in any manner the compensation or fringe benefits of any director or
officer of BlueGill, or increased the compensation or fringe benefits of any
executive officer of BlueGill other than in the ordinary course of business
consistent with past practices, or made any payment of a cash bonus to any
director or officer or to any employee of, or consultant or agent to, BlueGill
or made any other material change in the terms or conditions of employment, (x)
announced any plan or legally binding commitment to create any employee benefit
plan, program or arrangement or to amend or modify in any material respect any
existing employee benefit plan, program or arrangement, (xi) eliminated the
vesting conditions or otherwise accelerated the payment of any compensation,
(xii) suffered any damage, destruction or loss to any of its assets or
properties, (xiii) made any change in its accounting systems, policies,
principles or practices, (xiv) made any loans to any person, (xv) incurred
damage, destruction, or loss, whether or not covered by insurance, affecting the
properties, assets, or Business of BlueGill, (xvi) made any change with respect
to management, supervisory, or other key personnel of BlueGill, or (xvii) paid
or discharged a lien or liability not appearing on the Financial Statements,
other than statutory liens or liens arising in the ordinary course of business.
Between September 30, 1999 and the Effective Date, there has not been a BlueGill
Material Adverse Effect.
(i) CERTAIN INFORMATION. Provided that Parent allows BlueGill to
modify any information regarding the BlueGill contained therein, none of the
information supplied by BlueGill specifically for inclusion in the Registration
Statement or the Proxy Statement/Prospectus (as hereinafter defined) will, at
the respective times such documents or any amendments or supplements thereto are
filed with the SEC, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that no
representation is made by BlueGill with respect to information other than
information regarding the BlueGill Shareholders or BlueGill supplied by BlueGill
for inclusion in the Registration Statement or the Proxy Statement/Prospectus.
Provided that Parent allows BlueGill to modify
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any information regarding BlueGill contained therein, none of the information
relating to BlueGill included in the Registration Statement or the Proxy
Statement/Prospectus that has been supplied by BlueGill for inclusion therein
will, at the time the Proxy Statement/Prospectus is distributed to BlueGill's
and/or Parent's stockholders, be false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) ACTIONS PENDING. Except as set forth on Schedule 3.01(j)
hereto, (i) there is no action, suit, dispute, to the knowledge of BlueGill any
investigation, proceeding or claim pending or, to the knowledge of BlueGill
threatened against or affecting BlueGill, or its properties or rights, or the
Business, before any court, administrative agency, governmental body,
arbitrator, mediator or other dispute resolution body, and BlueGill is not aware
of any facts or circumstances which are reasonably likely to give rise to any
such action, suit, dispute, investigation, proceeding or claim, (ii) BlueGill is
not subject to any order, judgment, decree, injunction, stipulation, or consent
order of or with any court or other governmental agency, and (iii) BlueGill has
not entered into any agreement to settle or compromise any proceeding pending or
threatened against it which has involved any obligation other than the payment
of money or for which BlueGill has any continuing obligation, which (in the case
of each of clauses (i), (ii) and (iii) of this Section 3.01(j)) would reasonably
be expected to have a BlueGill Material Adverse Effect or which would reasonably
be expected to materially and adversely affect the ability of BlueGill to
consummate the transactions contemplated hereby, or materially and adversely
affect the ability of Parent to conduct the Business after the Effective Time.
(k) TITLE TO PROPERTIES. BlueGill has good and valid title to the
properties and assets reflected on the unaudited balance sheet of BlueGill as of
September 30, 1999 other than nonmaterial properties and assets disposed of in
the ordinary course of business consistent with past practice since the date of
such balance sheet, and all such properties and assets are free and clear of
Claims, except (i) as described on Schedule 3.01(k) hereto, (ii) liens for
current taxes not yet due, and (iii) minor imperfections of title, if any, not
material in amount and not materially detracting from the value or impairing the
use of the property subject thereto or impairing the operations or proposed
operations of BlueGill (collectively, "PERMITTED LIENS"). Such properties and
assets constitute all of the assets necessary to conduct the Business
substantially in the same manner as it has been conducted prior to the date
hereof.
(l) REAL PROPERTY INTERESTS. Schedule 3.01(l) hereto sets forth a
complete and accurate list of (i) the real properties owned by BlueGill (the
"FEE PROPERTIES") and (ii) the real properties leased by BlueGill (the "LEASED
PROPERTIES"). BlueGill has good and marketable fee simple title to the Fee
Properties and good and marketable leasehold title to the Leased Properties,
listed on Schedule 3.01(l), free and clear of all Claims, tenants and occupants
except for Permitted Liens. Complete and accurate copies of all leases or other
agreements relating to the Leased Properties have been delivered to Parent and
there have been no material changes or amendments to such leases or agreements
since such delivery. BlueGill is the lawful owner of all improvements and
fixtures located on the Fee Properties and all moveable fixtures located at the
Leased Properties, free and clear of all Claims except for Permitted Liens. Each
lease or other agreement relating to the Leased Properties is a valid and
subsisting agreement, without
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any material default of BlueGill thereunder and without any material default
thereunder of the other party thereto, and such leases and agreements give
BlueGill the right to use or occupy, as the case may be, all real properties as
are sufficient and adequate to operate the Business as it is currently being
conducted. Except as set forth on Schedule 3.01(l), BlueGill's possession of
such property has not been disturbed nor has any claim relating to BlueGill's
title to or possession of such property been asserted against BlueGill.
(m) INTELLECTUAL PROPERTY RIGHTS. For purposes hereof, the term
"INTELLECTUAL PROPERTY RIGHTS" shall mean patents, trademarks and trade names,
trademark and trade name registrations, service mark, brand mark and brand name
registrations, copyrights, inventions, know-how, trade secrets, proprietary
processes and information, software source and object code, the applications
therefor and the licenses with respect thereto, and the term "BLUEGILL SOFTWARE"
shall mean software programs that BlueGill licenses to its customers in the
ordinary course of business. Schedule 3.01(m) sets forth a complete and accurate
list of all of BlueGill's patent registrations, trademark and trade name
registrations, service mark, brand mark and brand name registrations, and
copyright registrations. Except for the Embedded Software (as defined on
Schedule 3.01(m)) licensed to BlueGill, BlueGill owns exclusively all
Intellectual Property Rights (other than patent rights) embodied in (i) the
products BlueGill sells to customers, and (ii) BlueGill internally-developed
software programs and utilities used by BlueGill to configure the BlueGill
Software and convert customer data for use with the BlueGill Software. Except as
set forth on Schedule 3.01(m), (i) BlueGill conducts the Business without any
known infringement or claim of infringement of any Intellectual Property Right
of others and the conduct by the Surviving Corporation after the Effective Time
of the Business, in substantially the same manner as it is currently conducted,
will not constitute a breach or violation of any agreement relating to the
Intellectual Property Rights listed on Schedule 3.01(m) (other than as a result
of agreements to which Parent or any of its affiliates is a party); (ii)
BlueGill is, and after the consummation of the Merger will be, the sole and
exclusive owner of each Intellectual Property Right listed on Schedule 3.01(m),
free and clear of any Claims (other than Permitted Liens), and, to the knowledge
of BlueGill, no person is challenging, infringing, misappropriating or otherwise
violating any such Intellectual Property Rights or claiming that the conduct of
the Business, infringes, misappropriates or otherwise violates the Intellectual
Property Rights of any third party; (iii) BlueGill is not aware of any
impediment to the registration of any trademark that is the subject of any
application for registration listed on Schedule 3.01(m); (iv) none of the
Intellectual Property Rights listed on Schedule 3.01(m) is the subject of any
outstanding order, ruling, decree, judgment or stipulation specifically binding
on BlueGill; (v) to the knowledge of BlueGill, none of the activities of any
employee of BlueGill on behalf thereof violates any obligations of such employee
to third parties, including, without limitation, confidentiality or
noncompetition obligations under agreements with a former employer; (vi)
BlueGill is not aware of any unauthorized use by a third party of any computer
software programs or applications that BlueGill considers to be a trade secret
belonging to BlueGill; (vii) BlueGill has taken and is taking reasonable
precautions to keep confidential all material trade secrets and other
confidential information relating to its proprietary computer software programs
and applications or included in the Intellectual Property Rights that are
material to the conduct of the Business; and (viii) the execution, delivery, and
performance of this Agreement and the consummation of the Merger will not
constitute a breach or default of any Intellectual Property Rights that are
material to the conduct of the Business.
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(n) LABOR MATTERS. BlueGill is not a party to any collective
bargaining or union agreement, and no such agreement is applicable to any
employees of BlueGill. There are not any controversies between BlueGill and any
of such employees that might reasonably be expected to result in a BlueGill
Material Adverse Effect, or any unresolved labor union grievances or unfair
labor practice or labor arbitration proceedings pending, or to BlueGill's
knowledge threatened relating to the Business. There are no labor unions or
other organizations representing or purporting to represent any employees of
BlueGill and there are not any organizational efforts currently being made, or
to BlueGill's knowledge threatened, involving any of such employees. Except as
set forth on Schedule 3.01(n) hereto, BlueGill is in compliance in all material
respects with all laws and regulations or other legal or contractual
requirements regarding the terms and conditions of employment of employees,
former employees or other labor related matters, including, without limitation,
laws, rules, regulations, orders, rulings, conciliation agreements, decrees,
judgments and awards relating to wages, hours, the payment of social security
and similar taxes, equal employment opportunity, employment discrimination, fair
labor standards and occupational health and safety, wrongful discharge or
violation of the personal rights of employees, former employees or prospective
employees. BlueGill is not liable for any material amount of arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing.
(o) SEVERANCE ARRANGEMENTS. Except as set forth on Schedule 3.01(o)
hereto, BlueGill is not party to any agreement with any employee (i) the
benefits of which (including, without limitation, severance benefits) are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving BlueGill of the nature of any of the transactions
contemplated by this Agreement or (ii) providing severance benefits in excess of
those generally available under BlueGill's severance policies (which are
described on Schedule 3.01(o)), or which are conditioned upon a change of
control, after the termination of employment of such employees regardless of the
reason for such termination of employment, and BlueGill is not a party to any
employment agreement or compensation guarantee extending for a period longer
than one year. Schedule 3.01(o) sets forth all employment agreements and
compensation guarantees, regardless of duration, to which BlueGill is a party.
Except as a result of actions taken by Parent or the Surviving Corporation, no
amounts will be due or payable to any employee of BlueGill under any such
severance arrangement or otherwise by virtue of the refusal of such employee to
accept the offer of employment of the Surviving Corporation.
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(p) TAXES.
(i) Except as set forth on Schedule 3.01(p) hereto,
BlueGill or an affiliate on behalf of BlueGill has (A) timely filed all
Federal and all material state, local and foreign returns,
declarations, reports, estimates, information returns and statements
relating to BlueGill's operations ("RETURNS") required to be filed by
it in respect of any Taxes (as hereinafter defined), (B) timely paid
all Taxes that are due and payable with respect to the periods covered
by the Tax Returns referred to in clause (A) without regard to whether
such Taxes have been assessed (except for audit adjustments not
material in the aggregate or to the extent that liability therefor is
reserved for in BlueGill's most recent unaudited financial statements),
(C) established reserves that are adequate for the payment of all Taxes
not yet due and payable with respect to the results of operations of
BlueGill for periods through the Effective Date, and (D) complied in
all material respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes and has in all
material respects timely withheld from employee wages and paid over to
the proper governmental authorities all amounts required to be so
withheld and paid over.
(ii) BlueGill has no liability for the Taxes of any
Person or entity other than BlueGill and BlueGill Technologies
International, Inc. under Regulation 1.1502-6 of the Internal Revenue
Code.
(iii) Schedule 3.01(p) sets forth the last taxable
period through which the Federal income Tax Returns of BlueGill have
been examined by the Internal Revenue Service or otherwise closed. All
deficiencies asserted as a result of such examinations and any
examination by any applicable state, local or foreign taxing authority
which have not been or will not be appealed or contested in a timely
manner have been paid, fully settled or adequately provided for in
BlueGill's most recent audited financial statements. Except as set
forth on Schedule 3.01(p), no Federal, state, local or foreign Tax
audits or other administrative proceedings or court proceedings are
currently pending with regard to any Federal or material state, local
or foreign Taxes for which BlueGill would be liable, and no deficiency
for any such Taxes has been proposed, asserted or assessed or
threatened pursuant to such examination of BlueGill by such Federal,
state, local or foreign taxing authority with respect to any period.
(iv) Except as set forth on Schedule 3.01(p),
BlueGill has not executed or entered into (or prior to the Effective
Time will execute or enter into) with the Internal Revenue Service or
any taxing authority (A) any agreement or other document extending or
having the effect of extending the period for assessments or collection
of any Federal, state, local or foreign Taxes for which BlueGill would
be liable or (B) a closing agreement pursuant to Section 7121 of the
Internal Revenue Code, or any predecessor provision thereof or any
similar provision of state, local or foreign income tax law that
relates to the assets or operations of BlueGill.
(v) Except as set forth on Schedule 3.01(p), BlueGill
is not a party to any agreement providing for the allocation or sharing
of liability for any Taxes.
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(vi) BlueGill has made available to Parent complete
and accurate copies of all income and franchise Tax Returns pertaining
solely to BlueGill and all material other Tax Returns pertaining solely
to BlueGill filed by or on behalf of BlueGill for the taxable years
ending on or prior to 1998.
(vii) BlueGill is not a "U.S. real property holding
corporation" (as defined in Section 897(c)(2) of the Internal Revenue
Code), and, except as set forth on Schedule 3.01(p), neither BlueGill
nor any stockholder of BlueGill is a non-resident alien individual,
foreign corporation, foreign partnership, or foreign trust.
For purposes of this Agreement, "TAXES" shall mean
all Federal, state, local, foreign or other taxing authority income, franchise,
sales, use, ad valorem, property, payroll, social security, unemployment,
assets, value added, withholding, excise, severance, transfer, employment,
alternative or add-on minimum and other taxes, charges, fees, levies, imposts,
duties or other assessments, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority.
(q) COMPLIANCE WITH LAW; PERMITS. BlueGill is not in default in any
material respect under any order or decree of any court, governmental authority,
arbitrator or arbitration board or tribunal that is specifically binding on
BlueGill or under any laws, ordinances, governmental rules or regulations to
which BlueGill or any of its respective properties or assets is subject.
Schedule 3.01(q) hereto sets forth a list of all material permits,
authorizations, approvals, registrations (excluding those relating to corporate
organization, qualification to do business, Intellectual Property Rights and
securities law filings), variances and licenses ("PERMITS") issued to or used by
BlueGill in connection with the conduct of the Business; such Permits constitute
all Permits necessary for BlueGill to own, use and maintain its properties and
assets or required for the conduct of the Business in substantially the same
manner as it is currently conducted. Each Permit listed on Schedule 3.01(q) is
in full force and effect and no proceeding is pending or, to BlueGill's
knowledge, threatened to modify, suspend, revoke or otherwise limit any of such
Permits and no administrative or governmental actions have been taken or, to
BlueGill's knowledge, threatened in connection with the expiration or renewal of
any of such Permits. Except as set forth on Schedule 3.01(q), neither BlueGill
nor Parent or Acquisition will be required, as a result of the consummation of
the transactions contemplated hereby, to obtain or renew any Permits.
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(r) EMPLOYEE BENEFIT PLANS.
(i) Schedule 3.01(r) hereto sets forth a complete and
accurate list of each plan, program, arrangement, agreement or
commitment that is an employment, consulting or deferred compensation
agreement, or an executive compensation, incentive bonus or other
bonus, employee pension, profit-sharing, savings, retirement, stock
option, stock purchase, severance pay, life, health, disability or
accident insurance plan, or vacation or other employee benefit plan,
program, arrangement, agreement or commitment, including, without
limitation, each employee benefit plan (as defined under Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") in which employees of BlueGill participate that is (i)
maintained by BlueGill or any trade or business (whether or not
incorporated) which, together with BlueGill, would be treated as a
single employer under Title IV of ERISA or Section 414 of the Internal
Revenue Code (collectively, the "ERISA AFFILIATES") or (ii) to which
any ERISA Affiliate contributes or has any obligation to contribute to,
or has or may have any liability (including, without limitation, a
liability arising out of an indemnification, guarantee, hold harmless
or similar agreement) (collectively, the "PLANS"). Each Plan is
identified on Schedule 3.01(r), to the extent applicable, as one or
more of the following: an "employee pension plan" (as defined in
Section 3(2)(A) of ERISA), an "employee welfare plan" (as defined in
Section 3(1) of ERISA), or as a plan intended to be qualified under
Section 401 of the Internal Revenue Code.
(ii) The Plans have been, and currently are in
compliance, in all material respects, with all laws and regulations
applicable to the Plans under which noncompliance would have a BlueGill
Material Adverse Effect, including, without limitation, ERISA and the
Internal Revenue Code.
(iii) Except as set forth on Schedule 3.01(r), no
ERISA Affiliate has maintained, adopted or established, contributed to
or been required to contribute to, or otherwise participated in or been
required to participate in, any employee benefit plan or other program
or arrangement subject to Title IV of ERISA (including, without
limitation, a "multi-employer plan" (as defined in Section 3(37) of
ERISA), a multiple employer plan (as defined in Section 210 of ERISA)
and a defined benefit plan (as defined in Section 3(35) of ERISA)).
(iv) Except as set forth on Schedule 3.01(r),
BlueGill neither provides nor may be required to provide and no Plan,
other than a Plan that is an employee pension benefit plan (within the
meaning of Section 3(2)(A) of ERISA), provides or may be required to
provide benefits, including, without limitation, death, health or
medical benefits (whether or not insured), with respect to current or
former employees of BlueGill beyond their retirement or other
termination of service with BlueGill other than (A) coverage mandated
by applicable law, (B) deferred compensation benefits accrued as
liabilities on the books of BlueGill, or (C) benefits the full cost of
which is borne by the current or former employee (or his or her
beneficiary). No ERISA Affiliate maintains any Plan under which any
employee or former employee of BlueGill may receive medical benefits
which cannot be modified or terminated by the ERISA Affiliates at any
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time without the consent of any person, and no employees or former
employees of BlueGill will have any claim in respect of such benefits
as of the Effective Time.
(v) The transactions contemplated hereby will not
result in (i) any portion of any amount paid or payable by BlueGill to
a "disqualified individual" (within the meaning of Section 280G(c) of
the Internal Revenue Code and the regulations promulgated thereunder),
whether paid or payable in cash, securities of BlueGill or otherwise
and whether considered alone or in conjunction with any other amount
paid or payable to such a "disqualified individual," being an "excess
parachute payment" within the meaning of Section 280G(b)(1) of the
Internal Revenue Code and the regulations promulgated thereunder, other
than possible excess parachute payments set forth on Schedule 3.01(r),
(ii) any employee of BlueGill being entitled to severance pay,
unemployment compensation (other than payments by state unemployment
compensation program), or any other payment, (iii) an acceleration of
the time of payment (other than eligibility for a distribution from a
defined contribution plan) or vesting or an increase in the amount of
compensation due to any such employee or former employee of BlueGill or
(iv) any prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Internal Revenue Code for which an exemption is not
available.
(vi) No ERISA Affiliates has incurred any material
liability with respect to any Plan under ERISA (including, without
limitation, Title I or Title IV thereof, other than liability for
premiums due to the Pension Benefit Guaranty Corporation which are
current if applicable), the Internal Revenue Code or other applicable
law for which BlueGill may be held liable, which has not been satisfied
in full or been accrued on the balance sheet of BlueGill as of
September 30, 1999, pending full satisfaction, and no event has
occurred, and there exists no condition or set of circumstances, which
could result in the imposition of any material liability on BlueGill
not set forth in or reserved in BlueGill's unaudited balance sheet at
September 30, 1999, under ERISA, the Internal Revenue Code or other
applicable law with respect to any Plan.
(vii) With respect to each Plan subject to Section
412 of the Internal Revenue Code that is funded wholly or partially
through an insurance policy, all premiums required to have been paid to
date under the insurance policy have been paid, and, except as set
forth on Schedule 3.01(r), as of the Effective Time there will be no
liability of BlueGill under any such insurance policy or ancillary
agreement with respect to such insurance policy in the nature of a
retroactive rate adjustment, loss sharing arrangement or other actual
or contingent liability arising wholly or partially out of events
occurring prior to the Effective Time.
(viii) None of the ERISA Affiliates has made any
contribution to any Plan that may be subject to any excise tax under
Section 4972 of the Internal Revenue Code for which BlueGill may be
held liable.
(s) ENVIRONMENTAL MATTERS. To BlueGill's knowledge, BlueGill
is in compliance in all material respects with all Federal, state or local
statutes, ordinances, orders,
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judgments, rulings or regulations relating to environmental pollution or to
environmental regulation or control ("Environmental Laws"). Except as set forth
on Schedule 3.01(s) hereto, neither BlueGill nor any of its respective officers,
employees, representatives or agents has treated, stored, processed, discharged,
spilled or otherwise disposed of any substance defined as hazardous or toxic by
any applicable Environmental Laws, at any real property or any other facility
owned, leased or used by BlueGill, in material violation of any applicable
Environmental Laws. Except as set forth on Schedule 3.01(s), to BlueGill's
knowledge, no employee of BlueGill or other person has ever made a claim or
demand against BlueGill based on alleged damage to human health caused by any
violation of Environmental Laws. Except as set forth on Schedule 3.01(s), to
BlueGill's knowledge, BlueGill has not been charged by any governmental
authority with improperly using, handling, storing, discharging or disposing of
any such hazardous or toxic substance or waste or by-product thereof or with
causing or permitting pollution without a required permit of any body of water.
Except as set forth on Schedule 3.01(s), to BlueGill's knowledge, the Fee or
Leased Properties and the Business are not subject to any pending or threatened
administrative or judicial proceeding under any Environmental Law and there are
no facts or circumstances known to BlueGill which are reasonably likely to give
rise to any proceeding. Except as set forth on Schedule 3.01(s), to the
knowledge of BlueGill, there are no inactive, closed, or abandoned storage or
disposal areas or facilities or underground storage tanks on the Fee or Leased
Properties.
(t) PERSONAL PROPERTY. BlueGill has provided Parent lists of
(i) all of the tangible personal property used by BlueGill in its business
having an original acquisition cost of $50,000 or more, and (ii) all leases of
personal property binding upon BlueGill having an annual rental in excess of
$25,000. All of such tangible personal property is presently utilized by
BlueGill in the ordinary course of its business and is in working order,
ordinary wear and tear excepted.
(u) CONTRACTS. Schedule 3.01(u) lists all contracts and
arrangements of the following types to which BlueGill is a party or by which it
is bound:
(i) any contract or arrangement with a sales
representative, distributor, dealer, broker, sales agency, advertising
agency or other person engaged in sales, distribution or promotional
activities, or any contract to act as one of the foregoing on behalf of
any person, which is not terminable by BlueGill on 30 or fewer days
notice;
(ii) any contract or arrangement of any nature which
involves the payment or receipt of cash or other property, an
unperformed commitment, or goods or services, having a value in excess
of $20,000;
(iii) any contract or arrangement pursuant to which
BlueGill has made or will make loans or advances, or has or will have
incurred indebtedness for borrowed money or become a guarantor or
surety or pledged its credit on or otherwise become responsible with
respect to any undertaking of another (except for the negotiation or
collection of negotiable instruments in transactions in the ordinary
course of business or except for advances to employees for business
purposes) in excess of $20,000;
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(iv) any indenture, credit agreement, loan agreement,
note, mortgage, security agreement, lease of real property or personal
property, loan commitment or other contract or arrangement relating to
the borrowing of funds, an extension of credit or financing;
(v) any contract or arrangement involving a
partnership, a limited liability company, a joint venture or other
cooperative undertaking requiring a sharing of assets or technology of
BlueGill;
(vi) any contract or arrangement involving any
restrictions with respect to the geographical area of operations or
scope or type of business of BlueGill;
(vii) any power of attorney or agency agreement or
arrangement with any person pursuant to which such person is granted
the authority to act for or on behalf of BlueGill, or BlueGill is
granted the authority to act for or on behalf of any person;
(viii) any contract not fully performed and relating
to any acquisition or disposition of BlueGill or any predecessor in
interest of BlueGill, or any acquisition or disposition of any
subsidiary, division, line of business, or real property of BlueGill;
(ix) any contract or arrangement with a customer
or financial institution;
(x) all contracts and arrangements between BlueGill
and BlueGill Shareholders or BlueGill's affiliates that would require
BlueGill to pay more than $50,000; and
(xi) any contract not specified above which the
cancellation, breach, or nonperformance of would constitute a BlueGill
Material Adverse Effect.
BlueGill has delivered to Parent complete and accurate copies of the contracts
and agreements set forth on Schedule 3.01(u), and each such contract or
agreement is a valid and subsisting agreement, without any material default of
BlueGill thereunder and, to BlueGill's knowledge, without any material default
thereunder of the other party thereto. Except as set forth on Schedule 3.01(u),
BlueGill has not received notice of any cancellation or termination of, or of
any threat to cancel or terminate, any of such contracts or agreements required
to be listed on Schedule 3.01(u).
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(v) INSURANCE.
(i) All policies of fire, liability, workers'
compensation and other forms of insurance providing insurance coverage
to or for BlueGill for events or occurrences arising or taking place in
the case of occurrence type insurance, and for claims made and/or suits
commenced in the case of claims-made type insurance, between the
Effective Date and the Effective Time, are listed on Schedule 3.01(v)
hereto, and, except as set forth on Schedule 3.01(v), all premiums with
respect thereto have been paid, and no notice of cancellation or
termination has been received with respect to any such policy. All such
policies are in full force and effect, and, except as set forth on
Schedule 3.01(v), provide insurance in such amounts and against such
risks as and BlueGill believes is customary for companies engaged in
similar businesses to protect the employees, properties, assets,
businesses and operations of BlueGill. All such policies will remain in
full force and effect and will not be adversely modified or affected
by, or terminate or lapse by reason of, any of the transactions
contemplated hereby, except by reason of an insurer's assessment of
Parent or the conduct of the Business after the Effective Time.
(ii) BlueGill has provided Parent information
concerning all claims, which (including related claims which in the
aggregate) exceed $10,000 and which have been made by BlueGill in the
last two years under any workers' compensation, general liability,
property, directors' and officers' liability or other insurance policy
applicable to BlueGill or any of its properties. Except as set forth in
written materials provided by BlueGill to Parent, there are no pending
or to BlueGill's knowledge threatened claims under any insurance
policy, the outcome of which would have a BlueGill Material Adverse
Effect.
(w) PENDING TRANSACTIONS. Except for this Agreement and the
transactions contemplated hereby, BlueGill is not a party to or bound by any
agreement, negotiation, discussion, commitment or undertaking with respect to a
merger or consolidation with, or an Acquisition of all or substantially all of
the property and assets of, any other corporation or person or the sale, lease
or exchange of all or substantially all of its properties and assets to any
other person.
(x) CLAIMS AGAINST OFFICERS AND DIRECTORS. Except as set forth
on Schedule 3.01(x), to the knowledge of BlueGill, there are no pending or
threatened claims against any director, officer, employee or agent of BlueGill,
in their capacities as such which could give rise to any claim for
indemnification against BlueGill.
(y) CUSTOMERS AND SUPPLIERS. Except to the extent set forth in
Schedule 3.01(y), between September 30, 1999 and the Effective Date: (i) there
has not been any material dispute between BlueGill and any of its fifteen
largest customers ("Major Customers") or ten largest developers/suppliers
("Major Suppliers"); (ii) BlueGill did not receive notice from any Major
Customer stating that such Major Customer intends to reduce its purchases from
BlueGill; or (iii) BlueGill did not receive notice from any Major Supplier
stating that such Major Supplier intends to reduce its sale of goods or services
to BlueGill.
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(z) IMPROPER AND OTHER PAYMENTS. Except as set forth on
Schedule 3.01(z), neither BlueGill nor, to the knowledge of BlueGill, any
director, officer, employee, agent or representative of BlueGill acting in such
capacity, nor any person acting on behalf of any of them, has (i) made, paid or
received any bribes, kickbacks or other similar payments to or from any person,
whether lawful or unlawful, (ii) made any unlawful contributions, directly or
indirectly, to a domestic or foreign political party or candidate, or (iii) made
any improper foreign payment (as defined in the Foreign Corrupt Practices Act).
(aa) BROKERS. Except as set forth on Schedule 3.01(aa),
BlueGill has not used any broker or finder in connection with the transactions
contemplated hereby and BlueGill has not nor will have any liability or
otherwise suffer or incur any loss as a result of or in connection with any
brokerage or finder's fee or other commission of any person retained by BlueGill
in connection with any of the transactions contemplated by this Agreement.
(bb) ACCURACY OF STATEMENTS. Neither this Agreement, the
Applicable Disclosure Letter (as defined below), nor any schedule, exhibit,
statement, list, document, certificate or other information furnished or to be
furnished by or on behalf of BlueGill to Parent in connection with this
Agreement, when read together, contain any untrue statement of a material fact
or omits to state a material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they are made, not
misleading. For purposes of this paragraph, the term "APPLICABLE DISCLOSURE
LETTER" shall mean the BlueGill Disclosure Letter as of the Effective Date and
the Closing BlueGill Disclosure Letter as of the Closing Date.
(cc) DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES EXCEPT
AS EXPRESSLY SET FORTH IN THIS SECTION 3.01 AND IN THE BLUEGILL DISCLOSURE
LETTER, BLUEGILL MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW
OR IN EQUITY, IN RESPECT OF ITS BUSINESS, BLUEGILL'S OPERATION OF ITS BUSINESS,
OR THE ASSETS INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE, AND ANY SUCH REPRESENTATIONS OR WARRANTIES
ARE HEREBY EXPRESSLY DISCLAIMED. PARENT AND ACQUISITION HEREBY ACKNOWLEDGE AND
AGREE THAT ALL SUCH REPRESENTATIONS AND WARRANTIES ARE HEREBY EXCLUDED AND
DISCLAIMED.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF PARENT. Except as set
forth in the Parent Disclosure Letter dated of even date herewith, Parent
represents and warrants to BlueGill as follows:
(a) ORGANIZATION AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own or
lease and operate its properties and assets and to carry on its business as it
is now being conducted. Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Parent Material Adverse Effect (as hereinafter defined). As used in this
Agreement, the term "PARENT MATERIAL ADVERSE EFFECT"
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shall mean a material adverse effect on the properties, assets, financial
condition, operating results or business of Parent, taken as a whole.
(b) SUBSIDIARIES. Schedule 3.02(b) includes a complete and
accurate list of each subsidiary of the Parent, indicating the jurisdiction of
incorporation and the nature and level of ownership in such subsidiary by the
Parent, any subsidiary of the Parent and any other person. Complete and correct
copies of the certificate of incorporation and by-laws of the Parent and of each
subsidiary of the Parent have previously been delivered to BlueGill. Except as
set forth on Schedule 3.02(b) hereto, neither the Parent nor any of its
subsidiaries owns of record or beneficially, directly or indirectly, (i) any
shares of outstanding capital stock or securities convertible into capital stock
of any other corporation or (ii) any participating interest in any partnership,
joint venture or other noncorporate business enterprise. Each subsidiary of the
Parent is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to own or lease and operate its properties and
assets and to carry on its business as it is now being conducted. Each
subsidiary of the Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Parent Material Adverse Effect. All the outstanding shares of capital
stock of the Parent's subsidiaries are duly authorized, validly issued, fully
paid and nonassessable and, except as set forth on Schedule 3.02(b), are owned
by the Parent or by a wholly owned subsidiary of the Parent free and clear of
any Claims, and there are no proxies or voting or transfer agreements or
understandings outstanding with respect to any such shares. Without limiting the
foregoing representations and warranties, Parent owns beneficially of record all
of the issued and outstanding shares of the capital stock of Acquisition free
and clear of all Claims. For purposes of this Agreement, the term "subsidiary,"
when used with respect to the Parent, shall mean any corporation or other
business entity a majority of whose outstanding equity securities is at the time
owned, directly or indirectly, by the Parent and/or one or more other
subsidiaries of the Parent.
(c) CAPITALIZATION. The authorized capital stock of Parent
consists of 150,000,000 shares of Parent Common Stock and 15,000,000 shares of
Parent Preferred Stock, and, as of November 10, 1999, 52,211,714 shares of
Parent Common Stock were issued and outstanding, all of which were duly
authorized and validly issued and are fully paid and nonassessable, and no
shares of Parent Preferred Stock were issued and outstanding. As of November 10,
1999, Parent had outstanding options to purchase up to a total of 5,162,098
shares of Parent Common Stock. Except as provided in the immediately preceding
sentence or in Schedule 3.02(c) hereto, Parent has, no subscription, warrant,
option, convertible security, stock appreciation or other right (contingent or
other) to purchase or acquire any shares of any class of capital stock of Parent
that is authorized or outstanding and there is not any commitment of Parent to
issue any shares, warrants, options or other such rights or to distribute to
holders of any class of its capital stock any evidences of indebtedness or
assets. Except as disclosed in Schedule 3.02(c), Parent does not have any
obligation (contingent or other) to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any dividend or
make any other distribution in respect thereof.
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(d) AUTHORITY RELATIVE TO AGREEMENTS. Parent has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement by Parent if
necessary as provided in Section 8.14 and the consummation by Parent of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Parent, and except for approval by the stockholders of Parent, no
other corporate approvals or proceedings on the part of Parent are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Parent and constitutes the
legal, valid and binding obligation of Parent, enforceable against Parent in
accordance with its terms, subject to the effect, if any, of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally,
(b) rules of law governing specific performance, injunctive relief and other
equitable remedies, and (c) the limitations imposed by public policy on the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities. The Parent's Board of Directors has by
the requisite vote of its Board of Directors present (i) determined that this
Agreement and the Merger is advisable and fair and in the best interests of the
Parent and its stockholders, and (ii) if necessary as provided in Section 8.14
resolved to recommend the approval of this Agreement and the Merger by the
Parent's stockholders and directed that the Merger be submitted for
consideration by such stockholders. The affirmative vote of the holders of a
majority of the outstanding Parent Common Stock if necessary as provided in
Section 8.14 is the only vote of the holders of any class or series of the
Parent's capital stock necessary to approve this Agreement, the Merger, and the
transactions contemplated hereby and thereby.
(e) NON-CONTRAVENTION. The execution and delivery of this
Agreement by Parent and the consummation by Parent of the transactions
contemplated hereby will not (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of Parent, (ii) result in any violation
of, conflict with, or default (or an event which with notice or lapse of time or
both would constitute a default) or loss of a benefit under, or permit the
termination of or the acceleration of any obligation under, any material
mortgage, indenture, lease, agreement or other instrument to which Parent is a
party or by which its assets are bound, permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective properties,
or (iii) result in the creation or imposition of any Claim in favor of any third
person or entity upon any of the assets of Parent or any of its subsidiaries,
other than any such violation, conflict, default, loss, termination or
acceleration that would not have a Parent Material Adverse Effect or adversely
affect the ability of Parent to consummate the Merger or any other transaction
contemplated hereby.
(f) CONSENTS. No consent, approval, order or authorization of,
or registration, declaration or filing with, any Federal, state, local or
foreign governmental or regulatory authority is required to be made or obtained
by Parent in connection with the execution and delivery of this Agreement by
Parent or the consummation by Parent of the transactions contemplated hereby,
except for (i) compliance by Parent with the HSR Act, (ii) filings pursuant to
the Securities Act as contemplated by Section 4.02 hereof, (iii) the filing of a
certificate of merger with the Secretary of State of the State of Delaware in
accordance with the Delaware GCL, (iv) any licenses, permits, franchises or
other governmental authorizations pertaining to the Business that are required
as a result of the consummation of the transactions contemplated
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hereby, (v) the consents described in Schedule 3.02(f), and (vi) such consents,
approvals, orders or authorizations which if not obtained, or registrations,
declarations or filings which if not made, would not have a Parent Material
Adverse Effect or materially adversely affect the ability of Parent to
consummate the transactions contemplated hereby or to conduct the Business after
the Effective Time.
(g) SEC FILINGS. Parent has filed all forms, reports and
documents required to be filed with the SEC since January 1, 1998, and Parent
has made available to BlueGill, as filed with the SEC, complete and accurate
copies of all reports, statements and registration statements filed by Parent
with the SEC since January 1, 1998, in each case including all amendments and
supplements (collectively, the "PARENT SEC FILINGS"). The Parent SEC Filings
(including, without limitation, any financial statements or schedules included
therein) (i) were prepared in compliance with the requirements of the Securities
Act or Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), as the
case may be, and (ii) did not at the time of filing (or if amended, supplemented
or superseded by a filing prior to the date hereof, on the date of that filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
The financial statements of Parent included in the Parent SEC
Filings have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied and consistent with prior periods
indicated (except as otherwise noted therein or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) and fairly present (subject,
in the case of unaudited statements, to normal, recurring year-end adjustments
and any other adjustments described therein) the consolidated financial position
of Parent and its consolidated subsidiaries as at the dates thereof and the
consolidated results of operations and cash flows of Parent and its consolidated
subsidiaries for the periods then ended. Since September 30, 1999, there has
been no change in any of the significant accounting (including tax accounting)
policies, practices or procedures of the Parent or any of its subsidiaries.
Except for liabilities or obligations that are accrued or reserved against in
Parent's financial statements included in the Parent SEC Reports neither of
Parent or its subsidiaries has any liabilities or obligations (whether absolute,
accrued, contingent or otherwise, and whether due or to become due) that would
be required by GAAP to be reflected on a consolidated balance sheet, or the
notes thereto, or which would have a Parent Material Adverse Affect.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth
in the Parent SEC Filings made through the date hereof or otherwise provided on
Schedule 3.02(h), (i) Parent has not conducted its business and operations other
than in the ordinary course of business and consistent with past practices and
(ii) there has not been any fact, event, circumstance or change affecting or
relating to Parent or its subsidiaries that has caused or is reasonably likely
to cause a Parent Material Adverse Change.
(i) CERTAIN INFORMATION. None of the information supplied by
Parent or Acquisition for inclusion in the Registration Statement or the Proxy
Statement/Prospectus (as defined in Section 4.02 hereof) will, at the respective
times such documents or any amendments or supplements thereto are filed with the
SEC, contain any untrue statement of a material fact or
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omit to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, except no
representation is made by Parent or Acquisition with respect to information
supplied by BlueGill which relates to BlueGill or any affiliate or associate of
BlueGill for inclusion in the Registration Statement or the Proxy
Statement/Prospectus. None of the information relating to Parent included in the
Registration Statement or the Proxy Statement/Prospectus that has been supplied
by Parent will, at the time the Proxy Statement/Prospectus is distributed to
BlueGill Shareholders and/or Parent's stockholders, be false or misleading with
respect to any material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(j) REGISTRATION RIGHTS. Except as set forth on Schedule
3.02(j) and except as otherwise provided for in this Agreement, Parent is not a
party to any agreement obligating or requiring it to register under the
Securities Act any Parent Common Stock or other security of Parent.
(k) BROKERS. Except as set forth on Schedule 3.02(k), neither
Parent nor any of its subsidiaries has used any broker or finder in connection
with the transactions contemplated hereby, and neither Parent nor any of its
subsidiaries has or shall have any liability or otherwise suffer or incur any
loss as a result of or in connection with any brokerage or finder's fee or other
commission of any person retained by Parent or any of its subsidiaries in
connection with any of the transactions contemplated by this Agreement.
(l) PENDING TRANSACTIONS. Except for this Agreement and the
transactions contemplated hereby and as otherwise set forth on Schedule 3.02(l),
Parent is not a party to or bound by any agreement, negotiation, discussion,
commitment or undertaking with respect to a merger or consolidation with, or an
acquisition of all or substantially all of the property and assets of, any other
corporation or person or the sale, lease or exchange of all or substantially all
of its properties and assets to any other person.
(m) CLAIMS AGAINST OFFICERS AND DIRECTORS. To the knowledge of
Parent, there are no pending or threatened claims against any director, officer,
employee or agent of Parent which could give rise to any claim for
indemnification against BlueGill or Parent.
(n) TAX-FREE REORGANIZATION. Parent hereby makes the
representations set forth on the Parent Tax Representation Certificate, which
representations shall survive the Closing until six months after the expiration
of the applicable statute of limitations.
SECTION 3.03 REPRESENTATIONS AND WARRANTIES OF ACQUISITION. Acquisition
represents and warrants to BlueGill as follows:
(a) ORGANIZATION AND QUALIFICATION. Acquisition is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own or lease and operate its properties and assets and to carry on its business
as it is now being conducted. Acquisition is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction in
which the
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character of its properties owned or leased or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not have a material adverse effect on the financial condition, operating
results or business of Acquisition.
(b) CAPITALIZATION. The authorized capital stock of
Acquisition consists of 1,000 shares of Common Stock. As of the date hereof, 100
shares of Common Stock are issued and outstanding, all of which were duly
authorized and validly issued and are fully paid and nonassessable, and all such
shares are owned of record and beneficially by Parent free of all Claims, and no
shares of Common Stock are held in the treasury of Acquisition. Acquisition has
no commitments to issue or sell any shares of its capital stock or any
securities or obligations convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire from Acquisition, any shares of its
capital stock, and no securities or obligations evidencing any such rights are
outstanding.
(c) AUTHORITY RELATIVE TO AGREEMENT. Acquisition has all
requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Acquisition and by Parent as its sole stockholder, and no other corporate
approvals or proceedings on the part of Acquisition are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Acquisition and constitutes the legal, valid and
binding obligation of Acquisition, enforceable against Acquisition in accordance
with its terms subject to the effect, if any, of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors generally, (b) rules of law
governing specific performance, injunctive relief and other equitable remedies,
and (c) the limitations imposed by public policy on the enforceability of
provisions requiring indemnification in connection with the offering, issuance
or sale of securities.
(d) NON-CONTRAVENTION. The execution and delivery of this
Agreement by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby will not (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of Acquisition or (ii) result in any
violation of, conflict with, or default (or an event which with notice or lapse
of time or both would constitute a default) or loss of a benefit under, or
permit the termination of or the acceleration of any obligation under, any
material mortgage, indenture, lease, agreement, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Acquisition or
its properties.
(e) CONSENTS. No consent, approval, order or authorization of,
or registration, declaration or filing with, any Federal, state, local or
foreign governmental or regulatory authority is required to be made or obtained
by Acquisition in connection with the execution and delivery of this Agreement
by Acquisition or the consummation by Acquisition of the transactions
contemplated hereby, except for (i) compliance by Acquisition with the HSR Act,
(ii) the filing of a certificate of merger with the Secretary of State of
Delaware in accordance with the Delaware GCL, and (iii) any licenses, permits,
franchises or other governmental authorizations pertaining to the Business that
are required as a result of the consummation of the transactions contemplated
hereby.
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(f) OTHER MATTERS. Acquisition has been formed for the sole
purpose of effecting the Merger and, except as contemplated by this Agreement,
Acquisition has not conducted any business activities and does not have any
material liabilities or obligations.
ARTICLE IV
COVENANTS
SECTION 4.01 CONDUCT OF BLUEGILL'S BUSINESS. BlueGill covenants and
agrees that, prior to the Effective Time, unless Parent shall otherwise consent
in writing and except as otherwise expressly contemplated by this Agreement,
Schedule 4.01 or any other contract or agreement that BlueGill may enter into
with Parent and/or BlueGill Shareholders:
(a) the business of BlueGill shall be conducted only in, and
BlueGill shall not take any action except in, the ordinary course of
business consistent with past practice and BlueGill shall use its best
efforts to preserve intact its present business organization, keep
available the services of its current officers and employees, maintain
its assets (other than those permitted to be disposed of hereunder) in
working order, maintain its books of account and records in the usual,
regular and ordinary manner and preserve its goodwill and ongoing
business, it being understood and agreed that any action requiring
prior consultation with Parent pursuant to Section 4.01(c) or 4.01(i)
shall not be prohibited by this paragraph (a);
(b) BlueGill shall not directly or indirectly do any of the
following: (i) issue, sell, pledge, dispose of or encumber any property
or assets (including Intellectual Property Rights) of BlueGill, except
inventory, licensing of software products in the ordinary course of
business, assets no longer used in the business and immaterial assets
in the ordinary course of business consistent with past practice; (ii)
amend or propose to amend its Certificate of Incorporation or By-Laws;
(iii) split, combine or reclassify any outstanding shares of its
capital stock, or declare, set aside or pay any dividend payable in
cash, stock, property or otherwise with respect to such shares; (iv)
redeem, purchase, acquire or offer to acquire (or permit any of its
subsidiaries to redeem, purchase, acquire or offer to acquire) any
shares of its capital stock other than in connection with the
termination of employment pursuant to written contractual arrangements
between BlueGill and the former employee; (v) incorporate or otherwise
form or create any subsidiary; (vi) materially change BlueGill's
equipment or technology, except upgrades, improvements, replacements
and the like; (vii) accelerate the vesting of outstanding options;
(viii) terminate BlueGill's purchase or repurchase rights with respect
to stock options; or (vii) enter into any contract, agreement,
commitment or arrangement with respect to any of the matters set forth
in this paragraph (b), other than agreements connected with stock
options granted prior to the Effective Date, and other than agreements
which BlueGill is permitted to do under this paragraph (b).
(c) BlueGill shall not except after notification to and prior
consultation with Parent (i) issue, sell, pledge or dispose of, or
agree to issue, sell, pledge or dispose of,
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any additional shares of, or securities convertible or exchangeable
for, or any options, warrants or rights of any kind to acquire any
shares of, its capital stock of any class or other property or assets;
provided that BlueGill may after prior consultation with Parent grant
options to purchase shares of BlueGill Common Stock to newly hired
employees in accordance with BlueGill's option guidelines which were
furnished to Parent on or before the Effective Date at an exercise
price at least equal to the then fair market value of BlueGill Common
Stock on the date of grant and on such other terms or conditions as are
consistent with BlueGill's past practice of option grants; (ii) acquire
(by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division
thereof or any material amount of assets; (iii) incur or guarantee any
indebtedness for borrowed money other than in the ordinary course of
business and consistent with past practices, or refinance any such
indebtedness or issue or sell any debt securities; (iv) enter into or
modify any material contract, lease, agreement or commitment, except in
the ordinary course of business or as otherwise permitted by this
Section 4.01, or permit or perform any act that would cause a material
breach of any such contract, lease, agreement or commitment; (v)
terminate, modify, assign, waive, release or relinquish any material
contract rights or amend any material rights or claims except as
otherwise permitted by this Section 4.01; (vi) discharge or satisfy any
material claim or settle or compromise any material claim, action, suit
or proceeding pending or threatened against BlueGill (or, if BlueGill
may be liable or obligated to provide indemnification to its directors
or officers), against BlueGill's directors or officers, before any
court, governmental agency or arbitrator; (vii) make any loans,
advances or capital contributions to or investments in, any other
person, except as may be required under agreements in effect as of and
identified on Schedule 3.01(u) hereto and except advances to employees
in the ordinary course of business; (viii) alter through merger,
liquidation, reorganization, restructuring or in any other manner the
corporate structure or ownership of BlueGill except as otherwise
permitted herein; (ix) knowingly violate or fail to perform, in any
material respect, any obligation imposed upon BlueGill by any
applicable laws, orders or decrees, ordinances, government rules or
regulations or conciliation agreements; or (x) hire any executive level
employees.
(d) BlueGill shall not grant any increase in the salary or
other compensation of its directors, officers or employees, except
reasonable salary increases for employees or executive officers of
BlueGill, in the ordinary course of business consistent with past
practice, or grant any bonus to any employee or enter into any
employment agreement or make any loan (other than advances in the
ordinary course of business consistent with past practices) to or enter
into any material transaction of any other nature with any employee of
BlueGill;
(e) BlueGill shall not take any action to institute any new
severance or termination pay practices with respect to any directors,
officers or employees of BlueGill or to increase the benefits payable
under its severance or termination pay practices;
(f) BlueGill shall not adopt or amend, in any material
respect, any plan for the benefit or welfare of any directors, officers
or employees of BlueGill, except as contemplated hereby or as may be
required by applicable law or regulation;
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(g) BlueGill shall use its best efforts, to the extent not
prohibited by the foregoing provisions of this Section 4.01, to
maintain its relationships with its suppliers and customers, clients,
and others having business dealings with it, and if and as requested by
Parent or Acquisition, (i) BlueGill shall use its best efforts to make
reasonable arrangements for representatives of Parent or Acquisition to
meet with customers and suppliers of BlueGill, and (ii) BlueGill shall
schedule, and the management of BlueGill shall participate in, meetings
of representatives of Parent or Acquisition with employees of BlueGill
for purposes of dealing with the transition issues related to the
Merger;
(h) BlueGill shall provide to Parent a draft of any federal
income Tax return pertaining only to BlueGill or material state, local
or foreign Tax return (other than state or local sales and use taxes)
pertaining only to BlueGill required to be filed on behalf of BlueGill
between the Effective Date and the Effective Time at least 15 days
prior to the date on which such return is due; and
(i) BlueGill shall respond to inquiries of and consult with
Parent as to the management, Business and affairs of BlueGill. In
addition, BlueGill shall consult with Parent concerning actions
BlueGill proposes to take with respect to material matters involving
the management, Business, and affairs of BlueGill. If BlueGill takes
the proposed action after receipt of written confirmation from Parent
indicating Parent's opposition to such action and referencing this
Section 4.01(i) (a "BLUEGILL ACTION"), then Parent shall be entitled to
terminate this Agreement pursuant to Section 6.01(i), if such BlueGill
Action results in a BlueGill Material Adverse Effect. Notwithstanding
any provision of this Section 4.01(i), until the Effective Time, the
final decisions as to the conduct of the management, Business, and
affairs of BlueGill shall remain with BlueGill.
(j) BlueGill shall allow Parent to maintain on site at
BlueGill's offices an executive to consult with BlueGill's management
on the issues addressed in the foregoing provisions of this Section
4.01, as well as to consult with BlueGill on day-to-day decisions as to
the management, Business, and affairs of BlueGill.
(k) BlueGill shall provide at the Closing a list of all loans
by BlueGill outstanding to its employees in excess of $500.
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SECTION 4.02 REGISTRATION STATEMENT; STOCKHOLDER APPROVAL;
ETC.
(a) (i) Parent and BlueGill shall, in consultation with each
other, prepare a joint proxy statement pertaining to the Merger and containing
the recommendation of the Board of Directors of each of Parent and BlueGill to
approve and adopt this Agreement and the Merger as promptly as reasonably
practicable after the date hereof and shall initially file it with the SEC, in
good faith, on a confidential basis pursuant to Rule 14a-6(e)(2) of the Exchange
Act. BlueGill's proxy or information statement shall also constitute the
prospectus included in the Registration Statement to be filed by Parent pursuant
to Section 4.02(b) hereof (the "PROXY STATEMENT/PROSPECTUS"). Parent and
BlueGill shall cooperate fully with each other in the preparation of the Proxy
statement/prospectus and any amendments and supplements thereto, and Parent and
BlueGill will provide any audited and unaudited financial statements that may be
required by the applicable rules of the SEC or otherwise to be included in the
Proxy Statement/Prospectus. The Proxy Statement/Prospectus shall not be
distributed, and no amendment or supplement thereto shall be made by Parent or
BlueGill, without the prior consent of the other party and its counsel. Each of
Parent and BlueGill shall cause a definitive Proxy Statement/Prospectus to be
distributed to its stockholders entitled to vote upon the Merger promptly
following the effective date of the Registration Statement.
(ii) As promptly as reasonably practicable after the
date hereof (but in any event within 21 days after the Effective Date subject to
the conditions set forth below), Parent shall in good faith prepare and
initially file with the SEC under the Exchange Act the confidential Proxy
Statement/Prospectus; provided, however, that BlueGill has provided Parent
within 18 days after the date hereof all information and financial statements
(including, but not limited to, cooperating with Parent and Parent's
representatives to provide in a timely manner all requested information
necessary to prepare any financial information and analysis required so that
Parent and Parent's representatives shall have sufficient time to evaluate such
information and perform the necessary analysis for inclusion in the Proxy
Statement/Prospectus). Failure of BlueGill to comply with the foregoing
obligation within the required 18-day period shall act as a waiver of the
covenant set forth in this Section 4.02(a)(ii). If Parent fails to initially
file the confidential Proxy Statement/Prospectus within 21 days after the
Effective Date and BlueGill has fully complied with its foregoing obligations
required above within the 18-day period, then, unless BlueGill notifies Parent
in writing by the earlier of 4:00 p.m., Eastern Time, on the 28th day after the
Effective Date or such time as Parent initially files the confidential Proxy
Statement/Prospectus with the SEC of BlueGill's decision to terminate this
Agreement pursuant to Section 6.01(b) for failure of the covenant set forth in
this Section 4.02(a)(ii), BlueGill shall have waived the covenant set forth in
this Section 4.02(a)(ii). The waiver of the covenant set forth in this Section
4.01(a)(ii) shall not act as a waiver of Parent's obligations for the other
covenants set forth in this Section 4.02.
(b) (i) As promptly as reasonably practicable after the date
hereof, Parent shall prepare and file with the SEC under the Exchange Act and
the Securities Act, a Registration Statement on Form S-4 (the "REGISTRATION
STATEMENT") with respect to the approval of the Merger and the issuance of the
shares of Parent Common Stock and stock options and warrants to be issued in the
Merger, and shall use its best efforts to have the Proxy Statement/Prospectus
and Registration Statement declared effective by the SEC as promptly as
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practicable. Parent shall also take any action required to be taken under state
blue sky or other securities laws in connection with the issuance of shares of
Parent Common Stock in the Merger.
(ii) As soon as reasonably practicable after the
effective date of the Registration Statement, Parent shall take all action
necessary, subject to Section 8.14 hereof and subject to and in accordance with
the Delaware GCL and its Certificate of Incorporation and By-Laws, to obtain the
requisite approval and adoption of this Agreement and the Merger by the Parent's
stockholders at a duly called meeting pursuant to the Delaware GCL and shall
take such other actions as may be required by applicable law and the applicable
rules of the Nasdaq NM. The Board of Directors of Parent has determined that the
Merger is advisable and in the best interests of the stockholders of Parent and
shall, subject to Section 8.14 hereof, recommend that Parent's stockholders vote
to approve and adopt this Agreement and the Merger and any other matters to be
submitted to Parent's stockholders in connection therewith.
(iii) BlueGill shall cooperate fully with Parent in
the preparation of the Proxy Statement/Prospectus and the Registration Statement
and any amendments and supplements thereto and shall furnish Parent with all
information and shall take such other action as Parent may reasonably request in
connection therewith. BlueGill shall provide Parent with all pro forma financial
information required by Regulation S-X to be included in the Registration
Statement or in any other filing that is required to be made by Parent pursuant
to the Securities Act or the Exchange Act in connection with the Merger. All
such pro forma financial information shall be prepared in accordance with
Regulation S-X and shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(c) As soon as reasonably practicable after the effective date
of the Registration Statement, subject to Section 8.14 hereof, BlueGill and
Parent shall take all action necessary, subject to and in accordance with the
Delaware GCL and their Certificates of Incorporation and By-Laws, to obtain the
requisite approval and adoption of this Agreement and the Merger by their
respective stockholders at a duly called meeting or by written consents pursuant
to Section 228 of the Delaware GCL and shall take such other actions as may be
required by applicable law. The Board of Directors of BlueGill and Parent have
each determined that the Merger is advisable and in the best interests of their
respective stockholders and shall recommend that their respective stockholders
vote to approve and adopt this Agreement and the Merger and any other matters to
be submitted to such stockholders in connection therewith.
(d) Parent shall notify BlueGill of the receipt of any
comments of the SEC with respect to (and of any requests by the SEC for
amendments or supplements to) the Proxy Statement/Prospectus or the Registration
Statement, or for additional information within 24 hours after receipt thereof
from the SEC, and shall promptly supply BlueGill with copies of all
correspondence between Parent (or its representatives) and the SEC (or its
staff) with respect thereto within 24 hours after receipt thereof from the SEC.
If, at any time prior to the approval of the Merger by Parent's or BlueGill's
stockholders, any event should occur relating to or affecting BlueGill, Parent
or Acquisition, or to their respective officers or directors, which event should
be described in an amendment or supplement to the Proxy Statement/Prospectus or
the
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Registration Statement, the parties shall promptly inform one another and shall
cooperate in promptly preparing, filing and clearing with the SEC and, if
required by applicable securities laws, distributing to Parent's or BlueGill's
stockholders, such amendment or supplement.
(e) Parent shall cause the Parent Common Stock to be issued in
the Merger, to be listed on the Nasdaq NM, subject to official notice of
issuance.
(f) Parent shall prepare the Proxy Statement/Prospectus and
the Registration Statement without incorporating by reference any information
previously filed with the SEC or otherwise.
SECTION 4.03 ACCESS TO INFORMATION.
(a) Each of Parent and BlueGill shall, and shall cause its
respective subsidiaries, officers, directors and employees to, afford, from the
date hereof to the Effective Time, the officers, employees, representatives,
advisors and agents of the other party complete access at all reasonable times
to its officers, employees, properties, books, records and workpapers, and shall
furnish each other party all financial, operating and other information and data
as Parent or BlueGill, through its officers, employees or agents, may reasonably
request and shall promptly furnish to the other monthly operating and financial
reports in such form as Parent or BlueGill shall reasonably request. For each
calendar month that ends between the Effective Date through the Closing Date,
BlueGill will within thirty days after the end of such month prepare and deliver
to Parent unaudited monthly balance sheets and statements of operations for
BlueGill, that shall fairly present the financial condition and the results of
operations of BlueGill in all material respects.
(b) BlueGill, at least three business days prior to the
Effective Time, shall deliver to Parent a list setting forth the names and
locations of each bank or other financial institution at which BlueGill has an
account (giving the account numbers) or safe deposit box and the names of all
persons authorized to draw thereon or have access thereto, and the names of all
persons, if any, now holding powers of attorney or comparable delegation of
authority from BlueGill and a summary statement thereof.
(c) Each of Parent and BlueGill shall, and shall cause its
respective officers, directors and employees to, afford the officers, employees,
representatives, advisors and agents of the other party with access to such
information concerning Parent or BlueGill as may be necessary for each party to
ascertain the accuracy and completeness of the information supplied by Parent or
BlueGill for inclusion in any pre-merger notification report filed under the HSR
Act (and any additional information or documentary material supplied in response
to any request pursuant to Section 7A(e) of the HSR Act and the regulations
thereunder) or in the Proxy Statement/Prospectus.
(d) If this Agreement is terminated, each of the parties
hereto shall, and shall cause its officers, employees, representatives, advisors
and agents to, destroy or return to the other party all confidential documents,
work papers and other materials, and all copies thereof, obtained by it or on
its behalf from such other party and/or containing or derived from or
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analyzing such document, work papers and other materials, as a result of this
Agreement or in connection herewith, whether so obtained before or after the
execution and delivery hereof.
(e) Each of the parties hereto and its officers and employees
shall not disclose or use any information so obtained, except as required by
applicable law or legal process or by any applicable rules or regulations of a
national securities exchange or the NASD upon the advice of counsel, without the
prior written consent of the other party; PROVIDED that any such information may
be disclosed to a party's financial advisors, accountants, counsel and other
representatives, as may be appropriate or required in connection with the
transactions contemplated hereby, but only if such persons shall be specifically
informed by such party of the confidential nature of such information and agree
to comply with the restrictions contained herein. The agreements contained in
this Section 4.03(e) do not apply to information that (i) is or becomes
generally available to the public other than as a result of a disclosure by a
receiving party or its representatives, (ii) can be demonstrated to have been
known to the receiving party on a non-confidential basis prior to its receipt,
(iii) becomes available to a party on a non-confidential basis from a source not
bound by any duty of confidentiality to the other party or (iv) is independently
developed by a receiving party without reference to any confidential
information.
If any party or any of its respective representatives becomes
required by law (by deposition, interrogatory, request for documents, subpoena,
civil investigative demand, or similar process) or otherwise become required to
disclose any confidential information or material the recipient party will
provide the disclosing party with prompt prior written notice of such
requirement so that the disclosing party may seek a protective order or other
remedy, or waive compliance with the terms of this Agreement. If such protective
order or other remedy is not obtained, or if the disclosing party is required to
waive compliance with the provisions hereof, the recipient party will furnish
only that portion of the confidential information or material which it
reasonably believes after consultation with counsel, is required.
(f) No investigation pursuant to this Section 4.03 shall
affect, add to, or subtract from any representations or warranties of the
parties hereto or the conditions to the obligations of the parties hereto to
effect the Merger.
SECTION 4.04 FURTHER ASSURANCES. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its best efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the Merger and all other transactions contemplated by
this Agreement, including, without limitation, using all reasonable efforts to
obtain all necessary waivers, consents and approvals and to effect all necessary
registrations and filings and to cause the conditions to Closing set forth in
Article V hereof to be promptly fulfilled; PROVIDED, that the foregoing shall
not require Parent to agree to make, or to require or permit BlueGill to make,
any divestiture of a significant asset in order to obtain any waiver, consent or
approval.
SECTION 4.05 INQUIRIES AND NEGOTIATIONS. Neither BlueGill nor any of
its affiliates, directors, officers or employees shall, directly or indirectly,
encourage, solicit or initiate any
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discussions, submissions of proposals or offers or negotiations with, or,
subject to the fiduciary obligations of the Board of Directors of BlueGill under
applicable law as advised by counsel, participate in any negotiations or
discussions with, or provide any information or data of any nature whatsoever
to, or otherwise cooperate in any other way with, or assist or participate in,
facilitate or encourage any effort or attempt by, any person, other than Parent
and its affiliates, representatives and agents, concerning any merger,
consolidation, sale of substantial assets, sale of shares of capital stock or
other equity securities (except as permitted in accordance with Section 4.01),
recapitalization, debt restructuring or similar transaction involving BlueGill,
or any division of BlueGill (such transactions being hereinafter referred to as
"ALTERNATIVE TRANSACTIONS"). BlueGill shall immediately notify Parent if any
proposal, offer, inquiry or other contact is received by, any information is
requested from, or any discussions or negotiations are sought to be initiated or
continued with BlueGill in respect of an Alternative Transaction and shall, in
any such notice to Parent, indicate the identity of the offeror and the terms
and conditions of any proposals or offers or the nature of any inquiries or
contacts, and thereafter shall keep Parent informed of the status and terms of
any such proposals or offers and the status of any such discussions or
negotiations. BlueGill shall not release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which BlueGill is a
party, except to the extent required by provisions thereof.
SECTION 4.06 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) BlueGill and, from and after the Effective Time, the
Surviving Corporation, shall indemnify, defend and hold harmless the present and
former officers, directors, employees and agents of BlueGill and its
Subsidiaries (the "INDEMNIFIED PARTIES") against all judgments, fines, losses,
claims, damages, costs or expenses (including reasonable attorneys' fees) or
liabilities ("Indemnified Liabilities") arising out of or related to matters,
actions or omissions or alleged actions or omissions occurring at or prior to
the Effective Time whether asserted or claimed prior to or after the Effective
Time (i) to the full extent permitted by Delaware law or, if the protections
afforded thereby to an Indemnified Person are greater, (ii) to the same extent
and on the same terms and conditions (including with respect to advancement of
expenses) provided for in BlueGill's Certificate of Incorporation, as amended,
and Bylaws and agreements in effect at the date hereof (to the extent consistent
with applicable law), which provisions will survive the Merger and continue in
full force and effect after the Effective Time. Without limiting the generality
of the foregoing, (i) Parent shall, and shall cause the Surviving Corporation
to, periodically advance expenses (including attorney's fees) as incurred by an
Indemnified Person with respect to the foregoing to the full extent permitted
under applicable law, and (ii) any determination required to be made with
respect to whether an Indemnified Party shall be entitled to indemnification
shall, if requested by such Indemnified Party, be made by independent legal
counsel selected by the Surviving Corporation and reasonably satisfactory to
such Indemnified Party.
(b) Parent agrees that BlueGill, and, from and after the
Effective Time, the Surviving Corporation, shall cause to be maintained in
effect for not less than six years from the Effective Time the current policies
of the directors' and officers' liability insurance maintained by BlueGill, if
any; provided that the Surviving Corporation may substitute therefor other
policies of at least the same coverage amounts and which contain terms and
conditions not less
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advantageous to the beneficiaries of the current policies and, provided further,
that such substitution shall not result in any gaps or lapses in coverage with
respect to matters occurring on or prior to the Effective Time; and provided
further, that the Surviving Corporation shall not be required to pay an annual
premium in excess of 200% of the last annual premium paid by BlueGill prior to
the date hereof and if the Surviving Corporation is unable to obtain the
insurance required by this Section 4.06(b) it shall obtain as much comparable
insurance as possible for an annual premium equal to such maximum amount.
(c) This Section 4.06 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit BlueGill, the Surviving
Corporation and the Indemnified Parties, shall be binding on all successors and
assigns of Parent and the Surviving Corporation, and shall be enforceable by the
Indemnified Parties.
SECTION 4.07 NOTIFICATION OF CERTAIN MATTERS. BlueGill shall give
prompt notice to Parent and Acquisition, and Parent and Acquisition shall give
prompt notice to BlueGill, of (i) the occurrence, or failure to occur, of any
event that such party believes would cause any of its representations or
warranties contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time and (ii)
any failure of BlueGill, Parent or Acquisition, as the case may be, or any
officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; PROVIDED, HOWEVER, that failure to give such notice shall not
constitute a waiver of any defense that may be validly asserted.
SECTION 4.08 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Effective
Time, BlueGill shall deliver to Parent a list identifying all persons who would,
in its opinion, be deemed to be "affiliates" of BlueGill for purposes of Rule
145 under the Securities Act (the "AFFILIATES"). BlueGill shall use its best
efforts to cause each person who is identified as an Affiliate to deliver to
Parent on or prior to the Effective Time a written agreement, in such form as
may be agreed to by the parties, that he will not offer to sell, sell or
otherwise dispose of any of the shares of Parent Common Stock issued to him in
connection with the Merger, except pursuant to an effective registration
statement or in compliance with Rule 145 or pursuant to an exemption from the
registration requirements of the Securities Act. Parent shall be entitled to
place appropriate legends on the certificates evidencing the Parent Common Stock
to be received by Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stock transfer instructions to the transfer agent for Parent
Common Stock, to the effect that the shares received or to be received by such
Affiliate pursuant to this Agreement may only be sold, transferred or otherwise
conveyed, and the holder thereof may only reduce his interest in or risks
relating to such shares, pursuant to an effective registration statement under
the Securities Act or in accordance with the provisions of paragraph (d) of Rule
145 or pursuant to an exemption from registration provided under the Securities
Act. The foregoing restrictions on the transferability of Parent Common Stock
shall apply to all purported sales, transfers and other conveyances of the
shares received or to be received by such Affiliate pursuant to this Agreement
and to all purported reductions in the interest in or risks relating to such
shares, whether or not such Affiliate has exchanged the certificates previously
evidencing shares of BlueGill's capital stock, into which such shares were
converted.
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SECTION 4.09 CONVERSION OF WARRANTS AND STOCK OPTIONS. At the Effective
Time, all outstanding BlueGill Options and Warrants will be assumed by Parent.
Each of the BlueGill Options and Warrants so assumed by Parent under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable warrant or option agreement immediately
prior to the Effective Time (including, without limitation, any repurchase
rights or vesting provisions), except that (i) the BlueGill Options and Warrants
will be exercisable (or will become exercisable in accordance with its terms)
for that number of whole shares of Parent Common Stock equal to the product of
the number of shares of BlueGill Common Stock that were issuable upon exercise
of such BlueGill Options and Warrants immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded to the nearest whole number of shares
of Parent Common Stock, and (ii) the per share exercise price for the share of
Parent Common Stock issuable upon exercise of such assumed BlueGill Options and
Warrants will be equal to the quotient determined by dividing the exercise price
per share of BlueGill Common Stock at which such BlueGill Options and Warrants
were exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded to the nearest whole cent. On the Closing Date, Parent will have in
effect a Form S-8 registration statement covering all Parent Common Stock
issuable upon exercise of the BlueGill Options. At the Effective Time, Parent
shall have reserved from its authorized but unissued Common Stock a sufficient
number of shares of Parent Common Stock to permit exercise in full of the
warrants to be issued by Parent in exchange for BlueGill Warrants.
SECTION 4.10 PARENT INDEMNITY. Subject to the applicable provisions of
Section 7.05, Parent agrees to defend, indemnify and hold BlueGill and the
BlueGill Securityholders harmless from and against:
(a) any and all Losses (as defined in Section 7.01) arising in
any manner out of any failure of Parent (and any failure of BlueGill after the
Effective Time), to comply with or perform any contractual or other obligation
to which BlueGill is now, or hereafter becomes, bound or obligated, or arising
from any misrepresentation or inaccuracy in any representation or warranty made
herein by or obligation hereunder of Parent or Acquisition; and
(b) any Taxes payable by BlueGill or the BlueGill
Securityholders as a result of any misrepresentation by Parent under Section
3.02(n) or the Parent Tax Representation Certificate.
SECTION 4.11 BRING-DOWN OF REPRESENTATIONS AND WARRANTIES.
(a) On the Closing Date, BlueGill shall prepare and deliver to
Parent a revised version of the BlueGill Disclosure Letter, updated to reflect
facts as of the Closing Date (the "CLOSING BLUEGILL DISCLOSURE LETTER"),
together with a certificate signed by the President and Chief Financial Officer
of BlueGill, dated as of the Effective Time, to the effect that the
representations and warranties made by BlueGill in Section 3.01 (as qualified by
the Closing BlueGill Disclosure Letter), are not, as of the Closing Date,
incorrect, untrue or false in any respect (as though made on and as of the
Closing Date, except for those representations and warranties which address
matters only as of a particular date, which representations shall not be
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incorrect, untrue or false in any respect as of such particular date) that
constitute a BlueGill Material Adverse Effect as of the Closing Date.
(b) The Closing BlueGill Disclosure Letter, the officers'
certificate referred to in the preceding sentence, and any failure of the
representations and warranties made by BlueGill in Section 3.01 to be true and
correct as of the Closing Date, shall not be taken into account for purposes of
determining whether the condition set forth in Section 5.03(b) has been
satisfied and shall not give rise to any right of termination under Section
6.01(e).
(c) The Closing BlueGill Disclosure Letter shall not be taken
into account for purposes of determining whether Parent has the right to
terminate this Agreement (i) by reason of any noncompliance by BlueGill with the
provisions of Section 4.01, or (ii) under Section 6.01(i).
SECTION 4.12 AGREEMENTS EXECUTED. Concurrently with their execution of
this Agreement, the applicable parties thereto shall execute and deliver to each
other a Stock Restriction Agreement, which is attached hereto as EXHIBIT C and
incorporated herein by reference.
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) this Agreement and the Merger shall have been approved
and adopted by the requisite action of the BlueGill Shareholders;
(b) subject to Section 8.14, this Agreement and the Merger
shall have been approved and adopted by the requisite action of Parent's
stockholders;
(c) the expiration or earlier termination of any waiting
period under the HSR Act shall have occurred;
(d) no preliminary, temporary or permanent injunction or other
order, decree or ruling issued by any court of competent jurisdiction nor any
statute, rule, regulation or order entered, promulgated or enacted by any
governmental, regulatory or administrative agency or authority shall be in
effect that would prevent the consummation of the Merger as contemplated hereby;
and
(e) the Registration Statement shall have been declared
effective and no stop order with respect thereto shall be in effect at the
Effective Time.
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SECTION 5.02 CONDITIONS TO THE OBLIGATION OF BLUEGILL TO EFFECT THE
MERGER. The obligation of BlueGill to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Parent and Acquisition shall have performed and complied
in all material respects with all their obligations, covenants, and agreements
required to be performed and complied with by them under this Agreement at or
prior to the Effective Time;
(b) the representations and warranties made by Parent and
Acquisition in Sections 3.02 and 3.03 hereof (as qualified by the Parent
Disclosure Letter), shall not as of the Effective Date have been, and shall not
as of the Closing Date be, incorrect, untrue or false in any respect (as though
made on and as of Effective Date and the Closing Date, respectively, except for
those representations and warranties which address matters only as of a
particular date, which representations shall not be incorrect, untrue or false
in any respect as of such particular date) that constituted a Parent Material
Adverse Effect as of either such date;
(c) BlueGill shall have received a certificate from the
President and Chief Financial Officer of Parent and Acquisition, dated as of the
Effective Time, to the effect that the conditions set forth in paragraphs (a)
and (b) above have been satisfied;
(d) the shares of Parent Common Stock to be issued in the
Merger shall have been approved for listing on the Nasdaq NM, subject to
official notice of issuance;
(e) Parent shall have executed and delivered to the BlueGill
Securityholders the Parent Tax Representation Certificate in compliance with
Section 2.08;
(f) BlueGill shall have received the consents described
in Schedule 3.01(f);
(g) the execution and delivery by Parent of the Escrow
Agreement; and
(h) the receipt of an opinion from BlueGill's outside Canadian
counsel, in form and substance satisfactory to BlueGill, to the effect that the
Merger will not give rise to any requirement for any BlueGill Securityholder to
pay tax under Canadian federal, provincial or local law.
SECTION 5.03 CONDITIONS TO THE OBLIGATION OF PARENT AND ACQUISITION TO
EFFECT THE MERGER. The obligation of Parent and Acquisition to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of the
following additional conditions:
(a) BlueGill shall have performed and complied in all material
respects with all their obligations, covenants, and agreements required to be
performed and complied with by them under this Agreement at or prior to the
Effective Time;
(b) The representations and warranties made by BlueGill in
Section 3.01 (as qualified by the BlueGill Disclosure Letter), shall not as of
the Effective Date (subject to Section 7.07) be incorrect, untrue or false in
any respect (except for those representations and warranties
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which address matters only as of a particular date, which representations shall
not be incorrect, untrue or false in any respect as of such particular date)
that constitute a BlueGill Material Adverse Effect as of the Effective Date;
(c) Parent shall have received a certificate from the
President and Chief Financial Officer of BlueGill, dated as of the Effective
Time, to the effect that the conditions set forth in paragraphs (a) and (b)
above have been satisfied;
(d) Holders of not more than 10% of the outstanding capital
stock of BlueGill shall have notified BlueGill, in accordance with procedures
set forth in Section 262 of the Delaware GCL, of their intention to assert
appraisal rights pursuant to such section; and
ARTICLE VI
TERMINATION AND ABANDONMENT
SECTION 6.01 TERMINATION AND ABANDONMENT. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval by the stockholders of Parent and
BlueGill:
(a) by mutual written consent approved by the respective
Boards of Directors of Parent and BlueGill;
(b) by BlueGill if the conditions set forth in Section 5.01 or
Section 5.02 shall not have been satisfied, waived or performed and such
nonsatisfaction or nonperformance shall not have been cured or eliminated (or by
its nature cannot be cured or eliminated), by Parent and Acquisition on or
before April 30, 2000; provided, however, that BlueGill may not terminate this
Agreement pursuant to this Section 6.1(b) if it shall have materially breached
this Agreement; or
(c) by BlueGill, if Parent's Board of Directors fails to
recommend approval of this Agreement or the Merger to Parent's stockholders or
recommends against approval of this Agreement or the Merger to Parent's
stockholders, subject to Section 8.14; or
(d) by Parent or Acquisition, if the conditions set forth in
Section 5.01 or Section 5.03 shall not have been satisfied, waived or performed
and such nonsatisfaction or nonperformance shall not have been cured or
eliminated (or by its nature cannot be cured or eliminated), by BlueGill on or
before April 30, 2000; provided, however, that neither Parent nor Acquisition
may terminate this Agreement pursuant to this Section 6.1(d) if such party shall
have materially breached this Agreement; or
(e) by Parent, if the representations and warranties made by
BlueGill in Section 3.01 hereof (as qualified by the BlueGill Disclosure
Letter), shall, as of the Effective Date (subject to Section 7.07), have been
incorrect, untrue or false in any respect that failed to correctly state facts
in existence on the Effective Date that constituted a BlueGill Material Adverse
Effect on the Effective Date; or
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(f) by BlueGill, if the representations and warranties made by
Parent and/or Acquisition in Sections 3.02 and 3.03 hereof (as qualified by the
Parent Disclosure Letter), shall, as of the Effective Date, have been incorrect,
untrue or false in any respect that failed to correctly state facts in existence
on the Effective Date that constituted a Parent Material Adverse Effect on the
Effective Date.
(g) by Parent by written notice hand-delivered or telecopied
to BlueGill by no later than 6:00 p.m. Eastern Time on the business day
immediately preceding the Closing Date, in the event that the Parent Average
Closing Price is less than $50.00, provided that Parent pays to BlueGill the
Termination Fee pursuant to Section 6.02(a); provided, that notwithstanding the
foregoing, BlueGill may, by providing a written notice ("REINSTATEMENT NOTICE")
to Parent no later than 11:59 p.m. on same day, reinstate this Agreement, with
the same effect as if Parent had not exercised its termination right under this
paragraph, in which event the Exchange Ratio will be equal to the Reduced Ratio.
(h) by BlueGill in the event the Registration Statement is not
filed with the SEC on or before the Filing Deadline (as defined below), provided
that Parent pays to BlueGill the Termination Fee pursuant to Section 6.02(a).
For purposes of this Agreement, the term "FILING DEADLINE" shall be 60 days
after the Effective Date, unless (i) the SEC has provided, or has indicated that
it will provide, comments on the Proxy Statement/Prospectus, and those comments
are not yet cleared with the SEC, (ii) BlueGill has failed to provide all
information and financial statements reasonably required in order for the S-4 to
be filed, or (iii) no preliminary, temporary or permanent injunction or other
order, decree or ruling issued by any court of competent jurisdiction prohibits
the filing of the S-4 (each event described in clauses (i), (ii) and (iii) being
hereinafter referred to as a "Delay Event"), in which event the Filing Deadline
shall be the later of (1) two business days after such Delay Event no longer
exists, or (2) 60 days after the Effective Date.
(i) by Parent, if a BlueGill Action results in a BlueGill
Material Adverse Effect in accordance with the terms set forth in Section
4.01(i).
SECTION 6.02 EFFECT OF TERMINATION. In the event of the termination of
this Agreement and the abandonment of the Merger pursuant to Section 6.01, this
Agreement shall thereafter become void and have no effect, and no party hereto
shall have any liability to any other party hereto or its stockholders or
directors or officers on account of such termination, and each party shall be
responsible for its own expenses, except as follows:
(a) PARENT PAYMENTS. In the event of termination pursuant to
Section 6.01(g) or (h), Parent shall pay to BlueGill a termination fee of
$7,500,000 within two business days of termination;
(b) BLUEGILL PAYMENTS. BlueGill shall pay to Parent a
termination fee of $7,500,000 within two business day following demand by
Parent, if this Agreement is terminated by Parent pursuant to Section 6.01(d) or
by BlueGill pursuant to Section 6.01(b), in either case because of the failure
of the condition set forth in Section 5.01(a) to have been satisfied.
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Furthermore, BlueGill shall pay to Parent an additional termination fee of
$17,500,000 within two business day following demand by Parent if a termination
of this Agreement described in the preceding sentence occurs and both of the
following events occur: (i) following the date hereof and prior to the
termination of this Agreement, a third party has announced, or negotiations have
commenced with BlueGill concerning, a Superior Acquisition Proposal (as defined
below); and (ii) within 12 months following the termination of this Agreement a
Superior Acquisition Proposal a definitive agreement for such Superior
Acquisition Proposal is entered into. For purposes of this Agreement, "Superior
Acquisition Proposal" shall mean an underwritten initial public offering
registered under the Securities Act or any offer or proposal (other than an
offer or proposal by Parent) relating to any transaction or series of related
transactions other than the transactions contemplated by this Agreement
involving: (A) any acquisition or purchase from BlueGill by any person or
"group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of more than a 25% interest in the total outstanding
voting securities of BlueGill or any merger or consolidation involving BlueGill
pursuant to which the BlueGill Securityholders immediately preceding such
transaction hold less than 75% of the equity interests in the surviving or
resulting entity of such transaction; or (B) any sale or other disposition of
more than 50% of the assets of BlueGill, in each case that is more favorable to
the BlueGill Shareholders from a financial point of view than the terms of the
Merger.
(c) SURVIVAL. The obligations imposed by Sections 4.03(d) and
4.03(e) hereof shall survive the termination of this Agreement; and
(d) WILLFUL BREACH. Nothing herein shall relieve any party
from liability for any willful breach hereof.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 INDEMNIFICATION BY BLUEGILL. Subject to the terms,
conditions, and limitations set forth herein, if the Merger is consummated,
Parent shall be entitled to be indemnified out of the Escrow Shares (except as
otherwise provided in Section 7.05(b)) against any and all actions, suits,
losses, costs, claims, damages and expenses (including reasonable attorneys'
fees) (the "LOSSES"), incurred or suffered by it relating to or arising out of
or in connection with any material breach of, or any material misrepresentation
or inaccuracy in, any representation or warranty made by BlueGill in Section
3.01 of this Agreement (as qualified by the Closing BlueGill Disclosure Letter)
where such material breach or material misrepresentation or inaccuracy existed
as of the Closing Date; PROVIDED, HOWEVER, that the amount of Losses recoverable
under the indemnity provisions of this Article shall be reduced,
dollar-for-dollar, by the amount of any insurance proceeds paid to Parent or
BlueGill or the Surviving Corporation and by the amount of tax benefits realized
by Parent or BlueGill or Surviving Corporation in respect of such Losses. Except
as otherwise provided in Section 7.05(b), the BlueGill Shareholders shall have
no liability to Parent or Acquisition pursuant to this Agreement other than
solely by means of recourse to the Escrow Shares.
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SECTION 7.02 CLAIMS. Subject to Section 7.03, claims against the Escrow
Shares shall be governed by the Escrow Agreement.
SECTION 7.03 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. Parent shall
give written notice as promptly as is reasonably practicable to the
Shareholders' Agent of the assertion of any claim, or the commencement of any
suit, action or proceeding, by any person or entity not a party hereto in
respect of which indemnity may be sought under Article VII of this Agreement
("THIRD PARTY CLAIM"); PROVIDED that the failure of Parent to promptly give such
notice shall not limit Parent's ability to pursue its indemnification claim
against the Escrow Shares, except to the extent (if any) that BlueGill
Shareholders shall have been prejudiced thereby. If Parent does not promptly
elect to defend or contest the Third Party Claim, then, at their sole option (i)
the Shareholders' Agent shall be free to assume and control the prosecution or
defense of any such Third Party Claim in a reasonable manner, (ii) may take all
reasonably necessary steps to contest the Third Party Claim or to prosecute such
Third Party Claim to conclusion or settlement satisfactory to the Shareholders'
Agent, (iii) shall notify Parent of the progress of any such Third Party Claim,
(iv) shall permit Parent, at the sole cost of such Parent, to participate in
such prosecution or defense, and (v) shall provide Parent with reasonable access
to all relevant information and documentation relating to the Third Party Claim
and the Shareholders' Agent's prosecution or defense thereof. In any case, the
party not in control of the defense or prosecution of the Third Party Claim
shall cooperate with the other party in the conduct of the prosecution or
defense of such Third Party Claim. If, however, Parent reasonably determines in
its judgment that representation by counsel of both and Parent would present
such counsel with a conflict of interest, then Parent may employ separate
counsel to represent or defend it in any such claim, action, suit or proceeding
and shall pay the fees and disbursements of such separate counsel. Whether or
not chooses to defend or prosecute any such claim, suit, action or proceeding,
all of the parties hereto shall cooperate in the defense or prosecution thereof.
SECTION 7.04 SETTLEMENT OR COMPROMISE. Neither Parent and Acquisition,
on the one hand, nor the Shareholders' Agent, on the other hand, shall
compromise or settle any Third Party Claim without the prior written consent of
the Shareholders' Agent (if Parent controls and defends such Third Party Claim)
or Parent (if the Shareholders' Agent controls and defends such Third Party
Claim), such consent not to be unreasonably withheld (provided, that, in the
case of Parent, such consent shall be deemed to be unreasonably withheld if
Parent will, as part of the terms of such compromise or settlement, be fully
released of liability arising from such Third Party Claim). The person
controlling the defense of such Third Party Claim will give the other person at
least 20 days' notice of any proposed settlement or compromise of any Third
Party Claim for which it is controlling the defense.
SECTION 7.05. LIMITATIONS ON INDEMNIFICATION.
(a) BASKET.
(i) Any indemnification pursuant to Section 7.01 of
this Agreement shall be subject to the requirement that no claim may be made
until the aggregate amount of Losses (other than Capitalization Losses, as
defined in Section 7.07) subject to indemnification
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thereunder exceeds $1,000,000, after which time claims for indemnification may
be made to the extent and only to the extent that the aggregate amount of all
such Losses (other than Capitalization Losses) exceeds $1,000,000, subject to
the terms, conditions and limitations set forth herein.
(ii) Any indemnification pursuant to Section 4.10(a)
of this Agreement shall be subject to the requirement that no claim may be made
until the aggregate amount of Losses subject to indemnification thereunder
exceeds $1,000,000, after which time claims for indemnification may be made to
the extent and only to the extent that the aggregate amount of all such Losses
exceeds $1,000,000, subject to the terms, conditions and limitations set forth
herein.
(b) MAXIMUM LIABILITY.
(i) Except as set forth in paragraph (ii) below, the
total and maximum aggregate lifetime liability under this Article VII shall be
limited to and shall not exceed the Escrow Shares.
(ii) The extent that any Losses are determined
by the final and non-appealable order of a court of competent jurisdiction to be
have resulted primarily from the intentional misrepresentation or fraud of any
BlueGill Shareholder who is an officer or employee of BlueGill, the liability of
such BlueGill Shareholder shall not be limited to such BlueGill Shareholder's
pro rata share of the Escrow Shares but shall, except as otherwise provided in
Section 7.06, be limited to the (i) the fair market value of the Parent Common
Stock into which the capital stock of BlueGill held by such shareholder was
converted in the Merger, and (ii) the intrinsic value of the BlueGill stock
options held by such shareholder at the Effective Time.
(c) DEADLINE FOR INDEMNITY CLAIMS.
(i) Parent may not assert a claim for indemnification
hereunder unless Parent notifies the Shareholders' Agent in accordance with this
Article VII of a claim for indemnification hereunder no later than the Escrow
Release Date (without regard to whether the Escrow Shares are actually released
from escrow on such date).
(ii) The BlueGill Securityholders may not assert a
claim for indemnification hereunder unless a BlueGill Securityholder notifies
Parent of a claim for indemnification hereunder no later than the Escrow Release
Date (without regard to whether the Escrow Shares are actually released from
escrow on such date).
SECTION 7.06. REMEDIES FOR FRAUD. Nothing in this Agreement is intended
to limit any person's rights under common law arising out of any intentional
misrepresentation or fraud. None of the limitations set forth in Section 7.05
shall apply with respect to a claim brought under this Section 7.06.
SECTION 7.07 CHANGES IN CAPITALIZATION. Any inaccuracy in Schedule
3.01(c)(iii) shall not be taken into account for purposes of determining whether
the condition set forth in Section 5.03(b) has been satisfied and shall not give
rise to any right of termination under Section
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6.01(e). Further, any indemnification claim by Parent for Losses arising out of
any such inaccuracy ("CAPITALIZATION LOSSES") shall be subject to
indemnification from the first dollar of such Capitalization Losses and shall
not be subject to the limitations set forth in Section 7.05(a)(i).
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as
otherwise specified, the representations and warranties of and BlueGill
contained herein shall survive the Closing for a period expiring at the close of
business on the first (1st) anniversary of the Effective.
SECTION 8.02 INTERPRETATION OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty made in this Agreement or pursuant hereto is
independent of all other representations and warranties made by the same
parties, whether or not covering related or similar matters, and must be
independently and separately satisfied; however, exceptions or qualifications to
any such representation or warranty shall qualify, and shall be exceptions to,
any other representation or warranty.
SECTION 8.03 RELIANCE.
(a) Notwithstanding the right of Parent and Acquisition to
investigate the business, assets, and financial condition of BlueGill, and
notwithstanding any knowledge determinable by Parent or Acquisition as a result
of such investigation, Parent and Acquisition have the unqualified right to rely
upon, and have relied upon, each of the representations and warranties made by
BlueGill in this Agreement or pursuant hereto, as qualified by the BlueGill
Disclosure Letter and the Closing BlueGill Disclosure Letter, except to the
extent that Parent or Acquisition had actual knowledge to the contrary at the
Effective Date.
(b) Notwithstanding the right of BlueGill and the BlueGill
Securityholders to investigate the business, assets, and financial condition of
Parent and Acquisition, and notwithstanding any knowledge determinable by
BlueGill and the BlueGill Securityholders as a result of such investigation,
BlueGill and the BlueGill Securityholders have the unqualified right to rely
upon, and have relied upon, each of the representations and warranties made by
Parent and Acquisition in this Agreement or pursuant hereto (including pursuant
to the Parent Tax Representation Certificate), as qualified by the Parent
Disclosure Letter, except to the extent that BlueGill or any BlueGill
Securityholder had actual knowledge to the contrary at the Effective Date.
SECTION 8.04 EXPENSES, ETC. If the transactions contemplated by this
Agreement are not consummated, neither BlueGill, on the one hand, nor Parent and
Acquisition, on the other hand, shall have any obligation to pay any of the fees
and expenses of the other incident to the negotiation, preparation and execution
of this Agreement, including the fees and expenses of
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counsel, accountants, investment bankers and other experts and Parent shall pay
all such fees and expenses incurred by Acquisition. In the event the Merger is
consummated, the Surviving Corporation shall, by operation of law, assume the
obligation to pay all such fees and expenses of BlueGill. BlueGill represents
that, in connection with the transactions contemplated by this Agreement,
BlueGill has committed to pay only the fees and expenses to the service
providers set forth on SCHEDULE 8.04 hereto, limited to the extent indicated on
such Schedule.
SECTION 8.05 PUBLICITY; CONFIDENTIALITY. BlueGill and Parent, on behalf
of themselves and their respective officers, directors, shareholder,
representatives, and other affiliates, agree that this Agreement and the
exchange of information pursuant thereto is confidential and they will not
disclose or issue any press release or make any other public announcement
concerning this Agreement or the transactions contemplated hereby without the
prior consent of the other party, which will not be unreasonably withheld,
except that BlueGill or Parent may make such public disclosure that it believes
in good faith to be required by law or any applicable rules and regulations of a
national securities exchange or the NASD (in which event such party shall
consult with the other prior to making such disclosure).
SECTION 8.06 EXECUTION IN COUNTERPARTS. For the convenience of the
parties, this Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
SECTION 8.07 NOTICES. All notices that are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered by hand or national
overnight courier service, mailed by registered or certified mail, postage
prepaid, or sent via telecopier, and shall be deemed given upon receipt. Other
forms of notice shall be effective only if and when acknowledged by the
recipient by other than automatic means. Notice shall be directed as follows:
If to Parent to:
CheckFree Holdings Corporation
4411 East Jones Bridge Road
Norcross, Georgia 30092
Telecopy number: (678)-375-3010
Attention: Peter J. Kight
Chairman
with copies to:
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CheckFree Holdings Corporation
4411 East Jones Bridge Road
Norcross, Georgia 30092
Telecopy number: (678)-375-3235
Attention: Allen L. Shulman
General Counsel
and
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215
Telecopy Number: (614)-227-2100
Attention: Curtis A. Loveland, Esq.
If to BlueGill, to:
935 Technology Drive
Ann Arbor, MI 48108
Telecopy Number: (734)-205-4211
Attention: Vinay Gupta and Scott Bloom, Esq.
with copies to:
Pepper Hamilton LLP
100 Renaissance Center, Suite 3600
Detroit, MI 48243
Telecopy Number: (313)-259-7426
Attention: Hugh D. Camitta
or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto.
SECTION 8.08 WAIVERS. BlueGill, on the one hand, and Parent and
Acquisition, on the other hand, may, by written notice to the other, (i) extend
the time for the performance of any of the obligations or other actions of the
other under this Agreement; (ii) waive any inaccuracies in the representations
or warranties of the other contained in this Agreement or in any document
delivered pursuant to this Agreement; (iii) waive compliance with any of the
conditions of the other contained in this Agreement; or (iv) waive performance
of any of the obligations of the other under this Agreement. Except as provided
in the preceding sentence, no action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
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SECTION 8.09 AMENDMENTS, SUPPLEMENTS, ETC. At any time, this Agreement
may be amended or supplemented by such additional agreements, articles or
certificates, as may be determined by the parties hereto to be necessary,
desirable or expedient to further the purposes of this Agreement, or to clarify
the intention of the parties hereto, or to add to or modify the covenants, terms
or conditions hereof or to effect or facilitate any governmental approval or
acceptance of this Agreement or to effect or facilitate the filing or recording
of this Agreement or the consummation of any of the transactions contemplated
hereby. Any such instrument must be in writing and signed by all of the parties
hereto.
SECTION 8.10 ENTIRE AGREEMENT. This Agreement and its schedules,
exhibits and Disclosure Letters, and the documents to be executed or delivered
at the Effective Time in connection herewith, constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and supersede
all prior agreements and understandings, oral and written, among the parties
hereto with respect to the subject matter hereof. No representation, warranty,
promise, inducement or statement of intention has been made by any party that is
not embodied in this Agreement or such other documents, and none of the parties
shall be bound by, or be liable for, any alleged representation, warranty,
promise, inducement or statement of intention not embodied herein or therein.
SECTION 8.11 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflict of laws principles.
SECTION 8.12 BINDING EFFECT, BENEFITS. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except for the BlueGill
Securityholders and the Shareholders' Agent, who are express third party
beneficiaries under this Agreement.
SECTION 8.13 ASSIGNABILITY. Neither this Agreement nor any of the
parties' rights hereunder shall be assignable by any party hereto without the
prior written consent of the other parties hereto.
SECTION 8.14 PARENT STOCKHOLDER APPROVAL. In the event that either (i)
Parent determines that approval of the Merger by its stockholders is not
required in accordance with the applicable listing requirements of Nasdaq NM, or
(ii) BlueGill notifies Parent that no Parent stockholder approval of the Merger
shall be sought, then Parent shall not send the Proxy Statement/Prospectus to
its stockholders and shall not seek approval and adoption of this Agreement ,
and the Merger by Parent's stockholders and the Proxy Statement/Prospectus shall
be revised so as not to constitute a joint proxy statement and not to
contemplate a Parent stockholders meeting.
SECTION 8.15 KNOWLEDGE QUALIFICATION. Whenever a representation or
warranty contained herein is based on the knowledge of BlueGill, such
representation and warranty is made based on the actual knowledge of the
individuals listed on Schedule 8.15 and on the
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knowledge that the individuals listed on Schedule 8.15 would have if they had
conducted a diligent inquiry into the subject matter of the representation or
warranty with appropriate BlueGill personnel.
SECTION 8.16 SEVERABILITY. Any term or provision of this Agreement that
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
SECTION 8.17 VARIATION AND AMENDMENT. This Agreement may be varied or
amended at any time before or after the approval and adoption of this Agreement
by the stockholders of Parent and BlueGill by action of the respective Boards of
Directors of Acquisition, BlueGill, Parent, and Acquisition, without action by
the stockholders thereof.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
CHECKFREE HOLDINGS CORPORATION
By: /s/ Peter F. Sinisqalli
------------------------------------
Its: President and COO
-----------------------------------
CHECKFREE ACQUISITION CORPORATION IV
By: /s/ Peter F. Sinisqalli
------------------------------------
Its: President
-----------------------------------
BLUEGILL TECHNOLOGIES, INC.
By: /s/ Hal Davis
------------------------------------
Its: President and CEO
-----------------------------------
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Exhibit B
ESCROW AGREEMENT
This Escrow Agreement ("Agreement") is made and entered into as of
_______________, 2000 by and among CHECKFREE HOLDINGS CORPORATION, a Delaware
corporation ("Parent"), the shareholders of BLUEGILL TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), identified on EXHIBIT A hereto (the
"BlueGill Shareholders"), Shareholders' Agent as defined below, and FIFTH THIRD
BANK, a state banking association (the "Escrow Agent").
RECITALS
--------
A. Parent, CheckFree Acquisition Corporation IV, a Delaware corporation
and a wholly-owned subsidiary of Parent ("Merger Sub"), and the Company have
entered into an Agreement and Plan of Merger dated as of December 20, 1999 (the
"Merger Agreement"), pursuant to which Merger Sub will merge with and into the
Company and the BlueGill Shareholders will have the right to receive shares of
common stock of Parent.
B. The Merger Agreement contemplates the establishment of an escrow
arrangement to secure the indemnification and other obligations of the BlueGill
Shareholders under the Merger Agreement.
AGREEMENT
---------
The parties, intending to be legally bound, agree as follows:
1. DEFINED TERMS. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given to them in the Merger Agreement.
2. SHAREHOLDERS' AGENT.
(a) Upon the Effective Time and without further act of any BlueGill
Shareholder, Harold N. Davis, Robert D. Pavey, Mark Siegel, John McIlwraith and
Thomas C. Kinnear shall be the five members (collectively, the "Members" and
individually, a "Member") of an entity known as the Shareholders' Agent. All
decisions of the Shareholders' Agent shall require the vote of a majority of the
Members.
(b) Upon the Effective Time, and without further act of any BlueGill
Shareholder, the Shareholders' Agent shall be constituted and appointed as agent
and attorney-in-fact for each BlueGill Shareholder for and on behalf of each
such BlueGill Shareholder, to give and receive notices and communications, to
authorize delivery to Parent of Escrow Shares from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
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claims, and to take all actions necessary or appropriate in the judgment of the
Shareholders' Agent for the accomplishment of the foregoing, including but not
limited to hiring attorneys and other professionals and incurring expenses in
furtherance of the Shareholders' Agent's responsibilities. No bond shall be
required of the Shareholders' Agent or the Members, and neither the
Shareholders' Agent nor any Member shall receive any compensation for its
services, except as otherwise provided in this Agreement. Notices or
communications to or from the Shareholders' Agent shall constitute notice to or
from each of the BlueGill Shareholders.
(c) If any Member shall resign, die, become disabled or otherwise be
unable to fulfill his responsibilities as Member or otherwise, then the
remainder of the Members constituting the Shareholders' Agent shall, within
thirty days after such resignation, death, disability or inability, appoint a
successor Member and, promptly thereafter, shall notify Parent of the identity
of such successor. Any such successor shall become a "Member" for purposes of
this Agreement.
(d) Neither the Shareholders' Agent nor any Member shall be liable
for any act done or omitted hereunder as the Shareholders' Agent or Member while
acting in good faith and in the exercise of reasonable judgment. The BlueGill
Shareholders shall jointly and severally indemnify the Shareholders' Agent and
each Member and hold the Shareholders' Agent and each Member harmless against
any loss, liability or expense incurred without gross negligence or willful
misconduct on the part of the Shareholders' Agent or Member and arising out of
or in connection with the acceptance or administration of the Shareholders'
Agent's duties or Member's duties hereunder, including the reasonable fees and
expenses of any legal counsel or other professional retained by the
Shareholders' Agent or Member.
(e) Each BlueGill Shareholder hereby agrees to pay its pro rata
share (based upon its Percentage Interest in the Escrow Fund as set forth on
EXHIBIT B) of all costs and expenses, including those of any legal counsel or
other professional retained by the BlueGill Shareholders' Agent or Member, in
connection with the acceptance or administration of the Shareholders' Agent's or
Member's duties hereunder. Such expenses may be assessed as provided in Section
14.
3. ACTIONS OF THE SHAREHOLDERS' AGENT. A decision, act, consent or
instruction (each a "Decision") of the Shareholders' Agent shall constitute a
decision of all the BlueGill Shareholders, and shall be final, binding and
conclusive upon each of the BlueGill Shareholders, and the Escrow Agent and
Parent may rely upon any Decision of the Shareholders' Agent as being the
decision, act, consent or instruction of each and all of the BlueGill
Shareholders. Prior to effecting a Decision, the Shareholders' Agent shall not
be required to either consult with or seek the consent of any of the BlueGill
Shareholders to such Decision and such consent will be deemed to have been given
by all BlueGill Shareholders. Each Decision will be deemed to have been made and
ratified by all BlueGill Shareholders. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with a Decision of the Shareholders' Agent.
4. ESCROW AND INDEMNIFICATION.
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(a) SHARES AND STOCK POWERS PLACED IN ESCROW. At the Effective Time,
the date of which shall be set forth in a notice to the Escrow Agent, Parent
shall deliver to the Escrow Agent certificates for 10% of the shares of Parent
Common Stock issued to each of the BlueGill Shareholders in the Merger as set
forth on EXHIBIT B hereto, evidencing the shares of Parent Common Stock to be
held in escrow in accordance with this Agreement. The shares of Parent Common
Stock being held in escrow pursuant to this Agreement (the "Escrow Shares")
shall constitute an escrow fund (the "Escrow Fund") with respect to the
indemnification obligations of the BlueGill Shareholders under the Merger
Agreement. The Escrow Fund shall be held as a trust fund which is a grantor
trust under Section 671 et seq. of the Internal Revenue Code with the BlueGill
Shareholders as grantors, and it is the intention of Parent, the Company, the
BlueGill Shareholders and the Shareholders' Agent that the Escrow Fund shall not
be subject to any lien, attachment, trustee process or any other judicial
process of any creditor of any BlueGill Shareholder or of any party hereto. The
Escrow Agent agrees to accept delivery of the Escrow Fund and to hold the Escrow
Fund in an escrow account (the "Escrow Account"), subject to the terms and
conditions of this Agreement. Upon execution of this Agreement by the BlueGill
Shareholders, each such BlueGill Shareholder shall deliver to Parent five
original "assignments separate from certificate" ("Stock Powers") endorsed by
each such BlueGill Shareholder in blank with signature guaranteed by a
commercial bank or by a member firm of the New York Stock Exchange.
(b) VOTING OF ESCROW SHARES. The record owner of the Escrow Shares
shall be entitled to exercise all voting rights with respect to such Escrow
Shares.
(c) DISTRIBUTIONS. Parent and each of the BlueGill Shareholders
agree among themselves, for the benefit of Parent and the Escrow Agent, that any
cash, securities or other property distributable (whether by way of dividend,
stock split or otherwise) in respect of or in exchange for any Escrow Shares
shall not be distributed to the record owners of such Escrow Shares, but rather
shall be distributed to and held by the Escrow Agent in the Escrow Account.
Unless and until the Escrow Agent shall actually receive such cash, securities
or other property, it may assume without inquiry that the Escrow Shares
currently being held by it in the Escrow Account are all that the Escrow Agent
is required to hold. At the time any Escrow Shares are required to be released
from the Escrow Account to any Person pursuant to this Escrow Agreement, any
cash, securities or other property previously received by the Escrow Agent in
respect of or in exchange for such Escrow Shares shall be released from the
Escrow to such Person.
(d) TRANSFERABILITY. The interests of the BlueGill Shareholders in
the Escrow Account and in the Escrow Shares shall not be assignable or
transferable, other than by operation of law.
(e) FRACTIONAL SHARES. No fractional shares of Parent Common Stock
shall be retained in or released from the Escrow Account pursuant to this Escrow
Agreement. In connection with any release of Escrow Shares from the Escrow
Account, Parent and the Escrow Agent shall "round down" in order to avoid
retaining any fractional share in the Escrow Account
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and in order to avoid releasing any fractional share from the Escrow Account.
When shares are "rounded down", no cash-in-lieu payments need to be made.
5. ADMINISTRATION OF ESCROW ACCOUNT. Except as otherwise provided
herein, the Escrow Agent shall administer the Escrow Account as follows:
(a) As soon as is reasonably practicable after becoming aware of a
claim for indemnification under Article VII of the Merger Agreement, Parent
shall promptly give written notice (a "Claim Notice") to the Shareholders' Agent
and to the Escrow Agent on or prior to the Termination Date. Each Claim Notice
shall state that Parent believes in good faith and after investigation that
Parent is entitled to indemnification under Article VII of the Merger Agreement
and contain a brief description of the circumstances supporting Parent's belief
that Parent is so entitled to indemnification and shall, to the extent possible,
contain a non-binding, preliminary estimate of the amount of Damages Parent
claims to have so incurred or suffered and that are required to be indemnified
under Article VII of the Merger Agreement, giving effect to the limitations set
forth in Section 7.05 thereof (the "Claimed Amount").
(b) Within 20 business days after receipt by the Shareholders' Agent
of a Claim Notice, the Shareholders' Agent may deliver to the Parent and to the
Escrow Agent a written response (the "Response Notice") in which the
Shareholders' Agent: (i) agrees that a whole number of Escrow Shares having a
"Stipulated Value" (as defined below) equal to the full Claimed Amount may be
released from the Escrow Account to the Parent; (ii) agrees that Escrow Shares
having a Stipulated Value equal to part, but not all, of the Claimed Amount (the
"Agreed Amount") may be released from the Escrow Account to the Parent; or (iii)
indicates that no part of the Claimed Amount may be released from the Escrow
Account to the Parent. Any part of the Claimed Amount that is not to be released
to the Parent shall be the "Contested Amount." If a Response Notice is not
received by the Escrow Agent within such 20 business-day period, then the
Shareholders' Agent shall be deemed to have agreed that Escrow Shares having a
Stipulated Value equal to the full Claimed Amount may be released to the Parent
from the Escrow Account.
(c) If the Shareholders' Agent delivers a Response Notice agreeing
that Escrow Shares having a Stipulated Value equal to the full Claimed Amount
may be released from the Escrow Account to the Parent, or if the Shareholders'
Agent does not deliver a Response Notice in accordance with Section 3(b), the
Escrow Agent shall promptly following the receipt of the Response Notice (or, if
the Shareholders' Agent has not delivered a Response Notice prior to the
expiration of the 20 business-day period referred to in Section 3(b)), deliver
(or cause the stock transfer agent of the Escrow Shares to deliver) to Parent
such Escrow Shares.
(d) If the Shareholders' Agent delivers a Response Notice agreeing
that Escrow Shares having a Stipulated Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Parent, the Escrow
Agent shall promptly following the receipt of the Response Notice deliver (or
cause the stock transfer agent of the Escrow Shares to deliver) to Parent Escrow
Shares having a Stipulated Value equal to the Agreed Amount.
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(e) If the Shareholders' Agent delivers a Response Notice indicating
that there is a Contested Amount, the Shareholders' Agent and the Parent shall
attempt in good faith to resolve the dispute related to the Contested Amount. If
the Parent and the Shareholders' Agent shall resolve such dispute, such
resolution shall be binding on all BlueGill Shareholders and a settlement
agreement containing the terms and conditions of such resolution shall be signed
by the Parent and the Shareholders' Agent and sent to the Escrow Agent, who
shall, upon receipt thereof, release (or cause the stock transfer agent of the
Escrow Shares to release) Escrow Shares from the Escrow Account in accordance
with such agreement.
(f) If the Shareholders' Agent and the Parent are unable to resolve
the dispute relating to any Contested Amount within 30 business days after the
delivery of the Claim Notice, then the claim described in the Claim Notice shall
be settled by binding arbitration in Wilmington, Delaware in accordance with the
Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). Arbitration will be conducted by three
arbitrators; one selected by Parent, one selected by the Shareholders' Agent and
the third selected by the first two arbitrators. If either the Shareholders'
Agent or Parent fails to select an arbitrator prior to the expiration of the
30-business day period commencing on the expiration of the 30 business-day
period referred to in the first sentence of this Section 4(f), then either the
Shareholders' Agent or Parent, as the case may be, shall be entitled to select
the second arbitrator. The parties agree to use all reasonable efforts to cause
the arbitration hearing to be conducted within 60 calendar days after the
appointment of the last of the three arbitrators and to use all reasonable
efforts in the circumstances to cause the arbitrators' decision to be furnished
within 95 calendar days after the appointment of the last of the three
arbitrators. The parties further agree that, to the extent practicable,
discovery shall be completed at least 20 business days prior to the date of the
arbitration hearing. The arbitrators' decision shall relate solely to whether
the Parent is entitled to recover the Contested Amount (or a portion thereof),
and the portion of such Contested Amount the Parent is entitled to recover. The
final decision of the arbitrators shall be furnished to the Shareholders' Agent,
the Parent and the Escrow Agent in writing and shall constitute a conclusive
determination of the issue in question, binding upon the BlueGill Shareholders,
the Shareholders' Agent, the Parent and the Escrow Agent and shall not be
contested by any of them. The non-prevailing party in any arbitration shall pay
the reasonable expenses (including attorneys' fees) of the prevailing party, any
additional reasonable fees and expenses (including reasonable legal fees) of the
Escrow Agent, and the fees and expenses associated with the arbitration
(including the arbitrators' fees and expenses). For purposes of this Section
4(f), the non-prevailing party shall be deemed to be the Parent if it is
entitled to recover less than 50% of the Contested Amount; otherwise it shall be
the BlueGill Shareholders.
(g) The Escrow Agent shall release Escrow Shares from the Escrow
Account in connection with any Contested Amount within five business days after
the delivery to it of: (i) a copy of a settlement agreement executed by the
Parent and the Shareholders' Agent setting forth instructions to the Escrow
Agent as to the number of Escrow Shares, if any, to be released from the Escrow
Account, with respect to such Contested Amount or (ii) a copy of the award of
the arbitrators referred to and as provided in Section 4(f) setting forth
instructions to the Escrow Agent as to the number of Escrow Shares, if any, to
be released from the Escrow
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Account, with respect to such Contested Amount.
(h) Any Escrow Shares released from the Escrow Account to Parent
shall be deemed to reduce the Escrow Shares pro rata with respect to each
Shareholder in accordance with each Shareholder's percentage interest in the
Escrow Fund as set forth in EXHIBIT B.
6. RELEASE OF ESCROW SHARES. For the purposes of this Agreement, the
Escrow Agent shall be deemed to have delivered Parent Common Stock to the Person
entitled to it when the Escrow Agent has delivered such certificates and Stock
Powers to an independent stock transfer agent for the Parent Common Stock with
instructions to deliver it to the appropriate Person. Distributions of Parent
Common Stock shall be made to Parent or the BlueGill Shareholders, as
appropriate, at the addresses described in Section 12(b). Whenever a
distribution is to be made to the BlueGill Shareholders, pro rata distributions
shall be made to each of them based on the Percentage Interests in the Escrow
Fund set forth in EXHIBIT B. Within five business days after the Termination
Date, the Escrow Agent shall distribute (or direct the independent stock
transfer agent for the Parent Common Stock to distribute) to each of the
BlueGill Shareholders such Shareholder's pro-rata portion of the Escrow Shares
then held in escrow at their addresses and based on the percentage interests in
the Escrow Fund set forth in EXHIBIT B; provided, however, that notwithstanding
the foregoing, if, prior to the Termination Date, Parent has given a Claim
Notice containing a claim which has not been resolved prior to the Termination
Date in accordance with Section 4, the Escrow Agent shall retain in the Escrow
Account after the Termination Date Escrow Shares having a Stipulated Value equal
to 100% of the Claimed Amount or Contested Amount, as the case may be, with
respect to all claims which have not then been resolved.
7. VALUATION OF ESCROW SHARES, ETC.
(a) STIPULATED VALUE. For purposes of this Agreement, the
"Stipulated Value" of each Escrow Share shall be deemed to be equal to
$__________ [the Parent Average Closing Price will be inserted in the blank].
(b) STOCK SPLITS. All numbers contained in, and all calculations
required to be made pursuant to, this Agreement shall be adjusted as appropriate
to reflect any stock split, reverse stock split, stock dividend or similar
transaction effected by Parent after the date hereof; provided, however, that
the Escrow Agent shall have received (i) notice of such stock split or other
action, (ii) the appropriate number of additional shares of Parent Common Stock
or other property pursuant to Section 3(c) hereof, and (iii) a revised version
of EXHIBIT B as contemplated by Section 12(n).
8. FEES AND EXPENSES. Upon the execution of this Agreement by all
parties hereto and the initial deposit of the Escrow Fund in the Escrow Account,
fees and expenses, in accordance with EXHIBIT C attached hereto, will be payable
to the Escrow Agent. This annual Escrow Agent fee will cover the first twelve
months of the escrow. In accordance with EXHIBIT C attached hereto, the Escrow
Agent will also be entitled to reimbursement for
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reasonable and documented out-of-pocket expenses incurred by the Escrow Agent in
the performance of its duties hereunder. All such fees and expenses shall be
paid by Parent.
9. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent undertakes to perform such duties as are
specifically set forth in this Agreement only and shall have no duty under any
other agreement or document notwithstanding their being referred to herein or
attached hereto as an exhibit. The Escrow Agent shall not be liable except for
the performance of such duties as are specifically set forth in this Agreement,
and no implied covenants or obligations shall be read into this Agreement
against the Escrow Agent. The Escrow Agent shall incur no liability with respect
to any action taken by it or for any inaction on its part in reliance upon any
notice, direction, instruction, consent, statement or other document believed by
it to be genuine and duly authorized, nor for any other action or inaction
except for its own willful misconduct or gross negligence. In no event shall the
Escrow Agent be liable for punitive, incidental or consequential damages. The
Escrow Agent may rely on and use the Stock Powers and shall not be liable in
connection therewith. In all questions arising under this Agreement, the Escrow
Agent may rely on the advice of counsel, and for anything done, omitted or
suffered in good faith by the Escrow Agent based upon such advice the Escrow
Agent shall not be liable to anyone. The Escrow Agent shall not be required to
take any action hereunder involving any expense unless the payment of such
expense is made or provided for in a manner reasonably satisfactory to it.
(b) The BlueGill Shareholders from the Escrow Fund and Parent hereby
agree to indemnify the Escrow Agent for, and hold it harmless against, any loss,
liability or expense incurred without negligence or willful misconduct on the
part of Escrow Agent, arising out of or in connection with its carrying out of
its duties hereunder. This right of indemnification shall survive the
termination of this Agreement, and the resignation of the Escrow Agent.
10. PERSONAL LIABILITY OF BLUEGILL OFFICERS AND EMPLOYEES. Any BlueGill
Shareholder who is also an officer or employee of the Company (an "Employee
Shareholder"), hereby acknowledges that such Employee Shareholder's exposure to
liability under the indemnification provisions in Article VII of the Merger
Agreement is not limited to his or her pro rata portion of the Escrow Shares,
and that each such Employee Shareholder may be subject to personal liability in
excess of his or her Escrow Shares to the extent that any Employee Shareholder
has committed intentional misrepresentation or fraud, subject to the limitations
set forth in Section 7.05(b) of the Merger Agreement. Reference is also made to
Section 7.06 of the Merger Agreement, which addresses common law liability for
fraud and intentional misrepresentation.
11. INDEMNIFICATION TERMINATION. The indemnification obligation of the
BlueGill Shareholders to Parent with respect to the Escrow Shares shall
terminate on the earlier to occur of (a) one (1) year after the Closing Date or
(b) the completion of an audit on the merged companies and the filing by Parent
of its Annual Report on Form 10-K with the
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Securities and Exchange Commission relating to the first fiscal year of Parent
ending after the Closing (the "Escrow Termination Date") or, if earlier, upon
the release by the Escrow Agent of the entire Escrow Fund in accordance with
this Agreement; provided, however, that if the Escrow Agent has received from
Parent a Claim Notice setting forth a claim that has not been resolved by the
Escrow Termination Date, then the indemnification obligation of the BlueGill
Shareholders to Parent with respect to the Escrow Shares shall continue in full
force and effect until the claim has been resolved and the Escrow Shares
released in accordance with this Agreement.
12. ESCROW TERMINATION. On the Escrow Termination Date, the Escrow
Agent shall deliver (or cause the stock transfer agent of the Escrow Shares to
deliver) all remaining Escrow Shares in the Escrow Account to the BlueGill
Shareholders; provided, however, that if the Escrow Agent has received from
Parent a Claim Notice setting forth a claim that has not been resolved by the
Escrow Termination Date, then the Escrow Agent shall not distribute to the
BlueGill Shareholders Escrow Shares having a Stipulated Value equal to the full
Claimed Amount of the unresolved claim. Unresolved claims shall be treated as
provided in Section 4. Upon resolution of all unresolved claims, all remaining
Escrow Shares shall be delivered as provided in this Section 12, but subject to
the provisions of Section 14.
13. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes
unavailable or unwilling to continue as escrow agent under this Agreement, the
Escrow Agent may resign and be discharged from its duties and obligations
hereunder by giving its written resignation to the parties to this Agreement.
Such resignation shall take effect not less than 30 calendar days after it is
given to all parties hereto. Parent may appoint a successor Escrow Agent only
with the consent of the Shareholders' Agent (which consent shall not be
unreasonably withheld or delayed). The Escrow Agent shall act in accordance with
written instructions from Parent as to the transfer of the Escrow Fund to a
successor escrow agent.
14. EXPENSES. Each BlueGill Shareholder agrees to pay within five days
after receipt of notice its pro rata portion of any expenses incurred by the
Shareholders' Agent and the Members in connection with this Agreement, which pro
rata share shall be the BlueGill Shareholder's Percentage Interests in the
Escrow Fund set forth on EXHIBIT B. If, on the date the Escrow Agent is required
to make a final distribution to the BlueGill Shareholders from the Escrow Fund,
Escrow Shares remain in the Escrow Fund and either there are unpaid expenses
incurred by the Shareholders' Agent or a Member or a BlueGill Shareholder has
not made payment pursuant to a written notice sent by the Shareholders' Agent,
then the Shareholders' Agent may send notice to the Escrow Agent to make the
delivery to the Shareholders' Agent of Escrow Shares with a Stipulated Value
equal to the expenses owed by all BlueGill Shareholders (apportioned amongst the
BlueGill Shareholders based upon the Percentage Interests set forth on EXHIBIT
B) with respect to expenses owed by all BlueGill Shareholders or Escrow Shares
with a Stipulated Value equal to the expenses owed by the particular BlueGill
Shareholder with respect to expenses with respect to which that BlueGill
Shareholder has not made payment as required by this Section 14. In calculating
the Escrow Shares to be delivered to pay expenses, an amount shall be added to
cover reasonable selling expenses, including brokerage fees, anticipated to be
required in connection with the sale of those securities. The Shareholders'
Agent is authorized to
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sell any Escrow Shares received by it to pay the expenses.
15. MISCELLANEOUS.
(a) NOTICES. Any notice or other communication required or permitted
to be delivered to any party under this Agreement shall be in writing and shall
be deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth in Section 10.5 of the Merger
Agreement or to the Escrow Agent at the address set forth below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other parties hereto):
If to Escrow Agent:
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, OH 45263
Attn: Dana Hushak, MD 10AT69
Telecopier: 513-744-6398
If to Parent:
CheckFree Holdings Corporation
4411 E. Jones Bridge Road
Norcross, GA 30092
Attn: Peter J. Kight, Chairman
Telecopier: 678-375-3010
CheckFree Holdings Corporation
4411 E. Jones Bridge Road
Norcross, GA 30092
Attn: Allen L. Shulman, General Counsel
Telecopier: 678-375-3235
with a copy to:
Porter, Wright, Morris & Arthur LLP
41 S. High Street
Columbus, OH 43215
Attn: Curtis A. Loveland, Esq.
Telecopier: 614-227-2100
If to Shareholders' Agent:
Pepper Hamilton LLP
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100 Renaissance Center, Suite 3600
Detroit, MI 48243-1157
Attn: Hugh D. Camitta, Esq.
Telecopier: 313-259-7926
with copies to the persons set forth on
EXHIBIT D
If any Claim Notice, Response Notice or other document or notice of any kind is
required to be delivered to the Escrow Agent and any other person, the Escrow
Agent may assume without inquiry that such document has been delivered to such
other person if it has been delivered to the Escrow Agent.
(b) HEADINGS. The underlined headings contained in this Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
(d) GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
Delaware (without giving effect to principles of conflicts of laws).
(e) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
each of the parties hereto and each of their respective permitted successors and
assigns, if any. No BlueGill Shareholder may assign such Shareholder's rights
and obligations under this Agreement without the express prior written consent
of Parent, provided, however, that upon the death of a BlueGill Shareholder,
such BlueGill Shareholder's rights and obligations under this Agreement shall be
transferred to the person(s) who receive such Shareholder's Escrow Shares under
the laws of descent and distribution. Nothing in this Agreement is intended to
confer, or shall be deemed to confer, any rights or remedies upon any person or
entity other than the parties hereto and the Members and their permitted
successors and assigns. This Agreement shall inure to the benefit of the
BlueGill Shareholders, Parent, the Members, Escrow Agent and the respective
successors and assigns, if any, of the foregoing.
(f) WAIVER. No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. No Person shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or remedy under
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver
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shall not be applicable or have any effect except in the specific instance in
which it is given.
(g) AMENDMENTS. This Agreement may not be amended, modified, altered
or supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto; provided, however, that any
amendment duly executed and delivered by the Shareholders' Agent shall be deemed
to have been duly executed and delivered by all BlueGill Shareholders.
(h) SEVERABILITY. In the event that any provision of this Agreement,
or the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
(i) PARTIES IN INTEREST. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns, if any.
(j) ENTIRE AGREEMENT. This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof.
(k) TAX REPORTING INFORMATION AND CERTIFICATION OF TAX
IDENTIFICATION NUMBERS.
(i) The parties hereto agree that, for tax reporting purposes,
all interest on or other income, if any, attributable to the Escrow Shares or
any other amount held in escrow by the Escrow Agent pursuant to this Agreement
shall be allocable to the BlueGill Shareholders in accordance with their
Percentage Interests in the Escrow Fund set forth in EXHIBIT B.
(ii) Each BlueGill Shareholder agrees to provide to [the Escrow
Agent] its tax identification number by furnishing appropriate forms W-9 (or
Forms W-8, in the case of non-U.S. persons) and other forms and documents that
[the Escrow Agent] may reasonably request (collectively, "Tax Reporting
Documentation"). The parties hereto understand that, if such Tax Reporting
Documentation is not so supplied to [the Escrow Agent], [the Escrow Agent] may
be required by the Internal Revenue Code to withhold a portion of any interest
or other income earned on the investment of monies or other property held by the
Escrow Agent pursuant to this Escrow Agreement. Parent shall timely provide to
the Escrow Agent the requisite information for income tax reporting purposes,
and the Escrow Agent in turn shall timely provide to each BlueGill Shareholder
the requisite information for income tax reporting purposes. The Escrow Agent
shall file such tax forms and information with respect to the Escrow Fund as a
grantor trust as may be required under the Internal Revenue Code.
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(l) CONSTRUCTION.
(i) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(ii) The parties hereto agree that any rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(iii) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(m) RECALCULATION OF PERCENTAGE INTERESTS. If for any reason EXHIBIT
B should need to be recalculated, Parent and the Shareholders' Agent shall
jointly (i) calculate revised percentage interests for the BlueGill Shareholders
and (ii) submit to the Escrow Agent a revised version of EXHIBIT B, on which the
Escrow Agent may rely without inquiry.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first set forth above.
CHECKFREE HOLDINGS CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
SHAREHOLDERS' AGENT:
By:
--------------------------------------
Harold N. Davis
By:
--------------------------------------
Robert D. Pavey
By:
--------------------------------------
Mark Siegel
By:
--------------------------------------
John McIlwraith
By:
--------------------------------------
Thomas C. Kinnear
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BLUEGILL ESCROW AGREEMENT
SHAREHOLDER SIGNATURE PAGE
By signing and returning a counterpart hereof, this Escrow Agreement,
along with all counterparts executed as of the date of this Escrow Agreement and
thereafter by additional BlueGill Shareholders, will become a binding agreement
among the Parent, the Shareholders' Agent, the Escrow Agent and the BlueGill
Shareholders signatory to this Escrow Agreement.
SHAREHOLDER:
----------------------------------------
By:
-------------------------------------
Print Name:
-----------------------------
Tax I.D. Number:
------------------------
Address:
--------------------------------
----------------------------------------
----------------------------------------
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Exhibit A
---------
BLUEGILL SHAREHOLDERS
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Exhibit B
---------
<TABLE>
- ------------------------------------------------ ----------------------- ----------------------
<CAPTION>
Name, Address and Taxpayer Identification Pro Rata Share of
Number of Shareholder Number of Shares Escrow Fund
- ------------------------------------------------ ----------------------- ----------------------
<S> <C> <C>
- ------------------------------------------------ ----------------------- ----------------------
</TABLE>
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Exhibit C
---------
ESCROW FEES AND EXPENSES
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Exhibit D
---------
NOTIFICATION INFORMATION
Harold N. Davis
BlueGill Technologies, Inc.
935 Technology Drive
Ann Arbor, MI 48108
Telecopier: 734-205-4211
Robert D. Pavey
Morgenthaler Venture
Terminal Towers
50 Public Square, Suite 2700
Cleveland, OH 44113
Telecopier: 216-416-7501
Mark Siegel
Menlo Ventures
3000 Sand Hill Road
Menlo Park, CA 94025
Telecopier: 650-854-7059
John McIlwraith
BlueChip Venture Co.
250 E. Fifth Street
1100 Chiquita Center
Cincinnati, OH 45202
Telecopier: 513-723-2306
Thomas C. Kinnear
University of Michigan
4202 Davidson Hall
Ann Arbor, MI 48109
Telecopier: 734-994-5673
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APPENDIX B
DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall
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be available for the shares of any class or series of its stock as a result of
an amendment to its certificate of incorporation, any merger or consolidation in
which the corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the
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merger or consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
(8 Del. C. 1953, Section 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, Section
24; 57 Del. Laws, c. 148, Sections 27-29; 59 Del. Laws, c. 106, Section 12; 60
Del. Laws, c. 371, Sections 3-12; 63 Del. Laws, c. 25, Section 14; 63 Del. Laws,
c. 152, Sections 1, 2; 64 Del. Laws, c. 112, Sections 46-54; 66 Del. Laws, c.
136, Sections 30-32; 66 Del. Laws, c. 352, Section 9; 67 Del. Laws, c. 376,
Sections 19, 20; 68 Del. Laws, c. 337, Sections 3, 4; 69 Del. Laws, c. 61,
Section 10; 69 Del. Laws, c. 262, Sections 1-9; 70 Del. Laws, c. 79, Section 16;
70 Del. Laws, c. 186, Section 1; 70 Del. Laws, c. 299, Sections 2, 3; 70 Del.
Laws, c. 349, Section 22; 71 Del. Laws, c. 120, Section 15; 71 Del. Laws, c.
339, Sections 49-52.)
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APPENDIX C
BLUEGILL TECHNOLOGIES, INC.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS WITHOUT A MEETING
The undersigned, a stockholder of BlueGill Technologies, Inc, a Delaware
corporation ("BlueGill"), hereby consents, without prior notice and without a
vote or meeting of stockholders, (1) with respect to all those shares of Series
A Preferred Stock, par value $.001 per share ("Series A Stock"), all those
shares of Series B Preferred Stock, par value $.001 per share ("Series B
Stock"), and/or all those shares of Common Stock, par value $.001 per share
("Common Stock"), of BlueGill which the undersigned holds, to approval and
adoption of the Agreement and Plan of Merger dated as of December 20, 1999,
among CheckFree Holdings Corporation, CheckFree Acquisition Corporation IV
("Acquisition") and BlueGill (the "Agreement"), providing for the merger of
Acquisition with and into BlueGill (the "Merger"), and (2) with respect to all
those shares of Series A Stock and/or Series B Stock which the undersigned
holds, to approve that the Merger will not be deemed a liquidation under Article
5, Section 2, of BlueGill's Certificate of Incorporation, as both matters are
more fully described in BlueGill's Consent Solicitation Statement dated
_____________, 2000, receipt of which is hereby acknowledged.
THIS CONSENT IS BEING SOLICITED ON BEHALF OF BLUEGILL'S BOARD OF DIRECTORS
[X] Please mark your consent as in this example.
1. APPROVE AND ADOPT THE AGREEMENT
CONSENT [ ] CONSENT WITHHELD [ ]
2. APPROVE THAT THE MERGER NOT BE DEEMED A LIQUIDATION
CONSENT [] CONSENT WITHHELD [ ]
Please date and sign. If signing as an individual, sign exactly as your
name appears below. If more than one owner, all should sign. Executors,
administrators, trustees, guardians, attorneys-in-fact, and corporate and other
entity officers, managers or partners should indicate their capacity or title
when signing. A consent executed by a stockholder may be revoked in writing at
any time prior to the time consents sufficient to approve the actions have been
received by BlueGill.
Date:
-----------------------------
----------------------------------
(Signature)
----------------------------------
(Signature)
----------------------------------
(Title or capacity, if applicable)
RETURN THIS CONSENT AS SOON AS POSSIBLE TO:
BlueGill Technologies, Inc.
935 Technology Drive
Ann Arbor, MI 48108
Attn: Vinay Gupta, Secretary
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
(a) Article IX of the Registrant's By-Laws (the "By-Laws") provides that
the Registrant shall, to the fullest extent permitted by applicable law as then
in effect, indemnify any person who is or was involved or threatened to be made
so involved in any action by reason of the fact that he is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another entity. The right to indemnification
includes the right to receive payment of expenses in advance of the final
disposition of the proceeding. All indemnification rights in Article IX are
contract rights. The Registrant also may provide indemnification for employees,
agents, attorneys and representatives of the Registrant by action of its board
of directors. Article IX expressly states that no amendment to the By-Laws or
the Certificate of Incorporation shall adversely affect any right to
indemnification for acts occurring prior to such amendment. The right of
indemnification is not exclusive of any other rights of indemnification that may
be available.
In determining the right to indemnification 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 certain 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
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
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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 that,
subject to certain exceptions, insures the directors and officers of the
Registrant and its subsidiaries
(d) The Registrant has entered into indemnification contracts with its
directors and certain officers which provides that such directors and officers
will be indemnified to the fullest extent provided by Section 145 of the
Delaware 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.
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.
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Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- ------- -----------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of December 20, 1999, among the
Company, CheckFree Acquisition Corporation IV, and BlueGill
Technologies, Inc. (Attached as Appendix A to this Registration
Statement.)
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., FDC International Partner, Inc., MSFDC International,
Inc., Citicorp Electronic Commerce, Inc., CheckFree Holdings
Corporation, Chopper Merger Corporation, and Chopper Corporation.
3(a) Restated Certificate of Incorporation of the Company. (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(b) By-Laws of the Company. (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(c) Form of Specimen Stock Certificate. (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 the
Company's Restated Certificate of Incorporation (contained in the
Company's Restated Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the Company's By-Laws
(contained in the Company's By-Laws filed as Exhibit 3(b) hereto).
4(b) Rights Agreement, dated as of December 16, 1997, by and between the
Company 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.)
</TABLE>
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<PAGE> 300
<TABLE>
<S> <C>
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 the Company'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 the Company. (Reference is made to
Exhibit 10(i) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by reference.)
10(i) Noncompete, Nondisclosure, and Assignment Agreement, dated February 1,
1990, between Mark A. Johnson and the Company. (Reference is made to
Exhibit 10(j) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by reference.)
10(j) Electronic Bill Payment Services Agreement, dated March 10, 1995,
between the Company and FiTech, Inc. (Reference is made to Exhibit
10(gg) to Registration Statement on Form S-1, as amended (Registration
No. 33-95738), filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by reference.)**
10(k) Amendment to Bill Payment and Remote Banking Services Agreement, dated
July 1, 1995, between the Company and FiTech, Inc. (Reference is made
to Exhibit 10(hh) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.)**
10(l) ACH Operations Agreement, dated April 1, 1994, between the Company and
Society National Bank. (Reference is made to Exhibit 10(ii) to
Registration Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(m) Merchant Processing Agreement, dated March 13, 1995, between the
Company and Society National Bank. (Reference is made to Exhibit
10(jj) to Registration Statement on Form S-1, as amended (Registration
No. 33-95738), filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by reference.)
10(n) Lease, dated August 1, 1993, between the Company and the Director of
Development of the State of Ohio. (Reference is made to Exhibit 10(rr)
to Registration Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(o) Guaranty Agreement, dated August 1, 1993, between the Company and The
Provident Bank. (Reference is made to Exhibit 10(ss) to Registration
Statement on Form S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(p) Demand Mortgage Note, dated August 25, 1993, of the Company.
(Reference is made to Exhibit 10(tt) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with the Securities
and Exchange Commission on August 14, 1995, and incorporated herein by
reference.)
</TABLE>
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<PAGE> 301
<TABLE>
<S> <C>
10(q) Irrevocable Letter of Credit from Society National Bank for the
Company, dated August 25, 1993 (including second renewal thereof).
(Reference is made to Exhibit 10(uu) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with the Securities
and Exchange Commission on August 14, 1995, and incorporated herein by
reference.)
10(r) Open-End Mortgage, Assignment of Rents and Security Agreement, dated
August 25, 1993, with the Company as mortgagor and Society National
Bank as mortgagee. (Reference is made to Exhibit 10(vv) to
Registration Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(s) Loan and Security Agreement, dated August 25, 1993, between the
Company and Society National Bank. (Reference is made to Exhibit
10(ww) to Registration Statement on Form S-1, as amended (Registration
No. 33-95738), filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by reference.)
10(t) Commercial Note Variable Rate, dated January 3, 1995, of the Company.
(Reference is made to Exhibit 10(xx) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed with the Securities
and Exchange Commission on August 14, 1995, and incorporated herein by
reference.)
10(u) Reimbursement Agreement, dated August 25, 1993, between the Company
and Peter J. Kight. (Reference is made to Exhibit 10(yy) to
Registration Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(v) License Agreement, dated October 27, 1995, between the Company and
Block Financial Corporation. (Reference is made to Exhibit 10(ddd) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995, filed with the Securities and Exchange Commission, and
incorporated herein by reference.)**
10(w) Joint Marketing and Trademark License Agreement, dated December 28,
1995, between the Company and Electronic Data Systems Corporation.
(Reference is made to Exhibit 10(eee) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission, and incorporated herein by
reference.)**
10(x) Joint Marketing Agreement, dated November 3, 1995, between the Company
and Fiserv, Inc. (Reference is made to Exhibit 10(fff) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission, and
incorporated herein by reference.)**
10(y) Payment Services, Software Development and Marketing Agreement, dated
as of February 27, 1996, between the Company and CyberCash. (Reference
is made to Exhibit 10(a) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange Commission, and
incorporated herein by reference.) **
10(z) Executive Employment Agreement between the Company and Peter J. Kight.
(Reference is made to Exhibit 10(z) to the Company'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 the Company and Lynn D. Busing.
(Reference is made to Exhibit 10(f) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(bb) Agreement for ACH Services between the Company and The Chase Manhattan
Bank, N.A., dated as of July 1, 1996. (Reference is made to Exhibit
10(qqq) to the Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange Commission, and
incorporated herein by reference.)
</TABLE>
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<PAGE> 302
<TABLE>
<S> <C> <C>
10(cc) Loan and Security Agreement, dated as of May 13, 1997, among KeyBank
National Association, the Company, CheckFree Software Solutions, Inc.,
CheckFree Services Corporation, Security APL, Inc., Servantis Systems,
Inc., and Servantis Services, Inc. (Reference is made to Exhibit
10(ee) to the Company'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 the Company'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 the Company'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.)
21 Subsidiaries of the Registrant. (Reference is made to Exhibit 21 of
the Company's Form 10-K for the year ended June 30, 1999, filed with
the Securities & 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.
</TABLE>
- ------------------------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
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
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<PAGE> 303
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.
II-7
<PAGE> 304
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it 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 March 15, 2000.
CHECKFREE HOLDINGS CORPORATION
By: /s/ Allen L. Shulman
----------------------------------
Allen L. Shulman,
Executive Vice President, Chief
Financial Officer and
General Counsel
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 15th day of March, 2000. .
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*Peter J. Kight Chairman of the Board, President, and Chief
- ---------------------- Officer
Peter J. Kight (Principal Executive Officer)
*Mark A. Johnson Vice Chairman and Director
- ----------------------
Mark A. Johnson
/s/Allen L. Shulman Executive Vice President, Chief Financial Officer
- ---------------------- and General Counsel
Allen L. Shulman (Principal Financial Officer)
*Gary A. Luoma, Jr. Vice President, Chief Accounting Officer and
- ---------------------- Assistant Secretary
Gary A. Luoma, Jr. (Principal Accounting Officer)
*William P. Boardman Director
- ----------------------
William P. Boardman
*George R. Manser Director
- ----------------------
George R. Manser
*Eugene F. Quinn Director
- ----------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- ----------------------
Jeffrey M. Wilkins
*By: /s/Curtis A. Loveland
- -----------------------------------------
Curtis A. Loveland, Attorney-in-Fact
</TABLE>
II-8
<PAGE> 1
Exhibit 2(b)
AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION AGREEMENT
DATED AS OF FEBRUARY 15, 2000
AMONG
MICROSOFT CORPORATION, FIRST DATA CORPORATION, CITIBANK, N.A.,
MS II, L.L.C., FIRST DATA, L.L.C., H&B FINANCE, INC.,
FDC INTERNATIONAL PARTNER, INC., MSFDC INTERNATIONAL, INC.,
CITICORP ELECTRONIC COMMERCE, INC.,
CHECKFREE HOLDINGS CORPORATION,
CHOPPER MERGER CORPORATION,
AND
CHOPPER CORPORATION
<PAGE> 2
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
<S> <C>
Actions............................................11
Adjusted Working Capital...........................47
Affiliate..........................................58
Agreement...........................................1
Alternative Agreement Period.......................53
Ancillary Agreements................................2
Antitrust Laws.....................................43
Authorizations.....................................19
Balance Sheet......................................15
Capital Stock......................................58
Certificate of Merger...............................3
Certificates........................................7
CheckFree...........................................1
CheckFree Common Stock..............................5
CheckFree Disclosure Schedule......................26
CheckFree Filed SEC Documents......................31
CheckFree Merger....................................2
CheckFree Options...................................6
CheckFree Plan.....................................42
CheckFree Right.....................................6
CheckFree Rights Agreement..........................4
CheckFree SEC Documents............................30
Checkfree Stock Plan...............................58
CheckFree Stockholders Meeting.....................40
CheckFree Warrants..................................6
Citibank............................................1
Citibank Registration Rights Agreement..............2
Citicorp Electronic.................................1
Closing.............................................5
Closing Date........................................5
Code................................................2
Commercial Alliance Agreement.......................2
Control............................................58
Designated Group, Designated Groups................58
DGCL................................................3
Disclosing Party...................................61
DoJ................................................43
Effective Time......................................3
Environmental Laws.................................23
Environmental Permits..............................23
Environmental Report...............................23
Exchange Act.......................................59
Exchange Agent......................................7
Exchange Fund.......................................7
Exclusive Services.................................37
Executory Period...................................37
Fair Market Value..................................59
FDC.................................................1
FDC International...................................1
Fee Properties.....................................16
Financial Statements...............................14
First Data, L.L.C...................................1
FTC................................................43
Governmental Entity................................59
H&B.................................................1
HoldCo..............................................1
HoldCo Amended and Restated Certificate
of Incorporation..................................4
HoldCo Common Stock.................................4
HoldCo Registration Statement......................39
HoldCo Rights Plan..................................4
Holding Subsidiaries................................1
HSR Act............................................11
Indebtedness.......................................15
indemnified party..................................56
Infringement.......................................20
Intellectual Property Agreements...................18
Intellectual Property Rights.......................19
International GP....................................1
Knowledge..........................................59
Laws...............................................19
Leased Properties..................................16
License Agreements..................................2
Liens..............................................59
Losses.............................................54
Marketing Agreement.................................2
Material Adverse Effect............................59
Material Contracts.................................17
Material Customers.................................24
Material Transaction Proposal......................59
Materials of Environmental Concern.................23
Merger Sub C........................................1
Merger Sub C Common Stock...........................5
Microsoft...........................................1
MS II...............................................1
MSFDC...............................................1
</TABLE>
-1-
<PAGE> 3
<TABLE>
<S> <C>
MSFDC International.................................1
Non-Disclosure Agreement...........................45
OCC................................................11
Order..............................................43
Other Services.....................................37
Outstanding CheckFree Common Stock.................27
Parent Disclosure Schedules........................10
Parent Indemnified Parties.........................57
Parent IPR.........................................20
Parents.............................................1
Parents and Parent Consideration....................7
Parents' Agent.....................................57
Permitted Liens....................................59
Person.............................................59
Proxy Statement/Prospectus.........................39
Registration Rights Agreement.......................2
Representatives....................................40
Required CheckFree Vote............................49
SEC................................................60
Securities Act.....................................60
Stockholder Agreement...............................2
Subsidiary.........................................60
Superior Proposal..................................60
Supplemental Financial Information.................45
Surviving CheckFree.................................3
Tank Disclosure Schedule...........................13
Tank Indemnified Persons...........................48
Tax Return.........................................60
Tax, Taxes, Taxable................................60
Third Party Claim..................................56
Third Party IPR....................................20
Transfers...........................................2
Transition Services Agreement.......................2
TransPoint..........................................1
TransPoint Accounting...............................1
TransPoint Business.................................1
TransPoint Contribution.............................2
TransPoint Entities.................................1
TransPoint Technology...............................1
Unaudited Balance Sheet............................15
</TABLE>
-2-
<PAGE> 4
AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION AGREEMENT
AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION AGREEMENT ("Agreement")
dated as of February 15, 2000 by and among CheckFree Holdings Corporation, a
Delaware corporation ("CheckFree"); Chopper Corporation, a Delaware corporation
and a wholly-owned subsidiary of CheckFree Holdings Corporation ("HoldCo");
Microsoft Corporation, a Washington corporation ("Microsoft"); First Data
Corporation, a Delaware corporation ("FDC"); Citibank, N.A., a Delaware
corporation ("Citibank", and, together with Microsoft and FDC, the "Parents");
MS II, L.L.C., a Washington limited liability company all of the equity
interests in which are owned by Microsoft ("MS II"); First Data, L.L.C., a
Delaware limited liability company ("First Data, L.L.C.") all of the equity
interests in which are owned by First Data Resources, Inc., a Delaware
corporation and a wholly-owned subsidiary of FDC; H&B Finance, Inc., a
Washington corporation and a wholly-owned subsidiary of Microsoft ("H&B") ; FDC
International Partner, Inc., a Delaware corporation and a wholly-owned
subsidiary of First Data Corporation ("FDC International"); MSFDC International,
Inc., a Delaware corporation ("International GP"); and Citicorp Electronic
Commerce, Inc., a Delaware corporation and a wholly-owned subsidiary of Citibank
("Citicorp Electronic" and, together with MS II, First Data, L.L.C., H&B,
International GP and FDC International, the "Holding Subsidiaries"); and Chopper
Merger Corporation, a Delaware corporation and a wholly-owned direct subsidiary
of HoldCo ("Merger Sub C").
BACKGROUND
WHEREAS, CheckFree is a provider of electronic billing and payment
services;
WHEREAS, the Parents, First Data Resources, Inc. and the Holding
Subsidiaries are, in the aggregate, the sole beneficial owners of all of the
limited liability company interests of each of MSFDC, L.L.C., a Delaware limited
liability company ("MSFDC"), TransPoint Technology & Services, L.L.C., a
Delaware limited liability company ("TransPoint Technology"), and TransPoint,
L.L.C., a Delaware limited liability company ("TransPoint") (and TransPoint
Technology and TransPoint hold all of the equity interests in TransPoint
Accounting, L.L.C., a Delaware limited liability company ("TransPoint
Accounting")), and all of the partnership interests of MSFDC International,
L.P., a Delaware limited partnership ("MSFDC International", and, together with
MSFDC, TransPoint Technology, TransPoint and TransPoint Accounting, the
"TransPoint Entities");
WHEREAS, the sole activity of the TransPoint Entities (and their
predecessors-in-interest) is to develop and conduct a business relating to the
provision of electronic billing and payment services (the "TransPoint
Business");
WHEREAS, pursuant to the terms of this Agreement, HoldCo has been
formed to acquire and hold the combined businesses of CheckFree and the
TransPoint Entities in order to achieve important business objectives of each of
the parties;
<PAGE> 5
WHEREAS, each of the respective Boards of Directors (or equivalent
governing bodies) of CheckFree, each of the Holding Subsidiaries and each of the
Parents (i) has determined that a combination of the businesses of CheckFree and
the TransPoint Entities is advisable and fair to, and in the best interests of,
such party and its stockholders or members and (ii) has approved this Agreement;
WHEREAS, the parties to this Agreement intend to effect the combination
of the businesses of CheckFree and the TransPoint Entities upon the terms and
subject to the conditions set forth in this Agreement, which terms include (i)
the merger of Merger Sub C with and into CheckFree and the conversion of the
CheckFree Common Stock (as defined herein) into HoldCo Common Stock (as defined
herein) (the "CheckFree Merger"), and (ii) the direct and indirect contribution
of all of the equity interests in the TransPoint Entities to HoldCo (the
"TransPoint Contribution," and, collectively with the CheckFree Merger, the
"Transfers");
WHEREAS, concurrently with the execution and delivery of this Agreement
as an inducement to the willingness of each of the Parents to enter into this
Agreement, certain holders of shares of CheckFree Common Stock have each entered
into Stockholder Support Agreements dated as of the date hereof pursuant to
which such holders have agreed to vote their shares of CheckFree Common Stock in
the manner set forth therein;
WHEREAS, for federal income tax purposes, it is intended that (i) the
CheckFree Merger and the TransPoint Contribution together will qualify as an
exchange pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"), and (ii) the CheckFree Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code; and
WHEREAS, upon the terms and subject to the conditions of this
Agreement, at the time of the Closing, (i) each of Microsoft and FDC intend to
enter with HoldCo into (A) a Stockholder Agreement in the form set forth as
Exhibit B to this Agreement (the "Stockholder Agreement"), and (B) a
Registration Rights Agreement as set forth as Exhibit C to this Agreement (the
"Registration Rights Agreement"), which agreements will set forth certain rights
and obligations of each such Parent as stockholders of HoldCo subsequent to the
Transfers, (ii) Citibank intends to enter with HoldCo into a Registration Rights
Agreement as set forth in Exhibit D to this Agreement (the "Citibank
Registration Rights Agreement"), (iii) HoldCo and Microsoft intend to enter into
a Commercial Alliance Agreement in the form set forth as Exhibit E to this
Agreement (the "Commercial Alliance Agreement"), (iv) HoldCo and FDC intend to
enter into a Marketing Agreement in the form set forth as Exhibit F to this
Agreement (the "Marketing Agreement"), (v) each of Microsoft and FDC will
confirm the existence of and make certain modifications to the intellectual
property license agreements between such Parents and one or more of the
TransPoint Entities, in the form set forth as Exhibits G(1) and G(2),
respectively, to this Agreement (the "License Agreements"), and (vi) HoldCo,
Microsoft and FDC intend to enter into a Transition Services Agreement in the
form set forth as Exhibit H to this Agreement (the "Transition Services
Agreement" and, collectively with the agreements set forth in (i) through (v),
the "Ancillary Agreements").
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained herein and other
good and valuable
-2-
<PAGE> 6
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE 1 [RESERVED]
ARTICLE 2
THE TRANSFERS; CLOSING
SECTION 2.1 The Transfers.
(a) CheckFree Merger. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section 2.2),
Merger Sub C shall be merged with and into CheckFree in accordance with the
applicable provisions of the Delaware General Corporation Law ("DGCL").
CheckFree shall be the surviving corporation in the CheckFree Merger and shall
continue its corporate existence under the laws of the State of Delaware
("Surviving CheckFree"). As a result of the CheckFree Merger, Surviving
CheckFree shall become a wholly-owned subsidiary of HoldCo.
(b) TransPoint Contribution. Upon the terms and subject to the
conditions of this Agreement, immediately following the CheckFree Merger, the
Holding Subsidiaries shall contribute, and the Parents shall cause the Holding
Subsidiaries to contribute, all of the Capital Stock of each of the TransPoint
Entities to HoldCo in the following order: (i) Citicorp Electronic shall
contribute, and Citibank shall cause such Holding Subsidiary to contribute, its
limited liability company interests in each of TransPoint Technology and
TransPoint to HoldCo; and (ii) subsequently, in the following order, (A) MS II
and First Data, L.L.C. shall contribute, and Microsoft and FDC shall cause such
Holding Subsidiaries to contribute, their respective limited liability company
interests in MSFDC to HoldCo; (B) H&B and FDC International shall contribute,
and Microsoft and FDC shall cause such Holding Subsidiaries to contribute, their
respective limited partner interests in MSFDC International to HoldCo; and (C)
International GP shall deliver its resignation as general partner of MSFDC
International. As a result of the TransPoint Contribution, HoldCo shall own all
of the equity interests in the TransPoint Entities, either directly or
indirectly through other TransPoint Entities.
SECTION 2.2 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 9, the parties
shall file such certificate of merger, articles of merger or other appropriate
documents (in any such case, the "Certificate of Merger") executed in accordance
with the relevant provisions of the DGCL and shall make all other filings,
recordings or publications required by the DGCL in connection with the CheckFree
Merger. The CheckFree Merger shall become effective at the time specified in the
Certificate of Merger, and the TransPoint Contribution shall become effective
immediately thereafter (the time of the CheckFree Merger and the immediately
following TransPoint Contribution collectively being the "Effective Time").
-3-
<PAGE> 7
SECTION 2.3 Effects of the Transfers. At the Effective Time, the
effects of the CheckFree Merger shall be as provided in the applicable
provisions of the DGCL, and the TransPoint Contribution shall be deemed
completed in the order set forth above in Section 2.1.
SECTION 2.4 Certificate of Incorporation and Bylaws. (a) At the
Effective Time, the Certificate of Incorporation of HoldCo will be amended and
restated in its entirety to read as set forth in Exhibit I hereto (the "HoldCo
Amended and Restated Certificate of Incorporation").
(b) The Certificate of Incorporation and Bylaws of CheckFree
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation and Bylaws of Surviving CheckFree until thereafter changed or
amended as provided therein or by applicable law.
(c) The current limited liability company operating agreements
and limited partnership agreement of the TransPoint Entities shall be terminated
as of the Effective Time and the form of the revised limited liability company
certificates of formation and limited partnership agreement of each of the
respective TransPoint Entities upon contribution at the Effective Time shall be
as set forth in Exhibit J.
SECTION 2.5 HoldCo Rights Agreement. Effective as of the Effective
Time, HoldCo shall adopt and implement a rights agreement (the "HoldCo Rights
Plan") substantially similar to the Rights Agreement, dated as of December 16,
1997, as amended through the date hereof (the "CheckFree Rights Agreement"), by
and between CheckFree and The Fifth Third Bank of the Stockholder Agreement.
Subsequent to the adoption and implementation of the HoldCo Rights Plan, all
references in this Agreement to the common stock, par value $.01 per share
("HoldCo Common Stock"), of HoldCo to be issued pursuant to the Transfers shall
be deemed to include the corresponding rights to purchase shares of HoldCo stock
pursuant to the terms and subject to the conditions of the HoldCo Rights Plan,
except where the context otherwise requires.
SECTION 2.6 Directors and Officers. (a) CheckFree shall cause (i) the
Board of Directors of HoldCo at the Effective Time to be comprised entirely of
six (6) directors designated by CheckFree, one (1) director designated by
Microsoft and one (1) director designated by First Data Resources, Inc., which
Microsoft and First Data Resources, Inc. directors shall each be in the class of
directors that will stand for election on the furthest possible date from the
Effective Time among the first three consecutive classes to be elected after the
Effective Time, and the directors in such class shall have a term of three (3)
years from election pursuant to the HoldCo Amended and Restated Certificate of
Incorporation, and (ii) the officers of HoldCo at the Effective Time to consist
of the officers of CheckFree immediately prior to the Effective Time. Such
directors and officers will continue to serve in such capacities until the
earlier of their resignation or removal or until their respective successors are
duly elected or appointed and qualified in accordance with the Certificate of
Incorporation and the Bylaws of HoldCo.
(b) From and after the Effective Time, (i) the directors of
Merger Sub C at the Effective Time shall be the initial directors of Surviving
CheckFree and (ii) the officers of CheckFree at the Effective Time shall be the
initial officers of Surviving CheckFree, in each
-4-
<PAGE> 8
case, until the earlier of their resignation or removal or their respective
successors are duly elected or appointed and qualified.
(c) At the Effective Time, the officers of MSFDC, TransPoint
Technology, TransPoint and TransPoint Accounting shall deliver their
resignations as officers of the respective TransPoint Entities, and
International GP shall deliver its resignation as general partner of MSFDC
International.
SECTION 2.7 The Closing. (a) Subject to the terms and conditions of
this Agreement, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place (i) at the offices of Simpson Thacher &
Bartlett, 3373 Hillview Avenue, Palo Alto, California, at 10:00 a.m., local
time, on the first business day following the day on which the last to be
fulfilled or waived of the conditions set forth in Article 9 shall be fulfilled
or waived in accordance herewith or (ii) at such other time, date or place as
CheckFree and the Parents may agree. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
(b) At the Closing, (i) the Parents and the Holding Subsidiaries shall
deliver or cause the delivery of written assignments to HoldCo of all of the
Capital Stock of the TransPoint Entities immediately prior to the TransPoint
Contribution; (ii) the Parents and the Holding Subsidiaries will deliver
unconditional and irrevocable releases to CheckFree and HoldCo of all claims
against the TransPoint Entities and the TransPoint Entities will deliver
irrevocable releases to the Parents and the Holding Subsidiaries of all
liabilities under the limited liability company operating agreements and the
limited partnership agreement and the formation documents of the TransPoint
Entities, in the form set forth as Exhibits K(1) and K(2) to this Agreement;
(iii) HoldCo shall deliver to the Holding Subsidiaries certificates representing
the HoldCo Common Stock issued pursuant to the Transfers; (iv) each party shall
execute and deliver such of the Ancillary Agreements as it is required under
this Agreement to execute and deliver; and (v) the parties shall take any and
all other lawful actions and do any and all other lawful things necessary to
cause the Transfers to become effective as of the Effective Time.
ARTICLE 3
EFFECTS OF THE TRANSFERS ON THE COMMON STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 3.1 Effect on Merger Sub C Common Stock and CheckFree Common
Stock. As of the Effective Time, by virtue of the CheckFree Merger and without
any action on the part of CheckFree, Merger Sub C or the holders of any of the
following securities:
(a) Common Stock of Merger Sub C. Each issued and outstanding
share of common stock, par value $.01 per share ("Merger Sub C Common Stock"),
of Merger Sub C shall be converted into one fully paid and nonassessable share
of common stock, $.01 par value per share, of Surviving CheckFree.
(b) Cancellation of Treasury Stock. Each share of common
stock, par value $.01 per share ("CheckFree Common Stock"), of CheckFree that is
held in the treasury of
-5-
<PAGE> 9
CheckFree shall automatically be canceled and retired and shall cease to exist,
and no shares of HoldCo Common Stock or other consideration shall be delivered
in exchange therefor.
(c) Conversion of CheckFree Common Stock. Each issued and
outstanding share of CheckFree Common Stock (other than shares to be canceled in
accordance with Section 3.1(b)) together with the associated stock purchase
right issued pursuant to the CheckFree Rights Agreement (each reference to
"CheckFree Common Stock" in this Agreement shall be deemed to include the
related right issued pursuant to the CheckFree Rights Agreement (each a
"CheckFree Right"), except where the context otherwise requires) shall be
converted into one fully paid and nonassessable share of HoldCo Common Stock. As
of the Effective Time, each certificate theretofore representing shares of
CheckFree Common Stock, without any action on the part of HoldCo, CheckFree or
the holder thereof, shall be deemed to represent an equivalent number of shares
of HoldCo Common Stock and shall cease to represent any rights in any shares of
CheckFree Common Stock.
(d) Treatment of CheckFree Options. (i) As of the Effective
Time, each outstanding option to purchase CheckFree Common Stock granted under a
CheckFree Stock Plan (such options being the "CheckFree Options"), shall be
assumed by HoldCo and converted into an option to purchase shares of HoldCo
Common Stock. Following the Effective Time, each CheckFree Option shall continue
to have, and shall be subject to, the same terms and conditions set forth in the
CheckFree Stock Plans or in any award agreement, and each such CheckFree Option
shall be exercisable at the exercise price per share specified in such CheckFree
Option for the same number of shares of HoldCo Common Stock as the number of
shares of CheckFree Common Stock for which such CheckFree Option was exercisable
immediately prior to the Effective Time.
(ii) As of the Effective Time, HoldCo shall enter
into an assumption agreement with respect to each CheckFree Option, which shall
provide for HoldCo's assumption of the obligations of CheckFree under the
CheckFree Stock Plans. Prior to the Effective Time, CheckFree shall make such
amendments, if any, to the CheckFree Stock Plans as shall be necessary to permit
such assumption in accordance with this Section 3.1(d).
(iii) It is the intention of the parties that, to the
extent that any CheckFree Option constitutes an "incentive stock option" (within
the meaning of Section 422 of the Code) immediately prior to the Effective Time,
such CheckFree Option shall continue to qualify as an incentive stock option to
the maximum extent permitted by Section 422 of the Code, and that the assumption
of the CheckFree Option provided by this Section 3.1(d) shall satisfy the
conditions of Section 424(a) of the Code.
(e) Treatment of CheckFree Warrants. As of the Effective Time,
each outstanding warrant to purchase CheckFree Common Stock (the "CheckFree
Warrants") shall be assumed (whether by amendment to the CheckFree Warrants,
execution of an assumption agreement or as otherwise required by the terms of
any such CheckFree Warrant) by HoldCo and converted into a warrant to purchase
shares of HoldCo Common Stock. Following the Effective Time, each CheckFree
Warrant shall continue to have, and shall be subject to, the same terms and
conditions set forth such CheckFree Warrant or in any agreements governing the
terms of
-6-
<PAGE> 10
such CheckFree Warrant, and each such CheckFree Warrant shall be exercisable at
the exercise price per share specified in such CheckFree Warrant for the same
number of shares of HoldCo Common Stock as the number of shares of CheckFree
Common Stock for which such CheckFree Warrant was exercisable immediately prior
to the Effective Time.
SECTION 3.2 Issuance of HoldCo Common Stock to Parents and Holding
Subsidiaries. At the Effective Time, HoldCo shall issue, (i) in consideration of
the Holding Subsidiaries' respective contributions of their equity interests in
the TransPoint Entities, 13,000,000 fully paid and nonassessable shares of
HoldCo Common Stock to the Holding Subsidiaries, to be allocated in accordance
with Schedule 3.2, and (ii) in consideration of the obligations of Microsoft and
FDC pursuant to the Commercial Alliance Agreement and Marketing Agreement,
respectively, 3,000,000 and 1,000,000 fully paid and nonassessable shares of
HoldCo Common Stock to Microsoft and FDC (the foregoing clauses (i) and (ii), in
the aggregate, the "Parent Consideration"). Certificates representing the shares
of HoldCo Common Stock issuable pursuant to this Section shall be available for
inspection at the Closing and shall be delivered as of the Effective Time. Upon
delivery of such certificates, each of the Parents and Holding Subsidiaries and
First Data Resources, Inc. shall have no further interests in the TransPoint
Entities other than an indirect interest as holders of HoldCo Common Stock.
SECTION 3.3 Exchange of Shares and Certificates. To the extent the
certificates representing shares of CheckFree Common Stock may not act as
certificates representing an equal number of shares of HoldCo Common Stock, the
provisions of this Section 3.3 shall apply.
(a) Exchange Agent. As of the Effective Time, HoldCo shall
deposit with The Fifth Third Bank or such other bank or trust company as may be
designated by CheckFree (the "Exchange Agent"), for the benefit of the holders
of shares of CheckFree Common Stock, for exchange in accordance with this
Article 3 through the Exchange Agent, certificates representing the shares of
HoldCo Common Stock (such shares of HoldCo Common Stock, together with any
dividends or distributions with respect thereto with a record date after the
Effective Time, being hereinafter referred to as the "Exchange Fund") issuable
pursuant to Section 3.1 in exchange for outstanding shares of CheckFree Common
Stock.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, the Exchange Agent shall mail to each holder of record
of a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of CheckFree Common Stock (the "Certificates")
whose shares were converted into shares of HoldCo Common Stock pursuant to
Section 3.1, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as HoldCo may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of HoldCo Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by CheckFree, together with such
letter of transmittal, duly executed, and such other documents as may reasonably
be required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of HoldCo Common Stock which such holder has the
-7-
<PAGE> 11
right to receive pursuant to the provisions of this Article 3, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of CheckFree Common Stock which is not registered in the
transfer records of CheckFree, a certificate representing the proper number of
shares of HoldCo Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes required by
reason of the issuance of shares of HoldCo Common Stock to a person other than
the registered holder of such Certificate or establish to the satisfaction of
HoldCo that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 3.3, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of HoldCo Common Stock as
contemplated by this Section 3.3.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions with respect to HoldCo Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HoldCo Common Stock
represented thereby, until the surrender of such Certificate in accordance with
this Article 3. Subject to the effect of applicable laws, following surrender of
any such Certificate, there shall be paid to the holder of the certificate
representing whole shares of HoldCo Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of HoldCo Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
HoldCo Common Stock.
(d) No Further Ownership Rights in CheckFree Common Stock. All
shares of HoldCo Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Article 3 (including any cash
paid pursuant to Section 3.3(c)) shall be deemed to have been issued (and paid)
in full satisfaction of all rights pertaining to the shares of CheckFree Common
Stock theretofore represented by such Certificates, subject, however, to the
obligation of CheckFree, to pay any dividends or make any other distributions
with a record date prior to the Effective Time which may have been declared or
made by CheckFree, on such shares of CheckFree Common Stock in accordance with
the terms of this Agreement, and which remain unpaid at the Effective Time, and
there shall be no further registration of transfers on the stock transfer books
of CheckFree, of the shares of CheckFree Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to CheckFree or the Exchange Agent for any reason,
they shall be canceled and exchanged as provided in this Article 3, except as
otherwise provided by law.
(e) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of the Certificates for six
months after the Effective Time shall be delivered to HoldCo, upon demand, and
any holders of the Certificates who have not theretofore complied with this
Article 3 shall thereafter look only to HoldCo for payment of their claim for
HoldCo Common Stock and any dividends or distributions with respect to HoldCo
Common Stock.
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(f) No Liability. None of CheckFree, HoldCo, Merger Sub C, the
Parents or the Exchange Agent shall be liable to any person in respect of any
shares of HoldCo Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to seven years after the
Effective Time (or immediately prior to such earlier date on which any shares of
HoldCo Common Stock or any dividends or distributions with respect to HoldCo
Common Stock in respect of such Certificate would otherwise escheat to or become
the property of any Governmental Entity), any such shares, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of HoldCo free and clear of all claims or
interest of any person previously entitled thereto.
(g) Lost Certificates. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such Certificate to be lost, stolen or destroyed and subject to
such other conditions as the Board of Directors of HoldCo may impose, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificate the shares of HoldCo Common Stock as determined under Section
3.1(c), and pay any dividends or other distributions as determined in accordance
with Section 3.3(c) in respect of such Certificate; provided that HoldCo may, in
its reasonable discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificate to deliver a
bond in such sum as it may reasonably require as indemnity against any claim
that may be made against HoldCo, CheckFree, the Parents, Surviving CheckFree, or
the Exchange Agent with respect to the Certificate alleged to have been lost,
stolen or destroyed.
(h) Withholding Taxes. The Exchange Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of CheckFree Common Stock, such amounts as the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Exchange Agent, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of CheckFree Common Stock in respect of
which such deduction and withholding was made by the Exchange Agent. All amounts
in respect of taxes received or withheld by HoldCo or the Exchange Agent shall
be disposed of by HoldCo or the Exchange Agent in accordance with the Code or
such state, local or foreign tax law, as applicable.
SECTION 3.4 Adjustment of Parent Consideration. Prior to the Effective
Time, in the event of any: (A) reclassification, stock split, combination or
stock dividend with respect to the CheckFree Common Stock, (B) any change or
conversion of CheckFree Common Stock into other securities or any other dividend
or (C) distribution with respect to the CheckFree Common Stock, appropriate and
proportionate adjustments, if any, shall be made to the Parent Consideration,
and all references to the Parent Consideration in this Agreement shall be deemed
to be the Parent Consideration so adjusted.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE PARENTS WITH RESPECT TO THEMSELVES
Except as disclosed in the applicable disclosure schedule of even date
herewith with respect to each Parent, referring specifically to the
representations and warranties in this Agreement and identifying the section
number of this Agreement to which each disclosure relates (the "Parent
Disclosure Schedules"), each of the Parents, severally but not jointly, on
behalf of itself and any of the Holding Subsidiaries in which it beneficially
owns Capital Stock, represents and warrants to CheckFree as follows, with
respect to itself and any such Holding Subsidiary:
SECTION 4.1 Organization. (a) Such Parent is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as it is now being conducted. Such Parent is
duly qualified or licensed as a foreign corporation to do business and is in
good standing in each jurisdiction where the nature of its business or the
ownership, leasing or operation of its properties requires such qualification or
licensing, except where the failure to be so qualified or licensed and in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on such Parent, HoldCo, or the TransPoint Entities.
(b) Each such Holding Subsidiary is either a corporation or a
limited liability company duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation and has all
requisite power and authority to carry on its business as it is now being
conducted. Each such Holding Subsidiary is duly qualified or licensed to do
business and is in good standing in each jurisdiction where the nature of its
business or the ownership, leasing or operation of its properties requires such
qualification or licensing, except where the failure to be so qualified or
licensed and in good standing would not, individually or in the aggregate, have
a Material Adverse Effect on such Holding Subsidiary, HoldCo, or the TransPoint
Entities.
SECTION 4.2 Authority. Each of such Parent and such Holding Subsidiary
has full power and authority to execute, deliver and perform this Agreement and
the Ancillary Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance by such Parent and such Holding Subsidiary of this Agreement and the
Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized and
approved by all necessary corporate or equivalent action of such Parent and such
Holding Subsidiary and no other corporate or equivalent proceedings on the part
of such Parent or such Holding Subsidiary are necessary to authorize this
Agreement and the Ancillary Agreements to which it is a party and the
transactions contemplated hereby and thereby. This Agreement has been, and on
the Closing Date each Ancillary Agreement to which such Parent or such Holding
Subsidiary is a party will be, duly authorized, executed and delivered by such
Parent and such Holding Subsidiary and this Agreement constitutes, and on the
Closing Date each Ancillary Agreement to which such Parent or such Holding
Subsidiary is a party will constitute, the legal, valid and
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binding obligation of such Parent or such Holding Subsidiary, as the case may
be, enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by the
effect of general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
SECTION 4.3 No Conflicts. (a) The execution, delivery and performance
by each of such Parent and such Holding Subsidiary of this Agreement and the
Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby, including without limitation the
consummation of the Transfers, do not, and will not, (i) violate or conflict
with any provision of the Certificate of Incorporation, Articles of
Incorporation, Bylaws or similar organizational documents of such Parent or such
Holding Subsidiary, (ii) violate any law, rule, regulation, order, writ,
injunction, judgment or decree of any Governmental Entity applicable to such
Parent or such Holding Subsidiary, or (iii) result in a violation or breach of,
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under,
require the payment of any additional compensation (whether as a penalty,
liquidated damages or otherwise) to any party with respect thereto, or result in
the creation of or imposition of any Lien in favor of any Person upon any of the
assets of such Parent or such Holding Subsidiary under, any note, bond,
indenture, lien, mortgage, lease, permit, guaranty or other agreement,
instrument or obligation to which such Parent or such Holding Subsidiary is a
party or by which any of its assets or other rights may be bound, except in the
case of clauses (ii) and (iii) (A) as set forth in Section 4.3(a) of the
applicable Parent Disclosure Schedule, and (B) for such matters which,
individually or in the aggregate, would not have a Material Adverse Effect on
such Parent, such Holding Subsidiary, HoldCo, or the TransPoint Entities.
(b) The execution, delivery and performance by such Parent and
such Holding Subsidiaries of this Agreement and the Ancillary Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby will not require any consent, approval, authorization or permission
of, or filing with or notification to any Governmental Entity, or any other
Person except for (i) such filings as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and any applicable foreign antitrust laws, (ii) such consents or
approvals from the Office of the Controller of the Currency ("OCC") with respect
to Citibank as may be required under applicable laws, and (iii) any such
consent, approval, authorization, permission, notice or filing which if not
obtained or made would not, individually or in the aggregate, have a Material
Adverse Effect on such Parent, such Holding Subsidiary, HoldCo, or the
TransPoint Entities.
SECTION 4.4 Litigation. There are no claims, actions, suits,
arbitrations, legal or administrative proceedings or investigations ("Actions")
pending or, to the Knowledge of such Parent, threatened against or affecting
such Parent or any such Holding Subsidiary that would have a Material Adverse
Effect on HoldCo or the TransPoint Entities or have a material adverse effect on
the ability of such Parent or such Holding Subsidiary to perform its obligations
hereunder or under any of the Ancillary Agreements to which it is a party.
Neither such Parent nor such Holding Subsidiary, nor the assets, rights or
business of such Parent or such Holding Subsidiary, is subject to any judgment,
order, writ, injunction, decree, settlement or stipulation of
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or under any court, governmental agency or arbitration tribunal which would have
a Material Adverse Effect on HoldCo or the TransPoint Entities or have a
material adverse effect on the ability of such Parent or such Holding Subsidiary
to perform its obligations hereunder or under any of the Ancillary Agreements to
which it is a party.
SECTION 4.5 Brokers. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's or
similar fee or commission, in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of such Parent or
such Holding Subsidiary.
SECTION 4.6 Reorganization. Each such Parent and Holding Subsidiary has
not taken any action or failed to take any action, which action or failure would
jeopardize the qualification of (i) the TransPoint Contribution and the
CheckFree Merger, together, as an exchange pursuant to Section 351 of the Code,
or (ii) the CheckFree Merger as a reorganization within the meaning of Section
368(a) of the Code. No Parent or Holding Subsidiary has a present plan or
intention to sell or otherwise transfer its HoldCo Common Stock after the
Effective Time.
SECTION 4.7 Information in the Proxy Statement/Registration Statement.
None of the written information with respect to such Parent and its Holding
Subsidiaries supplied or to be supplied by such Parent or such Holding
Subsidiaries in writing specifically for inclusion or incorporation by reference
in (i) the HoldCo Registration Statement (as defined in Section 8.1) will, at
the time the HoldCo Registration Statement is filed with the SEC and at the time
it becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (ii) the Proxy
Statement/Prospectus (as defined in Section 8.1) will, at the dates mailed to
stockholders of CheckFree and at the times of the meeting of stockholders of
CheckFree to be held in connection with the CheckFree Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. No representation
or warranty is made by such Parent or such Holding Subsidiaries pursuant to this
Section 4.7 with respect to statements made in or information incorporated by
reference in the HoldCo Registration Statement or the Proxy Statement/Prospectus
other than statements based on information supplied by such Parent or such
Holding Subsidiaries in writing specifically for inclusion or incorporation by
reference in the HoldCo Registration Statement or the Proxy/Statement
Prospectus.
SECTION 4.8 Parent Licenses. Microsoft and FDC have licensed certain
intellectual property to the TransPoint Entities, and Citibank has given the
TransPoint Entities an option to license certain intellectual property, all as
described in the License Agreements, each as amended and restated as of the date
hereof, which licenses are in full force and effect, and are valid and binding
against the respective licensors. The Parents acknowledge that the rights of the
licensees pursuant to such respective licenses may be transferred to HoldCo or
its Subsidiaries following the Effective Time.
SECTION 4.9 Parent Conflicting Contracts. Section 4.9 of the Microsoft
Disclosure Schedule lists those contracts or agreements of Microsoft which, to
the Knowledge of Microsoft,
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conflict with or are exceptions to the exclusivity and non-competition
provisions of the proposed Commercial Alliance Agreement to which Microsoft will
be a party. All such contracts will expire or may be terminated by Microsoft
within one year of the Effective Time.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF THE PARENTS WITH RESPECT TO THE TRANSPOINT ENTITIES
Except as disclosed in a disclosure schedule of even date herewith,
referring specifically to the representations and warranties in this Agreement
with respect to the TransPoint Entities and identifying the section number of
this Agreement to which each disclosure relates (the "TransPoint Disclosure
Schedule"), each of the Parents, severally but not jointly, represents and
warrants to CheckFree and HoldCo as follows; provided, however, that Citibank is
not representing or warranting as to MSFDC or MSFDC International:
SECTION 5.1 Organization. Each of the TransPoint Entities is duly
organized, validly existing and in good standing under the laws of the state or
jurisdiction of its incorporation or formation and has all requisite corporate
power and authority to carry on its business as it is now being conducted. The
Parents have delivered to CheckFree complete and correct copies of the
certificate of incorporation and bylaws or equivalent organizational documents,
in each case, as amended to the date of this Agreement of each TransPoint
Entity. Each TransPoint Entity is duly qualified or licensed as a foreign
corporation or other organization to do business and is in good standing in each
jurisdiction where the nature of its business or the ownership, leasing or
operation of its properties requires such qualification or licensing, except
where the failure to be so qualified or licensed and in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on such Person.
SECTION 5.2 Capitalization; Options and Other Rights.
(a) Section 5.2(a) of the TransPoint Disclosure Schedule sets
forth (i) the name and jurisdiction of incorporation or organization of each of
the TransPoint Entities, (ii) the total number of authorized shares or equity
interests of each class of Capital Stock of each of the TransPoint Entities, the
number of shares outstanding (if applicable) and the number of shares (or
percentage equity interests) owned by any other TransPoint Entity or any other
Person and (iii) a complete list of the directors and officers (or equivalent
positions) of each TransPoint Entity. All the issued and outstanding shares or
equity interests of Capital Stock of each TransPoint Entity have been duly and
validly authorized and issued and are fully paid in accordance with such
TransPoint Entity's organizational documents, and are free of pre-emptive
rights. None of the outstanding shares or equity interests of Capital Stock of
any TransPoint Entity has been issued in violation of the preemptive rights of
any equityholder of such TransPoint Entity. The Capital Stock of each TransPoint
Entity was issued in compliance with all applicable federal and state securities
laws and regulations, and is owned free and clear of all Liens.
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(b) There are neither (i) any existing agreements,
subscriptions, options, warrants, calls, commitments, trusts (voting or
otherwise), or rights of any kind whatsoever granting to any Person any interest
in or the right to purchase or otherwise acquire from any TransPoint Entity, at
any time, or upon the occurrence of any stated event, any Capital Stock in any
TransPoint Entity, whether or not presently issued or outstanding, nor (ii) is
there any outstanding Capital Stock in any TransPoint Entity or any other Person
which is convertible into or exchangeable for other shares of Capital Stock of
or equity interests in any TransPoint Entity, nor (iii) are there any
agreements, subscriptions, options, warrants, calls, commitments or rights of
any kind granting to any Person any interest in or the right to purchase or
otherwise acquire from any TransPoint Entity or any other Person any shares of
Capital Stock or equity interests so convertible or exchangeable, nor (iv) are
there any proxies, agreements or understandings with respect to the voting of
the Capital Stock of any TransPoint Entity. No TransPoint Entity, directly or
indirectly, has any ownership or other interest in, or control of, any Person.
No TransPoint Entity is controlled by or under common control with any Person
other than the Parents, their Affiliates and other TransPoint Entities.
SECTION 5.3 No Conflicts; Consents. (a) The execution and delivery and
the performance of this Agreement and the consummation of the transactions
contemplated hereunder including, without limitation, the consummation of the
Transfers, do not, and will not, (i) violate or conflict with any provision of
the certificate of incorporation, bylaws, limited liability company agreement,
partnership agreement or equivalent organizational documents of any TransPoint
Entity, (ii) violate any law, rule, regulation, order, writ, injunction,
judgment or decree of any court or Governmental Entity applicable to any
TransPoint Entity or (iii) result in a violation or breach of, constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, require the payment
of any additional compensation (whether as a penalty, liquidated damages or
otherwise) to any party with respect thereto, or result in the creation of or
imposition of any Lien in favor of any Person upon any of the assets of any
TransPoint Entity under any Material Contract (as defined in Section 5.8) to
which any TransPoint Entity is a party or by which any of its assets or other
rights may be bound, except in the case of clause (ii) for matters which
individually or in the aggregate, would not have a Material Adverse Effect on
the TransPoint Entities.
(b) The execution and delivery of this Agreement does not, and
the performance of this Agreement and the consummation of the transactions
contemplated hereby will not, as to any TransPoint Entity, require any consent,
approval, authorization or permission of, or filing with or notification to any
Governmental Entity or any other Person except for (i) the filing and
recordation of appropriate merger documents as required by the DGCL, (ii) such
filings as may be required under the HSR Act, and any applicable foreign
antitrust laws and such consents or approval of the OCC as may be required by
applicable law and (iii) any such consent, approval, authorization, permission,
notice or filing which if not obtained or made would not have, individually or
in the aggregate, a Material Adverse Effect on the TransPoint Entities.
SECTION 5.4 Financial Statements. Attached hereto in Section 5.4 of the
TransPoint Disclosure Schedule are true and complete copies of the following
financial statements of the TransPoint Business (the "Financial Statements"):
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(a) audited balance sheets of the TransPoint Business
as of June 30, 1999 (the "Balance Sheet"), audited and with a report by Deloitte
& Touche LLP;
(b) audited statements of operations, member
interests and cash flows of the TransPoint Business for the fiscal year ended
June 30, 1999, audited and with a report by Deloitte & Touche LLP;
(c) the unaudited balance sheet of the TransPoint
Business as of December 31, 1999 (the "Unaudited Balance Sheet)";
(d) an unaudited statement of operations of the
TransPoint Business for the six months ended December 31, 1999.
The Financial Statements were prepared in accordance with GAAP
consistently applied except as indicated in the reports thereto of Deloitte &
Touche LLP. The Financial Statements were prepared on the basis of the books and
records of the TransPoint Business (in each case, as of the date of such
Financial Statements) and present fairly, in all material respects, the
financial position of the TransPoint Business as of the dates thereof and the
results of its operations and changes in stockholders' equity and cash flows for
each of the periods then ended in conformity with GAAP. Each of the Financial
Statements (including any related schedules and/or notes, if any) has been
prepared in a consistent manner with the periods set forth in the other
Financial Statements.
SECTION 5.5 Absence of Undisclosed Liabilities; Indebtedness. (a)
Except as set forth in the Balance Sheet or the notes thereto, no TransPoint
Entity has any liability or obligation of any nature (whether absolute, accrued
or contingent or otherwise or whether known or unknown) other than (i)
liabilities or obligations incurred in the ordinary course of business and not
required to be set forth in the Balance Sheet or the notes thereto under GAAP
applied on a basis consistent with the Financial Statements, (ii) liabilities or
obligations incurred after the date of the Balance Sheet in the ordinary course
of business and consistent with past practice, and (iii) liabilities which,
individually or in the aggregate, would not have a Material Adverse Effect on
the TransPoint Entities.
(b) No TransPoint Entity has any Indebtedness. "Indebtedness"
shall mean each of the following: (i) obligations created, issued or incurred
for borrowed money, including all fees and obligations thereunder (including,
without limitation, any prepayment or termination fees arising or which will
arise out of the prepayment of such Indebtedness prior to its maturity and
termination), (ii) obligations to pay the deferred purchase price or acquisition
price of property or services, other than trade or accounts payable arising, and
accrued expenses incurred, in the ordinary course of business consistent with
past practice, (iii) the face amount of all letters of credit issued for the
account of any TransPoint Entity and all drafts thereunder, (iv) capital lease
obligations, if any, and (v) any obligation guaranteeing any Indebtedness or
other financial obligations of any other Person (including any obligations under
any keep well or support agreements).
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SECTION 5.6 Operations and Obligations. Except as reflected on the
Balance Sheet, since June 30, 1999:
(a) There have been no events or conditions resulting,
individually or in the aggregate, in a Material Adverse Effect on the TransPoint
Entities other than as a result of (i) general economic conditions, (ii)
business and economic conditions generally affecting the electronic billing and
payment industry, (iii) liabilities incurred in connection with this Agreement
or the transactions contemplated hereby (including litigation brought or, to the
Knowledge of the Parents, threatened against any TransPoint Entity or any member
of their Boards of Directors or equivalent governing bodies in respect of this
Agreement) or (iv) the public announcement of this Agreement and the
transactions contemplated hereby.
(b) There has been no impairment, damage, destruction, loss or
claim, whether or not covered by insurance, or condemnation of any material
property or other assets of any of the TransPoint Entities.
(c) Since December 31, 1999, each TransPoint Entity has
conducted its business only in the ordinary course and consistent with the
TransPoint Business strategy, except for actions (i) required to be taken in
connection with the transactions contemplated hereunder or (ii) approved in
advance thereof by CheckFree in writing. Without limiting the generality of the
foregoing, since December 31, 1999, no TransPoint Entity has sold, leased (as
lessor), transferred or otherwise disposed of, mortgaged or pledged, or imposed
or suffered to be imposed any Lien on, any of the assets reflected on the
Balance Sheet or any assets acquired by such TransPoint Entity after December
31, 1999, except for (1) equipment sold or disposed of and replaced in the
ordinary course of its business and (2) Permitted Liens.
(d) There has been no material change in the accounting
principles or practices used by the TransPoint Entities, in each case, from
those applied in the preparation of the Financial Statements.
SECTION 5.7 Properties and Assets. (a) Each TransPoint Entity has good
and valid title to the properties, assets and other rights reflected on the
Balance Sheet or acquired since the date of the Balance Sheet, other than
nonmaterial properties, assets and other rights disposed of in the ordinary
course of business consistent with past practice since the date of such Balance
Sheet, and one or more of the TransPoint Entities has good and valid title to
all such properties, assets and other rights free and clear of Liens, except for
Permitted Liens.
(b) Section 5.7 of the TransPoint Disclosure Schedule sets
forth a complete and accurate list of (i) the real properties owned by any
TransPoint Entity (the "Fee Properties") and (ii) the real properties leased by
any TransPoint Entity (the "Leased Properties"). Each TransPoint Entity has good
and marketable fee simple title to the Fee Properties and good and marketable
leasehold title to the Leased Properties, in each case free and clear of all
Liens, tenants and occupants except for Permitted Liens. Complete and accurate
copies of all leases or other agreements relating to the Leased Properties have
been delivered to CheckFree and there have been no material changes or
amendments to such leases or agreements since such delivery. Each TransPoint
Entity is the lawful owner of all improvements and fixtures located on the Fee
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Properties and all moveable fixtures located at the Leased Properties, free and
clear of all Liens except for Permitted Liens. Each lease or other agreement
relating to the Leased Properties is a valid and subsisting agreement, without
any material default of any TransPoint Entity thereunder and, to the Knowledge
of the Parents, without any material default thereunder of the other party
thereto, and such leases and agreements give the TransPoint Entities the right
to use or occupy, as the case may be, all real properties as are sufficient and
adequate to operate the TransPoint Business as it is currently being conducted.
The TransPoint Entities' possession of such property has not been disturbed nor
has any claim relating to the TransPoint Entities' title to or possession of
such property been asserted against the TransPoint Entities.
(c) The Parents have provided CheckFree lists of (i) all of
the tangible personal property used by the TransPoint Entities in the TransPoint
Business having an original acquisition cost of $50,000 or more, and (ii) all
leases of personal property binding upon any TransPoint Entity. All of such
tangible personal property is presently utilized by the TransPoint Entities in
the ordinary course of its business and is in good working order, ordinary wear
and tear excepted.
SECTION 5.8 Contracts. (a) Section 5.8 of the TransPoint Disclosure
Schedule lists any of the following contracts or arrangements (whether written
or oral) to which any TransPoint Entity is a party or by which it is obligated
otherwise as of the date hereof (the "Material Contracts"):
(i) any contract or arrangement with a sales representative,
distributor, dealer, broker, sales agency, advertising agency or other
person engaged in sales, distribution or promotional activities, or any
contract to act as one of the foregoing on behalf of any person, which
is not terminable without the payment of any termination fee or the
incurring of any penalty by the applicable TransPoint Entity on 60 or
fewer days notice;
(ii) any contract or arrangement of any nature which involves
the payment or receipt of cash or other property, an unperformed
commitment or goods or services, having a value in excess of $50,000;
(iii) any contract or arrangement pursuant to which any
TransPoint Entity has made or will make loans or advances in excess of
$50,000;
(iv) any contract or arrangement for bill presentment and/or
bill payment services which is not terminable, without the payment of
any termination fee or the payment of any penalty, by the applicable
TransPoint Entity on 30 days notice;
(v) any contract or arrangement involving a partnership, a
limited liability company, a joint venture or other cooperative
undertaking requiring a sharing of assets or technology of any
TransPoint Entity;
(vi) any contract or arrangement involving any restrictions
with respect to the geographical area of operations or scope or type of
business of any TransPoint Entity;
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(vii) any power of attorney or agency agreement or arrangement
with any Person pursuant to which such Person is granted the authority
to act for or on behalf of any TransPoint Entity, or any TransPoint
Entity is granted the authority to act for or on behalf of any Person;
(viii) any contract not fully performed and relating to any
acquisition or disposition of any TransPoint Entity or any predecessor
in interest of any TransPoint Entity, or any acquisition or disposition
of any subsidiary, division, line of business, or real property of any
TransPoint Entity;
(ix) all contracts and arrangements between any TransPoint
Entity and the equityholders or Affiliates of any TransPoint Entity;
and
(x) any material agreement (including software licenses)
involving the licensing, use or ownership of the TransPoint Entities'
Intellectual Property Rights (as defined in Section 5.12)
("Intellectual Property Agreements"); and
(xi) any contract not specified above, the cancellation,
breach, or nonperformance of which would reasonably be expected to have
a Material Adverse Effect on the TransPoint Entities.
(b) The Parents have made available to CheckFree complete and accurate
copies of each of the written contracts and agreements and written summaries of
the material terms of any oral contract or agreement, set forth on Section 5.8
of the TransPoint Disclosure Schedule.
SECTION 5.9 Absence of Default. (a) Except as would not, individually
or in the aggregate have a Material Adverse Effect on the TransPoint Entities,
each of the agreements to which any of the TransPoint Entities is a party
constitutes a valid and binding obligation of the TransPoint Entities, and is in
full force and effect.
(b) Except with respect to circumstances that would not reasonably be
expected to have a Material Adverse Effect on the TransPoint Entities, (i) each
TransPoint Entity has fulfilled and performed in all respects its obligations
under each such agreement to which it is a party to the extent such obligations
are required by the terms thereof to have been fulfilled or performed through
the date hereof; (ii) no TransPoint Entity is or is alleged in writing to be,
and each other party to any such agreement is not, to the Knowledge of the
Parents, in breach of or default under, nor is there alleged in writing to be
any basis for termination of, any such agreement; (iii) no event has occurred
and no condition or state of facts exists which, with the passage of time or the
giving of notice or both, would constitute such a default or breach by any
TransPoint Entity or, to the Knowledge of the Parents, by any such other party;
and (iv) no TransPoint Entity is currently renegotiating any such agreement in
respect of which such TransPoint Entity is alleged to be in default or paying
liquidated damages in lieu of performance thereunder.
SECTION 5.10 Litigation. (a) There are no actions, suits, arbitrations,
legal or administrative proceedings or investigations pending against any
TransPoint Entity. To the Knowledge of the Parents, there are no actions, suits,
arbitrations, legal or administrative
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proceedings or investigations threatened against or affecting any TransPoint
Entity which would reasonably be expected to have a Material Adverse Effect on
the TransPoint Entities. Neither any TransPoint Entity, nor the assets,
properties or business of any TransPoint Entity, is subject to any judgment,
order, writ, injunction or decree of any court, governmental agency or
arbitration tribunal. No TransPoint Entity is the plaintiff in any such
proceeding nor is any TransPoint Entity contemplating commencing legal action
against any other Person.
SECTION 5.11 Compliance with Law. (a) Except as would not, individually
or in the aggregate, have a Material Adverse Effect upon the TransPoint
Entities, each TransPoint Entity is not in breach or default under any order or
decree of any court, Governmental Entity, arbitrator or arbitration board or
tribunal and has complied in all material respects with, and is not in violation
of, in any material respect, any law, ordinance or governmental rule or
regulation (collectively, "Laws").
(b) Each TransPoint Entity has obtained all licenses, permits,
certificates, authorizations, approvals, registrations or other governmental
authorizations (collectively "Authorizations") necessary for the ownership or
use of its assets, properties and rights or the conduct of its business other
than Authorizations, the failure of such TransPoint Entity to possess, would
not, individually or in the aggregate, have a Material Adverse Effect on the
TransPoint Entities.
(c) Except as would not, individually or in the aggregate,
have a Material Adverse Effect upon the TransPoint Entities, each Authorization
is in full force and effect and no proceeding is pending or, to the Knowledge of
the Parents, threatened to modify, suspend, revoke or otherwise limit any of
such Authorization and no administrative or governmental actions have been taken
or, to the Knowledge of the Parents, threatened in connection with the
expiration or renewal of any such Permits.
(d) Except as would not, individually or in the aggregate,
have a Material Adverse Effect upon the TransPoint Entities, no TransPoint
Entity has received written notice of violation by any TransPoint Entity of any
Laws or Authorization.
SECTION 5.12 TransPoint Intellectual Property. (a) Each TransPoint
Entity owns, or is validly licensed or otherwise has the valid right to use, on
and before the Effective Time, all trade secrets, copyrights, and U.S.
trademarks and service marks (the "Intellectual Property Rights") that any
TransPoint Entity has used in commerce on or before the Effective Time in the
conduct of its business. To the Knowledge of the Parents, such Intellectual
Property Rights used by any TransPoint Entity in the conduct of its business as
currently conducted consistent with past practices are free of all Liens.
Section 5.12 of the TransPoint Disclosure Schedule contains a list of all patent
registrations and applications, trademark registrations and applications, domain
name registrations and applications and copyright registrations and applications
owned by a TransPoint Entity. The execution, delivery and performance of this
Agreement and the transactions contemplated thereby will not constitute a breach
or default, or otherwise jeopardize or impair the validity or enforceability of
any Intellectual Property Rights of the TransPoint Entities that are material to
the conduct of the TransPoint Business.
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(b) No TransPoint Entity has received any written charge, complaint,
claim, demand or notice (excluding email, other than email addressed to the
officer of a TransPoint Entity or Parent) alleging any interference,
infringement, conflict with, misappropriation or violation ("Infringement") of
any Intellectual Property Rights or patents (including any claim that any
TransPoint Entity must license or refrain from using any Intellectual Property
Rights of any other Person) that has not been settled or otherwise fully
resolved in a manner that is not adverse to the TransPoint Entities. There are
no pending or outstanding Actions or Orders that seek to limit or challenge the
use, validity, ownership, value or enforceability of any Intellectual Property
Right or patent of the TransPoint Entities, nor to any Parent's Knowledge, are
any threatened.
(c) To Knowledge of the Parents, HoldCo's use after the Transfers of
the TransPoint Entities' Intellectual Property Rights which are material to the
conduct of the TransPoint Business will not Infringe the Intellectual Property
Rights of any other Person.
(d) Each employee, agent, consultant, officer, director or contractor
who has materially contributed to or participated in the creation or development
of any Intellectual Property Rights other than Parent IPR or Third Party IPR (as
defined herein) on behalf of any TransPoint Entity or any predecessor in
interest thereto either: (i) is a party to a "work-for-hire" agreement under
which any TransPoint Entity is deemed to be the sole original owner/author of
all Intellectual Property Rights therein; or (ii) has executed an assignment or
an agreement to assign solely in favor of any TransPoint Entity or such
predecessor in interest, as applicable, all right, title and interest and all
Intellectual Property Rights in such material. To the Knowledge of the Parents,
no Parent or employee of any TransPoint Entity has any interest in any
Intellectual Property Rights other than Parent IPR or Third Party IPR licensed
by Microsoft that are material to the business or operations of the TransPoint
Entities (other than as an equityholder in a Parent). For purposes of this
Section 5.12, "Parent IPR" means all trademarks, trade secrets, and/or
copyrights licensed by Microsoft, FDC or Citibank to a TransPoint Entity
pursuant to the License Agreements, and "Third Party IPR" means any patents,
trademarks, trade secrets and/or copyrights licensed to a TransPoint Entity by
(i) Microsoft pursuant to a standard license for commercially available software
products, or (ii) any Person other than a TransPoint Entity, Microsoft, FDC or
Citibank. Notwithstanding the foregoing, to the Knowledge of the Parents, the
parties licensing the Third Party IPR own all rights therein.
(e) To the Knowledge of the Parents, none of the activities of any
employee of any TransPoint Entity on behalf thereof violates any obligations of
such employee to third parties, including, without limitation, confidentiality
or noncompetition obligations under agreements with a former employer. No Parent
is aware of any unauthorized use by a third party of any Intellectual Property
Rights of the TransPoint Entities. The TransPoint Entities have taken and are
taking reasonable precautions (i) to keep confidential all material trade
secrets and other confidential information included in the Intellectual Property
Rights, and (ii) otherwise to protect and maintain the validity of their
material Intellectual Property Rights.
(f) No TransPoint Entity (i) has sold, assigned, transferred, licensed
or sublicensed, or entered into any contract to sell, assign, transfer or
sublicense its Intellectual Property Rights other than customary licenses
entered into in the ordinary course of business that permit its end-
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users and customers to use any Intellectual Property Rights embedded in its
products and (ii) has entered into any contract (oral or written) or other
arrangement pursuant to which any TransPoint Entity has agreed or is obligated
to license, transfer or place in escrow the source code for any of its products
(prior or current).
(g) Except as set forth in Section 5.12(g) of the TransPoint Disclosure
Schedule, to the Knowledge of the Parents, the change to the year 2000 has not
caused, and is not expected to cause any material (i) disruption or impairment
to the operation of the business of the TransPoint Entities or their provision
of any products or services, (ii) liabilities or payments to any other Person,
or (iii) additional expenses other than those reflected in the latest public
filings.
(h) Except as set forth in Section 5.12(h) of the TransPoint Disclosure
Schedule, in operating their businesses, the TransPoint Entities take all
commercially reasonable actions to prevent any Person from unauthorized or
improper use of, or access or modifications to, its software, systems or
services or the personal information of any Person contained therein.
SECTION 5.13 Tax Matters. (a) (i) Each TransPoint Entity has filed all
material Tax Returns required to be filed; (ii) all such Tax Returns are
complete and accurate in all material respects and all Taxes shown to be due on
such Tax Returns have been timely paid, except where failure to timely pay would
not, individually or in the aggregate, have a Material Adverse Effect on the
TransPoint Entities; (iii) all Taxes (whether or not shown on any Tax Return)
owed by the TransPoint Entities have been timely paid or the TransPoint Entities
have established adequate reserves therefor, except, where failure to timely pay
or establish adequate reserves would not, individually or in the aggregate, have
a Material Adverse Effect on the TransPoint Entities; (iv) there is no action,
suit, investigation, audit, claim or assessment pending or, to the Knowledge of
the Parents, proposed or threatened in writing with respect to Taxes of the
TransPoint Entities; (v) all material deficiencies asserted or assessments made
as a result of any examination of the Tax Returns referred to in clause (i) have
been paid in full; (vi) Tax indemnity arrangements, if any, will terminate prior
to Closing and the TransPoint Entities will not have any liability thereunder on
or after Closing; (vii) there are no Liens for Taxes upon the assets of the
TransPoint Entities except Liens relating to current Taxes not yet due; (viii)
Taxes which the TransPoint Entities are required by law to withhold or to
collect for payment have been duly withheld and collected, and have been paid or
accrued, reserved against and entered on the books of the TransPoint Entities in
accordance with GAAP; and (ix) no TransPoint Entity is or has been a member of
any affiliated group of corporations within the meaning of Section 1504(a) of
the Code.
(b) No TransPoint Entity owns an interest in any (i) domestic
international sales corporation, (ii) foreign sales corporation, (iii)
controlled foreign corporation or (iv) passive foreign investment company.
(c) Each TransPoint Entity has never been and is not a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code.
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SECTION 5.14 Employees. No TransPoint Entity currently has any
employees, and no TransPoint Entity has any continuing liabilities or
obligations with respect to any former employees of such TransPoint Entity. No
TransPoint Entity has any employment agreement with, or maintains any employee
benefit plan (within the meaning of Section 3(3) of ERISA) with respect to, any
Person. There are no agreements with respect to any Person that would obligate
the TransPoint Entities to make any payment or provide any benefit the deduction
of which is limited by Section 280G of the Code or that could be subject to tax
under Section 4999 of the Code.
SECTION 5.15 Employment Practices; Labor Relations. (a) Each TransPoint
Entity has complied in all material respects with all applicable laws, rules and
regulations or contractual requirements respecting employment and employment
practices, terms and conditions of employment, of employees, former employees or
other labor related matters, including, without limitation, those relating to
wages, hours, the payment of social security and similar taxes, equal employment
opportunity, employment discrimination, fair labor standards and occupational
health and safety, wrongful discharge or violation of the personal rights of
employees, former employees or prospective employees, and is not liable for any
arrears of wages or any taxes or penalties for failure to comply with any such
Laws, rules or regulations.
(b) There are no material controversies relating to the
TransPoint Business pending or, to the Knowledge of the Parents, threatened
between any TransPoint Entity and any of the employees of any TransPoint Entity
or between any Parent and any employee of such Parent who is primarily engaged
in the TransPoint Business.
(c) No TransPoint Entity is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by any TransPoint Entity, nor is any Parent a party to any collective
bargaining agreement or other labor union contract applicable to employees of
such Parent who are primarily engaged in the TransPoint Business nor, to the
Knowledge of the Parents, are there any activities or proceedings of any labor
union to organize any such employees.
(d) There are no (i) unfair labor practice complaints pending
against any TransPoint Entity before the National Labor Relations Board or any
current union representation questions involving employees of any TransPoint
Entity or employees of a Parent primarily engaged in the TransPoint Business;
(ii) strikes, slowdowns, work stoppages or lockouts existing, or, to the
Knowledge of the Parents, threatened, by or with respect to any employees of any
TransPoint Entity or to employees of a Parent primarily engaged in the
TransPoint Business; (iii) charges pending before the Equal Employment
Opportunity Commission or any state, local or foreign agency responsible for the
prevention of unlawful employment practices with respect to any TransPoint
Entity or to any Parent in respect of employees primarily engaged in the
TransPoint Business; or (iv) claims pending against any TransPoint Entity or
against any Parent with respect to employees primarily engaged in the TransPoint
Business before any workers' compensation board.
(e) No TransPoint Entity has received written notice that any
federal, state, local or foreign agency responsible for the enforcement of labor
or employment laws intends to
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conduct an investigation of or relating to any TransPoint Entity and, to the
Knowledge of the Parents, no such investigation is in progress.
(f) There are no contracts, commitments or arrangements
between any TransPoint Entity and any employee which require the payment of any
compensation by any TransPoint Entity upon the occurrence of the Transfers or
any other transaction contemplated by this Agreement.
SECTION 5.16 Environmental Matters. (a) (i) Each TransPoint Entity
complies and has complied with all applicable Environmental Laws, and possesses
and complies with and has possessed and complied with all Environmental Permits;
(ii) there are and have been no Materials of Environmental Concern or other
conditions, at any property owned, leased or occupied by a TransPoint Entity
that could give rise to any liability under any Environmental Law or result in
costs arising out of any Environmental Law; (iii) no judicial, administrative,
or arbitral proceeding (including any notice of violation or alleged violation)
under any Environmental Law to which any TransPoint Entity is or will be named
as a party is pending or, to the Knowledge of the Parents, threatened, nor is
any TransPoint Entity the subject of any investigation in connection with any
such proceeding or, to the Knowledge of the Parents, potential proceeding; (iv)
there are no past or present conditions, circumstances, practices, plans, or
legal requirements that would be expected to prevent, or materially increase the
burden on the TransPoint Entities of complying with applicable Environmental
Laws or of obtaining, renewing, or complying with all Environmental Permits
required under such laws; and (v) the Parents have provided to CheckFree true
and complete copies of all Environmental Reports relating to the TransPoint
Business or the TransPoint Entities.
(b) For purposes of this Agreement:
(i) "Environmental Laws" shall mean any and all laws, rules,
orders, regulations, statutes, ordinances, guidelines, codes,
decrees, or other legally enforceable requirement (including,
without limitation, common law) of the United States, or any
state, local, municipal or other governmental authority,
regulating, relating to or imposing liability or standards of
conduct concerning protection of the environment or of human
health, or employee health and safety.
(ii) "Environmental Permits" shall mean any and all permits,
licenses, registrations, notifications, exemptions and any
other authorization required under any Environmental Law.
(iii) "Environmental Report" shall mean any report, study,
assessment, audit, or other similar document that addresses
any issue of actual or potential noncompliance with, or actual
or potential liability under or cost arising out of, any
Environmental Law that may in any way affect any TransPoint
Entity or the TransPoint Business.
(iv) "Materials of Environmental Concern" shall mean any
gasoline or petroleum (including crude oil or any fraction
thereof) or petroleum products,
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polychlorinated biphenyls, urea-formaldehyde insulation,
asbestos, pollutants, contaminants and radioactivity, and any
other substances of any kind that are regulated pursuant to or
could give rise to liability under any Environmental Law.
SECTION 5.17 Insurance. Section 5.17 of the TransPoint Disclosure
Schedule sets forth a list of all policies of insurance maintained, owned or
held by, or on behalf of, any TransPoint Entity as of the date hereof and a
brief description of any outstanding claims under any of such insurance
policies. Such policies provide insurance in such amounts and against such risks
customary for companies engaged in similar businesses to the TransPoint Business
to protect the employees, properties, assets, businesses and operations of the
TransPoint Entities. Each TransPoint Entity has complied in all material
respects with each such insurance policy to which it is a party and has not
failed to give any notice or present any claim thereunder in a due and timely
manner. The full policy limits (subject to deductibles provided in such
policies) are available and unimpaired under each such policy and no insurer
under any of such policies has a basis to void such policy on grounds of
non-disclosure on the part of a TransPoint Entity thereunder. Each such policy
is in full force and effect and will not in any way be affected by or terminate
or lapse by reason of the transactions contemplated by this Agreement and the
Ancillary Agreements.
SECTION 5.18 Accounts Receivable. All accounts receivable of the
TransPoint Entities (i) have arisen from bona fide transactions by the
TransPoint Entities in the ordinary course of their businesses and represent
bona fide claims against debtors for sales and other charges and (ii) are not
subject to discount except for cash and immaterial trade discount consistent
with past practice. The amount carried for doubtful accounts and allowances
accrued on the books of the TransPoint Entities, based on past loss experience,
is sufficient to provide for any losses that may be sustained on realization of
the accounts receivable of the TransPoint Entities.
SECTION 5.19 Customers and Suppliers. As of the date of this Agreement
and, to the Knowledge of the Parents, during the 12-month period ended on the
date hereof (i) none of the customers of the TransPoint Entities which
individually account for more than 5% of the consolidated gross revenues of the
TransPoint Entities during the 12-month period ended December 31, 1999 (the
"Material Customers") has terminated or communicated that it intends to
terminate any agreement with, or reduce its purchases from, the TransPoint
Entities, (ii) no material supplier of any TransPoint Entity has communicated
that it will stop, or decrease the rate of, supplying materials, products or
services to any TransPoint Entity and (iii) there has not been any material
dispute between any TransPoint Entity and any of the Material Customers or any
of its material suppliers.
SECTION 5.20 Affiliate Transactions. All agreements, arrangements,
undertakings or other transactions between any TransPoint Entity and any Parent
or any Affiliate of any Parent, excluding any other TransPoint Entities as of
the date hereof, are described in Section 5.20 of the TransPoint Disclosure
Schedule and, other than the Transition Services Agreement (as described in
Section 8.7 hereof) and those agreements specifically so identified in Section
5.20 of the TransPoint Disclosure Schedule, none of the above shall be binding
on any TransPoint Entity, or any Parent or any Affiliate of any Parent as of the
Effective Time.
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SECTION 5.21 Export Control Laws. Each TransPoint Entity has conducted
its export transactions in accordance with applicable provisions of United
States export control laws and regulations, including but not limited to the
Export Administration Act and implementing Export Administration Regulations.
Without limiting the foregoing:
(a) The TransPoint Entities have obtained all export licenses
and other approvals required for their current export (including transmissions)
of products, software and technologies from the United States;
(b) The TransPoint Entities are in compliance whereas by 5.11
with the terms of all applicable export licenses or other approvals;
(c) There are no pending or, to the Knowledge of the Parents,
threatened material claims against any TransPoint Entity with respect to such
export licenses or other approvals;
(d) To the Knowledge of the Parents, there are no actions,
conditions or circumstances pertaining to the export transactions (or
transmissions) of any TransPoint Entity that are likely to give rise to any
future Actions; and
(e) No consents or approvals for the transfer of export
licenses to HoldCo and its Subsidiaries are required, or such consents and
approvals can be obtained expeditiously without material cost to HoldCo or its
Subsidiaries.
SECTION 5.22 Reorganization. No TransPoint Entity has taken any action
or failed to take any action, which action or failure would jeopardize the
qualification of (i) the TransPoint Contribution and the CheckFree Merger,
together, as an exchange pursuant to Section 351 of the Code or (ii) the
CheckFree Merger as a reorganization within the meaning of Section 368(a) of the
Code.
SECTION 5.23 Brokers. Except for the engagement of Morgan Stanley Dean
Witter no broker, investment banker, financial advisor or other person is
entitled to any broker's, finder's, financial advisor's or similar fee or
commission, in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the TransPoint Entities.
SECTION 5.24 Entire Business. The assets and other rights of the
TransPoint Entities, together with the rights to be made available to HoldCo and
its Subsidiaries pursuant to the License Agreements and the services provided
and the assets made available by the Parents under the Transition Services
Agreement constitute all of the assets, properties and other rights used by the
TransPoint Entities to conduct the TransPoint Business, as currently conducted
(including provision of services and assets by the Parents), other than
third-party intellectual property which is generally commercially available
where the cost to license such intellectual property is less than $100,000 per
annum; provided, however, that nothing in this Section 5.24 shall be read as
making any representation as to the rights of the TransPoint Entities to use any
intellectual property currently used in the conduct of the TransPoint Business.
No TransPoint
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Entity has engaged in any activity other than the operation of, or has any
liabilities or obligations other than those arising from, the TransPoint
Business.
SECTION 5.25 Information in the HoldCo Registration Statement and Proxy
Statement/Prospectus. None of the written information supplied or to be supplied
by any of the Parents on behalf of the TransPoint Entities, or by any of the
TransPoint Entities themselves, specifically for inclusion or incorporation by
reference in (i) the HoldCo Registration Statement will, at the time the HoldCo
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) the Proxy
Statement/Prospectus will, at the dates mailed to stockholders of CheckFree and
at the times of the meeting of stockholders of CheckFree to be held in
connection with the CheckFree Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. No representation or warranty is made
pursuant to this Section 5.25 with respect to (i) any written information
subject to the representations and warranties provided in Section 4.7 and (ii)
statements made in or information incorporated by reference in the HoldCo
Registration Statement or the Proxy Statement/Prospectus other than statements
based on information supplied by any Parent or any TransPoint Entity in writing
specifically for inclusion or incorporation by reference in the HoldCo
Registration Statement or the Proxy Statement/Prospectus.
SECTION 5.26 Minute Books. All minute books of each of the TransPoint
Entities have been made available to CheckFree.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF CHECKFREE AND HOLDCO
Except as disclosed in a disclosure schedule of even date herewith,
referring specifically to the representations and warranties in this Agreement
and identifying the section number of this Agreement to which each disclosure
relates (the "CheckFree Disclosure Schedule"), each of CheckFree and HoldCo
represents and warrants to each of the Parents and the Holding Subsidiaries as
follows:
SECTION 6.1 Organization. Each of CheckFree, HoldCo, and Merger Sub C
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of CheckFree, HoldCo, and Merger Sub C has
all requisite corporate power and authority to enter into and perform this
Agreement and the Ancillary Agreements to which it is a party and to consummate
the transactions contemplated hereby and thereby. Each of CheckFree and, upon
Closing, HoldCo, is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction in which the character of its
properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect on CheckFree or HoldCo. Merger Sub C
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was organized solely for the purposes of effecting the CheckFree Merger and has
engaged in no activity other than in connection therewith.
SECTION 6.2 Subsidiaries. Section 6.2 of the CheckFree Disclosure
Schedule includes a complete and accurate list of each Subsidiary of CheckFree,
indicating the jurisdiction of incorporation and the nature and level of
ownership in such Subsidiary by CheckFree, any Subsidiary of CheckFree and any
other Person. Complete and correct copies of the Certificate of Incorporation
and Bylaws of CheckFree and of each Subsidiary of CheckFree have previously been
delivered to the Parents. Neither CheckFree nor any of its Subsidiaries owns of
record or beneficially, directly or indirectly, any outstanding Capital Stock or
securities convertible into Capital Stock of any other corporation, partnership,
joint venture or other noncorporate business enterprise. Each Subsidiary of
CheckFree is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to own or lease and operate its properties and
assets and to carry on its business as it is now being conducted. Each
Subsidiary of CheckFree is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect on CheckFree. All the outstanding Capital Stock
of CheckFree's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and is owned by CheckFree or by a wholly owned Subsidiary of
CheckFree free and clear of any Liens, and there are no proxies or voting or
transfer agreements or understandings outstanding with respect to any such
shares. Complete and correct copies of the Certificate of Incorporation and
Bylaws of each of HoldCo and Merger Sub C have been delivered to the Parents.
SECTION 6.3 Capitalization; Options and Other Rights. (a) The
authorized Capital Stock of CheckFree consists of 150,000,000 shares of
CheckFree Common Stock and 15,000,000 shares of CheckFree Preferred Stock, and,
as of December 31, 1999, 57,305,659 shares of CheckFree Common Stock were issued
and 51,756,278 shares of CheckFree Common Stock were outstanding (the
"Outstanding CheckFree Common Stock"), all of which were duly authorized and
validly issued and are fully paid and nonassessable, and no shares of CheckFree
Preferred Stock were issued and outstanding. As of December 31, 1999, there were
CheckFree Options to purchase up to a total of 5,824,608 shares of CheckFree
Common Stock and outstanding CheckFree Warrants to purchase up to a total of
11,400,000 shares of CheckFree Common Stock. All the Outstanding CheckFree
Common Stock has been duly and validly authorized and issued and is fully paid
and nonassessable. None of the Outstanding CheckFree Common Stock has been
issued in violation of the preemptive rights of any stockholder of CheckFree.
The Outstanding CheckFree Common Stock has been issued, and the shares of
CheckFree Common Stock to be issued upon the exercise of CheckFree Options will
be issued, in compliance in all material respects with all applicable federal
and state securities laws and regulations.
(b) The authorized Capital Stock of HoldCo consists of 1,000
shares of HoldCo Common Stock, of which 100 shares are issued and outstanding
and owned by CheckFree. The authorized Capital Stock of Merger Sub C consists of
1,000 shares of Merger Sub C Common Stock, of which 100 shares are issued and
outstanding and owned by HoldCo.
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All of the outstanding stock of HoldCo and Merger Sub C have been duly and
validly authorized and issued and are fully-paid and nonassessable.
(c) There are neither (i) any existing agreements,
subscriptions, options, warrants, calls, commitments, trusts (voting or
otherwise), or rights of any kind granting to any Person any interest in or the
right to purchase or otherwise acquire from CheckFree, HoldCo, or Merger Sub C
or granting to CheckFree, HoldCo, or Merger Sub C any interest in or the right
to purchase or otherwise acquire from any Person, at any time, or upon the
occurrence of any stated event, any securities of CheckFree, HoldCo, or Merger
Sub C, whether or not presently issued or outstanding, other than the purchase
rights to receive shares of CheckFree stock under the CheckFree Rights
Agreement, nor (ii) any outstanding securities of CheckFree or any other entity
which are convertible into or exchangeable for other securities of CheckFree,
nor (iii) any agreements, subscriptions, options, warrants, calls, commitments
or rights of any kind granting to any Person any interest in or the right to
purchase or otherwise acquire from CheckFree, HoldCo, or Merger Sub C or any
other Person any securities so convertible or exchangeable, nor, (iv) to the
Knowledge of CheckFree, any proxies, agreements or understandings with respect
to the voting of the Outstanding CheckFree Common Stock, except as contemplated
by this Agreement.
SECTION 6.4 Authority. (a) Each of CheckFree, HoldCo, and Merger Sub C
has full power and authority to execute, deliver and perform this Agreement and
the Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby. The execution, delivery and
performance by each of CheckFree, HoldCo, and Merger Sub C of this Agreement and
the Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized and
approved by all necessary corporate action by such party except, in the case of
CheckFree, for the approval of CheckFree's stockholders as set forth in Section
6.6 and, except for the filing of appropriate merger documents as required by
the DGCL, no other corporate proceedings other than actions previously taken on
the part of CheckFree, HoldCo, and Merger Sub C are necessary to authorize this
Agreement and the Ancillary Agreements to which it is a party and the
consummation of the transactions contemplated hereby and thereby. This Agreement
has been duly authorized, executed and delivered by each of CheckFree, HoldCo,
and Merger Sub C and constitutes the legal, valid and binding obligation of
CheckFree, HoldCo, and Merger Sub C enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law). On the Closing Date, each Ancillary Agreement to which HoldCo is a party
will be duly authorized, executed and delivered by HoldCo, and on the Closing
Date each Ancillary Agreement to which HoldCo is a party will constitute the
legal, valid and binding obligation of HoldCo, enforceable in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors rights generally and by the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law.) The filing of the HoldCo Registration Statement and all other aspects of
the registration of the HoldCo Common Stock to be issued pursuant to the
CheckFree Merger under the Securities Act have been duly authorized by HoldCo.
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(b) The Board of Directors of CheckFree (i) has approved this
Agreement and the transactions contemplated hereby, (ii) has determined that the
terms of the CheckFree Merger are in the best interests of its stockholders and
(iii) has resolved to recommend the approval of the CheckFree Merger, the
adoption of this Agreement and the consummation of the transactions contemplated
hereby to its stockholders.
(c) The Board of Directors of HoldCo (i) has approved this
Agreement and the transactions contemplated hereby, (ii) has determined that the
terms of the CheckFree Merger and the TransPoint Contribution are in the best
interests of its stockholders and (iii) has resolved to recommend the approval
of the CheckFree Merger, the TransPoint Contribution, the adoption of this
Agreement and the consummation of the transactions contemplated hereby to its
stockholders.
(d) The sole shareholder of HoldCo has unanimously approved
and adopted the CheckFree Merger, the TransPoint Contribution and this Agreement
and the transactions contemplated hereby.
SECTION 6.5 No Conflicts; Consents. (a) The execution, delivery and
performance by CheckFree, HoldCo, and Merger Sub C of this Agreement and the
Ancillary Agreements to which it is a party and the transactions contemplated
hereby and thereby, including without limitation the consummation of the
Transfers, do not, and will not, (i) violate or conflict with any provision of
the Certificate of Incorporation or Bylaws of CheckFree, HoldCo, or Merger Sub
C, (ii) violate any law, rule, regulation, order, writ, injunction, judgment or
decree of any Governmental Entity applicable to CheckFree, HoldCo, or Merger Sub
C or (iii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, require the payment of any
additional compensation (whether as a penalty, liquidated damages or otherwise)
to any party with respect thereto, or result in the creation of or imposition of
any Lien in favor of any Person upon any of the assets of CheckFree, HoldCo, or
Merger Sub C under, any note, bond, indenture, lien, mortgage, lease, permit,
guaranty or other agreement, instrument or obligation, oral or written, to which
CheckFree, HoldCo, or Merger Sub C or CheckFree's Subsidiaries is a party or by
which any of its assets or other rights may be bound, except for such matters
which, individually or in the aggregate, would not have a Material Adverse
Effect on CheckFree or HoldCo.
(b) The execution, delivery and performance by each of
CheckFree and HoldCo of this Agreement and each Ancillary Agreement to which it
is a party and the consummation of the transactions contemplated hereby and
thereby does not require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity or any other Person
except for (i) the filing and recordation of appropriate merger documents as
required by the DGCL; (ii) any such consent, approval, authorization,
permission, notice or filing which is required under the Securities Act, the
Exchange Act and applicable state securities laws; (iii) such filings as may be
required under the HSR Act and any applicable foreign antitrust laws; and (iv)
any such consent, approval, authorization, permission, notice or filing which,
if not obtained or made, would not have a Material Adverse Effect on CheckFree
or HoldCo.
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SECTION 6.6 Stockholder Vote; State Anti-takeover Laws. (a) Pursuant to
the provisions of the DGCL, the Certificate of Incorporation of CheckFree, the
Bylaws of CheckFree and any other applicable law or stock exchange rules, the
only approval of holders of CheckFree Common Stock required to approve the
Transfers and to approve and adopt this Agreement and the transactions
contemplated hereby is the approval of a majority of the outstanding CheckFree
Common Stock.
(b) Prior to the execution of this Agreement, the Board of
Directors of each of CheckFree and HoldCo has taken all necessary action to
cause this Agreement and the transactions contemplated hereby and thereby to be
exempt from the provisions of Section 203 of the DGCL.
SECTION 6.7 Litigation. Neither CheckFree nor HoldCo is a party to any
suit, action, arbitration or legal, administrative, governmental or other
proceeding or investigation pending or, to its Knowledge threatened, which in
any manner challenges the Transfers, seeks to prevent, enjoin, alter or delay
the Transfers or otherwise reasonably could adversely affect or restrict its
ability to consummate the transactions contemplated by this Agreement or to
perform its obligations hereunder.
SECTION 6.8 SEC Filings; CheckFree Financial Statements. (a) Since
December 31, 1998, CheckFree has filed with the SEC all required reports,
schedules, forms, statements and other documents (including exhibits and all
other information incorporated therein) required under the Securities Act and
the Exchange Act (the "CheckFree SEC Documents"). As of their respective dates,
the CheckFree SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
CheckFree SEC Documents and none of the CheckFree SEC Documents at the time they
were filed contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of CheckFree included in the CheckFree
SEC Documents comply as to form, as of their respective dates of filing with the
SEC, in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present in all material respects the consolidated financial position of
CheckFree as of the dates thereof and the consolidated results of CheckFree's
operations, stockholders' equity and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal recurring year-end
audit adjustments) and are consistent in all material respects with the books
and records of CheckFree. Since June 30, 1999, there has been no change in any
of the significant accounting (including tax accounting) policies, practices or
procedures of CheckFree or any of its Subsidiaries. Except for liabilities or
obligations that are accrued or reserved against in CheckFree's financial
statements included in the CheckFree SEC Documents, neither CheckFree nor any of
its Subsidiaries has any liabilities or obligations (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) that would be
required by
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GAAP to be reflected on a consolidated balance sheet, or the notes thereto, or
which would have a Material Adverse Effect on CheckFree.
(b) Except for liabilities or obligations (i) reflected in the
financial statements or in the notes thereto included in the CheckFree SEC
Documents filed and publicly available prior to the date of this Agreement (the
"CheckFree Filed SEC Documents"), (ii) incurred in the ordinary course of
business consistent with past practice since the date of the most recent audited
financial statements of CheckFree contained in the CheckFree Filed SEC Documents
or (iii) incurred in connection with this Agreement or the transactions
contemplated hereby, neither CheckFree nor any of its Subsidiaries has any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature which, individually or in the aggregate, would have a Material
Adverse Effect on CheckFree.
SECTION 6.9 HoldCo Registration Statement; Proxy Statement/Prospectus.
Subject to the last sentence of this Section 6.9, the HoldCo Registration
Statement, at the time it becomes effective under the Securities Act and at the
Effective Time, will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading. Subject to the last sentence of this
Section 6.9, the Proxy Statement/Prospectus, at the dates mailed to stockholders
of CheckFree and at the times of the meeting of stockholders of CheckFree to be
held in connection with the CheckFree Merger, will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. Each of the HoldCo
Registration Statement and the Proxy Statement/Prospectus will comply as to form
in all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations thereunder. No representation or
warranty is made by CheckFree with respect to statements made in the HoldCo
Registration Statement or incorporated by reference therein or in the Proxy
Statement/Prospectus or incorporated by reference therein based on information
supplied by the Parents or any of the TransPoint Entities in writing
specifically for inclusion or incorporation by reference in the HoldCo
Registration Statement or the Proxy Statement/Prospectus.
SECTION 6.10 Operations and Obligations. Except as described in the
CheckFree SEC Documents, since the date of the most recent audited balance sheet
of CheckFree contained in the CheckFree Filed SEC Documents, there has been no
event or condition resulting in a Material Adverse Effect on CheckFree, other
than as a result of (a) general economic conditions, (b) business and economic
conditions generally affecting the electronic billing and payment industry, or
(c) liabilities incurred in connection with this Agreement or the transactions
contemplated hereby (including litigation brought or, to the Knowledge of
CheckFree, threatened against CheckFree or any member of CheckFree's Board of
Directors in respect of this Agreement).
SECTION 6.11 Reorganization. Neither CheckFree, HoldCo nor Merger Sub C
has taken any action or failed to take any action, which action or failure would
jeopardize (i) the treatment of the TransPoint Contribution and the CheckFree
Merger, together, as an exchange
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pursuant to Section 351 of the Code, and (ii) the treatment of the CheckFree
Merger as a reorganization within the meaning of Section 368(a) of the Code.
SECTION 6.12 Brokers. Except for the engagement of Merrill Lynch & Co.,
no broker, investment banker, financial advisor or other person is entitled to
any broker's, finder's, financial advisor's or similar fee or commission, in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of CheckFree or HoldCo.
SECTION 6.13 CheckFree Rights Agreement. CheckFree and the Board of
Directors of CheckFree have taken all necessary action so that none of the
execution of this Agreement and the consummation of the transactions
contemplated hereby will (i) cause any CheckFree Rights issued pursuant to the
CheckFree Rights Agreement to become exercisable, (ii) cause any of the Parents
or any of their Affiliates (as defined in the CheckFree Rights Agreement) to be
a 15% Stockholder (as defined in the CheckFree Rights Agreement) or give rise to
a Distribution Date, Section 11(a)(ii) Event or a Section 13(a) Event (as each
such term is defined in the CheckFree Rights Agreement).
SECTION 6.14 Opinion of Financial Advisor. CheckFree has received the
opinion of Merrill Lynch & Co. to the effect that, as of the date of such
opinion, the consideration to be received by the CheckFree Stockholders in the
CheckFree Merger is fair to the CheckFree Stockholders from a financial point of
view.
SECTION 6.15 CheckFree Intellectual Property. (a) To the Knowledge of
CheckFree, CheckFree owns, or is validly licensed or otherwise has the valid
right to use, on and before the Effective Time, all trade secrets, copyrights,
and U.S. trademarks and service marks (the "Intellectual Property Rights") that
CheckFree has used in commerce on or before the Effective Time in the conduct of
its business. The execution, delivery and performance of this Agreement and the
transactions contemplated thereby will not constitute a breach or default, or
otherwise jeopardize or impair the validity or enforceability, of any
Intellectual Property Rights of CheckFree that are material to the conduct of
CheckFree's business.
(b) CheckFree has not received any written charge, complaint, claim,
demand or notice (excluding email, other than email addressed to the officer of
CheckFree) alleging any interference, infringement, conflict with,
misappropriation or violation ("Infringement") of any Intellectual Property
Rights or patents (including any claim that CheckFree must license or refrain
from using any Intellectual Property Rights of any other Person) that has not
been settled, otherwise fully resolved in a manner that is not adverse to
CheckFree or determined to be baseless with the advice of counsel. There are no
pending or outstanding Actions or Orders that seek to limit or challenge the
use, validity, ownership, value or enforceability of any Intellectual Property
Right of CheckFree, nor to CheckFree's Knowledge, are any threatened.
(c) CheckFree has taken and is taking reasonable precautions (i) to
keep confidential all material trade secrets and other confidential included in
its Intellectual Property Rights, and (ii) otherwise to protect and maintain the
validity of its material Intellectual Property Rights.
(d) CheckFree has not sold, assigned, transferred, licensed or
sublicensed, or entered
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into any contract to sell, assign, transfer or sublicense its Intellectual
Property Rights other than customary licenses entered into in the ordinary
course of business that permit its end-users and customers to use any
Intellectual Property Rights embedded in its products.
(e) Except as set forth in Section 6.15(e) of the CheckFree Disclosure
Schedule, to the Knowledge of CheckFree, the change to the year 2000 has not
caused, and is not expected to cause any material (i) disruption or impairment
to the operation of the business of CheckFree or their provision of any products
or services, (ii) liabilities or payments to any other Person, or (iii)
additional expenses other than those reflected in the latest public filings.
(f) Except as set forth in Section 6.15(f) of the CheckFree Disclosure
Schedule, in operating its business, CheckFree takes all commercially reasonable
actions to prevent any Person from unauthorized or improper use of, or access or
modifications to, its Software, systems or services or the personal information
of any Person contained therein.
SECTION 6.16 Major Contracts. CheckFree has made available to the
Parents the material terms of all material contracts or arrangements for bill
presentment and/or bill payment services. Section 6.16 of the CheckFree
Disclosure Schedule lists any of the following contracts or arrangements to
which CheckFree is a party or by which CheckFree or HoldCo is or will be
obligated otherwise as of the date hereof:
(a) any contract or arrangement involving any restrictions
with respect to the geographical area of operations or scope or type of business
of CheckFree; and
(b) any contract or arrangement involving a partnership, a
limited liability company, a joint venture or other cooperative undertaking
requiring a sharing of technology of CheckFree or HoldCo.
SECTION 6.17 Compliance with Law. (a) Except as would not, individually
or in the aggregate, have a Material Adverse Effect upon CheckFree or HoldCo,
each of CheckFree and HoldCo is not in breach or default under any order or
decree of any Governmental Entity, arbitrator or arbitration board or tribunal
and has complied in all material respects with, and is not in violation of, in
any material respect, any Laws.
(b) Each of CheckFree and HoldCo has obtained all
Authorizations necessary for the ownership or use of its assets, properties and
rights or the conduct of its business other than Authorizations, the failure of
CheckFree or HoldCo to possess, would not, individually or in the aggregate,
have a Material Adverse Effect on CheckFree or HoldCo.
(c) Except as would not, individually or in the aggregate,
have a Material Adverse Effect upon CheckFree or HoldCo, each Authorization is
in full force and effect and no proceeding is pending or, to the Knowledge of
CheckFree and HoldCo, threatened to modify, suspend, revoke or otherwise limit
any of such Authorization and no administrative or governmental actions have
been taken or, to the Knowledge of CheckFree and HoldCo, threatened in
connection with the expiration or renewal of any such Permits.
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(d) Except as would not, individually or in the aggregate,
have a Material Adverse Effect upon CheckFree or HoldCo, neither CheckFree nor
HoldCo has received written notice of any violation of Laws or Authorization.
SECTION 6.18 Absence of Default. (a) Except as would not, individually
or in the aggregate, have a Material Adverse Effect on CheckFree or HoldCo, each
of the material agreements to which CheckFree is a party constitutes a valid and
binding obligation of CheckFree, and is in full force and effect.
(b) Except with respect to circumstances that would not
reasonably be expected to have a Material Adverse Effect on CheckFree or HoldCo,
(i) CheckFree has fulfilled and performed in all respects its obligations under
each such agreement referenced in Section 6.18(a) to which it is a party to the
extent such obligations are required by the terms thereof to have been fulfilled
or performed through the date hereof; (ii) CheckFree is not and is not alleged
in writing to be, in breach or default under, nor is there alleged in writing to
be any basis for termination of, any such agreement of any such agreement
referenced in Section 6.18(a); (iii) no event has occurred and no condition or
state of facts exists which, with the passage of time or the giving of notice or
both, would constitute such a default or breach by CheckFree referenced in
Section 6.18(a); and (iv) CheckFree is not currently renegotiating any such
agreement referenced in Section 6.18(a) in respect of which CheckFree is alleged
to be in default or paying liquidated damages in lieu of performance thereunder.
SECTION 6.19 Taxes. Except as would not, individually or in the
aggregate, have a Material Adverse Effect upon CheckFree or HoldCo:
(a) (i) CheckFree has filed all material Tax Returns required
to be filed; (ii) all such Tax Returns are complete and accurate in all material
respects and all Taxes shown to be due on such Tax Returns have been timely
paid; (iii) all Taxes (whether or not shown on any Tax Return) owed by CheckFree
have been timely paid or CheckFree has established adequate reserves therefor;
(iv) there is no action, suit, investigation, audit, claim or assessment pending
or, to the Knowledge of CheckFree, proposed or threatened in writing with
respect to Taxes of CheckFree; (v) all material deficiencies asserted or
assessments made as a result of any examination of the Tax Returns referred to
in clause (i) have been paid in full; (vi) there are no Liens for Taxes upon the
assets of CheckFree except Liens relating to current Taxes not yet due; (vii)
Taxes which CheckFree is required by law to withhold or to collect for payment
have been duly withheld and collected, and have been paid or accrued, reserved
against and entered on CheckFree's books in accordance with GAAP; and (viii)
CheckFree has not been a member of any affiliated group of corporations within
the meaning of Section 1504 of the Code, other than an affiliated group of which
CheckFree is the common parent.
(b) CheckFree does not own any interest in any (i) domestic
international sales corporation, (ii) foreign sales corporation, (iii)
controlled foreign corporation or (iv) passive foreign investment company.
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(c) Each of CheckFree and HoldCo has never been and is not a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
SECTION 6.20 Intention to Sell. To the Knowledge of CheckFree, no
existing shareholder of CheckFree owning a beneficial interest in five percent
(5%) or more of the Capital Stock of CheckFree has a plan or intention to sell
or otherwise transfer such shareholder's HoldCo Common Stock after the Effective
Time.
ARTICLE 7
CONDUCT OF THE BUSINESSES PENDING THE TRANSFERS
SECTION 7.1 Conduct of the TransPoint Business Pending Closing. (a)
From the date hereof until the Effective Time, Microsoft and FDC and their
Holding Subsidiaries will cause each TransPoint Entity, and Citibank will cause
each TransPoint Entity other than MSFDC and MSFDC International, to do each of
the following, and the Parents and Holding Subsidiaries will cause their
respective employees engaged in the TransPoint Business to do each of the
following unless expressly contemplated by this Agreement or CheckFree shall
otherwise consent in writing:
(i) maintain its existence in good standing;
(ii) maintain the general character of its business and
properties and conduct its business in the ordinary course consistent with the
current TransPoint Business strategy;
(iii) maintain business and book of account and records and
practices consistent with past practices; and
(iv) use its reasonable best efforts (A) to preserve its
business intact and (B) to preserve the goodwill of its suppliers, customers and
others having business relationships with the TransPoint Entities.
(b) Except as (1) otherwise expressly provided for herein or (2)
approved by CheckFree in writing, from the date hereof until the Effective Time,
each TransPoint Entity shall not (and the Parents and the Holding Subsidiaries
shall not permit any TransPoint Entity to):
(i) amend or otherwise change its Certificate of
Incorporation, Bylaws, limited liability company agreement or partnership
agreement (or equivalent organizational documents);
(ii) issue, sell, pledge or otherwise dispose of, or authorize
for issuance, sale, pledge or disposal of any of its Capital Stock or any other
of its securities, or make other agreements with respect to, any of its Capital
Stock or any other of its securities (other than issuance or sale of Capital
Stock to the Parents or the Holding Subsidiaries);
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(iii) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its Capital Stock;
(iv) (A) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or any division thereof ; (B) authorize any capital
commitment; or (C) enter into, amend or otherwise modify any contract,
agreement, commitment or arrangement with respect to any matter set forth in
this Section 7.1(b)(iv) if as a result of any such action under classes (A), (B)
or (C) of this subsection the TransPoint Entities would have any Indebtedness at
the Effective Time or have any undisclosed liabilities which would be a breach
of the representations in Section 5.5, considering the TransPoint Entities
together with any such acquisition on a consolidated basis whether or not
consolidated for GAAP purposes;
(v) sell, lease, license, mortgage, pledge, subject to Lien or
otherwise dispose of or encumber, in whole or in part, any of its assets or
properties (including Intellectual Property Rights), or agree to do so, except
for (A) Permitted Liens and (B) obsolete or worn out equipment no longer used in
the TransPoint Business;
(vi) materially change any of its equipment, software or
technology, except for upgrades, improvements or replacements;
(vii) enter into or modify any Material Contract, except (A)
in the ordinary course of business as consistent with the current TransPoint
Business strategy or (B) with the prior written consent of CheckFree (which
shall not be unreasonably withheld or delayed), or permit or perform any act
that would cause a material breach of any such Material Contract;
(viii) terminate, modify, assign, waive, release or relinquish
any rights under a Material Contract or amend any material rights or claims
except (A) in the ordinary course of business as consistent with the current
TransPoint Business strategy or (B) as otherwise permitted by this Section 7.1;
(ix) materially alter the present employment relationships of
the TransPoint Entities except as consistent with past practices;
(x) change any of its accounting policies or procedures;
(xi) make any material Tax election or settle or compromise
any material federal, state, local or foreign income Tax liability;
(xii) except as set forth on Schedule 7.1 of the TransPoint
Disclosure Schedule, settle or compromise any pending or threatened suit, action
or claim that is material or which relates to any of the transactions
contemplated by this Agreement or the Ancillary Agreements;
(xiii) make any loans, advances or capital contributions to or
investments in, any other Person, except as may be required under agreements in
effect as of the date hereof and identified on Section 7.1 of the TransPoint
Disclosure Schedule;
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(xiv) violate or fail to perform, in any material respect, any
obligation imposed upon a TransPoint Entity by any applicable laws, orders or
decrees, ordinances, governmental rules or regulations or otherwise as a result
of legal or regulatory process;
(xv) except in connection with the sale or licensing of any of
the TransPoint Entities' products in the ordinary course of business consistent
with past practice, sell, assign, transfer, license, sublicense, pledge or
otherwise encumber any of the Intellectual Property Rights in whole or in part;
(xvi) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing, or announce an intention,
commit or agree to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing; or
(xvii) terminate, modify, amend, assign, waive, release or
relinquish any rights under any agreement or arrangement with any Affiliate in a
manner adverse to CheckFree or HoldCo other than the releases between the
TransPoint Entities and Parents attached as Exhibits K(1) and K(2).
(c) From the date hereof until the Effective Time, each of the Parents
will (i) use reasonable best efforts to keep available the services of their
respective employees (or qualified replacements) dedicated to the TransPoint
Business as currently conducted and (ii) continue to provide not less than the
level of support and assistance to the TransPoint Entities that they are
currently providing and are expected to provide consistent with the current
TransPoint Business strategy.
(d) (i) During the period beginning on the date hereof and ending at
the Effective Time (the "Executory Period"), neither Microsoft nor its
Subsidiaries other than any existing Subsidiary which is registered under the
Exchange Act as of the date hereof or new Subsidiary which becomes so registered
during the Executory Period (other than MSN) will enter into any agreement with
a third party (other than the TransPoint Entities) for the provision of back end
services for Pay Anyone (as defined in the form of the Commercial Alliance
Agreement attached hereto as Exhibit E) or Bill Payment and Presentment (as
defined in the form of the Commercial Alliance Agreement attached hereto as
Exhibit E) on MSN, which services are available from CheckFree as of the signing
of this Agreement (the "Exclusive Services"), unless such agreement will expire
or may be terminated by Microsoft or such Subsidiaries within one year or less
from Closing.
(ii) During the Executory Period, if Microsoft or its
Subsidiaries other than any existing Subsidiary which is registered under the
Exchange Act as of the date hereof or new Subsidiary which becomes so registered
during the Executory Period (other than MSN) desires to implement features or
functionality on MSN that require back end DDA (as defined in the form of
Commercial Alliance Agreement attached hereto as Exhibit E) to DDA payment
processing services other than the Exclusive Services ("Other Services"),
Microsoft shall notify CheckFree of its requirements, and CheckFree shall
promptly respond as to whether such
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services are available from CheckFree. If they are, then the parties shall have
a 45-day exclusive negotiating period in which to come to a written service
level agreement therefor, during which period Microsoft or such Subsidiaries
shall not procure Other Services from a third party. Microsoft or such
Subsidiaries shall have the ultimate discretion as to whether to select
CheckFree or a third party supplier of Other Services. If Microsoft and
CheckFree agree during such 45-day period, then CheckFree shall supply the Other
Services to Microsoft pursuant to the terms of a written service level
agreement. As used herein, Other 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 the Other Services to Microsoft's requirements
at pricing specified by CheckFree, which offer commits CheckFree to deliver the
Other Services to Microsoft within 45 days of Microsoft's request.
(iii) Notwithstanding section 7.1(d)(ii) above, Microsoft may
elect not to contact CheckFree about the Other Services and contract with a
third party for Other Services; provided, however, in such event, Microsoft
shall not enter into such third party agreement unless such agreement will
expire or may be terminated by Microsoft within one year or less from Closing.
SECTION 7.2. Conduct of CheckFree's Business Pending Closing. (a) From
the date hereof until the Effective Time or the Transfers, CheckFree will:
(i) maintain its existence in good standing; and
(ii) conduct its business in the ordinary course and
consistent with past practices, except as expressly permitted by this Agreement
or approved by each of Microsoft and FDC in writing.
(b) Except (1) as set forth in Section 7.2 of the CheckFree Disclosure
Schedule, (2) as otherwise provided for herein or (3) as approved by each of
Microsoft and FDC in writing (which approval with respect to a split of the
CheckFree Common Stock shall not be unreasonably withheld or delayed), from the
date hereof until the Effective Time, CheckFree shall not:
(i) issue, sell or authorize for issuance or sale any shares
of its Capital Stock or any securities convertible or exchangeable for, or any
options, warrants or rights of any kind to acquire any shares of its Capital
Stock, in each case if such issuance or sale would require approval of the
stockholders of CheckFree under applicable law or stock exchange rules;
(ii) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise with respect to any
of the CheckFree Common Stock;
(iii) reclassify, combine, split or subdivide any of the
CheckFree Common Stock;
(iv) (A) enter into any transaction, other than as
contemplated pursuant to this Agreement, to the extent any such transaction
would require approval of the stockholders of
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CheckFree under applicable law or stock exchange rules except a Material
Transaction Proposal entered into after the Required CheckFree Vote or prior to
the Required CheckFree Vote with a party who agrees with Parents to approve this
Agreement as a stockholder of CheckFree; or (B) for a period of six (6) months
following the date hereof, enter into an agreement relating to any acquisition,
merger, consolidation or purchase that would reasonably be expected to (I)
impose any material delay in the obtaining of, or significantly increase the
risk of not obtaining, any Authorizations, consents, orders, declarations or
approvals of any Governmental Entity necessary to consummate the Transfers or
the expiration or termination of any applicable waiting period, (II)
significantly increase the risk of any Governmental Entity entering an order
prohibiting the consummation of the Transfers, or (III) significantly increase
the risk of not being able to remove any such order on appeal or otherwise; or
(v) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing, or announce an intention,
commit or agree to do any of the foregoing or to enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing.
SECTION 7.3 Conduct of Business by HoldCo and Merger Sub C Pending the
Transfers. Prior to the Effective Time and subject to any applicable regulatory
approvals, CheckFree shall cause HoldCo and Merger Sub C to (a) perform their
respective obligations hereunder and under this Agreement and the other
agreements referred to herein in accordance with the terms hereof and thereof
and take all other actions necessary or appropriate for the consummation of the
transactions contemplated hereby and thereby, (b) not incur directly or
indirectly any liabilities or obligations except those incurred in connection
with the consummation of this Agreement and the other agreements referred to
herein and the transactions contemplated hereby and thereby, (c) not engage
directly or indirectly in any business or activities of any type or kind
whatsoever and not enter into any agreements or arrangements with any person or
entity, or be subject to or be bound by any obligation or undertaking which is
not contemplated by this Agreement or the other agreements referred to herein,
(d) not create, grant or suffer to exist any Lien upon their respective
properties or assets which would attach to any properties or assets of HoldCo
after the Effective Time and (e) not amend the Certificate of Incorporation or
Bylaws of HoldCo or Merger Sub C.
ARTICLE 8
OTHER AGREEMENTS
SECTION 8.1 Preparation and Filing of HoldCo Registration Statement and
Proxy Statement/Prospectus. HoldCo and CheckFree, with the reasonable
cooperation of each of the Parents, the Holding Subsidiaries and the TransPoint
Entities, shall promptly prepare and file with the SEC as soon as practicable a
registration statement on Form S-4 (together with any amendments or supplements
thereto, whether prior to or after the effective date thereof, the "HoldCo
Registration Statement"), a portion of which HoldCo Registration Statement shall
also serve as the proxy statement/prospectus with respect to the meeting of
CheckFree's stockholders and the issuance of HoldCo Common Stock in connection
with the Transfers (together with any amendments or supplements thereto, the
"Proxy Statement/Prospectus"). The Parents and
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CheckFree shall use their reasonable best efforts to have the HoldCo
Registration Statement declared effective by the SEC as promptly as practicable
and to keep the HoldCo Registration Statement effective as long as is necessary
to consummate the Transfers. The Parents and CheckFree shall use their
reasonable best efforts to obtain, prior to the effective date of the HoldCo
Registration Statement, all necessary permits or approvals required under Blue
Sky Laws to carry out the Transfers; provided, however, that no party shall be
required to register or qualify as a foreign corporation or to take other action
which would subject it to service of process in any jurisdiction where it will
not be, following the Transfers, so subject.
SECTION 8.2 Stockholder Meeting; Approvals. (a) CheckFree shall, as
promptly as practicable following the execution of this Agreement, duly call
and, subject to providing a reasonable period for solicitation of proxies from
holders of CheckFree Common Stock, give notice of, convene and hold a meeting of
its stockholders (the "CheckFree Stockholders Meeting") for the purpose of
obtaining the Required CheckFree Vote with respect to the transactions
contemplated by this Agreement. In connection with the CheckFree Stockholders
Meeting, CheckFree will (i) mail to its shareholders, as promptly as
practicable, the Proxy Statement/Prospectus and all other proxy materials for
the CheckFree Stockholders Meeting, (ii) use its reasonable efforts to obtain
the Required CheckFree Vote and (iii) otherwise comply in all material respects
with all legal requirements applicable to the CheckFree Stockholders Meeting.
Notwithstanding a modification or withdrawal of the Board of Directors
recommendation to the CheckFree shareholders pursuant to Section 8.2(b), the
Board of Directors of CheckFree shall cause the CheckFree Stockholders Meeting
to be held as provided in this Section 8.2(a), unless the Parents have
terminated this Agreement pursuant to Section 10.1(g).
(b) The Board of Directors of CheckFree shall recommend
approval and adoption of this Agreement and the Transfers by CheckFree's
stockholders. The Board of Directors of CheckFree shall be permitted to withdraw
or modify its recommendation to the CheckFree stockholders that they give the
Required CheckFree Vote, if upon receiving a Material Transaction Proposal which
has a condition or requirement that the Transfers not occur, the Board of
Directors of CheckFree determines in good faith, based on the advice of outside
legal counsel, that, (i) in light of such Material Transaction Proposal, such
withdrawal or modification is required to comply with their fiduciary duties
under applicable law, and (ii) such Material Transaction Proposal constitutes a
Superior Proposal.
SECTION 8.3 No Solicitation. CheckFree shall not, and shall not
authorize or permit any of its officers, directors, employees, investment
bankers, attorneys or other advisers or representatives ("Representatives") to,
directly or indirectly, initiate, solicit or encourage (including by way of
furnishing information), or take any action to facilitate any inquiries or the
making of any offer or proposal which constitutes or may reasonably be expected
to lead to, any Material Transaction Proposal (as defined in Section 12.1), or,
in the event of an unsolicited Material Transaction Proposal, engage in any
discussions or negotiations relating thereto or provide any information or data
to any person relating to any Material Transaction Proposal or accept or approve
any Material Transaction Proposal; provided, however, that notwithstanding any
other provision hereof, CheckFree may (i) at any time prior to the time at which
the approval of the CheckFree Merger by a majority of all the votes entitled to
be cast by all holders of CheckFree Common Stock has been obtained, engage in
discussions or negotiations with a third
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party and/or may furnish such third party information concerning itself and its
business, properties and assets if, and only to the extent that, (A)(x) such
third party shall first have made an unsolicited bona fide Material Transaction
Proposal to CheckFree and (y) the Board of Directors of CheckFree shall have
determined in good faith, based upon the advice of outside counsel that such
action is required to comply with their fiduciary duties under applicable law
and (B) prior to furnishing such information to or entering into negotiations
with such third party, CheckFree (1) provides prompt notice to the Parents to
the effect that it is furnishing information to or entering into discussions or
negotiations with such third party and (2) receives from such third party an
executed confidentiality agreement and (ii) comply with Rule 14e-2 promulgated
under the Exchange Act with regard to a tender or exchange offer. CheckFree
shall notify the Parents orally and in writing of any such inquiries, offers or
proposals (including the terms and conditions of any such proposal and the
identity of the person making it) within 24 hours of the receipt thereof and
shall keep the other party informed of the status and details of any such
inquiry, offer or proposal. CheckFree shall immediately cease and cause to be
terminated all existing discussions and negotiations, if any, with any parties
conducted heretofore with respect to any Material Transaction Proposal.
SECTION 8.4 CheckFree Stock Plans. At the Effective Time, by virtue of
the Transfers, the CheckFree Stock Plans and the CheckFree Options granted
thereunder shall be assumed by HoldCo, with the result that all obligations of
CheckFree under the CheckFree Stock Plans, including with respect to awards
outstanding at the Effective Time under the CheckFree Stock Plan, shall be
obligations of HoldCo following the Effective Time; provided that in the case of
any CheckFree Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 or Section 423 of the Code, the option price,
number of shares purchasable pursuant to such CheckFree Option and the terms and
conditions of exercise of such CheckFree Option shall be determined in order to
comply with Section 424 of the Code. Prior to the Effective Time, CheckFree
shall cause HoldCo to take all necessary actions (including, if required to
comply with Section 162(m) of the Code (and the regulations thereunder) or
applicable law or stock exchange rules, obtaining the approval of its
stockholders at the next regularly scheduled annual meeting of HoldCo following
the Effective Time) for the assumption of the CheckFree Stock Plans, including
the reservation, issuance and listing of HoldCo Common Stock in a number at
least equal to the number of shares of HoldCo Common Stock that will be subject
to the HoldCo Options.
SECTION 8.5 Non-Disparagement. (a) Prior to the Effective Time, each of
the Parents and the Holding Subsidiaries and the TransPoint Entities shall not,
and shall require their respective employees working in connection with the
TransPoint Business not to, make comments publicly or to current or prospective
customers or otherwise take action which disparages CheckFree or its business.
(b) Prior to the Effective Time, CheckFree shall not, and
shall require its employees not to, make comments publicly or to current or
prospective customers, or otherwise take any action which disparages the
TransPoint Business, including by using the existence of this Agreement and the
transactions contemplated hereby as a reason not to use the products or services
of the TransPoint Business.
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SECTION 8.6 CheckFree Employee Matters. With respect to any employee
benefit plan maintained by CheckFree (a "CheckFree Plan") that is a "welfare
benefit plan" (as defined in Section 3(1) of ERISA), HoldCo and Parents shall
(i) cause there to be waived any pre-existing condition or waiting periods, (ii)
give effect, in determining any deductible and maximum out-of-pocket
limitations, to claims incurred and amounts paid by, and amounts reimbursed to,
such employees with respect to similar plans maintained by CheckFree immediately
prior to the Effective Time and (iii) recognize all credited service to the same
extent such service was recognized under similar plans maintained by CheckFree
immediately prior to the Effective Time.
SECTION 8.7 TransPoint Employee Matters. (a) Beginning as of the
Effective Time, CheckFree and HoldCo will have an initial three (3) month window
to solicit and hire key personnel of the Parents primarily engaged in the
TransPoint Business, for both electronic billing operations and electronic
commerce development; provided, however, that all costs of hiring such personnel
by CheckFree or HoldCo, including replacement of Microsoft or FDC stock options,
shall be the responsibility of and paid by CheckFree or HoldCo. For a period
ending no earlier than the first anniversary of the Effective Time, for any
employee of Microsoft primarily engaged in the TransPoint Business that is hired
by HoldCo or any of its Affiliates, HoldCo shall provide notice of termination
or pay in lieu thereof and severance pay, if applicable, that is no less
favorable than the employee's arrangement with Microsoft.
(b) At CheckFree's or HoldCo's election, for a period of up to
twelve (12) months after the Transfers, Microsoft and FDC will continue the
current arrangement under which Microsoft and FDC perform services for the
TransPoint Entities under the Transition Services Agreement attached as Exhibit
G. Under these arrangements, CheckFree or HoldCo will pay the cost of such
services at the rates set forth in the Transition Services Agreement which rates
are determined using multiples consistent with those currently used in
calculating the fees paid by the TransPoint Entities for such services but using
actual salaries at the time(s) of the performance of such services. During the
period of the Transition Services Agreement, Parents shall provide support for
the services to be provided to the MSFDC International licensees.
SECTION 8.8 Reserved.
SECTION 8.9 Post-Closing Business Plan. CheckFree and HoldCo shall
reasonably consult with Microsoft and FDC regarding the development by HoldCo of
a post-merger business plan for HoldCo within 60 days after Closing, which plan
may include without limitation the maintenance and operation of a development
center in Redmond, Washington. CheckFree and HoldCo will consider in good faith
the views of Microsoft and FDC in the development of such plan.
SECTION 8.10 Notification of Certain Matters. Each party hereto agrees,
subject to applicable laws relating to the exchange of information, promptly to
furnish the other parties hereto with copies of written communications (and
memoranda setting forth the substance of all oral communications) received by
such party, or any of its Affiliates or "associates" (as such term is defined in
Rule 12b-2 under the Exchange Act as in effect on the date hereof), from, or
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delivered by any of the foregoing to, any Governmental Entity relating to or in
respect of the transactions contemplated under this Agreement.
SECTION 8.11 Regulatory Matters. (a) Each party hereto shall take all
reasonable steps (i) promptly to file or cause to be filed with the Federal
Trade Commission (the "FTC") and the Department of Justice (the "DoJ") any
notifications required to be filed under the HSR Act, and the rules and
regulations promulgated thereunder with respect to the transactions contemplated
hereby; (ii) to comply in a timely manner with any request under the HSR Act for
additional information, documents, or other material received by such party or
any of its controlled Affiliates or Subsidiaries from the FTC or the DoJ or
other Governmental Entity in respect of such filings, the Transfers, or any
other transactions provided for in this Agreement, and (iii) to cooperate with
the other party in connection with any such filing and in connection with
resolving any investigation or other inquiry of any such agency or other
Governmental Entity under any Antitrust Laws (as defined in Section 8.11(b))
with respect to any such filing, the Transfers, or any such other transaction.
Each party shall promptly inform the other party of any material communication
with, and any proposed understanding, undertaking, or agreement with, any
Governmental Entity regarding any such filings, the Transfers, or any such other
transactions. No party shall participate in any meeting with any Governmental
Entity in respect of any such filings, investigation, or other inquiry without
giving the other parties notice of the meeting and, to the extent permitted by
such Governmental Entity, the opportunity to attend and participate.
(b) Subject to the other terms of this Section 8.11, each of
CheckFree and the Parents shall take all reasonable steps to resolve such
objections, if any, as may be asserted by any Governmental Entity with respect
to the Transfers or any other transactions provided for in this Agreement under
the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the
Federal Trade Commission Act, as amended, and any other federal, state or
foreign statutes, rules, regulations, orders, or decrees that are designed to
prohibit, restrict or regulate actions having the purpose or effect of
monopolization or restraint of trade (collectively, "Antitrust Laws").
(c) If any administrative or judicial action or proceeding is
instituted (or threatened to be instituted) challenging the Transfers as
violative of any Antitrust Law, and, if by mutual agreement, CheckFree and the
Parents decide that litigation is in their best interests, each of the Parents
and CheckFree shall (unless and until it determines that litigation is not in
its best interests) cooperate vigorously to contest and resist any such action
or proceeding and to have vacated, lifted, reversed, or overturned any decree,
judgment, injunction, or other order, whether temporary, preliminary, or
permanent (each, an "Order"), that is in effect and that prohibits, prevents, or
restricts consummation of the Transfers. Each of CheckFree and the Parents shall
take such reasonable action as may be required to cause the expiration of the
notice periods under the HSR Act or other Antitrust Laws with respect to the
Transfers and any other transactions provided for under this Agreement as
promptly as possible after the execution of this Agreement.
(d) Notwithstanding anything to the contrary in this Section
8.11, (i) neither the Parents, nor any of their respective Subsidiaries shall be
required to (A) divest or agree to
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hold separate any of their respective businesses, product lines, or assets, or
(B) to take or agree to take any other action or agree to any limitation that
such party reasonably believes in good faith would be materially adverse to such
party, and (ii) neither HoldCo, CheckFree nor their Subsidiaries shall be
required to (A) divest or agree to hold separate any of their respective
businesses, product lines, or assets, or (B) to take or agree to take any other
action or agree to any limitation such that CheckFree reasonably determines in
good faith that (1) such action or limitation would be materially detrimental to
the current CheckFree business or (2) CheckFree will no longer receive the
material benefits contemplated by this Agreement and the transactions
contemplated hereby taken as a whole.
(e) Each party hereto shall cooperate and use its commercially
reasonable efforts to promptly prepare and file all necessary documentation, to
effect all necessary applications, notices, petitions, filings and other
documents, and to use all commercially reasonable efforts to obtain all
necessary permits, consents, approvals, waivers and authorizations of all
Governmental Entities and all other persons necessary or advisable to consummate
the transactions contemplated by this Agreement. CheckFree shall have the right
to review and approve in advance all characterizations of the information
relating to CheckFree, on the one hand, and Parents shall have the right to
review and approve in advance all characterizations of the information relating
to Parents or the TransPoint Entities, on the other hand, in either case which
appear in any filing sought in connection with this Agreement. CheckFree and
Parents shall each consult with the other with respect to the obtaining of all
such necessary or advisable permits, consents, approvals, waivers and
authorizations of any Governmental Entity.
SECTION 8.12 Reasonable Efforts. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties hereto will use its
reasonable efforts to take or cause to be taken all actions, and to do, or cause
to be done, all things necessary, proper or advisable under applicable law and
regulations to consummate and make effective in the most expeditious manner
practicable, the transactions contemplated by this Agreement including (i)
subject to Section 8.11(c) the obtaining of all necessary actions and
non-actions, waivers and consents, if any, from any Governmental Entity and the
making of all necessary registrations and filings and the taking of all
reasonable steps as may be necessary to obtain an approval or waiver from, or to
avoid an action or proceeding by any Governmental Entity; (ii) the obtaining of
all necessary consents, approvals or waivers from any other Person; (iii)
subject to Section 8.11(c) the defending of any claim, investigation, action,
suit or other legal proceeding, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby; and
(iv) the execution of additional instruments necessary to consummate the
transactions contemplated by this Agreement. Each party will promptly consult
with the other and provide necessary information (including copies thereof) with
respect to all filings made by such party with any Governmental Entity in
connection with this Agreement and the transactions contemplated hereby.
SECTION 8.13 Access; Documents; Supplemental Information. (a) From the
date hereof through the Closing, the Parents shall afford, shall cause each
TransPoint Entity to afford and, with respect to clause (ii) below, shall use
their reasonable best efforts to cause the independent certified public
accountants for the TransPoint Entities to afford, (i) to the officers,
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independent certified public accountants, counsel and other representatives of
CheckFree, upon reasonable notice, reasonable access during regular business
hours to (A) the properties, books and records, including Tax Returns filed and
those in preparation, of the TransPoint Entities, and (B) the officers,
employees, accountants, counsel and other representatives of the TransPoint
Entities and of the Parents to the extent involved with the TransPoint Business,
in order that CheckFree may have full opportunity to make such investigations as
it shall reasonably desire to make of the operations, properties, business,
financial condition and prospects of the TransPoint Business, (ii) to the
independent certified public accountants of CheckFree, upon reasonable notice,
reasonable access during regular business hours to the work papers and other
records of the accountants relating to the TransPoint Business, and (iii) to
CheckFree and its representatives, such additional financial and operating data
and other information as to the properties, operations, business and financial
condition of the TransPoint Entities as CheckFree shall from time to time
reasonably require. Unless otherwise required by law, CheckFree will treat any
such information which is nonpublic as confidential in accordance with the terms
of the Non-Disclosure Agreement, dated as of November 2, 1999 (the
"Non-Disclosure Agreement"), among CheckFree, Microsoft and MSFDC.
(b) From the date hereof through the Closing, CheckFree shall
afford, shall cause each of its Subsidiaries to afford and, with respect to
clause (ii) below, shall use its reasonable best efforts to cause the
independent certified public accountants for CheckFree and its Subsidiaries to
afford, (i) to the officers, independent certified public accountants, counsel
and other representatives of the Parents, upon reasonable notice, reasonable
access during regular business hours to (A) the properties, books and records,
including Tax Returns filed and those in preparation, of CheckFree and its
Subsidiaries, and (B) the officers, employees, accountants, counsel and other
representatives of CheckFree and its Subsidiaries, in order that the Parents may
have full opportunity to make such investigations as it shall reasonably desire
to make of the operations, properties, business, financial condition and
prospects of CheckFree and its Subsidiaries, (ii) to the independent certified
public accountants of the Parents, upon reasonable notice, reasonable access
during regular business hours to the work papers and other records of the
accountants relating to CheckFree and its Subsidiaries, and (iii) to the Parents
and their representatives, such additional financial and operating data and
other information as to the properties, operations, business and financial
condition of CheckFree and its Subsidiaries as the Parents shall from time to
time reasonably require. Unless otherwise required by law, the Parents will
treat any such information which is nonpublic as confidential in accordance with
the terms of the Non-Disclosure Agreement.
(c) From the date hereof through the Closing, CheckFree and
the Parents agree to furnish promptly to each other copies of any notices,
documents, requests, court papers, or other materials received from any
Governmental Entity or any other third party with respect to the transactions
contemplated by this Agreement, except where it is obvious from such notice,
document, request, court paper or other material that the other party was
already furnished with a copy thereof.
(d) The Parents shall deliver to CheckFree without charge, the
following financial information (the "Supplemental Financial Information"): (i)
within 45 days after each fiscal quarter ending after the date hereof and prior
to the Effective Time, the unaudited balance
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sheet of the TransPoint Business as of the end of such quarter and the unaudited
statements of operations, stockholders' equity and cash flows of the TransPoint
Business for such quarter and for the portion of the fiscal year then completed,
(ii) within 90 days after each fiscal year ending after the date hereof and
prior to the Effective Time, the audited balance sheet of the TransPoint
Business as of the end of such year and the audited statements of operations,
stockholders' equity and cash flows of the TransPoint Business for such year, in
each case prepared in accordance with GAAP and certified by Deloitte & Touche
LLP, and (iii) promptly upon the reasonable request by CheckFree, such
additional financial information as may be required in connection with any
filing by CheckFree pursuant to the requirements of federal or state securities
laws. Such Supplemental Financial Information shall present fairly, in all
material respects, the financial position of the TransPoint Entities for the
period covered, subject, in the case of unaudited financials, to normal year-end
adjustments and the omission of footnotes.
SECTION 8.14 Comfort Letters. (a) The Parents shall use their
reasonable best efforts to cause to be delivered to CheckFree, on behalf of the
TransPoint Entities, a "comfort" letter of Deloitte & Touche LLP, the TransPoint
Entities' independent public accountants, dated the date on which the HoldCo
Registration Statement shall become effective and as of the Effective Time, and
addressed to CheckFree and HoldCo, in form and substance reasonably satisfactory
to CheckFree and reasonably customary in scope and substance for letters
delivered by independent public accountants in connection with transactions such
as those contemplated by this Agreement.
(b) CheckFree shall use its reasonable best efforts to cause to be
delivered to CheckFree and HoldCo a "comfort" letter of Deloitte & Touche LLP,
CheckFree's independent public accountants, dated the date on which the HoldCo
Registration Statement shall become effective and as of the Effective Time, and
addressed to each of CheckFree and HoldCo, in form and substance reasonably
satisfactory to the Parents and reasonably customary in scope and substance for
letters delivered by independent public accountants in connection with
transactions such as those contemplated by this Agreement.
SECTION 8.15 Stock Exchange Listing. CheckFree, with the reasonable
cooperation of the Parents, shall use its reasonable best efforts to list on the
NASDAQ National Market or the New York Stock Exchange upon official notice of
issuance, the shares of HoldCo Common Stock to be issued in connection with the
Transfers.
SECTION 8.16 Tax Returns; Cooperation. The Parents, CheckFree and
HoldCo will cooperate with each other and provide such information as any party
hereto may require in order to file any return to determine Tax liability or a
right to a Tax refund or to conduct a Tax audit or other Tax proceeding. Such
cooperation shall include, but not be limited to, making employees available on
a mutually convenient basis to explain any documents or information provided
hereunder or otherwise as required in the conduct of any audit or other
proceeding. In the event that HoldCo or CheckFree receives notice of a Tax audit
or other Tax proceeding relating to the TransPoint Entities that would
reasonably be expected to adversely affect the Tax liability of the Parents with
respect to any pre-Closing period, CheckFree or HoldCo shall, promptly upon
receipt of notice of such Tax audit or other Tax proceeding, notify the Parents
of such Tax audit or other Tax proceeding and permit the Parents to participate
in the resolution of such Tax audit
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or other Tax proceeding, to the extent applicable to pre-Closing periods. In the
event that the Parents receive notice of a Tax audit or other Tax proceeding
relating to the TransPoint Entities that would reasonably be expected to
adversely affect the Tax liability of the TransPoint Entities with respect to
any post-Closing period, the Parents shall, promptly upon receipt of notice of
such Tax audit or other Tax proceeding, notify HoldCo of such Tax audit or other
Tax proceeding and permit HoldCo to participate in the resolution of such Tax
audit or other Tax proceeding, to the extent applicable to post-Closing periods.
The Parents and CheckFree will retain until the expiration of any applicable
statutes of limitations (including any extensions thereof) all Tax Returns,
schedules and workpapers and all other material records or documents relating to
Merger Sub C, HoldCo and the TransPoint Entities for all Tax periods through the
first Tax period ending after the Closing Date. At the expiration of such
statutory period (including any extensions thereof), each party shall have the
right to dispose of any such Tax Returns and other documents or records on
thirty (30) days written notice to the other party. Any information, documents
or records obtained under this Section 8.16 shall be kept confidential, except
as may be otherwise necessary in connection with the filing of Tax Returns or
claims for refund or in conducting an audit or other proceeding.
SECTION 8.17 Reorganization. (a) On or after the Effective Time, each
of the Parents, the TransPoint Entities, HoldCo and CheckFree shall use its best
efforts to cause (i) the TransPoint Contribution and the CheckFree Merger,
together, to be qualified as an exchange pursuant to Section 351 of the Code,
and (ii) the CheckFree Merger to be qualified as a reorganization under Section
368(a) of the Code.
(b) HoldCo shall not, within the three (3) year period
following the Effective Time, (i) liquidate (or permit the liquidation of)
Surviving CheckFree, (ii) merge Surviving CheckFree with or into another
corporation or other entity, including HoldCo, if Surviving CheckFree is not the
surviving corporation of such merger, (iii) merge HoldCo into Surviving
CheckFree, (iv) otherwise terminate the existence of Surviving CheckFree, or (v)
cause Surviving CheckFree to distribute substantially all of its assets, or (vi)
enter into a contract to do any of the foregoing.
SECTION 8.18 Financial Condition. Each of the Parents covenants and
agrees that immediately prior to and at the Effective Time (i) each TransPoint
Entity, and any entity acquired prior to the Effective Time as permitted by
Section 7.1(b)(iv), will have no Indebtedness; (ii) the TransPoint Entities and
any entity acquired prior to the Effective Time as permitted by Section
7.1(b)(iv), in the aggregate, will have available $100 million of cash
(determined in accordance with GAAP applied in a manner consistent with the
Financial Statements); and (iii) the Adjusted Working Capital of the TransPoint
Entities will be zero or greater. For purposes hereof, "Adjusted Working
Capital" means the consolidated short term assets of the TransPoint Entities
minus the consolidated short-term liabilities of the TransPoint Entities, in
each case determined in accordance with GAAP applied in a manner consistent with
the Financial Statements; provided, however, that for purposes of this Section
8.18 the "deferred revenues" liability resulting from the existing contracts of
MSFDC International (as set forth on Schedule 8.18) shall not be included in
such calculation; provided further, that for purposes of determining Adjusted
Working Capital, consolidated short term assets and liabilities of the
TransPoint Entities shall include the pro rata share of such assets and
liabilities (based on the
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percentage ownership by the TransPoint Entities) of any acquisitions made by the
TransPoint Entities in the Executory Period; provided further, if such
acquisition has not closed prior to the Effective Time and such proposed
acquisition had a net adjustment included in the calculation of Adjusted Working
Capital under this Section 8.18 and such acquisition does not close, Parents and
HoldCo shall make an equitable adjustment based on this change as soon as
practicable thereafter; provided further that the accounts payable of the
TransPoint Entities in connection with the transactions contemplated in this
Agreement (excluding investment banking fees) that are either a direct
obligation of the TransPoint Entities or of the TransPoint Entities to one or
more Parents shall also be excluded from the net short term liabilities in
computing Adjusted Working Capital; and provided further that the direct
expenses of Parents in Section 10.3(a) shall not be considered a TransPoint
Entity expense. Each of the Parents jointly and severally agrees to take all
necessary action to cause the first sentence of this Section 8.18 to be true and
correct including, to the extent necessary, making such additional cash
contributions to the TransPoint Entities as may be required.
SECTION 8.19 Other Actions of the Parties. At the Closing, each of the
parties to this Agreement shall execute and deliver each of the Ancillary
Agreements to which it is a party.
SECTION 8.20 Officers and Directors. CheckFree and HoldCo agree that
all rights to indemnification (including advancement of expenses) existing on
the date hereof in favor of the present or former officers, directors, and
employees of the TransPoint Entities (collectively, the "TransPoint Indemnified
Persons") with respect to actions taken in their capacities as officers,
directors, and employees of the TransPoint Entities prior to the Effective Time
as provided in the TransPoint Entities' organizational documents and
indemnification agreements shall survive the Transfers and continue in full
force and effect for a period of six (6) years following the Effective Time and
shall be guaranteed by HoldCo and that the TransPoint Entities' former and
present officers and directors shall be provided by HoldCo with the same level
of indemnification as currently exists for CheckFree's officers and directors.
This Section 8.20 shall survive the consummation of the Transfers at the
Effective Time, and is intended to be for the benefit of, and shall be
enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on HoldCo and its respective successors and
assigns.
SECTION 8.21 CheckFree Rights Agreement. CheckFree agrees that the
CheckFree Rights Agreement shall remain in effect, and shall not be amended or
revised, through the Effective Time except as may be required in connection with
the Board of Directors' determination regarding a Material Transaction Proposal
pursuant to Section 8.3. If CheckFree waives the application of the CheckFree
Rights Agreement as to any party other than (i) after the Required CheckFree
Vote in connection with a Material Transaction Proposal or (ii) prior to the
CheckFree stockholder vote in connection with a Material Transaction Proposal
with a party that agrees with Parents to approve this Agreement as a stockholder
of CheckFree, it shall afford the same treatment to Parents.
SECTION 8.22 Non-Competition. In connection with and as part of the
transactions contemplated in this Agreement, Microsoft and FDC will be obligated
under, effective as of the Effective Time, certain non-competition agreements as
contained in the Commercial Alliance Agreement and the Marketing Agreement.
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SECTION 8.23 Support of TransPoint Platform. CheckFree and HoldCo agree
to, and as soon as practicable after the date hereof will publicly announce that
they will, support the TransPoint Business bill presentment and bill payment
services platform for the TransPoint Entities' customers (including the
licensees of MSFDC International) for the longer of (i) the term of each such
customer's contract and (ii) three years from the Effective Time. Consequently,
if the contract of any TransPoint customer terminates prior to the third
anniversary of the Effective Time, and such customer chooses to enter into a new
contract on substantially the same terms, such customer may elect to continue to
use the TransPoint Business bill presentment and bill payment services platform
until the third anniversary of the Effective Time.
SECTION 8.24 Post-Closing Cooperation. At the Effective Time, the
Parents will deliver or cause to be delivered to HoldCo copies of all books and
records relating to the TransPoint Entities, including all written contracts to
which any of the TransPoint Entities is a party. After the Effective Time, the
Parents will cooperate and use reasonable best efforts to cause their continuing
employees who formerly were primarily engaged in the TransPoint Business to
cooperate with HoldCo, at HoldCo's expense, in respect of any litigation
relating to the TransPoint Entities or the TransPoint Business. At the Effective
Time, the Parents will provide HoldCo with a list of employees of Parents who
were primarily engaged in the TransPoint Business prior to the Effective Time.
ARTICLE 9
CONDITIONS PRECEDENT TO CLOSING
SECTION 9.1 Conditions to Each Party's Obligation to Effect the
Transfers. The respective obligations of each party hereto to effect the
Transfers shall be subject to the fulfillment or satisfaction, prior to or on
the Closing Date, of the following conditions:
(a) Shareholder Approval. The CheckFree Merger shall have been
duly approved by the requisite vote of the outstanding shares of CheckFree
Common Stock (as set forth in Section 6.5(a)) entitled to vote thereon in
accordance with the DGCL and the Certificate of Incorporation and Bylaws of
CheckFree (the "Required CheckFree Vote").
(b) Approvals. All authorizations, consents, orders,
declarations or approvals of, or filings with, or terminations or expirations of
waiting periods imposed by, any Governmental Entity, which the failure to
obtain, make or occur would have the effect of making the Transfers or any of
the transactions contemplated hereby illegal or would, assuming the Transfers
had taken place, be inconsistent with the obligations of the parties under the
provisions of Section 8.11(d), shall have been obtained, made or occurred or
there has been a specific written consent of such adversely affected party.
(c) No Injunction. No judgment, order, decree, statute, law,
ordinance, rule or regulation, entered, enacted, promulgated, enforced or issued
by any court or other Governmental Entity of competent jurisdiction or other
legal restraint or prohibition shall be in
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effect specifically referencing any of the parties hereto or the transactions
contemplated by this Agreement that prevents or would make illegal the
consummation of the Transfers.
(d) Representation Letters. (i) Each of the Parents shall have
executed and delivered a letter of representation relating to certain tax
matters substantially in the form of Exhibits L1, L2 and L3, respectively, (ii)
each of CheckFree and HoldCo shall have executed and delivered a letter or
representation relating to certain tax matters substantially in the form of
Exhibits M1 and M2, respectively, and (iii) CheckFree and HoldCo shall have
jointly executed and delivered a letter of representation relating to certain
tax matters substantially in the form of Exhibit N.
(e) Registration Statement. The HoldCo Registration Statement
shall have become effective in accordance with the provisions of the Securities
Act. No stop order suspending the effectiveness of the HoldCo Registration
Statement shall have been issued by the SEC and no proceedings for that purpose
shall have been initiated or, to the Knowledge of the Parents or CheckFree,
threatened by the SEC.
(f) Stock Exchange Listing. The shares of HoldCo Common Stock
issued in accordance with the Transfers and issuable upon exercise of the HoldCo
Options shall have been authorized for listing on the NASDAQ National Market or
the New York Stock Exchange, subject to official notice of issuance.
(g) Ancillary Agreements. The Parents, CheckFree and HoldCo
shall have previously or concurrently executed all of the Ancillary Agreements
to which they are parties.
SECTION 9.2 Conditions to Obligations of Parents to Effect the
TransPoint Contribution. All obligations of Parents to effect the TransPoint
Contribution and execute the Ancillary Agreements are subject to the fulfillment
or satisfaction, prior to or on the Closing Date, of each of the following
conditions precedent:
(a) Performance of Obligations; Representations and
Warranties. CheckFree and HoldCo shall have performed and complied in all
material respects with all agreements and conditions contained in this
Agreement, that are required to be performed or complied with by each prior to
or at the Closing. Each of the representations and warranties of CheckFree and
HoldCo contained in Article 6 of this Agreement or in any of the Ancillary
Agreements to the extent it is qualified by Material Adverse Effect or
materiality shall be true and correct and each of the representations and
warranties of CheckFree and HoldCo to the extent it is not so qualified by
Material Adverse Effect or materiality shall be true and correct in all material
respects, in each case, on and as of the Closing with the same effect as though
such representations and warranties were made on and as of the Closing, except
to the extent that any representations and warranties expressly relate to an
earlier date, in which case such representations and warranties shall be as of
such earlier date.
(b) Officers Certificate. The Parents shall have received a
certificate dated the Closing Date and signed by the President or a Vice
President of CheckFree and HoldCo, certifying that the conditions specified in
Section 9.2(a) have been satisfied.
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(c) Tax Opinion. The Parents shall have received from their
respective counsel, on the Closing Date, a written opinion dated as of such date
that the TransPoint Contribution and the CheckFree Merger, together, constitute
an exchange under Section 351 of the Code. In rendering such opinion, counsel to
the Parents shall be entitled to rely upon the letters of representations
referenced in Section 9.1(d).
SECTION 9.3 Conditions to Obligations of CheckFree to Effect the
CheckFree Merger. All obligations of CheckFree to effect the CheckFree Merger
and execute the Ancillary Agreements are subject to the fulfillment or
satisfaction, prior to or on the Closing Date, of each of the following
conditions precedent:
(a) Performance of Obligations; Representations and
Warranties. Each of the Parents, the Holding Subsidiaries and the TransPoint
Entities shall have performed and complied in all material respects with all
agreements and conditions contained in this Agreement that are required to be
performed or complied with by it prior to or at the Closing. Each of the
Parents' representations and warranties contained in Article 4 of this Agreement
with respect to themselves and the Holding Subsidiaries, each of the Parents'
representations and warranties contained in Article 5 of this Agreement with
respect to the TransPoint Entities, and each of the Parents' representation and
warranties set forth in the Ancillary Agreements, to the extent it is qualified
by Material Adverse Effect or materiality, shall be true and correct and each of
the Parents' representations and warranties to the extent it is not so qualified
by Material Adverse Effect or materiality shall be true and correct in all
material respects, in each case, on and as of the Closing with the same effect
as though such representations and warranties were made on and as of the
Closing, except for changes permitted by this Agreement and except to the extent
that any representations and warranties expressly relate to an earlier date, in
which case such representations and warranties shall be as of such earlier date.
(b) Officers Certificate. CheckFree shall have received a
certificate dated the Closing Date and signed by the President or a Vice
President of each of the Parents, the Holding Subsidiaries and the TransPoint
Entities certifying that the conditions specified in Section 9.3(a) have been
satisfied.
(c) Tax Opinion. CheckFree shall have received from Simpson
Thacher & Bartlett, counsel to CheckFree, a written opinion dated as of such
date that the CheckFree Merger is an exchange under Section 351 of the Code or a
reorganization under Section 368(a) of the Code. In rendering such opinion,
counsel to CheckFree shall be entitled to rely upon the letters of
representations referenced in Section 9.1(d).
ARTICLE 10
TERMINATION AND AMENDMENT
SECTION 10.1 Termination. This Agreement may be terminated, and the
Transfers may be abandoned, at any time prior to the Effective Time, whether
before or after the approval and
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adoption of this Agreement and the transactions contemplated hereby by the
stockholders of CheckFree:
(a) by the mutual written consent of each of the Parents and
CheckFree;
(b) by CheckFree or the Parents acting as a group, if (i) the
Effective Time shall not have occurred by February 15, 2001; provided that the
right to terminate this Agreement under this Section 10.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date; or (ii) any Governmental Entity shall have
issued an order, decree, ruling or taken any other action restraining, enjoining
or otherwise prohibiting the Transfers and such order, decree, ruling or other
action shall have become final and nonappealable;
(c) by the Parents acting as a group, if CheckFree or HoldCo
breaches any of its representations, warranties, covenants or agreements under
this Agreement, such that the conditions set forth in Section 9.2 would not be
satisfied unless such breach is cured within 15 days after notice to CheckFree
by the Parents;
(d) by CheckFree, if any of the Parents breach any of its
representations, warranties, covenants or agreements under this Agreement such
that the conditions set forth in Section 9.3 would not be satisfied, unless such
breach is cured within 15 days after notice to all Parents by CheckFree;
(e) by CheckFree or the Parents acting as a group if the
approval by the stockholders of CheckFree required for the consummation of the
CheckFree Merger shall not have been obtained by reason of the failure to obtain
the Required CheckFree Vote at a duly held meeting of stockholders of CheckFree
or at any adjournment thereof;
(f) by CheckFree or the Parents pursuant to Section
8.11(d)(ii) or Section 8.11(d)(i), respectively, if, as a condition or
requirement of approval or consent of a Governmental Entity to the Transfers,
such Governmental Entity would impose a limitation or restriction on such party
which it is not required to take under Section 8.11(d)(ii) or Section
8.11(d)(i), respectively; or
(g) by the Parents if the Board of Directors of CheckFree,
pursuant to Section 8.2(b), withdraws or adversely modifies its recommendation
to the CheckFree stockholders that they give the Required CheckFree Vote
(provided that a neutral stance shall not be deemed an adverse modification).
SECTION 10.2 Effect of Termination. In the event of a termination of
this Agreement by either the Parents or CheckFree as provided in Section 10.1,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of CheckFree or the Parents or their respective
Representatives, except with respect to any willful breach of any covenant or
agreement contained in this Agreement prior to such termination; and except that
this Section 10.2, Section 10.3 and the Non-Disclosure Agreement shall continue
in effect.
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SECTION 10.3 Fees and Expenses. (a) Subject to Sections 10.3(b), (c)
and (d), whether or not the Transfers are consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such fees
and expenses; provided, however that, in the event that the Transfers are
consummated, to the extent the aggregate fees and expenses of the investment
bankers for the TransPoint Entities exceed the aggregate fees and expenses of
the investment bankers for CheckFree and HoldCo, the Parents shall jointly and
severally pay (and indemnify and hold harmless HoldCo and its Affiliates
against) such excess fees and expenses. In the event that the Transfers are
consummated, Parents agree to pay the filing fees payable to the SEC; provided
that HoldCo shall be responsible for all other fees and expenses including legal
and accounting fees, blue sky fees and any listing fees and expenses.
(b) If either CheckFree or the Parents shall terminate this
Agreement pursuant to Section 10.1(e) or if any Parent shall terminate this
Agreement pursuant to Section 10.1(g), then CheckFree shall pay to the Parents
an aggregate amount of $25,000,000 not later than, the date of termination of
this Agreement, with such $25,000,000 payment to be allocated among the Parents
pro rata in the same proportion as set forth in Schedule 3.2. Subject to Section
10.3(d), receipt by the Parents of the final payment to which the Parents are
entitled pursuant to this Section 10.3(b) shall constitute conclusive evidence
that this Agreement has been validly terminated and upon acceptance of payment
of such amount, CheckFree shall be fully released and discharged from any
liability or obligations resulting from or under this Agreement or the
transactions contemplated herein.
(c) In the event CheckFree elects to terminate this Agreement
pursuant to Section 10.1(f) based on its reasonable good faith determination
under Section 8.11(d)(ii)(B), regarding a proposed restriction or limitation by
a Governmental Entity imposed as a condition to its consent to or approval of
the Transfers, then CheckFree shall pay to the Parents an aggregate amount of
$12,500,000 not later than the date of such termination. Such $12,500,000
payment shall be allocated among the Parents pro rata in the same proportions as
set forth in Schedule 3.2.
(d) If either CheckFree or any Parent shall terminate this
Agreement pursuant to Section 10.1(e) or if any Parent shall terminate this
Agreement pursuant to Section 10.1(g) in each case where the Board of Directors
of CheckFree has modified or withdrawn its recommendation of approval of the
Transfers to the CheckFree stockholders pursuant to Section 8.2(b), and if
CheckFree is a party to any Material Transaction Proposal where a definitive
agreement is entered into or where a third Person has publicly announced its
intention to commence a tender offer or exchange offer not later than 26 weeks
(the "Alternative Agreement Period") after such termination of this Agreement
(provided that if CheckFree is not a party to a Material Transaction Proposal
for at least a 56 consecutive day period during such 26 week period, then the
Alternative Agreement Period shall be for the longer of (i) 20 weeks or (ii)
until the last day of such 56 day period, but on no event shall the Alternative
Agreement Period extend beyond 26 weeks) and such transaction is consummated
within eighteen months after the termination of this Agreement, then CheckFree
shall pay an additional amount on the closing of
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such Material Transaction Proposal transaction such that the aggregate fee,
inclusive of the $25,000,000, shall total 3.5% of the amount of the Fair Market
Value of 17,000,000 shares of CheckFree Common Stock at the time of the
CheckFree stockholder vote. Such additional payment shall be allocated among the
Parents pro rata in the same proportion as set forth in Schedule 3.2. Receipt by
the Parents of the final payment to which the Parents are entitled pursuant to
this Section 10.3(d) shall constitute conclusive evidence that this Agreement
has been validly terminated and upon acceptance of payment of such amount,
CheckFree shall be fully released and discharged from any liability or
obligations resulting from or under this Agreement or the transactions
contemplated herein.
SECTION 10.4 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
but no amendment shall be made which by law requires further approval by the
stockholders of CheckFree without such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
SECTION 10.5 Extension; Waiver. At any time prior to the Effective
Time, each of the parties hereto, by action taken or authorized by their
respective Boards of Directors, may, to the extent legally allowed, (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document delivered
pursuant hereto and (c) waive compliance of the other parties with any of the
agreements or conditions to its obligations contained herein. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in a written instrument signed on behalf of such party.
ARTICLE 11
INDEMNIFICATION
SECTION 11.1 Indemnification by the Parents. (a) From and after the
Effective Time, the Parents, severally (but not jointly) in proportion to the
number of shares of HoldCo Common Stock received by each Parent's respective
Holding Subsidiaries in consideration of the TransPoint Contribution, shall
indemnify and hold harmless, on an after tax basis, CheckFree, HoldCo, each of
their respective Affiliates (including, after the Closing, the TransPoint
Entities) and the Representatives of each of the foregoing, from and against any
claim, loss, liability, damage, cost or expense (including reasonable legal fees
and expenses) (collectively, "Losses") suffered or incurred by any such
indemnified party to the extent arising from or relating to (i) any breach of
any representation or warranty of the Parents contained in Article 5 of this
Agreement, (ii) any breach of any covenant or other agreement of the Parents
contained in Article 7 or Sections 8.13, 8.14 or 8.18 of this Agreement, and
(iii) any Taxes of the TransPoint Entities for any period (or portion thereof)
ending on or before the Closing Date; provided, however, that (A) the Parents
shall not have any liability under clause (i) above unless the aggregate of all
Losses relating thereto for which the Parents would, but for this proviso, be
liable exceeds $7,500,000 on a cumulative basis, and then only to the extent of
any such excess, and (B) each Parents' aggregate liability under clause (i) of
this Section 11.1(a) and clause (i) of Section 11.1(b) shall in no event exceed,
except to the extent such liability arises from a breach
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of a representation under Section 5.2 regarding such Parent's beneficial
ownership of the Capital Stock of the TransPoint Entities, the lesser of
(x)forty percent (40%) of the Fair Market Value (measured at the Effective Time)
of the HoldCo Common Stock received by such Parent in consideration of the
TransPoint Contribution, and (y) the Fair Market Value, measured at the time
that such indemnification is due, of the HoldCo Common Stock received by such
Parent in consideration of the TransPoint Contribution. Solely with respect to
clause (i) of this Section 11.1(a), the representations and warranties in
Article 5 of this Agreement (other than Sections 5.4(b) and (d), 5.6(a) and
5.10) shall be considered without giving effect to any limitation or
qualification as to "materiality", "Material Adverse Effect" or any other
derivation of the word "material" for the purposes of determining (x) whether a
breach of any such representation or warranty has occurred or (y) the amount of
any damages related to such breach.
(b) From and after the Effective Time, the Parents, severally
but not jointly, shall indemnify and hold harmless, on an after tax basis,
CheckFree, HoldCo, each of their respective Affiliates (including, after the
Closing, the TransPoint Entities), and the Representatives of each of the
foregoing from any Losses suffered or incurred by any such indemnified party to
the extent arising from or relating to (i) any breach of any representation or
warranty of such Parent contained in Article 4 of this Agreement and (ii) any
breach of any covenant or other agreement of such Parent or its Holding
Subsidiaries other than any covenant or agreement subject to Section
11.1(a)(ii); provided, however, that each Parent's aggregate liability under
clause (i) of this Section 11.1(b) and clause (i) of Section 11.1(a) shall in no
event exceed the lesser of (A) forty percent (40%) of the Fair Market Value
(measured at the Effective Time) of the HoldCo Common Stock received by such
Parent in consideration of the TransPoint Contribution, and (B) the Fair Market
Value, measured at the time that such indemnification is due, of the HoldCo
Common Stock received by such Parent in consideration of the TransPoint
Contribution; and further provided that the Parents shall not have liability
under clause (i) above unless the aggregate of all Losses relating thereto for
which the Parents would, but for this proviso, be liable exceeds $7,500,000 on a
cumulative basis, and then only to the extent of such excess.
SECTION 11.2 Indemnification by HoldCo. From and after the Effective
Time, HoldCo shall indemnify and hold harmless, on an after tax basis, each of
the Parents, their respective Affiliates and their respective Representatives
from and against any Losses suffered or incurred by any such indemnified party
to the extent arising from or relating to (a) any breach of any representation
or warranty of CheckFree or HoldCo contained in Section 6 of this Agreement and
(b) any breach of any covenant or other Agreement of HoldCo or CheckFree
contained in this Agreement; provided, however, that (i) HoldCo shall not have
any liability under clause (a) of this Section 11.2 unless the aggregate of all
losses relating thereto for which HoldCo would but for this proviso, be liable
exceeds $7,500,000 on a cumulative basis, and then only to the extent of any
such excess; and (ii) HoldCo's aggregate liability under clause (a) of this
Section 11.2 shall in no event exceed forty percent (40%) of the Fair Market
Value of the HoldCo Common Stock issued to the Parents in consideration of the
TransPoint Contribution measured at the Effective Time.
SECTION 11.3 Calculation of Losses. The amount of any and all Losses
under this Article 11 shall be determined net of any amounts actually recovered
by the indemnified party
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from any third party or under any insurance policies which may be in effect with
respect to such losses.
SECTION 11.4 Termination of Indemnification. The obligations to
indemnify and hold harmless a party hereto, pursuant to clause (i) of Sections
11.1(a) and (b) and clause (a) of Section 11.2, shall terminate when the
applicable representation or warranty terminates pursuant to Section 12.2;
provided, however, that such obligations to indemnify and hold harmless shall
not terminate with respect to any matter as to which the person to be
indemnified or another indemnified party shall have, prior to the expiration of
the applicable period, previously made a claim by delivering a written notice
(stating in reasonable detail the nature of, and factual basis for, any such
claim for indemnification, and the provisions of this Agreement upon which such
claim for indemnification is made) to the indemnifying party. The obligation to
indemnify and hold harmless a party hereto pursuant to the other clauses of
Sections 11.1 and 11.2 shall not terminate.
SECTION 11.5 Procedures Relating to Indemnification. (a) In order for a
party (the "indemnified party") to be entitled to any indemnification provided
for under this Agreement in respect of, arising out of or involving a claim or
demand made by any Person against the indemnified party (a "Third Party Claim"),
such indemnified party must notify the indemnifying party in writing, and in
reasonable detail, of the Third Party Claim (including the estimated amount of
Losses, if known or reasonably capable of estimation) as promptly as reasonably
possible after receipt by such indemnified party of notice of the Third Party
Claim; provided, however, that failure to give such notification on a timely
basis shall not affect the indemnification provided hereunder except to the
extent the indemnifying party shall have been actually prejudiced as a result of
such failure.
(b) If a Third Party Claim is made against an indemnified
party, the indemnifying party shall be entitled to participate in the defense
thereof and, if it so chooses to assume the defense thereof with counsel
selected by the indemnifying party and reasonably satisfactory to the
indemnified party; provided, that, if the indemnifying party assumes such
defense, it shall promptly deliver to the indemnified party a notice as to
whether it will contest the applicability of this Article 11 to such Third Party
Claim or contest its obligation to provide indemnification with respect thereto.
Should the indemnifying party so elect to assume the defense of a Third Party
Claim, the indemnifying party shall not be liable to the indemnified party for
legal expenses subsequently incurred by the indemnified party in connection with
the defense thereof unless (i) representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interests
between them or (ii) the indemnifying party fails to reasonably continue to
contest any such Third Party Claim in good faith. If the indemnifying party
assumes such defense, the indemnified party shall have the right to participate
in the defense thereof and to employ counsel, at its own expense, separate from
the counsel employed by the indemnifying party, it being understood, however,
that the indemnifying party shall control such defense. The indemnifying party
shall be liable for the fees and expenses of counsel employed by the indemnified
party for any period during which the indemnifying party has not assumed the
defense thereof. Whether or not the indemnifying party chooses to defend any
Third Party Claim, all the parties hereto shall cooperate in the defense or
prosecution of such Third Party Claim. Such cooperation shall include the
retention and (upon
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the request of the party who is defending or prosecuting such Third Party Claim)
the provision of records and information which are reasonably relevant to such
Third Party Claim, and making employees available on a mutually convenient basis
to provide additional information and explanation of any material provided
hereunder. Whether or not the indemnifying party shall have assumed the defense
of a Third Party Claim, the indemnified party shall not settle or compromise
such Third Party Claim without the indemnifying party's prior written consent
(which consent shall not be unreasonably withheld). In any event, the
indemnifying party shall not, without the prior written consent of the
indemnified party, settle, compromise or offer to settle or compromise any such
Third Party Claim on a basis which would result in the imposition of a consent
order, injunction, deed restriction or decree upon or restrict the future
activity or conduct of the indemnified party or any Subsidiary or Affiliate
thereof or which does not include an unconditional release of the indemnified
party and its Affiliates and their respective Representatives for any liability
arising out of such Third Party Claim or any related Third Party Claim.
SECTION 11.6 Parents' Agent. (a) Lewis Levin shall be constituted and
appointed as agent ("Parents' Agent") for and on behalf of the Parents, their
respective Affiliates and their respective Representatives (collectively, the
"Parent Indemnified Parties") to give and receive notices and communications, to
organize or assume the defense of Third Party Claims, to agree to, negotiate, or
enter into settlements and compromises of, and demand arbitration and comply
with orders of courts and awards of arbitrators with respect to Third Party
Claims, and to take all actions necessary or appropriate in the judgment of the
Parents' Agent for the accomplishment of the foregoing. The Parents' Agent shall
act in a fiduciary capacity with respect to the affected Parent as to each such
action. Such agency may be changed by the holders of a majority of the shares of
HoldCo Common Stock acquired by the Parents in consideration of the TransPoint
Contribution from time to time upon not less than ten (10) days' prior written
notice to HoldCo. No bond shall be required of the Parents' Agent, and the
Parents' Agent shall receive no compensation for services rendered. Notices or
communications to or from the Parents' Agent shall constitute notice to or from
any applicable Parent Indemnified Party.
(b) The Parents' Agent shall not be liable to any of the
Parent Indemnified Parties for any act done or omitted hereunder as Parents'
Agent except to the extent it has acted with gross negligence or willful
misconduct, and any act done or omitted pursuant to the advice of counsel shall
be conclusive evidence that it did not act with gross negligence or willful
misconduct. The Parents shall severally indemnify the Parents' Agent and hold it
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Parents' Agent and arising out of or
in connection with the acceptance or administration of the duties hereunder.
(c) The Parents' Agent shall have reasonable access to
information about the TransPoint Entities and the reasonable assistance of the
TransPoint Entities' officers and employees for purposes of performing its
duties and exercising its rights hereunder, provided that the Parents' Agent
shall treat confidentially and not disclose any nonpublic information from or
about the TransPoint Entities to anyone (except on a need to know basis to
individuals who agree to treat such information confidentially). The Parents'
Agent shall be a third party beneficiary of the terms of this Section 11.6(c).
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SECTION 11.7 Actions of the Parents' Agent. A decision, act, consent or
instruction of the Parents' Agent shall constitute a decision of all Parents and
shall be final, binding and conclusive upon each such Parent, and HoldCo and
CheckFree may rely upon any written decision, act, consent or instruction of the
Parents' Agent as being the decision, act, consent or instruction of each and
every Parent. HoldCo and CheckFree are hereby relieved from any liability to any
Person for any acts done by them in accordance with such written decision, act,
consent or instruction of the Parents' Agent.
SECTION 11.8 Exclusive Remedy. Each of the parties to this Agreement
acknowledges and agrees that, from and after the Closing, its sole and exclusive
remedy with respect to any and all rights, claims, and causes of action (other
than fraud) for any breach of this Agreement shall be pursuant to the
indemnification provisions set forth in this Article 11.
ARTICLE 12
DEFINITIONS AND MISCELLANEOUS PROVISIONS
SECTION 12.1 Definitions. As used in this Agreement the terms set forth
below shall have the following meanings:
(a) "Affiliate" of a Person shall mean any other Person who
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, such Person. "Control" shall mean
the possession of the power, directly or indirectly, to direct or cause the
direction of the management and policies of a Person whether through the
ownership of voting securities, by contract or otherwise.
(b) "Capital Stock" shall mean, with respect to any Person,
any and all shares, interests, participations, rights in, or other equivalents
(however designated and whether voting or non-voting) of, such Person's capital
stock or other equity interests (including, without limitation, partnership or
membership interests in a partnership or limited liability company or any other
interest or participation that confers on a Person the right to receive a share
of the profits and loss, or distributions of assets, of the issuing Person)
whether outstanding on the date hereof or issued after the date hereof, and any
and all rights, warrants or options exchangeable for or convertible into such
capital stock.
(c) "Checkfree Stock Plan" shall mean each of the following:
Checkfree Holdings Corporation Amended and Restated Associate Stock Purchase
Plan, Checkfree Holdings Corporation Amended and Restated 1995 Stock Option
Plan, Checkfree Holdings Corporation Amended and Restated 1993 Stock Option
Plan, Checkfree Holdings Corporation Amended and Restated 1983 Non- Statutory
Stock Option Plan, Checkfree Holdings Corporation Second Amended and Restated
1983 Incentive Stock Option Plan.
(d) "Designated Group" or "Designated Groups" shall mean those
individuals set forth on Schedule 12.1 for each party to this Agreement.
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(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended and all rules and regulations promulgated thereunder.
(f) "Fair Market Value" shall mean, with respect to any
particular date, the closing price on the NASDAQ National Market or the New York
Stock Exchange as the case may be of the HoldCo Common Stock on such date
(unless such date is not a trading day on such market or exchange, in which case
the closing price on such market or exchange on the most recent trading day
immediately preceding such date shall apply).
(g) "Governmental Entity" shall mean any Federal, state or
local government or any court, administrative agency or commission or other
governmental authority or agency, domestic or foreign, including the European
Union.
(h) "Knowledge" in respect of any representation and warranty
of the Parents set forth in this Agreement shall mean the actual knowledge of
the applicable Designated Group.
(i) "Liens" shall mean any mortgage, pledge, lien, security
interest, conditional or installment sale agreement, encumbrance, charge or
other claims of third parties of any kind.
(j) "Material Adverse Effect" on a Person shall mean any
material adverse effect on (a) the assets, business, liabilities, financial
condition or results of operations of such Person and its Subsidiaries, taken as
a whole; or (b) the ability of the such Person to perform its obligations under
this Agreement.
(k) "Material Transaction Proposal" shall mean any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving CheckFree, or any proposal or offer to acquire in any
manner, directly or indirectly, at least 50% of the equity interests in or at
least 50% of the consolidated assets of CheckFree other than pursuant to the
transactions contemplated by this Agreement.
(l) "Permitted Liens" shall mean (a) Liens for taxes,
assessments, or similar charges, incurred in the ordinary course of business
that are not yet due and payable or are being contested in good faith; (b)
pledges or deposits made in the ordinary course of business; (c) Liens of
mechanics, materialmen, warehousemen or other like Liens securing obligations
incurred in the ordinary course of business that are not yet due and payable or
are being contested in good faith; and (d) other Liens and encumbrances which
are incurred in the ordinary course of business and which do not in the
aggregate materially detract from the value of the assets or properties affected
or materially impair the use thereof in the operation of the TransPoint
Business.
(m) "Person" shall mean any individual, corporation,
partnership, limited partnership, limited liability company, trust, association
or entity or government agency or authority.
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(n) "SEC" shall mean the Securities and Exchange Commission.
(o) "Securities Act" shall mean the Securities Act of 1933, as
amended, and all rules and regulations promulgated thereunder.
(p) "Subsidiary" of a Person shall mean any corporation,
partnership, joint venture or other entity in which such Person (a) owns,
directly or indirectly, 50% or more of the outstanding voting securities or
equity interests or (b) is a general partner.
(q) "Superior Proposal" shall mean a bona fide written
proposal made by a third party to acquire CheckFree pursuant to a Material
Transaction Proposal, which the Board of Directors of CheckFree determine in
good faith (taking into account the advice of independent financial advisors) to
be in the best interests of CheckFree and its stockholders rather than the
Transfers (and any revised proposal made by the other parties to this
Agreement).
(r) "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") shall mean (i) any federal, state, local, municipal or foreign net
income, gross income, gross receipts, windfall profit, severance, property,
production, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or add-on minimum, ad valorem, value-added, transfer,
stamp, or environmental tax, or any other tax, custom, duty, tariff levy,
import, governmental fee or other like assessment or charge, together with any
interest or penalty, addition to tax or additional amount imposed by any
Governmental Entity, (ii) any liability for the payment of any amounts of the
type described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any taxable period, and (iii) any
liability for the payment of any amounts of the type described in (i) or (ii) as
a result of being a transferee of or successor to any Person or as a result of
an express or implied obligation to indemnify any other Person.
(s) "Tax Return" shall mean any return, report or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
SECTION 12.2 Survival of Representations and Warranties. The
representations and warranties of the parties in Articles 4, 5 and 6 of this
Agreement shall survive the Closing for purposes of Section 11.1 and Section
11.2 until the close of business on the one year anniversary of the Closing Date
and shall then terminate for all purposes; provided, however, that (i) the
representations and warranties provided in Sections 4.2 and 6.5 with respect to
the authority to enter into this Agreement and the Ancillary Agreements shall
survive the Closing indefinitely solely for purposes of Sections 11.1 and 11.3
and (ii) the representations and warranties set forth in Section 5.13 (Taxes),
and the indemnification under Section 11.1(a)(iii), shall survive until the
30-day period following the termination of the statute of limitations with
respect thereto; and provided further that the representations set forth in
Section 4.6 (Reorganization) shall terminate at Closing.
SECTION 12.3 Schedules and Exhibits. All Schedules and Exhibits
referred to herein are intended to be and hereby are specifically made a part of
this Agreement.
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SECTION 12.4 Press Releases. Except as required by law or the rules of
any securities exchange on which such party's securities are listed or listing
agreement, none of the Parents, Holding Subsidiaries, HoldCo, CheckFree or the
TransPoint Entities shall issue, or cause to be issued, any press release or
otherwise make any public announcement with respect to this Agreement, the
Ancillary Agreements nor the transactions contemplated hereby or thereby, prior
to the Closing, without the prior written consent of CheckFree and the Parents;
provided, however, that in the event such disclosure is required by law or the
rules of such securities exchange, such disclosure shall be made by the party or
parties hereto making such disclosure (each, a "Disclosing Party") only to the
extent necessary to comply with such law or listing agreement and each such
Disclosing Party shall (a) use reasonable efforts to provide the other parties
hereto that are not Disclosing Parties with advance notice of such disclosure so
that such parties at their expense may seek a protective order or other
confidential treatment of such information and (b) use its reasonable efforts to
assist the other parties hereto that are not Disclosing Parties in obtaining
such order or treatment or otherwise limiting the adverse affects of the
disclosure to such parties.
SECTION 12.5 Contents of Agreement; Parties in Interest. This
Agreement, the Ancillary Agreements, and the other agreements, schedules and
exhibits referred to or contemplated herein and the Non-Disclosure Agreement set
forth the entire understanding of the parties hereto with respect to the
transactions contemplated hereby, and, except as set forth in this Agreement,
the Ancillary Agreements, and such other agreements, schedules and exhibits and
the Non-Disclosure Agreement, there are no representations or warranties,
express or implied, made by any party to this Agreement with respect to the
subject matter of this Agreement and the Non-Disclosure Agreement. Except for
the matters set forth in the Non-Disclosure Agreement, any and all previous
agreements and understandings between or among the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement, the
Ancillary Agreements, and the other agreements referred to or contemplated
herein. All statements contained in schedules, exhibits, certificates and other
instruments attached hereto shall be deemed representations and warranties (or
exceptions thereto) by the Parents or CheckFree or other parties hereto, as the
case may be.
SECTION 12.6 Assignment and Binding Effect. This Agreement may not be
assigned by any party hereto without the prior written consent of the other
parties. All the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto.
SECTION 12.7 Notices. Any notice, request, demand, waiver, consent,
approval, or other communication which is required or permitted to be given to
any party hereunder shall be in writing and shall be deemed given only if
delivered to the party personally or sent to the party by facsimile transmission
with the receipt of such transmission acknowledged by such party by other than
automatic means (promptly followed by a hard-copy delivered in accordance with
this Section 12.7), by registered or certified mail (return receipt requested),
with postage and registration or certification fees thereon prepaid, addressed
to the party at its address set forth below, or by any other means where receipt
of such notice is acknowledged by other than automatic means:
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<PAGE> 65
If to CheckFree or HoldCo:
HoldCo
4411 E. Jones Bridge Road
Norcross, Georgia 30092
Attn: Peter J. Kight
Phone: (678) 375-1600
Fax: (678) 375-3010
Email: [email protected]
with a copy to:
HoldCo
4411 E. Jones Bridge Road
Norcross, Georgia 30092
Attn: Allen L. Shulman
Phone: (678) 375-3632
Fax: (678) 375-3633
Email: [email protected]
with an additional copy to:
Simpson Thacher & Bartlett
3373 Hillview Avenue
Palo Alto, California 94304
Attn: Daniel Clivner
Richard Capelouto
Phone: (650) 251-5000
Fax: (650) 251-5002
Email: [email protected]
[email protected]
with an additional copy to:
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215
Attn: Robert J. Tannous
Phone: (614) 227-1953
Fax: (614) 227-2100
Email: [email protected]
If to Microsoft:
Microsoft
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<PAGE> 66
One Microsoft Way
Redmond, Washington 98052
Attn: Lewis Levin
Phone: (425) 936-8954
Fax: (425) 936-7329
Email: [email protected]
with a copy to:
Microsoft
One Microsoft Way
Redmond, Washington 98052
Attn: Kevin Harrang
Phone: (425) 936-6601
Fax: (425) 936-7329
Email: [email protected]
with an additional copy to:
Microsoft
One Microsoft Way
Redmond, Washington 98052
Attn: Robert A. Eshelman
Phone: (425) 936-7520
Fax: (425) 936-7329
Email: [email protected]
with a copy to:
Preston Gates & Ellis LLP
701 Fifth Avenue
Seattle, Washington 98104-7078
Attn: C. Kent Carlson
Phone: (206) 623-7580
Fax: (206) 623-7022
Email: [email protected]
If to FDC:
First Data Corporation
5660 New Northside Drive
Suite 1400
Atlanta, Georgia 30328-5800
Attn: Chairman and General Counsel
Fax: (770) 857-0405
with a copy to:
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<PAGE> 67
Sidley & Austin
Bank One Plaza
Chicago, Illinois
Attn: Frederick C. Lowinger
Michael A. Gordon
Phone: (312) 853-7238
Fax: (312) 853-7036
Email: [email protected]
If to Citibank:
Citibank, N.A.
Technology and Intellectual Property/Legal Affairs Office
909 Third Avenue, 32nd Floor
New York, NY 10043
Attn: e-citi General Counsel's Office
Phone: (212) 559-0619
Fax: (212) 793-2516
with a copy to:
Citicorp
153 East 53rd Street, 4th Floor
New York, NY 10043
Attn: Ed Horowitz, Executive Vice President
Phone: (212) 559-5051
Fax: (212) 793-2516
and
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Attn: Creighton O'M. Condon
Phone: (212) 848-4000
Fax: (212) 848-7179
or to such other address or Person as any party may have specified in a notice
duly given to the other party as provided herein. Such notice, request, demand,
waiver, consent, approval or other communication to such addresses will be
deemed to have been given as of the date so delivered, transmitted or mailed.
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SECTION 12.8 Governing Law. This Agreement shall be governed by and
interpreted and enforced in accordance with the laws of the State of Delaware as
applied to contracts made and fully performed in such state.
SECTION 12.9 Third Party Beneficiaries. The representations,
warranties, covenants and agreements contained in this Agreement are for the
sole benefit of the parties hereto, and their respective successors and assigns,
and they shall not be construed as conferring, and are not intended to confer,
any rights on any other Person; provided, however, that each of the indemnified
parties shall be a third party beneficiary of the general provisions set forth
in Article 11.
SECTION 12.10 Severability. If any term or other provision of this
Agreement is determined to be invalid, illegal or incapable of being enforced by
any rule of law or public policy, all other terms and provisions of the
Agreement shall remain in full force and effect. Upon such determination, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
give effect to the original intent of the parties to the fullest extent
permitted by applicable law.
SECTION 12.11 Section Headings. All section headings are for
convenience only and shall in no way modify or restrict any of the terms or
provisions hereof.
SECTION 12.12 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and the Parents
and CheckFree may become a party hereto by executing a counterpart hereof. This
Agreement and any counterpart so executed shall be deemed to be one and the same
instrument.
SECTION 12.13 Specific Performance. The parties hereto agree that money
damages may be an inadequate remedy in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this Agreement
in addition to any other remedy to which they are entitled at law or in equity.
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<PAGE> 69
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have duly executed this Agreement as of the date first above written.
CHECKFREE HOLDINGS CORPORATION
By: /s/ Allen L. Shulman
------------------------------------
Name: Allen L. Shulman
Title: Senior Vice President, Chief
Financial Officer and
General Counsel
MICROSOFT CORPORATION
By: /s/ Lewis C. Levin
-----------------------------------
Name: Lewis C. Levin
Title: Vice President
FIRST DATA CORPORATION
By: /s/ Robert C. Johnson
------------------------------------
Name: Robert C. Johnson
Title: Vice President
CITIBANK, N.A.
By: /s/ Edward D. Horowitz
-----------------------------------
Name: Edward D. Horowitz
Title: Executive Vice President
H&B FINANCE, INC.
By: /s/ Robert A. Shel
-----------------------------------
Name: Robert A. Shel
Title:
MS II, L.L.C.
By: /s/ Robert A. Shel
------------------------------------
Name: Robert A. Shel
Title:
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<PAGE> 70
FIRST DATA, L.L.C.
By: /s/ Jeffrey Leventhal
------------------------------------
Name: Jeffrey Leventhal
Title: Vice President and Secretary
CITICORP ELECTRONIC COMMERCE, INC.
By: /s/ Edward D. Horowitz
------------------------------------
Name: Edward D. Horowitz
Title: Executive Vice President
FDC INTERNATIONAL PARTNER
By: /s/ Jeffrey Leventhal
------------------------------------
Name: Jeffrey Leventhal
Title: Vice President and Secretary
MSFDC INTERNATIONAL, INC.
By: /s/ Lewis C. Levin
------------------------------------
Name: Lewis C. Levin
Title: Chief Executive Officer
CHOPPER CORPORATION
By: /s/ Allen L. Shulman
------------------------------------
Name: Allen L. Shulman
Title: Vice President
CHOPPER MERGER CORPORATION
By: /s/ Allen L. Shulman
------------------------------------
Name: Allen L. Shulman
Title: Vice President
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<PAGE> 1
PORTER, WRIGHT, MORRIS & ARTHUR LLP
41 South High Street
Columbus, OH 43215
Telephone: (614) 227-2000
Fax: (614) 227-2100
Exhibit 5
March 16, 2000
CheckFree Holdings Corporation
4411 East Jones Bridge Road
Norcross, Georgia 30092
Gentlemen:
With respect to the Registration Statement on Form S-4 (the
"Registration Statement") being filed by CheckFree Holdings Corporation (the
"Company") under the Securities Act of 1933, as amended, relating to the
registration of 3,205,128 shares of the Company's common stock, $.01 par value
(the "Shares"), to be issued in connection with the proposed merger (the
"Merger") of CheckFree Acquisition Corporation IV, a Delaware corporation and
wholly owned subsidiary of the Company ("Acquisition"), with and into BlueGill
Technologies, Inc., a Delaware corporation ("BlueGill"), which will, at the time
of the consummation of the Merger, be a wholly owned subsidiary of the Company,
we advise you as follows:
We are counsel for the Company and have participated in the preparation
of the Registration Statement. We have reviewed the Agreement and Plan of
Merger, dated as of December 20, 1999, among the Company, Acquisition and
BlueGill (the "Merger Agreement"), the Company's Restated Certificate of
Incorporation, as amended to date, the corporate action taken to date in
connection with the Registration Statement and the issuance and sale of the
Shares, and such other documents and authorities as we deem relevant for the
purpose of this opinion.
Based upon the foregoing, we are of the opinion that:
(a) upon the proper approval of the Merger Agreement by the BlueGill
stockholders;
(b) upon compliance with the Securities Act of 1933, as amended, and
with the securities or "blue sky" laws of the states in which the
Shares are to be offered for sale;
(c) upon the "Effective Time," as defined in the Merger Agreement;
the Shares, when issued and delivered as provided in the Merger Agreement in
accordance with the resolutions heretofore adopted by the Board of Directors of
the Company, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Porter, Wright, Morris & Arthur LLP
PORTER, WRIGHT, MORRIS & ARTHUR LLP
<PAGE> 1
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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
March 15, 2000
<PAGE> 1
Exhibit 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 such Information
Statement/Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
March 15, 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,
March 16, 2000.
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned directors and/or officers of CheckFree Holdings
Corporation, a Delaware corporation (the "Corporation") hereby appoints Peter J.
Kight, Mark A. Johnson, and Curtis A. Loveland as the undersigned's true and
lawful attorneys-in-fact, or any of them individually as the undersigned's
attorney, to sign, in the undersigned's name and behalf and in any and all
capacities stated below, to sign and to cause to be filed with the Securities
and Exchange Commission (the "Commission"), the Corporation's Registration
Statement on Form S-4 (the "Registration Statement") to register under the
Securities Act of 1993, as amended, a maximum of 5,000,000 shares of common
stock, without par value, of the Corporation, in connection with the Agreement
and Plan of Merger among the Corporation, its wholly owned subsidiary CheckFree
Acquisition Corporation IV, and BlueGill Technologies, Inc., and any and all
amendments, including post-effective amendments, to the Registration Statement,
hereby granting unto such attorneys-in-fact, full power and authority to do and
perform in the name and on behalf of the undersigned, in any and all such
capacities, every act and thing whatsoever necessary to be done in and about the
premises as fully as the undersigned could or might do in person, hereby
granting to such attorney-in-fact full power of substitution and revocation, and
hereby ratifying all that any such attorney-in-fact or his substitute may do by
virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 31st day of
January, 2000.
Signature Title
/s/Peter J. Kight Chairman of the Board of Directors
- ---------------------- and Chief Executive Officer
Peter J. Kight
/s/Mark A. Johnson Vice Chairman and Director
- ----------------------
Mark A. Johnson
/s/Allen L. Shulman Executive Vice President, Chief
- ---------------------- Financial Officer and General Counsel
Allen L. Shulman
/s/Gary A. Luoma, Jr. Vice President, Chief Accounting
- ---------------------- Officer and Assistant Secretary
Gary A. Luoma, Jr.
/s/William P. Boardman Director
- ----------------------
William P. Boardman
/s/George R. Manser Director
- ----------------------
George R. Manser
/s/Eugene F. Quinn Director
- ----------------------
Eugene F. Quinn
/s/Jeffery M. Wilkins Director
- ----------------------
Jeffrey M. Wilkins
