1 As filed with the Securities and Exchange Commission on April 18, 2000 Registration No. 333-32644 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CHECKFREE HOLDINGS CORPORATION (Exact name of Registrant as specified in its charter) Delaware 7374 58-2360335 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.) ------------------------ 4411 East Jones Bridge Road Norcross, Georgia 30092 (678) 375-3000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ Peter F. Sinisgalli President and Chief Operating Officer CheckFree Holdings Corporation 4411 East Jones Bridge Road Norcross, Georgia 30092 (678) 375-3000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies of Correspondence to: Robert J. Tannous, Esq. Hugh Douglas Camitta, Esq. Porter, Wright, Morris & Arthur LLP Pepper Hamilton LLP 41 South High Street 100 Renaissance Center, 36th Floor Columbus, Ohio 43215 Detroit, Michigan 48243 (614) 227-1953 (313) 393-7454 ------------------------ Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ---------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ---------- CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Proposed Maximum Proposed Maximum Amount of Registered Amount to be Registered Offering Price Per Unit(1) Aggregate Offering Price(1) Registration Fee(1) Common stock, $.01 par value................. 8,161,933(2) $30.63(2) $250,000,000 $11,506 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 of the Securities Act of 1933. At December 31, 1999, BlueGill Technologies, Inc. had an accumulated capital deficit. Pursuant to Section 6(b) and Rule 457(f)(2), the registration fee was calculated based on one-third of the aggregate par values on December 31, 1999 of 9,186,799 shares of common stock, $.001 par value (which includes 4,302,799 issuable in connection with stock options and warrants which are exercisable prior to the merger), 12,503,301 shares of Series A Preferred Stock, $.001 par value, and 12,825,651 shares of Series B Preferred Stock, $.001 par value, of BlueGill Technologies, Inc. to be cancelled in the merger. (2) The number of shares to be registered and the maximum offering price per share have been adjusted to reflect the current market price of our common stock.
2 BLUEGILL TECHNOLOGIES, INC. A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT BlueGill's board of directors unanimously approved a merger agreement among CheckFree Holdings Corporation, CheckFree Acquisition Corporation IV, and BlueGill Technologies, Inc., and has determined the merger to be fair to you and in your best interests. Your consent, as a stockholder of BlueGill, is now needed to adopt the merger agreement. In addition, the consent of BlueGill's preferred stockholders not to treat the merger as a liquidation is being requested. Following the merger, the BlueGill stockholders will collectively own less than 6% of the CheckFree common stock. In the merger, based on CheckFree's stock price on the date of the announcement of the merger, each share of your BlueGill common stock or BlueGill preferred stock would have been exchanged for approximately 0.09286 shares of CheckFree common stock. Based on the average closing price of CheckFree Corporation's common stock for the three trading days immediately preceding March 15, 2000, which was $87.75, the equivalent value of one share of BlueGill stock would be $8.15. At this price 3,205,128 shares of CheckFree common stock will be issued. The number of diluted shares of BlueGill common stock available for conversion was 34,515,751. This amount includes all of BlueGill's outstanding common stock, all outstanding preferred stock on an as converted basis as well as all vested options and warrants on a fully diluted basis. The precise number of shares to be converted will be unknown until closing. Additionally, the precise number of shares of CheckFree common stock you will receive in the merger is based on the weighted average intraday trading price of CheckFree common stock on the Nasdaq National Market during the three days immediately preceding the closing of the merger. Specifically, if the average trading price of CheckFree common stock is: o Greater than $101.40 per share, CheckFree will issue the number of shares of its common stock equal to $325,000,000 divided by its average trading price; o $78.00 or more and is equal to or less than $101.40 per share, CheckFree will issue a total of 3,205,128 shares of its common stock to BlueGill's stockholders; o $50.00 or more but less than $78.00 per share, CheckFree will issue the number of shares of its common stock equal to $250,000,000 divided by its average trading price; o Less than $50.00 per share, CheckFree exercises its right to terminate the merger agreement, and BlueGill provides CheckFree with a reinstatement notice, CheckFree will issue a total of 5,000,000 shares; or o Less than $50.00 per share, CheckFree does not exercise its right to terminate the merger agreement, CheckFree will issue the number of shares of its common stock equal to $250,000,000 divided by its average trading price. The effect of these price thresholds on the BlueGill balance sheet, as adjusted for purchase accounting, with respect to the goodwill acquired, the assets acquired and the liabilities acquired will be as follows: o If the CheckFree share price is in excess of $101.40: (in thousands) Goodwill acquired $280,065 Assets acquired 343,724 Liabilities acquired 21,708 o If the CheckFree share price is between $78.00 and $101.40: (in thousands, except share price) $78.00 $101.40 -------- -------- Goodwill acquired $253,309 $253,309 Assets acquired 316,968 316,968 Liabilities acquired 21,708 21,708 o If the CheckFree share price is between $50.00 and $78.00: (in thousands, except share price) $50.00 $78.00 -------- -------- Goodwill acquired $205,065 $280,065 Assets acquired 268,724 268,724 Liabilities acquired 21,708 21,708 o If the CheckFree price per share is below $50.00, CheckFree elects to terminate, and BlueGill elects to accept 5 million shares, then for every $1.00 lower than the $50.00 price goodwill acquired will decline by $5.0 million from the $205.1 million level, assets acquired will decline by $5.0 million from the $268.7 million level and liabilities acquired will remain constant at the $21.7 million level. o If the CheckFree price per share is below $50.00 and CheckFree does not elect to terminate, then key components remain constant as follows: (in thousands) Goodwill acquired $280,065 Assets acquired 268,724 Liabilities acquired 21,708 CheckFree common stock is listed on the Nasdaq National Market under the trading symbol "CKFR." On April 17, 2000, CheckFree common stock closed at $30.63 per share. Since BlueGill is not publicly traded, it is difficult for you to assess the value of the BlueGill stock you own. Based on the current trading price for CheckFree common stock, the total consideration to be paid to the BlueGill stockholders equals approximately $259,971,000. The merger cannot be completed unless the holders of: o Two-thirds of the then outstanding shares of Series A preferred stock; o Either three-fourths of the outstanding shares of Series B preferred stock or a majority of the outstanding shares of Series B preferred stock, including at least one "Series B Institutional Investor;" and o A majority of the common stock and the preferred stock, voting together, with the preferred stock voting on an as if converted basis; vote to approve the merger agreement and the merger. Each holder of a share of BlueGill common stock and BlueGill preferred stock will be entitled to cast one vote per share. Regardless of whether the merger is treated as a liquidation: o the CheckFree common stock to be issued in the merger will not contain any of the rights, preferences and privileges which BlueGill preferred stock now contains, including liquidation preferences, redemption rights and class voting; and o the form and amount of consideration receivable by a BlueGill preferred stockholder will be the same. This information statement/prospectus provides you with detailed information concerning CheckFree, BlueGill and the merger. Please give all of the information contained in the information statement/prospectus your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE 12 OF THIS INFORMATION STATEMENT/PROSPECTUS. To expedite the transaction, your approval is being solicited by written consent. Please take the time to vote on the merger by signing, dating and returning by overnight courier or mail your consent. THE BLUEGILL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU APPROVE THE MERGER AND MERGER AGREEMENT AND APPROVE THAT THE MERGER NOT BE TREATED AS A LIQUIDATION UNDER BLUEGILL'S CERTIFICATE OF INCORPORATION. We appreciate your interest in BlueGill and consideration of this matter. Harold N. Davis President and Chief Executive Officer NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This information statement/prospectus is dated as of April 18, 2000.
3 TABLE OF CONTENTS PAGE ---- Table of Contents..................................... 2 Summary............................................... 3 Recent Developments................................... 8 Risk Factors.......................................... 9 Forward-Looking Statements............................19 Where You Can Find More Information...................20 Comparative Per Share Information.....................21 Market Price Data; Dividend Policy....................23 Selected Historical Consolidated Financial Data of CheckFree..................................24 Selected Historical Consolidated Financial Data of BlueGill...................................26 Selected Historical Consolidated Financial Data of the TransPoint Entities....................27 Unaudited Pro Forma Combining Financial Data of Checkfree, BlueGill and the TransPoint Entities.....28 Unaudited Pro Forma Condensed Combining Financial Information .............................30 Unaudited Pro Forma Condensed Combining Balance Sheet, Statements of Operations and Notes to CheckFree, BlueGill and the TransPoint Entities....31 Unaudited Pro Forma Condensed Combining Balance Sheet, Statements of Operations and Notes to CheckFree and BlueGill..........................38 Unaudited Pro Forma Condensed Combining Balance Sheet, Statements of Operations and Notes to CheckFree and the TransPoint Entities..............48 The Merger............................................55 Background of the Merger...........................55 Approval by BlueGill Stockholders..................56 BlueGill's Reasons for the Merger; Recommendation of BlueGill's Board of Directors...............................58 Report of BlueGill's Financial Advisor.............60 The Merger Agreement...............................62 Exchange of Certificates...........................66 Appraisal Rights...................................66 Conflicts of Interest of Directors and Officers of BlueGill in the Merger...........................69 Nasdaq Listing.....................................70 Regulatory Approvals...............................70 Accounting Treatment...............................70 Income Tax Consequences............................70 U.S. Federal Income Tax............................70 Canadian Federal Income Tax........................71 Resales by Affiliates..............................71 The TransPoint Acquisition............................72 CheckFree Holdings Corporation........................81 General............................................81 Electronic Commerce Industry Background............82 The Electronic Solution............................84 The CheckFree Advantage............................84 Our Business Strategy..............................85 Products and Services..............................87 Competition........................................90 Sales, Marketing and Distribution..................90 Customer Care and Technical Support................91 Remittances........................................92 Technology.........................................93 Research and Development...........................94 Government Regulation..............................94 Proprietary Rights.................................95 Employees..........................................97 Management.........................................97 Committees of the Board of Directors..............101 Director Compensation.............................101 Executive Compensation............................101 Compensation Committee Interlocks and Insider Participation.......................103 Stock Option Plans................................103 Security Ownership of Principal Stockholders and Management..................................108 Certain Relationships and Related Transactions....................................110 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................111 Description of CheckFree Securities...............131 CheckFree Acquisition.............................149 BlueGill Technologies, Inc...........................150 General...........................................150 Electronic Commerce Industry Background...........150 The Electronic Solution...........................151 Products..........................................152 Technology........................................152 Competition.......................................152 Sales, Marketing and Distribution.................153 Research and Development..........................153 Employees.........................................153 Trading of BlueGill Securities....................153 Stock Ownership...................................153 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................153 Comparison of Rights of CheckFree Stockholders and BlueGill Stockholders............160 Experts..............................................163 Legal Maters.........................................163 CheckFree Financial Statements.......................F-1 BlueGill Financial Statements.......................F-36 TransPoint Financial Statements.....................F-54 Appendices Appendix A - Agreement and Plan of Merger............A-1 Appendix B - Section 262 of the Delaware General Corporation Law....................................B-1 Appendix C - BlueGill Action by Written Consent of Stockholders Without a Meeting.....................C-1 2
4 SUMMARY This section summarizes selected information about the merger from this information statement/prospectus. To understand the merger fully, we strongly encourage you to read carefully this entire information statement/ prospectus, including the financial statements and the appendices, and the documents we have filed with the Securities and Exchange Commission. For information on how to obtain the documents that we have filed with the Commission, see "Where You Can Find More Information" on page 24. THE COMPANIES CHECKFREE HOLDINGS CORPORATION 4411 EAST JONES BRIDGE ROAD NORCROSS, GEORGIA 30092 (678) 375-3000 WWW.CHECKFREE.COM The reference to our website address above does not constitute incorporation by reference of the information contained on our website, so you should not consider any information on this website to be a part of this information statement/prospectus. We are the leading provider of electronic billing and payment services. We operate our business through three independent but inter-related divisions: o Electronic Commerce; o Investment Services; and o Software. Our Electronic Commerce business provides services that allow consumers to: o receive electronic bills through the Internet; o pay bills received electronically or in paper form to anyone; o perform ordinary banking transactions, including balance inquiries, transfers between accounts and on-line statement reconciliations. Our Investment Services business offers portfolio accounting and performance measurement services to investment advisors, brokerage firms, banks and insurance companies and financial planning application software to financial planners. Our Software businesses provide electronic commerce and financial applications software and services for businesses and financial institutions. CHECKFREE ACQUISITION CORPORATION IV 4411 EAST JONES BRIDGE ROAD NORCROSS, GEORGIA 30092 (678) 375-3000 CheckFree Acquisition was incorporated in Delaware in December 1999, and is our wholly owned subsidiary formed for the purpose of facilitating the merger. BLUEGILL TECHNOLOGIES, INC. 935 TECHNOLOGY DRIVE ANN ARBOR, MICHIGAN 48108 (734) 205-4100 WWW.BLUEGILL.COM The reference to BlueGill's website address above does not constitute incorporation by reference of the information contained on that website, so you should not consider any information on this website to be a part of this information statement/prospectus. BlueGill Technologies, Inc. was incorporated in Delaware on September 20, 1996. BlueGill provides software used for Internet billing and statement delivery which enables customers to: o install and launch an electronic bill presentment product; o send e-mail notifications and present electronic bills through the Internet; o connect to a variety of bill aggregators and payment methods; and o establish interactive on-line relationships with customers. This proprietary software converts traditional paper-based bills and statements into electronic bills and statements which can be delivered over the Internet. BlueGill currently markets its products directly to individual bill providers, statement providers, and to companies that deliver Internet bills for third party customers. BlueGill's software products are targeted primarily at large corporate billers, including telephone companies, utilities, insurance companies and financial services institutions. BlueGill has in excess of 35 customers delivering Internet bills and statements on their own behalf. 3
5 In addition, BlueGill has a number of resellers that both sell and support BlueGill's products in the United States and internationally. Following completion of the merger BlueGill will continue offering its customers the opportunity to deliver bills and other documents to a variety of Internet portals and banks. THE MERGER We have included a copy of the merger agreement in this information statement/prospectus as Appendix A. We encourage you to read the merger agreement because it is the legal document that governs the merger. CheckFree Acquisition will merge with and into BlueGill, and BlueGill will continue as the surviving corporation. The following is an illustration of the proposed merger: [FLOW CHART] As consideration for the merger, each outstanding share of BlueGill's common stock, Series A preferred stock and Series B preferred stock will convert into the right to receive fully paid and non-assessable shares of our common stock. The amount of the consideration you will receive in the merger is based on a value negotiated by the parties and may not reflect the true value of your BlueGill stock. The parties determined the value of the consideration based on: o internal financial analyses; o valuation's of public companies that have businesses similar to BlueGill's business; and o discussions that BlueGill's management had with various investment banking firms while exploring a possible initial public offering. We will issue shares of our common stock to BlueGill stockholders as merger consideration, the number of which will be based on the weighted average intraday trading price of our common stock on the Nasdaq National Market during the three days immediately before the closing date of the merger. The number of shares of our common stock that you will receive for each share of BlueGill capital stock that you own will equal the number of shares of our common stock divided by the number of diluted shares of BlueGill common stock computed according to the merger agreement. Specifically, if the weighted average intraday trading price of our common stock is: o Greater than $101.40 per share, we will issue the number of shares of our common stock equal to $325,000,000 divided by our average trading price; o $78.00 or more and is equal to or less than $101.40 per share, we will issue a total of 3,205,128 shares of our common stock to BlueGill's stockholders; o $50.00 or more but less than $78.00 per share, we will issue the number of shares of our common stock equal to $250,000,000 divided by our average trading price; o Less than $50.00 per share, we exercise our right to terminate the merger agreement, and BlueGill provides us with a reinstatement notice, we will issue a total of 5,000,000 shares; or o Less than $50.00 per share, we do not exercise our right to terminate the merger agreement, we will issue the number of shares of our common stock equal to $250,000,000 divided by our average trading price. The effect of these price thresholds on the BlueGill balance sheet, as adjusted for purchase accounting, with respect to the goodwill acquired, the assets acquired and the liabilities acquired will be as follows: o If the CheckFree share price is in excess of $101.40: (in thousands) Goodwill acquired $280,065 Assets acquired 343,724 Liabilities acquired 21,708 o If the CheckFree share price is between $78.00 and $101.40: (in thousands, except share price) $78.00 $101.40 -------- -------- Goodwill acquired $253,309 $253,309 Assets acquired 316,968 316,968 Liabilities acquired 21,708 21,708 o If the CheckFree share price is between $50.00 and $78.00: (in thousands, except share price) $50.00 $78.00 -------- -------- Goodwill acquired $205,065 $280,065 Assets acquired 268,724 268,724 Liabilities acquired 21,708 21,708 o If the CheckFree price per share is below $50.00, CheckFree elects to terminate, and BlueGill elects to accept 5 million shares, then for every $1.00 lower than the $50.00 price goodwill acquired will decline by $5.0 million from the $205.1 million level, assets acquired will decline by $5.0 million from the $268.7 million level and liabilities acquired will remain constant at the $21.7 million level. o If the CheckFree price per share is below $50.00 and CheckFree does not elect to terminate, then key components remain constant as follows: (in thousands) Goodwill acquired $280,065 Assets acquired 268,724 Liabilities acquired 21,708 Example: The following table provides examples of the proposed exchange ratio for each share of BlueGill stock for various assumptions about our weighted average intraday trading price and assuming BlueGill has 34,515,751 shares of diluted common stock to be exchanged in the merger: 3-DAY AVERAGE STOCK PRICE EXCHANGE RATIO ------------------------- -------------- $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 4
6 If the merger is completed, based on CheckFree's stock price on the date of the announcement of the merger you will receive approximately 0.09286 of a share of CheckFree common stock for each share of BlueGill common stock or BlueGill preferred stock you own. Based on the average closing price of CheckFree's common stock for the three trading days immediately preceding March 15, 2000, which was $87.75, the equivalent value of one share of BlueGill common stock would be $8.15. The exact number of shares of CheckFree common stock to be issued for each share of BlueGill common stock or BlueGill preferred stock is not fixed and will be adjusted based upon changes in the value of our common stock. AS A RESULT, THE VALUE OF THE SHARES YOU RECEIVE IN THE MERGER WILL NOT BE KNOWN AT THE TIME YOU VOTE ON THE MERGER AND MAY GO UP OR DOWN AS THE MARKET PRICE OF OUR COMMON STOCK GOES UP OR DOWN. BlueGill is not permitted to "walk away" from the merger or resolicit the consent of its stockholders based solely on changes in the value of CheckFree common stock. Currently, we anticipate closing the merger three business days after the receipt of the necessary consents. Example: On April [__], 2000, the most recent practicable date prior to the filing of this information statement/prospectus, you would have been entitled to receive _______ shares of CheckFree common stock for each share of BlueGill common stock and BlueGill preferred stock you own. The actual exchange ratio, however, will depend on the value of the CheckFree common stock prior to closing, and may be more or less than the value given in this example. During the past 90 days, the per share price of CheckFree common stock has traded as follows: INTRADAY WEIGHTED HIGH LOW AVERAGE ------- ------ ------- $125.63 $28.50 $[ ] 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. 5
7 o BlueGill will be able to offer its customers a wider range of billing and payment services. BlueGill's board of directors considered the following risks and detriments of the merger: o The recent market price volatility of CheckFree's common stock. o The uncertainty as to the number of CheckFree shares which a BlueGill stockholder will receive. o The attractiveness of alternative strategies, like an IPO or merger with another company, which could produce greater value for BlueGill stockholders. o CheckFree's ability to manage BlueGill after the merger and to grow CheckFree. o CheckFree's financial condition, including its operating losses. o The impact that a material merger between CheckFree and a third party might have on the ability to complete the BlueGill - CheckFree merger in a timely manner. The board did not consider in its analysis information about TransPoint's business, operations and finances or the possible impact of a CheckFree - TransPoint merger on the business, operations, or finances of CheckFree or BlueGill. CONDITIONS TO THE MERGER We will complete the merger only if specific conditions are satisfied or, in some cases, waived, including the following: o approval by the BlueGill stockholders; o absence of any law or court order prohibiting the merger; o execution of the escrow agreement by the BlueGill stockholders; o notification from holders of less than 10% of BlueGill stock of their intention to assert their appraisal rights under applicable law; and o receipt of satisfactory closing certificates from CheckFree and BlueGill. Any of these conditions to the merger may be waived by the appropriate party. If BlueGill waives a condition to the merger, it will resolicit stockholder approval of the merger. Approval of the merger by our stockholders will not be required. EXPENSES We are bearing principally all of the transaction expenses of the merger. ACCOUNTING TREATMENT We intend to account for the merger using the purchase method of accounting under generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. REGULATORY APPROVALS Under the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, we and BlueGill each filed a pre-merger notification report with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice. As a condition to CheckFree's and BlueGill's obligation to complete the merger, the waiting period under the Hart-Scott-Rodino Act must have expired or been earlier terminated. This waiting period expired on January 24, 2000. APPRAISAL RIGHTS We have included a summary of the applicable laws governing your appraisal rights in this information statement/prospectus as Appendix B. We encourage you to read the summary because it contains the specific legal requirements that govern your appraisal rights. Under applicable law, non-consenting BlueGill stockholders have the right to receive an appraisal of the value of their shares in connection with the merger and liquidate them at a judicially determined value. As a condition of the merger, however, we are not required to close the merger if holders of more than 10% of BlueGill stock have notified BlueGill of their intention to assert their appraisal rights. Failure to timely take any of the steps required under applicable law may result in the loss of your appraisal rights. CONFLICTS OF INTEREST OF BLUEGILL DIRECTORS AND OFFICERS IN THE MERGER BlueGill's directors and officers have interests in the merger that are different from, or in addition to, yours as a stockholder. If we complete the merger, BlueGill's officers will have employment agreements with the combined company. In addition, upon consummation of the merger, options to purchase approximately 1,445,000 shares of BlueGill common stock held by BlueGill's senior management will become immediately exercisable. The combined company will continue to provide indemnification arrangements and directors and 6
8 officers liability insurance for BlueGill's existing directors and officers similar to those provided before the merger. INCOME TAX CONSEQUENCES We anticipate that the merger will be a tax-free reorganization for U.S. federal and Canadian income tax purposes, and that BlueGill stockholders will recognize no gain or loss upon conversion of their BlueGill stock into shares of our common stock, except with respect to cash received, if any, in lieu of fractional shares. BlueGill stockholders may, however, recognize income, gain or loss in connection with the exercise of appraisal rights. These conclusions are based upon advice of counsel, not upon an opinion of counsel, and, therefore, you should consult with your own tax advisers concerning the federal or Canadian income tax consequences of the merger, as well as the applicable state, local, foreign or other tax consequences, based upon your individual circumstances. BLUEGILL STOCKHOLDER APPROVAL The merger must be approved by the BlueGill stockholders. The BlueGill board of directors is seeking this stockholder approval by written consent of stockholders rather than at a special meeting of stockholders, because the BlueGill board believes that approval of the merger can be obtained most expeditiously by written consent. The BlueGill board has fixed March 27, 2000, as the record date to determine which stockholders are entitled to consent to the merger. An Action by Written Consent of Stockholders is attached to this information statement/prospectus as Appendix C. You may revoke your consent at any time prior to the date that there are a sufficient number of consents received by BlueGill to approve the merger. To revoke your consent, you must deliver to BlueGill's principal executive offices a signed and dated revocation. There are no agreements regarding the BlueGill stockholder consents being solicited. BlueGill officers as a group own approximately 72% of BlueGill's outstanding common stock, less than 0.2% of BlueGill's outstanding Series A preferred stock, and no shares of Series B preferred stock. BlueGill's certificate of incorporation requires that the merger be approved by the holders of a supermajority of BlueGill's two outstanding series of preferred stock, as well as by the holders of a majority of BlueGill's common stock and preferred stock voting together as a single class. In addition, the BlueGill board of directors will also seek approval by written consent of its preferred stockholders not to treat the merger as a liquidation. In a liquidation, BlueGill's preferred stockholders receive liquidation preferences before sharing remaining assets on an as if converted basis with the common stockholders. If the liquidation payments exceed $2.33 for each share of Series A preferred stock and $3.04 for each share of Series B preferred stock, preferred stockholders will receive no liquidation preferences and will share assets available for distribution with the common stockholders. In the merger, the consideration will exceed these thresholds. Consequently, treating the merger as a liquidation will not result in preferential payments to the preferred stockholders. A preferred stockholder would receive the same form and amount of consideration in the CheckFree merger whether or not the preferred stockholders agree not to treat the merger as a liquidation. BlueGill intends to proceed with the merger even if this preferred stockholder consent is not obtained. Under the merger agreement, the obligation of CheckFree and CheckFree Acquisition to complete the merger is conditioned on, among other requirements, holders of not more than 10% of BlueGill's outstanding capital stock notifying BlueGill of their intention to assert appraisal rights. BlueGill is, therefore, seeking consents from holders of more than 90% of its capital stock. If the merger is not approved by the BlueGill stockholders, CheckFree may terminate the merger agreement and collect a termination fee of $7.5 million from BlueGill, in which case BlueGill may be required to pay CheckFree an additional $17.5 million under specific circumstances provided in the merger agreement. BlueGill will bear the costs of the solicitation of written consents from its stockholders. ADDITIONAL INFORMATION After carefully reading and considering the information contained in this information statement/prospectus, please respond by signing and dating the accompanying form of Action by Written Consent of Stockholder and promptly return it to BlueGill's principal executive offices at: BlueGill Technologies, Inc. 935 Technology Drive Ann Arbor, Michigan 48108 Attention: Vinay Gupta, Corporate Secretary (734) 205-4100 IN ORDER TO EXPEDITE THE MERGER, YOU ARE REQUESTED TO RETURN YOUR CONSENTS BY OVERNIGHT DELIVERY SERVICE. You do not need to send your stock certificates at this time. You will receive separate written instructions from the exchange agent on how to exchange your stock certificates for shares of CheckFree common stock. Please do not send in your stock certificates with your consent. If you have any questions about the merger or how to submit your consent, or if you need additional copies of this information statement/prospectus or the accompanying form of Action by Written Consent of Stockholder, or if you wish to receive a copy of the report of BlueGill's financial advisor, you should contact: BlueGill Technologies, Inc. 935 Technology Drive Ann Arbor, Michigan 48108 Attention: Vinay Gupta, Corporate Secretary (734) 205-4100 COMPARISON OF RIGHTS OF CHECKFREE STOCKHOLDERS AND BLUEGILL STOCKHOLDERS In the merger, all of BlueGill's stock, both common and preferred, will be exchanged for CheckFree common stock. Since both CheckFree and BlueGill are Delaware corporations, the statutory rights of the BlueGill stockholders will not change. BlueGill's preferred stock, however, will be converted into shares of our common stock. BlueGill preferred stockholders will no longer have the liquidation preference they currently have nor will the preferred stock be redeemable. EFFECTIVE TIME Assuming that all conditions to the merger are either satisfied or waived, we anticipate closing the merger three business days after the receipt of the necessary consents. 7
9 RECENT DEVELOPMENTS ACQUISITION OF TRANSPOINT On February 15, 2000, we announced that we entered into a definitive merger agreement with MSFDC LLC and its subsidiaries, TransPoint Technology & Services LLC, TransPoint LLC, and MSFDC International, LP, collectively referred to as or TransPoint, entities owned by Microsoft Corporation, First Data Corporation and Citicorp, N.A. Under the terms of the merger agreement, all outstanding ownership interests in TransPoint, which are held by Microsoft, First Data and Citibank, will be transferred to us, and joint marketing agreements will be established, in exchange for 17 million shares of our common stock or approximately 23% of our common stock. CHASE MANHATTAN AGREEMENT On March 28, 2000, we announced that we had entered into a multi-year non-exclusive extension to our contract with Chase Manhattan Bank for electronic payment services. 8
10 RISK FACTORS A. RISKS RELATED TO THE MERGER OUR COMMON STOCK HAS BEEN VOLATILE OVER THE PAST THREE MONTHS. Since December 15, 1999, our stock price has been extremely volatile, trading at a high of $125.63 per share and a low of $28.50 per share for the period. Our stock price could dramatically decrease between the time that the BlueGill stockholders approve the merger and the time the merger closes. We can not assure that the price of our common stock at the time you vote to approve the merger will be the same as the price of our common stock when we close the transaction. The volatility in our stock price has been caused by: o actual or anticipated fluctuations in our operating results; o actual or anticipated fluctuations in our subscriber growth; o announcements by us, our competitors or our customers; o announcements of the introduction of new or enhanced products and services by us or our competitors; o announcements of joint development efforts or corporate partnerships in the electronic commerce market; o market conditions in the banking, telecommunications, technology and other emerging growth sectors; o rumors relating to our competitors or us; and o general market or economic conditions. THE NUMBER OF SHARES YOU WILL RECEIVE IN THE MERGER WILL BE UNKNOWN UNTIL CLOSING. You will not know the number of shares you will receive in the merger until closing. The number of shares to be issued in the merger will be determined at closing based on the number of diluted shares of BlueGill outstanding at closing and the price of our common stock. We can not assure you that the number of shares that you would be entitled to receive at the time you vote on the transaction will be the same as the amount of shares you receive at closing. WE HAVE ENTERED INTO A MERGER AND CONTRIBUTION AGREEMENT WITH TRANSPOINT WHICH, IF COMPLETED WILL DILUTE YOUR EQUITY INTEREST AND MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We have entered into a merger and contribution agreement with TransPoint whereby: o we will form a new holding company named CheckFree Corporation; o each of our stockholders will receive a share of CheckFree Corporation common stock for each share of our common stock they own; and o CheckFee Corporation will issue 17,000,000 shares of common stock to TransPoint. If both this transaction and the TransPoint acquisition occur, you will become a CheckFree Corporation stockholder and your equity interest will be diluted by approximately 23%. After the TransPoint acquisition is completed, BlueGill stockholders will own less than 5% of CheckFree Corporation's common stock. Additionally, the TransPoint acquisition may adversely affect our stock price, results of operations and financial condition. We will need to devote substantial time and resources to the completion of the acquisition and integration of TransPoint's business with our own. BLUEGILL'S DIRECTORS AND OFFICERS HAVE DIFFERENT INTERESTS RELATING TO THE MERGER. BlueGill's directors and officers have interests in the merger that are different from, or are in addition to, yours. In particular, we expect to retain all of BlueGill's employees, including all of BlueGill's officers, after the merger. These employees will be entitled to participate in our employee benefit plans, including grants of stock options in our stock option plan. Additionally, in connection with the merger, the vesting of options held by some BlueGill employees will accelerate. If we complete the merger, BlueGill's officers will have employment agreements with the combined company. Additionally, options to purchase approximately 1,445,000 shares of BlueGill common stock held by BlueGill's senior management will become immediately exercisable. Under the terms of the merger agreement, we agreed to indemnify the officers, directors, employees and agents of BlueGill and its subsidiaries against all judgments, fines, losses, claims, damages, costs or expenses or liabilities arising 9
11 from their positions relating to any act or omission occurring at or prior to closing. We also agreed to continue to pay the insurance premiums on the directors and officers insurance policies for all of the current directors and officers of BlueGill for six years for up to 200% of the current policy premiums. YOU MAY ONLY RECEIVE 90% OF THE MERGER CONSIDERATION DUE TO INDEMNITY PROVISIONS IN THE MERGER AGREEMENT. You may only receive 90% of the merger consideration you are entitled to. According to the merger agreement, 10% of the merger consideration will be placed into escrow to pay indemnification claims related to the merger. We will make claims against the escrowed funds if we incur losses, damages or expenses in excess of $1,000,000 arising from BlueGill's breach or misrepresentation of any representations or warranties in the merger agreement. Escrow funds not used for such claims will be returned to BlueGill for distribution to its stockholders. WE ARE REQUIRED TO AMORTIZE GOODWILL THAT WILL CAUSE OUR EARNINGS PER SHARE TO DECREASE. Because we will account for the merger and the TransPoint transaction using the purchase method, the amortization of goodwill from the BlueGill and TransPoint acquisitions will result in a charge to our earnings that will decrease our earnings per share. We will be required to amortize approximately $253,308,793 over a period of five years or $50,661,759 per year in connection with the BlueGill merger assuming a purchase price of $308,215,000, and approximately $806,003,165 over a period of five years or $160,200,633 per year in connection with the TransPoint acquisition, assuming a purchase price of $1,253,408,000. Additionally, because we will issue shares of our common stock in the merger, and since historically BlueGill is not a profitable entity, the merger may cause our earnings per share to decrease. A drop in our earnings per share could have a negative impact on the market price of our common stock. Analysts and investors carefully review a company's earnings per share and often base investment decisions on a company's earnings per share. AFTER THE MERGER, BLUEGILL MAY NOT ACHIEVE ANTICIPATED REVENUES, EARNINGS OR CASH FLOW. After the closing of the merger, we can not assure you that BlueGill will achieve its anticipated revenues, earnings or cash flow. Any shortfall may decrease the value and price of our common stock and have an adverse effect on our business or financial condition. THE BLUEGILL MERGER AND THE TRANSPOINT ACQUISITION WILL RESULT IN IMMEDIATE AND SUBSTANTIAL DILUTION IN OUR PER SHARE EARNINGS AND A SUBSTANTIAL INCREASE IN OUR LOSS FROM OPERATIONS. The BlueGill merger and the TransPoint acquisition on a pro forma basis would result in immediate and substantial dilution of earnings of $5.44 per share for the year ended June 30, 1999 and earnings of $2.49 per share for the six months ended December 31, 1999. Additionally, the BlueGill and TransPoint transactions on a pro forma basis would increase our loss from operations from $3,733,000 to $485,050,000 for the year ended June 30, 1999 and from $12,640,000 to $230,266,000 for the six months ended December 31, 1999. The anticipated dilution and the increase in our loss from operations could have a negative impact on the market price of our common stock. Analysts and investors carefully review a company's earnings per share and often base investment decisions on a company's operating profits and losses and per share earnings. IF THE MERGER IS NOT COMPLETED, BLUEGILL MAY BE REQUIRED TO PAY CHECKFREE UP TO $25 MILLION. The merger agreement provides that Bluegill must pay CheckFree a $7.5 million break up fee if BlueGill does not close the transaction because it has not meet all of the conditions to the merger, including the approval of the merger by the BlueGill stockholders. BlueGill may also be required to pay an additional $17.5 million to CheckFree if, prior to the termination of the merger agreement, BlueGill enters into negotiations with a third party and the third party acquires BlueGill within twelve months following the termination of the merger agreement. INTEGRATION OF BLUEGILL'S BUSINESSES AND TECHNOLOGIES MAY NOT BE SUCCESSFUL AND WE MAY NOT REALIZE ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER. The failure to successfully integrate BlueGill's operations may have a material adverse effect on our business and results of operations. We anticipate that the acquisition of BlueGill will result in economic, operational and other benefits, including increased profitability, greater operational efficiencies and better products for our customers. Any failure to accomplish these goals, or the failure to achieve them in a timely manner, may have a material adverse effect on our business and results of operations. THE ACQUISITION MAY RESULT IN DISRUPTION OF OUR EXISTING BUSINESS, DISTRACTION OF MANAGEMENT, DIVERSION OF OTHER RESOURCES. The integration of BlueGill may take management time and resources that will have to be diverted from our main business. This diversion of time and resources could cause the market price of our common stock to decrease. Our management will need to spend its time integrating BlueGill into CheckFree's operations. Management will need to focus some of its efforts onto BlueGill and away from our main business. This could cause our business to suffer. Additionally, we will need to devote resources into the continued development of BlueGill. These resources will come from our existing business and will have to be diverted from our existing operations. YOUR RIGHTS AS A STOCKHOLDER OF CHECKFREE WILL BE DIFFERENT THAN YOUR CURRENT RIGHTS AS A BLUEGILL STOCKHOLDER. Stockholders of BlueGill preferred stock will lose their liquidation preference and the preferred stock's redemption value once their shares are converted into shares of our common stock. Currently, stockholders of BlueGill preferred stock have a liquidation preference over the common stockholders. Once the BlueGill preferred 10
12 stock is converted into shares of our common stock, the stockholders of BlueGill preferred stock will lose that liquidation preference. Further, BlueGill's preferred stock is currently redeemable. Once the BlueGill preferred stock is converted into shares of our common stock, the stockholders of BlueGill preferred stock will lose their redemption rights. AS A RESULT OF THE MERGER, WE WILL HAVE AN INCREASED INTERNATIONAL PRESENCE IN WHICH WE HAVE HAD LIMITED BUSINESS EXPERIENCE. Historically, we have not offered or sold our products and services internationally. If we are unable to successfully adapt our business operations to international regulations and local business customs and practices, it could have a material adverse effect on our business and financial condition. YOU MAY HAVE TO PAY TAXES ON THE MERGER CONSIDERATION YOU RECEIVE. Neither we nor BlueGill has obtained an opinion of counsel regarding the United States tax consequences of the merger. Therefore, there is a risk that you will have to pay taxes on the merger consideration you receive. You should rely on your own tax advisor regarding the tax consequences of the merger to you. B. RISKS RELATED TO CHECKFREE THE MARKET FOR OUR ELECTRONIC COMMERCE SERVICES IS EVOLVING AND MAY NOT CONTINUE TO DEVELOP OR GROW RAPIDLY ENOUGH FOR US TO BECOME CONSISTENTLY PROFITABLE. If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on our business, financial condition and results of operations. The electronic commerce market is still evolving and currently growing at a rapid rate. We believe future growth in the electronic commerce market will be driven by the cost, ease-of-use and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue to adopt our services. WE HAVE NOT OPERATED PROFITABLY IN THE PAST AND EXPECT TO EXPERIENCE NET LOSSES IN THE FUTURE. We have not consistently operated profitably to date. Since our inception, our accumulated losses have totaled approximately $301,905,000. We incurred: o a loss from operations of $7.2 million and a net loss of $3.7 million in the fiscal year ended June 30, 1998; o a loss from operations of $3.7 million and net income of $10.5 million for the fiscal year ended June 30, 1999; and o a loss from operations of $12.6 million and a net loss of $7.9 million for the six months ended December 31, 1999. In addition, BlueGill has incurred significant losses to date, including a net loss of $7.1 million for the fiscal year ended December 31, 1999. We anticipate having a net loss from operations in fiscal 2000 and may experience net losses and may not be able to sustain or increase our profitability in the future. For the six months ended December 31, 1999, we invested over $15.1 million in research and development and over $18 million in sales and marketing. We intend to continue to make significant investments in research and development and sales and marketing. If the investment of our capital is not successful to grow our business, it will have a material adverse effect on our business and financial condition, as well as negatively impact your investment in our business and limit our ability to pay dividends in the future to our stockholders. OUR FUTURE PROFITABILITY DEPENDS ON OUR ABILITY TO IMPLEMENT OUR STRATEGY SUCCESSFULLY TO INCREASE ADOPTION OF ELECTRONIC BILLING AND PAYMENT METHODS. Our future profitability will depend, in part, on our ability to implement our strategy successfully to increase adoption of electronic billing and payment methods. Our strategy includes investment of time and approximately $40 million during fiscal 2000 in programs designed to: o drive consumer awareness of electronic billing and payment; o encourage consumers to sign up for and use our electronic billing and payment services offered by our distribution partners; o build our infrastructure to handle seamless processing of transactions; o continue to develop state of the art, easy-to-use technology; and o increase the number of billers whose bills we can present and pay electronically. If we do not successfully implement our strategy, revenue growth will be minimal, and expenditures for these programs will not be justified. 11
13 Our investment in these programs will have a negative impact on our short-term profitability. Additionally, our failure to implement these programs successfully or to increase substantially adoption of electronic commerce billing and payment methods by consumers who pay for the services could have a material adverse effect on our business, financial condition and results of operations. COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US. Electronic commerce is new and evolving rapidly, resulting in a dynamic competitive environment. We face significant competition in our each of our business units, Electronic Commerce, Investment Services and Software businesses. Increased competition or other competitive pressures may result in price reductions, reduced margins or loss of business, any of which could have a material adverse effect on our business, financial condition and results of operations. Further, we expect competition to persist, increase and intensify in the future. First, we need to switch billers and consumers from paper bills sent by mail and paid by check to electronic bill presentment and payment. Second, a number of financial institutions have developed, and others in the future may develop, in-house home banking services similar to ours. For example, in June 1999, Chase Manhattan Corporation, First Union Corporation and Wells Fargo & Co. announced the formation of a new venture called Spectrum that will allow individuals and businesses to receive and pay bills electronically. To the best of our knowledge, Spectrum has done limited electronic presentment of bills, and is developing a "pay anyone" capability. In addition, recently MasterCard International announced that it would begin offering online bill presentment to enable people to receive and pay bills over the Internet by September 2000. Additionally, TransPoint has entered into its own agreements with financial institutions to offer on-line home banking and electronic billing and payment services to consumers. As previously disclosed, we have entered into an agreement to acquire TransPoint and its operations. In the event that the TransPoint Acquisition is not completed, TransPoint will continue to be a competitor. We also face increased competition from billers directly presenting bills to their customers electronically and from new competitors offering billing and payment services utilizing scan and pay technology. These "scan and pay" companies offer a service whereby a consumer's bill is received by the company, scanned to create an electronic image of the bill, and electronically delivered to the consumer who can elect to pay that bill either by writing a paper check or through an electronic transfer of funds. We cannot assure you that we will be able to compete effectively against financial institutions, Spectrum, Mastercard TransPoint, billers directly delivering bills to their customers, scan and pay companies or other current and future electronic commerce competitors. In addition, we cannot assure you that we will be able to compete effectively against current and future competitors in the investment services and software products markets. The markets for our investment services and software products are also highly competitive. In Investment Services, our competition comes primarily from providers of portfolio accounting software. In Software, our competition comes from several different market segments, including large diversified computer software and service companies and independent suppliers of software products. Because there are relatively low barriers to entry, we expect competition in the software market to increase significantly in the future. Across all of our market segments, many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition and a larger installed base of customers than we do. As a result, these competitors may be able to respond to new or emerging technologies and changes in customer requirements faster and more effectively than we can, or to devote greater resources to the development, promotion and sale of products than we can. If these competitors were to acquire a significant market share, it could have a material adverse effect on our business, financial condition and results of operations. SOME OF OUR CUSTOMERS MAY COMPETE AGAINST US WHICH MAY RESULT IN A LOSS OF REVENUE. From time to time, some of our customers may compete against us which may have a material adverse effect on our revenues and results of operations. For example, in June 1999, Chase Manhattan, First Union and Wells Fargo announced the formation of Spectrum that will allow individuals and businesses to receive and pay bills electronically. Other of our significant customers may in the future decide to compete against us and such competition may have a material adverse affect on our business and financial results. SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS MAY DAMAGE CUSTOMER RELATIONS AND INHIBIT OUR GROWTH. Any failures in our security and privacy measures could have a material adverse effect on our business, financial condition and results of operations. We electronically transfer large sums of money and personal information about consumers, including bank account and credit card information, social security numbers, and merchant account numbers. If we are unable to protect, or consumers perceive that we are unable to protect, the security and privacy of our electronic transactions, our growth and the growth of the electronic commerce market in general could be materially adversely affected. A security or privacy breach may: o cause our customers to lose confidence in our services; o deter consumers from using our services; o harm our reputation; o expose us to liability; o increase our expenses from potential remediation costs; and 12
14 o decrease market acceptance of electronic commerce transactions. While we believe that we utilize proven applications designed for premium data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential subscribers. WE RELY ON THIRD PARTIES TO DISTRIBUTE OUR ELECTRONIC COMMERCE SERVICES, WHICH MAY NOT RESULT IN WIDESPREAD ADOPTION. We rely on our contracts with financial institutions, businesses, billers, Internet portals and other third parties like Intuit Inc. to provide branding for our electronic commerce services and to market our services to their customers. None of these third parties accounted for more than 10% of our total revenue for the year ended June 30, 1999 or for the six months ended December 31, 1999. These contracts are an important source of the growth in demand for our electronic commerce services. If any of these third parties abandon, curtail or insufficiently increase its marketing efforts, it could have a material adverse effect on our business, financial condition and results of operations. CONSOLIDATION IN THE BANKING INDUSTRY MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR ELECTRONIC COMMERCE SERVICES, INVESTMENT SERVICES AND SOFTWARE. Mergers, acquisitions and personnel changes at key financial institutions have the potential adversely to affect our business, financial condition and results of operations. Currently, the banking industry is undergoing large-scale consolidation, causing the number of financial institutions to decline. This consolidation could cause us to lose: o current and potential customers; o business opportunities, if combined financial institutions were to determine that it is more efficient to develop in-house home banking services similar to ours or offer our competitors' products or services; and o revenue, if combined financial institutions were able to negotiate a greater volume discount for, or to discontinue the use of, our products and services. WE ARE DEPENDENT UPON A SMALL NUMBER OF FINANCIAL INSTITUTION CUSTOMERS FOR A SIGNIFICANT PERCENTAGE OF OUR SUBSCRIBERS. We rely on our contracts with three key financial institutions for a substantial portion of our subscriber base and the volume of electronic transactions that we process. As of December 31, 1999, these three financial institutions accounted for approximately 1.4 million subscribers, or approximately 47% of our total subscriber base. No single customer, however, accounts for more than 10% of our revenues. The loss of the contract with any of these key financial institutions or a significant decline in the number of transactions processed through them could have a material adverse effect on our business, financial condition and results of operations. IF WE DO NOT SUCCESSFULLY RENEW OR RENEGOTIATE OUR AGREEMENTS WITH OUR CUSTOMERS, OUR BUSINESS MAY SUFFER. Our agreements for electronic commerce services with financial institutions generally provide for terms of three to five years. These agreements are renegotiated from time to time when financial institutions migrate from our PC-based platform to our web-based platform. If we are not able to renew or renegotiate these agreements on favorable terms, it could have a material adverse effect on our business, financial condition and results of operations. The profitability of our Software business depends, to a substantial degree, upon our software customers electing to periodically renew their maintenance agreements. If a substantial number of our software customers declined to renew these agreements, our revenues and profits in this business segment would be materially adversely affected. OUR FUTURE PROFITABILITY DEPENDS ON AN INCREASE IN THE PROPORTION OF TRANSACTIONS WE PROCESS ELECTRONICALLY. If we are unable to increase the percentage of transactions that we process electronically, our margins could decrease, which could have a material adverse effect on our business, financial condition and results of operations. We 13
15 processed electronically 45% of our transactions for the year ended June 30, 1999 and 52% of the transactions for the six months ended December 31, 1999. Our future profitability will depend, in part, on our ability to increase the percentage of transactions we process electronically. Compared with conventional paper-based transactions, electronic transactions: o cost much less to complete; o give rise to far fewer errors, which are costly to resolve; and o generate far fewer subscriber inquiries and, therefore, consume far fewer customer care resources. THE TRANSACTIONS WE PROCESS EXPOSE US TO CREDIT RISKS. Any losses resulting from returned transactions, merchant fraud or erroneous transmissions could result in liability to financial institutions, merchants or subscribers, which could have a material adverse effect on our business, financial condition and results of operations. The electronic and conventional paper-based transactions we process expose us to credit risks. These include risks arising from returned transactions caused by: o insufficient funds; o unauthorized use; o stop payment orders; o payment disputes; o closed accounts; o theft; o frozen accounts; and o fraud. We are also exposed to credit risk from merchant fraud and erroneous transmissions. WE MAY EXPERIENCE BREAKDOWNS IN OUR PAYMENT PROCESSING SYSTEM THAT COULD DAMAGE CUSTOMER RELATIONS AND EXPOSE US TO LIABILITY. A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. To successfully operate our business, we must be able to protect our payment processing and other systems from interruption by events that are beyond our control. For example, our system may be subject to loss of service interruptions caused by hostile third parties similar to those experienced by many companies operating Internet websites during February 2000 or other instances of deliberate system sabotage. Other events that could cause system interruptions include: o fire; o natural disaster; o power loss; o telecommunications failure; o unauthorized entry; and o computer viruses. For the fiscal year ended June 30, 1999, we incurred a charge of $2.7 million due to problems accessing and using our system. Without the charge, our loss from operations in our electronic commerce segment would have been $2.8 million compared to the actual $5.5 million we lost. These problems stemmed from system errors we experienced in April 1999 due to system degradation issues in connection with the migration of subscribers to our Genesis platform, which resulted in consumers inability to connect with and transmit data to our processing system. This system failure did not result in the loss of any consumer data. Although we completed the initial migration of some of our subscribers from our pre-existing data processing platforms to a new system that we call the Genesis platform, we will continue to migrate subscribers from non-Genesis platforms to the Genesis platform at the request of our other customers. Our main processing facility is located in Norcross, Georgia, and we have other processing facilities located in Ohio, Illinois and Texas. During the transition from the pre-existing platforms to the Genesis platform, we may be exposed to loss of data or unavailability of systems due to inadequate back-ups, reduced or eliminated redundancy, or both. Although we regularly back-up our data logs hourly and our overall system daily, as well as take other measures to protect against data loss and system failures, there is still some risk that we may lose critical data or experience system failures. We constantly review our usage and capacity constraints. We have engineered our systems to ensure that we never exceed 80% utilization of capacity at peak processing times. That means that, in general, we average processing at 40%-50% of capacity with no peak time consuming more than 80% of the system's resources. As a precautionary measure, we have entered into disaster recovery agreements for the processing systems at all our sites, and we conduct business resumption tests on a scheduled basis. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. 14
16 WE MAY EXPERIENCE SOFTWARE DEFECTS AND DEVELOPMENT DELAYS, DAMAGING CUSTOMER RELATIONS, DECREASING OUR POTENTIAL PROFITABILITY AND EXPOSING US TO LIABILITY. Our electronic commerce services and our software products are based on sophisticated software and computing systems which often encounter development delays, and the underlying software may contain undetected errors or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in: o additional development costs; o diversion of technical and other resources from our other development efforts; o loss of credibility with current or potential customers; o harm to our reputation; or o exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors or defects that could have a material adverse effect on our business, financial condition and results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation-of-liability provisions in our license and customer agreements, we cannot assure you that these measures will be successful in limiting our liability. 15
17 WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING RESULTS TO FLUCTUATE. We have historically experienced seasonal fluctuations in our net sales, and we expect to experience similar fluctuations in the future . If our net sales are below the expectations of securities analysts and investors due to seasonal fluctuations, our stock price could decrease unexpectedly. Our growth in new electronic commerce subscribers is affected by seasonal factors like holiday-based personal computer sales. These seasonal factors may impact our operating results by concentrating subscriber acquisition and set-up costs, which may not be immediately offset by revenue increases primarily due to introductory service price discounts. Additionally, on-line interactive service subscribers generally tend to be less active users during the summer months, resulting in lower revenue during this period. Our software sales also have historically displayed seasonal variability, with sales and earnings generally stronger in the quarters ended December 31 and June 30 of each year and generally weaker in the quarters ended September 30 and March 31 of each year. The seasonality in software sales is due, in part, to calendar year-end buying patterns of financial institution customers and our software sales compensation structure, which measures sales performance at our June 30 fiscal year end. IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE OR CHANGES IN INDUSTRY STANDARDS, OUR SERVICES COULD BECOME OBSOLETE AND WE COULD LOSE OUR CUSTOMERS. If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, proprietary technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The electronic commerce industry is changing rapidly. To remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. For example, we are currently migrating our products and services from a PC-based platform to a web-based platform. WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, PERMITTING COMPETITORS TO DUPLICATE OUR PRODUCTS AND SERVICES. Our success and ability to compete is dependent, in part, upon our proprietary technology, which includes our patent for our electronic billing and payment processing system, our source code information for our software products, and our operating technology. We rely primarily on patent, copyright, trade secret and trademark laws to protect our technology. In addition, we have been granted a patent for some features of our electronic billing and payment processing system, which we believe provides some measure of security for our technologies. If challenged, we cannot assure you that our patent will prove to be valid or provide the protection that we need. Further, the source code for our proprietary software is protected both as a trade secret and as a copyrighted work. We generally enter into confidentiality and assignment agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information. Because our means of protecting our proprietary rights may not be adequate, it may be possible for a third party to copy, reverse engineer or otherwise obtain and use our technology without authorization. In addition, the laws of some countries in which we sell our products do not protect software and intellectual property rights to the same extent as the laws of the U.S. Unauthorized copying, use or reverse engineering of our products could have a material adverse effect on our business, financial condition and results of operations. A third party could also claim that our technology infringes its proprietary rights. As the number of software products in our target markets increases and the functionality of these products overlap, we believe that software developers may increasingly face infringement claims. These claims, even if without merit, can be time-consuming and expensive to defend. A third party asserting infringement claims against us in the future may require us to enter into costly royalty arrangements or litigation. OUR BUSINESS COULD BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, WHICH COULD MAKE OUR BUSINESS MORE EXPENSIVE TO OPERATE. We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, or OCC, the Federal Reserve Board or other federal agencies that regulate or monitor banks or other types of providers of electronic commerce services. A number of states have legislation regulating or licensing check sellers, money transmitters or service providers to banks, and we have registered under this legislation in specific instances. Because electronic commerce in general, and most of our products and services in particular, are so new, the application of many of these laws and regulations is uncertain and difficult to interpret. The entities responsible for interpreting and enforcing these laws and regulations could amend these laws or regulations or issue new interpretations of existing laws or regulations. Any of these changes could lead to increased operating costs and reduce the convenience and functionality of our products or services, possibly resulting in reduced market acceptance. It is also possible that new laws and regulations may be enacted with respect to the Internet, including taxation of electronic commerce activities. The adoption of any of these laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our products or services, increase our cost of doing business or could otherwise have a material adverse effect on our business, financial condition and results of operations. The Federal Reserve rules provide that we can only access the Federal Reserve's Automated Clearinghouse through a bank. If the Federal Reserve rules were to change to further restrict our access to the Automated Clearinghouse or limit our ability to provide Automated Clearinghouse transaction processing services, it could have a material adverse effect on our business, financial condition and results of operations. 16
18 RISKS RELATED TO OUR COMMON STOCK AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE IN THE FUTURE COULD ADVERSELY AFFECT OUR STOCK PRICE. The availability for future sale of a substantial number of shares of our common stock in the public market, or issuance of common stock upon the exercise of stock options, warrants or conversion of the notes or otherwise could adversely affect the market price for our common stock. As of January 31, 2000, we had outstanding 52,635,730 shares of our common stock, of which 34,532,321 shares of our issued and outstanding common stock were held by nonaffiliates. The holders of the remaining 18,103,409 shares were entitled to resell them only by a registration statement under the Securities Act of 1933 or an applicable exemption from registration. As of January 31, 2000, we had an additional 21,087,430 shares of our common stock available for future sale, including: o outstanding options to purchase 5,826,583 shares of our common stock, of which options for 1,428,287 shares were fully vested and exercisable at an average weighted exercise price of approximately $9.21 per share; o issued warrants to purchase 11,400,000 shares of our common stock, of which warrants for 2,725,000 shares were fully vested and exercisable at a weighted exercise price of approximately $20.86 per share; o up to 704,347 shares available for issuance under our Associate Stock Purchase Plan; o up to 799,943 shares available for issuance under our 401(k) Plan; and o up to 2,356,557 shares of our common stock issuable upon conversion of the notes. As of March 31, 2000, the following entities hold shares or warrants to purchase shares of our common stock in the following amounts: o Intuit, Inc., which holds 10,175,000 shares; o Integrion Financial Network, L.L.C., which with current and former members, collectively holds warrants to purchase up to 9,700,000 shares, 2,700,000 of which are fully vested and exercisable; and o Bank One, which holds warrants to purchase 1,000,000 shares and may be entitled to receive warrants to purchase up to 2,000,000 additional shares,none of which are vested or exercisable. Each of Intuit, Integrion and Bank One may be entitled to registration rights. If Intuit, Integrion or Bank One, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, these sales may have an adverse effect on the market price of our common stock. If we complete the TransPoint acquisition, CheckFree Corporation will issue 17,000,000 shares of common stock as follows: o 8,567,250 shares to Microsoft; o 6,567,250 shares to First Data; and o 2,015,500 shares to Citibank. We have agreed with Microsoft, First Data and Citibank to file a shelf registration statement that would allow continuous resales of the shares that they will receive on the closing date of the acquisition. Although Microsoft and First Data will be limited in their ability to transfer their shares of common stock during the next three years pursuant to stockholder agreements with us, they will be able to transfer significant portions of their common stock in the future in both registered and unregistered sales. One year after the acquisition is completed, Microsoft and Citibank may be able to sell up to the greater of one percent of CheckFree Corporation's average weekly trading volume or one percent of CheckFree Corporation's outstanding common stock in reliance on registration exemptions. In addition, Microsoft and First Data will be permitted to a limited extent to engage in hedging transactions with respect to our common stock. Sales of substantial amounts of our common stock by either Microsoft or First Data, or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock. ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE ANY CHANGE IN CONTROL MORE DIFFICULT. Our certificate of incorporation and by-laws contain provisions that may have the effect of delaying or preventing a change in control, may discourage bids at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include: o division of our board of directors into three classes serving staggered three-year terms; o removal of our directors by the stockholders only for cause upon 80% stockholder approval; o prohibiting our stockholders from calling a special meeting of stockholders; o ability to issue additional shares of our common stock or preferred stock without stockholder approval; o prohibiting our stockholders from unilaterally amending our certificate of incorporation or by-laws except with 80% stockholder approval; and o advance notice requirements for raising business or making nominations at stockholders' meetings. 17
19 We also have a stockholder rights plan that allows us to issue preferred stock with rights senior to those of our common stock without any further vote or action by our stockholders. The issuance of our preferred stock under the stockholder rights plan could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. In some circumstances, the issuance of preferred stock could have the effect of decreasing the market price of our common stock. We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder's acquisition of our stock was approved in advance by our board of directors. In addition, both the commercial alliance agreement with Microsoft and the marketing agreement with First Data, each of which we will execute in connection with the closing of the TransPoint acquisition, both allow the termination of the agreement by Microsoft or First Data, as the case may be, under specific change of control circumstances. If either Microsoft or First Data terminates under these circumstances, we will lose a portion of the future revenue guarantees under the applicable agreement. This potential termination event could discourage third parties from acquiring us. 18
20 FORWARD-LOOKING STATEMENTS This information statement/prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements often, although not always, include words or phrases like "will likely result," "expect," "will continue," "anticipate," "estimate," "intend," "plan," "project," "outlook," or similar expressions. We have based these forward-looking statements on our current expectations and assumptions about future events. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those statements. These risks and uncertainties include those set forth under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The forward-looking statements contained in this information statement/prospectus include statements about the following: o our ability to integrate BlueGill's business and operations with our own; o anticipated trends in our business, including trends in the electronic commerce, investment services, and software segments; o our intention to develop and introduce new products and services; o our anticipated growth and growth strategies; and o anticipated levels of adoption of electronic billing and payment. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this information statement/prospectus might not occur. 19
21 WHERE YOU CAN FIND MORE INFORMATION We must comply with the informational requirements of the Securities Exchange Act of 1934 and its rules and regulations. Under the Exchange Act, we must file reports, proxy statements, and other information with the Securities and Exchange Commission. Copies of these reports, proxy statements, and other information can be inspected and copied at: Public Reference Room Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 or at the public reference facilities of the regional offices of the Commission at: 500 West Madison Street or: 7 World Trade Center Suite 1400 Suite 1300 Chicago, Illinois 60661-2511 New York, New York 10048-1102 You may obtain information on the operation of the Public Conference Room by calling the Commission at 1-800-SEC-0330. You may also obtain copies of our materials by mail at prescribed rates from the Public Reference Room at the address noted above. Finally, you may obtain these materials electronically by accessing the Commission's home page on the Internet at HTTP://WWW.SEC.GOV. Our common stock is listed on the Nasdaq National Market. Therefore, reports and other information concerning us should be available for inspection and copying at the offices of the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006-1504. All information contained in this information statement/prospectus with respect to us and CheckFree Acquisition, was supplied by us and all information contained in this information statement/prospectus with respect to BlueGill was supplied by BlueGill. Neither CheckFree nor BlueGill can warrant the accuracy or completeness of information relating to the other party. 20
22 COMPARATIVE PER SHARE INFORMATION The following table presents historical and unaudited pro forma per share data for CheckFree, BlueGill and TransPoint, which we agreed to acquire on February 15, 2000, and on a consolidated basis. This information is qualified in its entirety by the historical financial statements and accompanying notes for CheckFree, for BlueGill and for TransPoint contained in this information statement/prospectus. You should read this table in conjunction with those statements and notes. You should also read the following unaudited pro forma financial information in conjunction with CheckFree's, BlueGill's and TransPoint's unaudited pro forma financial statements and accompanying notes included in this information statement/prospectus. For more information, please refer to the section of this information statement/prospectus entitled "Unaudited Pro Forma Condensed Combining Financial Information." YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- CHECKFREE HISTORICAL Net Income (Loss) $ 0.18 $ (0.15) Cash Dividends Declared -- -- Book Value 3.61 3.86 YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- BLUEGILL HISTORICAL Net Income (Loss) $ (0.41) $ (1.43) Cash Dividends Declared -- -- Book Value (0.45) (1.84) YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- TRANSPOINT HISTORICAL (1) N/A N/A YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- CHECKFREE / BLUEGILL / TRANSPOINT PRO FORMA COMBINED Net Income (Loss) $ (5.26) $ (2.64) Cash Dividends Declared -- -- Book Value 25.43 YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- CHECKFREE / BLUEGILL PRO FORMA COMBINED Net Income (Loss) $ (1.03) $ (0.73) Cash Dividends Declared -- -- Book Value 8.95 21
23 YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- CHECKFREE / TRANSPOINT PRO FORMA COMBINED Net Income (Loss) $(4.52) $(2.29) Cash Dividends Declared -- -- Book Value 22.35 YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- EQUIVALENT BLUEGILL PRO FORMA COMBINED (2) Net Income (Loss) $ (0.10) $(0.07) Cash Dividends Declared -- -- Book Value 0.83 YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- EQUIVALENT TRANSPOINT PRO FORMA COMBINED N/A N/A YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- EQUIVALENT BLUEGILL / TRANSPOINT PRO FORMA COMBINED (1) N/A N/A - ----------------------------------------- (1) The TransPoint business is conducted through four limited liability companies and a limited partnership. Under the terms of the limited liability agreements and the limited partnership agreement, there are no shares outstanding. (2) Represents the CheckFree pro forma combined results multiplied by an assumed share conversion factor of 0.09286 per the merger agreement with BlueGill. 22
24 MARKET PRICE DATA; DIVIDEND POLICY Our common stock is traded on the Nasdaq National Market under the symbol "CKFR." The following table provides the high and low sales prices of our common stock for the periods indicated as reported by the Nasdaq National Market. COMMON STOCK PRICE FISCAL PERIOD HIGH LOW FISCAL 1998 First Quarter ............................. $ 23.13 $ 16.50 Second Quarter ............................ $ 31.44 $ 20.25 Third Quarter ............................. $ 28.50 $ 20.00 Fourth Quarter ............................ $ 30.63 $ 20.44 FISCAL 1999 First Quarter ............................. $ 31.50 $ 8.25 Second Quarter ............................ $ 23.44 $ 5.75 Third Quarter ............................. $ 46.00 $ 20.63 Fourth Quarter ............................ $ 69.13 $ 24.50 FISCAL 2000 First Quarter ............................. $ 44.25 $ 23.13 Second Quarter ............................ $ 107.50 $ 34.00 Third Quarter ............................. $ 125.63 $ 55.77 Fourth Quarter (through April 17, 2000).... $ 70.75 $ 28.50 On April 17, 2000, the last reported sale price for our common stock on the Nasdaq National Market was $30.63 per share. As of April 17, 2000, there were approximately 556 holders of record of our common stock. We have not paid cash dividends since 1986, and do not anticipate doing so in the foreseeable future. We presently anticipate that all of our future earnings will be retained for the development of our business. The payment of any future dividends will be at our board of directors' discretion and will be based on our future earnings, financial condition, capital requirements and other relevant factors. 23
25 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CHECKFREE HOLDINGS CORPORATION Our selected consolidated financial data for the fiscal year ended June 30, 1997 and as of and for the fiscal years ended June 30, 1998 and 1999, have been derived from our audited consolidated financial statements, included elsewhere in this information statement/prospectus. Our selected consolidated financial data as of and for the fiscal year ended December 31, 1994 and 1995, as of and for the six months ended June 30, 1996, and as of June 30, 1997, have been derived from our audited consolidated financial statements, which we have not included in this information statement/prospectus. The selected and consolidated financial data as of and for each of the six month periods ended December 31, 1998, and 1999 are derived from unaudited financial statements included in this information statement/prospectus which, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. The selected consolidated financial data for the twelve months ended June 30, 1996, are derived from unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the respective period. You should read the selected consolidated financial data provided below in conjunction with the section of this information statement/prospectus entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the related Notes contained elsewhere in this information statement/prospectus. 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) STATEMENT OF OPERATIONS: Revenues: Processing, servicing and merchant discount ................................ $ 38,282 $ 49,330 $ 33,305 $ 59,053 $ 104,522 $ 159,255 License fees .............................. -- -- 10,970 10,970 33,088 28,952 Maintenance fees .......................... -- -- 1,978 1,978 22,567 25,848 Other ..................................... 984 -- 4,787 4,788 16,268 19,809 --------- --------- --------- --------- --------- --------- Total revenues ...................... 39,266 49,330 51,040 76,789 176,445 233,864 Expenses: Cost of processing, servicing and support ................................. 24,212 30,258 35,438 51,236 102,721 129,924 Research and development .................. 4,724 6,876 9,907 13,765 32,869 36,265 Sales and marketing ....................... 4,427 7,242 17,167 21,349 32,670 28,839 General and administrative ................ 2,598 4,134 7,338 9,598 18,707 20,677 Depreciation and amortization ............. 1,922 2,485 6,997 8,246 24,919 24,999 In-process research and development(2) .... -- -- 122,358 122,358 140,000 719 Charge for stock warrants(3) .............. -- -- -- -- -- 32,827 Exclusivity amortization(4) ............... -- -- -- -- 5,958 2,963 --------- --------- --------- --------- --------- --------- Total expenses ...................... 37,883 50,995 199,205 226,552 357,844 277,213 Net gain on dispositions of assets(5) ....... -- -- -- -- 6,250 36,173 --------- --------- --------- --------- --------- --------- Income (loss) from operations ............... 1,383 (1,665) (148,165) (149,763) (175,149) (7,176) Interest: Income .................................... 298 2,135 1,659 3,104 2,153 3,464 Expense ................................... (795) (645) (325) (484) (834) (632) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes ........... 886 (175) (146,831) (147,143) (173,830) (4,344) Income tax expense (benefit)(6) ............. 400 40 (8,628) (8,650) (12,017) (641) --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item ..... 486 (215) (138,203) (138,493) (161,813) (3,703) Extraordinary item .......................... -- -- (364) (364) -- -- --------- --------- --------- --------- --------- --------- Net income (loss) ......................... $ 486 $ (215) $(138,567) $(138,857) $(161,813) $ (3,703) ========= ========= ========= ========= ========= ========= Basic income (loss) per common share before extraordinary item(7)......... $ 0.02 $ (0.01) $ (3.69) $ (4.14) $ (3.44) $ (0.07) Basic income (loss) per common share(7)...... $ 0.02 $ (0.01) $ (3.70) $ (4.15) $ (3.44) $ (0.07) Basic equivalent number of shares outstanding(7)............................. 25,232 28,219 37,450 33,435 46,988 55,087 Diluted income (loss) per common share before extraordinary item(7) ........ $ 0.02 $ (0.01) $ (3.69) $ (4.14) $ (3.44) $ (0.07) Diluted income (loss) per common share(7) .................................. $ 0.02 $ (0.01) $ (3.70) $ (4.15) $ (3.44) $ (0.07) Diluted equivalent number of shares outstanding(7) ............................ 27,103 28,219 37,420 33,435 46,988 55,087 SIX MONTHS ENDED DECEMBER 31, 1999 1998 1999 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Revenues: Processing, servicing and merchant discount ................................ $ 201,059 $ 93,575 $ 120,931 License fees .............................. 15,975 6,412 6,197 Maintenance fees .......................... 17,746 9,202 8,956 Other ..................................... 15,351 7,230 5,905 --------- --------- --------- Total revenues ...................... 250,131 116,419 141,989 Expenses: Cost of processing, servicing and support ................................. 146,704 71,457 86,889 Research and development .................. 21,085 12,157 15,110 Sales and marketing ....................... 32,354 15,232 18,577 General and administrative ................ 31,466 14,358 19,287 Depreciation and amortization ............. 24,630 11,999 14,756 In-process research and development(2) .... 2,201 -- -- Charge for stock warrants(3) .............. -- -- -- Exclusivity amortization(4) ............... -- -- -- --------- --------- --------- Total expenses ...................... 258,440 125,203 154,629 Net gain on dispositions of assets(5) ....... 4,576 3,914 -- --------- --------- --------- Income (loss) from operations ............... (3,733) (4,870) (12,640) Interest: Income .................................... 2,799 1,585 1,437 Expense ................................... (618) (366) (1,294) --------- --------- --------- Income (loss) before income taxes ........... (1,552) (3,651) (12,497) Income tax expense (benefit)(6) ............. (12,009) (13,558) (4,592) --------- --------- --------- Income (loss) before extraordinary item ..... 10,457 9,907 (7,905) Extraordinary item .......................... -- -- -- --------- --------- --------- Net income (loss) ......................... $ 10,457 $ 9,907 $ (7,905) ========= ========= ========= Basic income (loss) per common share before extraordinary item(7)......... $ 0.20 $ 0.19 $ (0.15) Basic income (loss) per common share(7)...... $ 0.20 $ 0.19 $ (0.15) Basic equivalent number of shares outstanding(7)............................. 52,444 53,419 52,023 Diluted income (loss) per common share before extraordinary item(7) ........ $ 0.18 $ 0.18 $ (0.15) Diluted income (loss) per common share(7) .................................. $ 0.18 $ 0.18 $ (0.15) Diluted equivalent number of shares outstanding(7) ............................ 56,529 54,664 52,023 24
26 AS OF AS OF DECEMBER 31, JUNE 30, --------------------- --------------------- 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- -------- 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 AS OF DECEMBER 31, --------------------- 1998 1999 -------- -------- 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 (1) On April 19, 1996, we elected to change our fiscal year end from December 31 to June 30. To assist in the analysis of the selected consolidated financial data, unaudited results for the twelve months ended June 30, 1996 are provided. (2) In connection with the acquisitions of Intuit Services Corporation in January 1997, Advanced Mortgage Technologies, Inc. in October 1997 and Mobius Group, Inc. in March 1999, we recorded charges to expense of $140.0 million, $0.7 million, and $2.2 million, respectively, for acquired in-process research and development that were determined to have no future value. See Note 2 to the audited consolidated financial statements contained elsewhere in this information statement/prospectus. (3) The $32.4 million and $0.4 million charges for stock warrants in the fiscal year ended June 30, 1998 resulted from the vesting of warrants related to a ten year processing agreement with Integrion and to a consulting agreement with a third party, respectively. See Note 15 to the audited consolidated financial statements contained elsewhere in this information statement/prospectus. (4) In connection with an exclusivity arrangement entered into upon our acquisition of Intuit Services Corporation in January 1997, we recorded amortization expense of $6.0 million for the fiscal year ended June 30, 1997 and $3.0 million for the fiscal year ended June 30, 1998. (5) The $6.3 million net gain on dispositions of assets in the year ended June 30, 1997 resulted from the March 1997 sale of our credit card business. The $36.2 million net gain in the year ended June 30, 1998 resulted from the sales of our recovery management business in August 1997, our item processing business in March 1998 and our electronic banking and wire businesses in April 1998. The resulting gains from these sales were $28.2 million, $3.2 million, and $14.7 million, respectively. The gains were offset by losses on the sale of the leasing business, discontinuation of the web investor business and write-offs of equipment. The resulting losses were $4.7 million, $1.0 million and $4.2 million, respectively. The $28.4 million net gain in the nine months ended March 31, 1998 resulted from the $28.2 million gain on the August 1997 sale of our recovery management business, the $3.2 million gain on the March 1998 sale of our item processing business, and the $3.0 million write-off of equipment and capitalized costs. (6) In connection with the creation of a special purpose subsidiary to administer our employee medical benefits program, we recorded a one-time tax benefit of approximately $12.2 million during the quarter ended December 31, 1998. See Note 7 to the audited consolidated financial statements contained elsewhere in this information statement/prospectus. (7) The earnings per share amounts prior to the fiscal year ended June 30, 1998 have been restated to comply with Statement of Financial Accounting Standards No. 128 "Earnings per Share" as required. For further discussion of earnings per share and the impact of Statement 128, see Note 1 to the audited consolidated financial statements contained elsewhere in this information statement/prospectus. (8) In November 1999, we issued $172.5 million of 6 1/2% convertible subordinated notes that are due on December 1, 2006. Interest on the notes is payable on June 1 and December 1 annually, commencing on June 1, 2000. The notes may be converted, at the holder's option, into 13.6612 shares of our common stock per note and we may redeem the notes at any time on or after December 1, 2002. 25
27 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF BLUEGILL TECHNOLOGIES, INC. The following selected financial data for the years ended December 31, 1997, 1998 and 1999 should be read in conjunction with the consolidated financial statements and the related notes, which have been audited by Arthur Andersen LLP, independent public accountants, included elsewhere in this information statement/prospectus, and with "BlueGill Technologies, Inc. - Management's Discussion and Analysis of Results of Operations and Financial Condition." The data provided below for the years ended December 31, 1997, 1998 and 1999 are derived from, and are qualified by reference to, the audited financial statements of BlueGill included elsewhere in this information statement/prospectus and should be read in conjunction with those financial statements and the related notes. The selected financial data for the period ended December 31, 1996 were derived from the unaudited financial information obtained from BlueGill. PERIOD FROM INCEPTION (SEPTEMBER 20, 1996) THROUGH DECEMBER 31, YEARS ENDED DECEMBER 31, ------------ ------------------------------------------------ 1996 1997 1998 1999 ------------ ------------ ------------ ------------ (UNAUDITED) (AUDITED) 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 AS OF DECEMBER 31, ----------------------------------------------------------------- 1996 1997 1998 1999 ------------ ------------ ------------ ------------ (UNAUDITED) (AUDITED) 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) 26
28 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE TRANSPOINT ENTITIES The following selected consolidated financial data of TransPoint as of and for the period June 18, 1997 (inception) to July 3, 1998 and as of and for year ended July 2, 1999, have been derived from audited consolidated financial statements, included elsewhere in this information statement/prospectus. The selected and consolidated financial data for the six month period ended December 31, 1998 and as of and for the six month period ended December 31, 1999 are derived from unaudited financial statements included in this information statement/prospectus which, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. You should read the selected consolidated financial data provided below in conjunction with the TransPoint consolidated financial statements and related notes thereto contained elsewhere in this information statement/prospectus. PERIOD FROM INCEPTION (JUNE 18, 1997) THROUGH YEAR ENDED SIX MONTHS ENDED JULY 3, JULY 2, DECEMBER 31, 1998 1999 1998 1999 ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============ AS OF AS OF JULY 3, JULY 2, DECEMBER 31, 1998 1999 1999 ----------- ---------- ----------- BALANCE SHEET DATA: Cash and cash equivalents ............ $ -- $ 51,113,749 $ 19,837,565 Working capital ...................... (6,514,307) 34,232,286 6,160,130 Total assets ......................... 1,660,852 52,824,291 30,721,311 Minority interest .................... -- (45,936,458) (43,060,952) Total members' capital deficiency .... (4,853,455) (9,993,630) (26,017,076) 27
29 UNAUDITED PRO FORMA COMBINING FINANCIAL DATA OF CHECKFREE HOLDINGS CORPORATION, BLUEGILL TECHNOLOGIES, INC. AND THE TRANSPOINT ENTITIES The following table summarizes the unaudited pro forma combining financial data, giving effect to the mergers, which will be accounted for as purchases, as if they had occurred on December 31, 1999, for balance sheet presentation purposes and as of July 1, 1998, for statement of operations presentation purposes, and the pro forma adjustments described in the Notes to the Unaudited Pro Forma Condensed Combining Financial Information. The BlueGill and TransPoint financial data included in the pro forma amounts are for the twelve months ended June 30, 1999, and for the six months ended December 31, 1999. You should read this information in conjunction with: o the historical financial statements of CheckFree, BlueGill, and TransPoint including the respective notes to these statements, which we have included elsewhere in this information statement/prospectus, and o the consolidated historical financial data for CheckFree, BlueGill and TransPoint, and the other pro forma information, including the related notes, which are included elsewhere in this information statement/prospectus. For additional information, you should refer to the sections of this document entitled "Recent Developments" and "Unaudited Pro Forma Condensed Combining Financial Information." The pro forma financial data are not necessarily indicative of the future financial position or future results of operations of the combined companies, or the financial position or results of operations of the companies that would have actually occurred had the merger been consummated at the dates specified. UNAUDITED PRO FORMA COMBINING FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 --------- ------------ --------- ------------ STATEMENT OF OPERATIONS DATA: Operating revenues ........................ $ 250,131 $ 141,989 $ 253,621 $ 145,069 Income (loss) from operations ............. (3,733) (12,640) (485,050) (231,717) Income (loss) before income taxes ......... (1,552) (12,497) (482,211) (230,266) Net income (loss).......................... 10,457 (7,905) (381,861) (190,504) COMMON SHARE DATA: Basic income (loss) per common share ...... $ 0.20 $ (0.15) $ (5.26) $ (2.64) Basic equivalent number of shares outstanding ............................. 52,444 52,023 72,649 72,228 Diluted income (loss) per common share .... $ 0.18 $ (0.15) $ (5.26) $ (2.64) Diluted equivalent number of shares outstanding ............................. 56,529 52,023 72,649 72,228 JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1999 1999 -------- ----------- ----------- BALANCE SHEET DATA: Current assets ............................. $ 82,685 $236,761 $ 375,590 Total assets ............................... 252,761 457,728 2,434,981 Current liabilities ........................ 58,440 77,082 187,586 Long-term obligations, less current portion. 7,418 178,268 178,268 Total stockholders' equity ................. 186,903 202,378 1,847,046 28
30 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 --------- ------------ --------- ------------ STATEMENT OF OPERATIONS DATA: Operating revenues ........................ $ 253,621 $ 145,066 $ 250,131 $ 141,992 Income (loss) from operations ............. (80,851) (46,907) (407,931) (197,450) Income (loss) before income taxes ......... (78,476) (46,367) (405,286) (196,396) Net income (loss).......................... (57,246) (40,365) (314,157) (158,044) COMMON SHARE DATA: Basic income (loss) per common share ...... $ (1.03) $ (0.73) $ (4.52) $ (2.29) Basic equivalent number of shares outstanding ............................. 55,649 55,228 69,444 69,023 Diluted income (loss) per common share .... $ (1.03) $ (0.73) $ (4.52) $ (2.29) Diluted equivalent number of shares outstanding ............................. 55,649 55,228 69,444 69,023 DECEMBER 31, DECEMBER 31, 1999 1999 -------- ------------ BALANCE SHEET DATA: Current assets .................................. $255,753 $ 356,598 Total assets .................................... 774,696 2,118,013 Current liabilities ............................. 90,789 173,879 Long-term obligations, less current portion ..... 178,268 178,268 Total stockholders' equity ...................... 497,638 1,551,786 29
31 UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION The following unaudited pro forma condensed combining financial information for CheckFree gives effect to: o The combined proposed acquisition by CheckFree of both BlueGill Technologies, Inc. and the TransPoint business using the purchase method of accounting, based on preliminary allocations of the total estimated purchase price. The historical financial information has been derived from the respective historical financial statements of CheckFree, BlueGill and TransPoint, and should be read in conjunction with the financial statements and the related notes included elsewhere in this information statement/prospectus. o The proposed acquisition by CheckFree of BlueGill using the purchase method of accounting, based on preliminary allocations of the total estimated purchase price. The historical information has been derived from the respective historical financial statements of CheckFree and BlueGill and should be read in conjunction with the financial statements and the related notes included in this information statement/prospectus. o The proposed acquisition by CheckFree of the TransPoint business using the purchase method of accounting, based on preliminary allocations of the total estimated purchase price. The historical information has been derived from the respective historical financial statements of CheckFree and TransPoint and should be read in conjunction with the financial statements and the related notes included in this information statement/prospectus. The unaudited pro forma condensed combining balance sheets have been prepared assuming the respective mergers took place as of December 31, 1999 and allocate the total estimated purchase prices to the fair values of assets and liabilities of the acquired companies based on preliminary valuations. The unaudited pro forma condensed combining statements of operations combine CheckFree's, BlueGill's and TransPoint's historical statements of operations and give effect to the acquisitions, excluding the immediate write-off of estimated in-process research and development costs and including the amortization of goodwill and other intangible assets resulting from the acquisitions, as if they occurred on July 1, 1998, the beginning of the earliest period presented. The total estimated purchase prices of BlueGill and TransPoint have been allocated on a preliminary basis to assets and liabilities based on management's estimates of their fair values with the excess costs over the net assets acquired allocated to goodwill and other intangible assets. These allocations are subject to change pending a final determination and analysis of the total purchase prices and the fair values of the assets acquired and liabilities assumed. The impact of these changes could be material. The unaudited pro forma condensed combining financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial condition that would have actually occurred if the acquisitions, either individually or combined, had been completed as of the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the combined companies. The pro forma adjustments are based on the information available as of the date of this information statement/prospectus. 30
32 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET WITH BLUEGILL AND THE TRANSPOINT ENTITIES AS OF DECEMBER 31, 1999 (IN THOUSANDS) HISTORICAL AMOUNTS ---------------------------------------- PRO FORMA CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL ----------- ----------- ----------- ----------- ----------- Assets: Current Assets: Cash and cash equivalents ....................... $ 152,779 $ 17,040 $ 19,837 $ 100,000 (1) $ 289,656 Investments ..................................... 17,015 -- -- -- 17,015 Accounts receivable, net ........................ 46,780 1,804 -- -- 48,584 Prepaid expenses and other assets ............... 11,863 148 -- -- 12,011 Deferred income taxes ........................... 8,324 -- -- -- 8,324 ----------- ----------- ----------- ----------- ----------- Total current assets .......................... 236,761 18,992 19,837 100,000 375,590 Property and equipment, net ........................ 80,416 1,265 1,445 -- 83,126 Capitalized software, net .......................... 21,584 -- 9,439 202,061 (1) 221,184 (11,900) (2) Goodwill, net ...................................... 30,559 -- -- 1,059,312 (1) 1,089,871 Other intangible assets, net ....................... 12,795 -- -- 576,800 (1) 589,595 Investments ........................................ 31,663 -- -- -- 31,663 Deferred income taxes .............................. 31,095 -- -- -- 31,095 Other noncurrent assets ............................ 12,855 2 -- -- 12,857 ----------- ----------- ----------- ----------- ----------- Total assets .................................. $ 457,728 $ 20,259 $ 30,721 $ 1,926,273 $ 2,434,981 =========== =========== =========== =========== =========== Liabilities and Stockholders' Equity: Current liabilities: Accounts payable ................................ $ 8,679 $ 1,234 $ 12,181 $ -- $ 22,094 Line of credit .................................. -- 556 -- -- 556 Accrued liabilities ............................. 37,494 969 1,246 3,855 (1) 44,764 1,200 (3) Deferred income taxes ........................... -- -- -- 88,341 (1) 88,341 Current portion of long-term obligations ........ 5,069 -- -- -- 5,069 Deferred revenue ................................ 25,840 672 250 -- 26,762 ----------- ----------- ----------- ----------- ----------- Total current liabilities ..................... 77,082 3,431 13,677 93,396 187,586 Accrued rent and other ............................. 4,862 -- -- -- 4,862 Obligations under capital leases - less current portion .......................................... 906 -- -- -- 906 Convertible subordinated notes ..................... 172,500 -- -- -- 172,500 Minority interest .................................. -- -- 43,061 (43,061) (1) -- Deferred income taxes .............................. -- -- -- 222,081 (1) 222,081 ----------- ----------- ----------- ----------- ----------- Total liabilities ............................. 255,350 3,431 56,738 272,416 587,935 Redeemable preferred stock ......................... -- 25,963 -- (25,963) (1) -- Stockholders' equity: Common stock .................................... 524 6 -- 196 (1) 726 Additional paid-in capital ...................... 504,058 1,698 -- 1,655,868 (1) 2,160,424 (1,200) (3) Other ........................................... (299) (632) -- 632 (1) (299) Member's capital deficiency ..................... -- -- (26,017) 26,017 (1) -- Accumulated deficit ............................. (301,905) (10,207) -- 10,207 (1) (313,805) (11,900) (2) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity .................... 202,378 (9,135) (26,017) 1,679,820 1,847,046 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity ................................... $ 457,728 $ 20,259 $ 30,721 $ 1,926,273 $ 2,434,981 =========== =========== =========== =========== =========== See Notes to Unaudited Pro Forma Condensed Combining Financial Information 31
33 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH BLUEGILL AND THE TRANSPOINT ENTITIES FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ---------------------------------------- PRO FORMA CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL ----------- ----------- ----------- ----------- --------- Revenues: Processing and servicing ...................... $ 201,059 $ -- $ -- $ -- $ 201,059 License fees .................................. 15,975 2,517 -- -- 18,492 Maintenance fees .............................. 17,746 48 -- -- 17,794 Other ......................................... 15,351 925 -- -- 16,276 --------- --------- --------- --------- --------- Total revenues ........................... 250,131 3,490 -- -- 253,621 Expenses: Cost of processing, servicing and support ..... 146,704 969 3,062 -- 150,735 Research and development ...................... 21,085 1,457 26,560 -- 49,102 Sales and marketing ........................... 32,354 2,318 11,302 -- 45,974 General and administrative .................... 31,466 2,045 2,404 -- 35,915 Depreciation and amortization ................. 24,630 106 1,870 432,714 (4) 459,320 In-process research and development ........... 2,201 -- -- -- 2,201 --------- --------- --------- --------- --------- Total expenses ........................... 258,440 6,895 45,198 432,714 743,247 Net gain on dispositions of assets ............ 4,576 -- -- -- 4,576 --------- --------- --------- --------- --------- Loss from operations ............................. (3,733) (3,405) (45,198) (432,714) (485,050) Other: Minority interest ............................. -- -- 2,064 (2,064) (5) -- Interest, net ................................. 2,181 194 464 -- 2,839 --------- --------- --------- --------- --------- Loss before income taxes ......................... (1,552) (3,211) (42,670) (434,778) (482,211) Income tax benefit ............................... (12,009) -- (88,341) (4) (100,350) --------- --------- --------- --------- --------- Net income (loss) ................................ $ 10,457 $ (3,211) $ (42,670) $(346,437) $(381,861) ========= ========= ========= ========= ========= Basic earnings (loss) per share: Net income (loss) per common share ............ $ 0.20 $ (5.26) ========= ========= Equivalent number of shares ................... 52,444 20,205 (1) 72,649 ========= ========= ========= Diluted earnings (loss) per share: Net income (loss) per common share ............ $ 0.18 $ (5.26) ========= ========= Equivalent number of shares ................... 56,529 16,120 (6) 72,649 ========= ========= ========= See Notes to Unaudited Pro Forma Condensed Combining Financial Information 32
34 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH BLUEGILL AND THE TRANSPOINT ENTITIES FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ---------------------------------------- PRO FORMA CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL ----------- ----------- ----------- ----------- --------- Revenues: Processing and servicing ...................... $ 120,931 $ -- $ 3 $ -- $ 120,934 License fees .................................. 6,197 2,231 -- -- 6,428 Maintenance fees .............................. 8,956 224 -- -- 9,180 Other ......................................... 5,905 622 -- -- 6,527 --------- --------- --------- --------- --------- Total revenues ........................... 141,989 3,077 3 -- 145,069 Expenses: Cost of processing, servicing and support ..... 86,899 789 7,616 -- 95,304 Research and development ...................... 15,110 1,226 1,521 -- 17,857 Sales and marketing ........................... 18,577 3,132 7,799 -- 29,508 General and administrative .................... 19,287 3,193 1,267 -- 23,747 Depreciation and amortization ................. 14,756 147 1,610 193,857 (4) 210,370 In-process research and development ........... -- -- -- -- -- --------- --------- --------- --------- --------- Total expenses ........................... 154,629 8,487 19,813 193,857 376,786 Net gain on dispositions of assets ............ -- -- -- -- --------- --------- --------- --------- --------- Loss from operations ............................. (12,640) (5,410) (19,810) (193,857) (231,717) Other: Minority interest ............................. -- -- 2,876 (2,876) (5) -- Interest, net ................................. 143 397 911 -- 1,451 --------- --------- --------- --------- --------- Loss before income taxes ......................... (12,497) (5,013) (16,023) (196,733) (230,266) Income tax benefit ............................... (4,592) -- -- (35,170) (4) (39,762) --------- --------- --------- --------- --------- Net income (loss) ................................ $ (7,905) $ (5,013) $ (16,023) $(161,563) $(190,504) ========= ========= ========= ========= ========= Basic earnings (loss) per share: Net income (loss) per common share ............ $ (0.15) $ (2.64) ========= ========= Equivalent number of shares ................... 52,023 20,205 (1) 72,228 ========= ========= ========= Diluted earnings (loss) per share: Net income (loss) per common share ............ $ (0.15) $ (2.64) ========= ========= Equivalent number of shares ................... 52,023 20,205 (1) 72,228 ========= ========= ========= See Notes to Unaudited Pro Forma Condensed Combining Financial Information 33
35 CHECKFREE HOLDINGS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION WITH BLUEGILL AND THE TRANSPOINT ENTITIES 1. Adjustment to reflect the issuance of CheckFree common stock, options and related direct acquisition expenses as the total purchase price for the net assets of BlueGill and TransPoint, and the elimination of BlueGill's redeemable preferred stock and stockholders' equity and the revaluation of TransPoint's capitalized software costs and the elimination of TransPoint's minority interest and member's capital deficiency. The fair market values of intangible assets are preliminary estimates based on independent appraisals and current facts and circumstances. The final value of intangible assets will change with any change in the final purchase price of either BlueGill or TransPoint or both and any resulting change could be material. (in thousands) Cash............................................. $ 100,000 Capitalized software, net........................ 202,061 Goodwill, net.................................... 1,059,312 Other intangible assets, net..................... 576,800 BlueGill redeemable preferred stock.............. 25,963 BlueGill common stock............................ 6 BlueGill additional paid in capital.............. 1,698 TransPoint minority interest..................... 43,061 CheckFree common stock...................... $ 202 CheckFree additional paid in capital........ 1,657,566 BlueGill accumulated deficit................ 10,207 BlueGill other equity....................... 632 TransPoint member's capital deficiency...... 26,017 Current deferred income tax liability....... 88,341 Long-term deferred income tax liability..... 222,081 Accrued acquisition expenses................ 3,855 ----------- ----------- Totals........................................... $ 2,008,901 $ 2,008,901 =========== =========== The following chart indicates the components of the estimated purchase prices of the acquisitions inherent in the adjusting entry: (in thousands) BLUEGILL TRANSPOINT COMBINED ACQUISITION ACQUISITION TOTAL ----------- ----------- ----------- CheckFree common stock ................. $ 298,244 $ 1,350,083 $ 1,684,327 Issuance of CheckFree options .......... 9,441 -- 9,441 TransPoint cash infusion ............... -- (100,000) (100,000) Estimated direct acquisition costs ..... 530 3,325 3,855 ----------- ----------- ----------- Total estimated purchase price .... $ 308,215 $ 1,253,408 $ 1,561,623 =========== =========== =========== The combined estimated purchase price will be issued in exchange for the net assets of BlueGill and TransPoint on their respective closing dates. The purchase price of BlueGill reflects the assumed issuance of 3,205,128 shares of our common stock at $93.05 per share which is the average closing price of our stock for the three trading days preceding and the three trading days following the announcement of the acquisition. Under the terms of the merger agreement, we are also issuing an estimated 243,263 CheckFree options to replace unvested BlueGill options. The value of the assumed CheckFree option grant is based on a Black-Scholes valuation model assuming a $93.05 stock price, an average strike price of $2.18, an average life of 2.9 years, a risk-free interest rate of 6.47% and volatility of 70%. The option value will vary from this estimate based on option grants and cancellations, resulting changes in the average strike price, changes in the fair market value of our stock, and changes in the risk-free rate and volatility of our stock between the date of this information statement/prospectus and the closing of the merger. 34
36 The purchase price of TransPoint reflects the assumed issuance of 17,000,000 shares of our common stock at $79.42 per share, which is the average end of day price of our stock for the three trading days preceding and the three days following the announcement of the acquisition. Under the terms of the merger and contribution agreement, TransPoint is to be funded with $100 million in cash immediately prior to the closing of the transaction. The following table provides the preliminary allocation of the purchase price inherent in the adjusting entry: (in thousands) BLUEGILL TRANSPOINT ACQUISITION ACQUISITION COMBINED ----------- ----------- ----------- In process research and development .......... $ 11,900 $ -- $ 11,900 Current technologies and products ............ 14,600 185,000 199,600 ----------- ----------- ----------- Sub-total capitalized software, net .... 26,500 185,000 211,500 Goodwill, net ................................ 253,309 806,003 1,059,312 Other intangible assets: Workforce in place ........................ 2,600 -- 2,600 Customer list ............................. 10,200 25,000 35,200 Tradename ................................. 14,800 29,000 43,800 Strategic agreements ...................... -- 494,000 494,000 Covenants not to compete .................. 1,200 -- 1,200 ----------- ----------- ----------- Sub-total other intangible assets ...... 28,800 548,000 576,800 Deferred income taxes ........................ (17,222) (293,200) (310,422) Net assets of respective company: Cash and cash equivalents ................. 17,040 19,838 36,878 Property and equipment .................... 1,265 1,445 2,710 Other, net ................................ (1,477) (13,678) (15,155) ----------- ----------- ----------- Sub-total net assets ................... 16,828 7,605 24,433 ----------- ----------- ----------- Total purchase price ......................... $ 308,215 $ 1,253,408 $ 1,561,623 =========== =========== =========== Details of specific technologies and the related useful lives of all intangible assets are described in the Notes to Unaudited Pro Forma Condensed Combining Financial Information for CheckFree and BlueGill on page 41 and CheckFree and TransPoint on page 51. 2. Adjustment to write off the balance of in-process research and development. As the amounts are non-deductible for federal and state tax purposes, there is no related income tax benefit resulting from the charge. Refer to Note B in the Notes to Unaudited Pro Forma Condensed Combining Financial Information for CheckFree and BlueGill on page 43 and CheckFree and TransPoint on page 53 for a detailed description of in-process research and development for the respective acquisition. The amount of in-process research and development is $11.9 million for BlueGill and $0 million for TransPoint. (in thousands) Accumulated deficit.................. $11,900 Capitalized software, net....... $11,900 3. Adjustment to accrue the cost of registering CheckFree shares to be issued for BlueGill of $525,000 and for TransPoint of $675,000. (in thousands) Additional paid-in capital.......... $ 1,200 Accrued liabilities............ $ 1,200 35
37 4. Adjustment to reflect additional amortization expense and the related income tax benefit associated with the intangible assets acquired. (in thousands) COMBINED BLUEGILL TRANSPOINT ADJUSTMENT ---------- ---------- --------------------------- YEAR ENDED JUNE 30, 1999 Depreciation and amortization .......... $ 73,713 $ 359,001 $ 432,714 Current deferred income tax liability .. 9,221 79,120 88,341 Capitalized software, net .......... 4,145 61,667 $ 65,812 Goodwill, net ...................... 50,662 161,201 211,863 Other intangible assets, net ....... 18,906 136,133 155,039 Income tax benefit ................. 9,221 79,120 88,341 ---------- ---------- Total .................................. $ 521,055 $ 521,055 ========== ========== SIX MONTHS ENDED DECEMBER 31, 1999 Depreciation and amortization .......... $ 28,857 $ 165,000 $ 193,857 Current deferred income tax liability .. 1,410 33,760 35,170 Capitalized software, net .......... 1,453 30,833 $ 32,286 Goodwill, net ...................... 25,331 80,600 105,931 Other intangible assets, net ....... 2,073 53,567 55,640 Income tax benefit ................. 1,410 33,760 35,170 ---------- ---------- Total .................................. $ 229,027 $ 229,027 ========== ========== 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. (in thousands) 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 ======== NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION Note A: Management believes that the assumptions used in preparing the Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro Forma Condensed Combining Statement of Operations provide a reasonable basis for presenting the significant effects of the acquisitions of BlueGill and TransPoint; that the pro forma adjustments give appropriate effect to those assumptions; and that the pro forma adjustments are properly applied in the Unaudited Pro Forma Condensed Combining Balance Sheet and Statement of Operations. 36
38 Note B: The Unaudited Pro Forma Condensed Combining Balance Sheet of CheckFree, BlueGill and TransPoint has been prepared as if the mergers were completed as of December 31, 1999 and were accounted for as purchases. The number of CheckFree common shares to be issued in the BlueGill merger will depend on a number of factors as specified in Note F in the Notes to Unaudited Pro Forma Condensed Combining information with BlueGill on page 51. We have assumed for purposes of these pro forma financial statements that 3,205,128 shares of CheckFree common stock will be issued with a fair market value of $93.05 per share. The excess of fair value over the strike price of options issued per the merger agreement carry a value of $9,441,000. We expect to incur $530,000 of direct acquisition costs. The total purchase price of $308,215,128 was allocated to the assets acquired and liabilities assumed based on BlueGill's December 31, 1999 balance sheet. We will issue 17,000,000 shares of our common stock at an assumed value of $79.42 for the net assets of TransPoint. Under the merger and contribution agreement, TransPoint is to be funded with $100 million of cash immediately prior to the closing of the transaction. We expect to incur approximately $3,325,000 of direct acquisition costs. The total purchase price of $1,253,408,000 was allocated to assets acquired and liabilities assumed based on TransPoint's December 31, 1999 balance sheet. The allocation of the BlueGill and TransPoint purchase prices among their related identifiable tangible and intangible assets and purchased in-process research and development is based on preliminary estimates of the fair market value of those assets. Final determination of the allocation of the purchase prices will be based on independent appraisals that we expect to have completed shortly after the respective mergers are consummated. For a detailed description of in-process research and development charges, see Note B for BlueGill on page 43 and Note B for TransPoint on page 53. Note C: CheckFree's statement of operations for the year ended June 30, 1999, has been combined with the BlueGill statement of operations and the TransPoint statement of operations for the twelve months ended June 30, 1999. Our statement of operations for the six month period ended December 31, 1999 has been combined with the BlueGill statement of operations and the TransPoint statement of operations for the six months ended December 31, 1999. Actual statements of operations of CheckFree and BlueGill, and CheckFree and TransPoint will be combined from the effective date of the respective merger, with no retroactive restatement. Note D: The unaudited pro forma condensed combining statement of operations for CheckFree, BlueGill and TransPoint have been prepared as if the merger was completed as of July 1, 1998, the beginning of the earliest period presented. The unaudited pro forma combined net income (loss) per share is based on the weighted average number of shares of our common stock outstanding during the periods, adjusted to give effect to shares assumed to be issued had the mergers taken place as of July 1, 1998. Note E: The unaudited pro forma condensed combining statement of operations do not include a charge for the value of the estimated $11.9 million (no income tax effect) of purchased research and development arising from the merger with BlueGill, which will be expensed at acquisition, as such expense will have no continuing impact. 37
39 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET WITH BLUEGILL AS OF DECEMBER 31, 1999 (IN THOUSANDS) HISTORICAL AMOUNTS ---------------------------- PRO FORMA CHECKFREE BLUEGILL ADJUSTMENTS TOTAL ---------------- ------------ ----------- --------- Assets: Current assets: Cash and cash equivalents .................. $ 152,779 $ 17,040 $ -- $ 169,819 Investments ................................ 17,015 -- -- 17,015 Accounts receivable, net ................... 46,780 1,804 -- 48,584 Prepaid expenses and other assets .......... 11,863 148 -- 12,011 Deferred income taxes ...................... 8,324 -- -- 8,324 --------- --------- --------- --------- Total current assets .................. 236,761 18,992 -- 255,753 Property and equipment, net ................... 80,416 1,265 -- 81,681 Capitalized software, net ..................... 21,584 -- 26,500 (1) 36,184 (11,900)(2) Goodwill, net ................................. 30,559 -- 253,309 (1) 283,868 Other intangible assets, net .................. 12,795 -- 28,800 (1) 41,595 Investments ................................... 31,663 -- -- 31,663 Deferred income taxes ......................... 31,095 -- -- 31,095 Other noncurrent assets ....................... 12,855 2 -- 12,857 --------- --------- --------- --------- Total assets ........................... $ 457,728 $ 20,259 $ 296,709 $ 774,696 ========= ========= ========= ========= Liabilities and Stockholder's Equity: Current liabilities: Accounts payable ........................... $ 8,679 $ 1,234 $ -- $ 9,913 Line of credit ............................. -- 556 -- 556 Accrued liabilities ........................ 37,494 969 530 (1) 39,518 525 (3) Deferred income taxes ...................... -- -- 9,221 (1) 9,221 Current portion of long-term obligations ... 5,069 -- -- 5,069 Deferred revenue ........................... 25,840 672 -- 26,512 --------- --------- --------- --------- Total current liabilities .............. 77,082 3,431 10,276 90,789 Accrued rent and other ........................ 4,862 -- -- 4,862 Obligations under capital leases - less current portion ..................................... 906 -- -- 906 Convertible subordinated notes ................ 172,500 -- -- 172,500 Deferred income taxes ......................... -- -- 8,001 (1) 8,001 --------- --------- --------- --------- Total liabilities ...................... 255,350 3,431 18,277 277,058 Redeemable preferred stock .................... -- 25,963 (25,963)(1) -- Stockholders' equity: Common stock ............................... 524 6 26 (1) 556 Additional paid-in capital ................. 504,058 1,698 305,955 (1) 811,186 (525) (3) Other ...................................... (299) (632) 632 (1) (299) Accumulated deficit ........................ (301,905) (10,207) 10,207 (1) (313,805) (11,900)(2) --------- --------- --------- --------- Total stockholder's equity ............. 202,378 (9,135) 304,395 497,638 --------- --------- --------- --------- Total liabilities and stockholders' equity ......... $ 457,728 $ 20,259 $ 296,709 $ 774,696 ========= ========= ========= ========= See Notes to Unaudited Pro Forma Condensed Combining Financial Information 38
40 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH BLUEGILL FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ------------------------ PRO FORMA CHECKFREE BLUEGILL ADJUSTMENTS TOTAL ---------- ---------- ----------- ---------- 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 ========== ========== ========== See Notes to Unaudited Pro Forma Condensed Combining Financial Information 39
41 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH BLUEGILL FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ------------------------ PRO FORMA CHECKFREE BLUEGILL ADJUSTMENTS TOTAL ---------- ---------- ----------- ---------- Revenues: Processing and servicing ...................... $ 120,931 $ -- $ -- $ 120,931 License fees .................................. 6,197 2,231 -- 8,428 Maintenance fees .............................. 8,956 224 -- 9,180 Other ......................................... 5,905 622 -- 6,527 ---------- ---------- ---------- ---------- Total revenues ........................... 141,989 3,077 -- 145,066 Expenses: Cost of processing, servicing and support ..... 86,899 789 -- 87,688 Research and development ...................... 15,110 1,226 -- 16,336 Sales and marketing ........................... 18,577 3,132 -- 21,709 General and administrative .................... 19,287 3,193 -- 22,480 Depreciation and amortization ................. 14,756 147 28,857(4) 43,760 In-process research and development ........... -- -- -- -- ---------- ---------- ---------- ---------- Total expenses ........................... 154,629 8,487 28,857 191,973 Net gain on dispositions of assets ............ -- -- -- -- ---------- ---------- ---------- ---------- Loss from operations ............................. (12,640) (5,410) (28,857) (46,907) Other: Interest, net ................................. 143 397 -- 540 ---------- ---------- ---------- ---------- Loss before income taxes ......................... (12,497) (5,013) (28,857) (46,367) Income tax benefit ............................... (4,592) -- (1,410)(4) (6,002) ---------- ---------- ---------- ---------- Net income (loss) ................................ $ (7,905) $ (5,013) $ (27,447) $ (40,365) ========== ========== ========== ========== Basic earnings (loss) per share: Net income (loss) per common share ............ $ (0.15) $ (0.73) ========== ========== Equivalent number of shares ................... 52,023 3,205(1) 55,228 ========== ========== ========== Diluted earnings (loss) per share: Net income (loss) per common share ............ $ (0.15) $ (0.73) ========== ========== Equivalent number of shares ................... 52,023 3,205(1) 55,228 ========== ========== ========== See Notes to Unaudited Pro Forma Condensed Combining Financial Information 40
42 CHECKFREE HOLDINGS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION WITH BLUEGILL 1. Adjustment to reflect the issuance of CheckFree common stock, CheckFree options and related acquisition expenses as the total purchase price for the net assets of BlueGill, and the elimination of BlueGill's redeemable preferred stock and shareholders' equity. The fair market values of intangible assets are preliminary estimates based on an independent appraisal, and current facts and circumstances. The final value of intangible assets will change with any change in the final purchase price and any resulting change could be material. (in thousands) 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 ========== ========== The following chart indicates the components of the estimated purchase price inherent in the adjusting entry: (in thousands) CheckFree common stock ........................... $ 298,244 Issuance of CheckFree options .................... 9,441 Estimated direct acquisition costs ............... 530 ---------- Total estimated purchase price .............. $ 308,215 ========== The estimated purchase price will be issued in exchange for of the common and preferred shares, warrants and vested options of BlueGill on the closing date. The purchase price reflects the assumed issuance of 3,205,128 shares of our common stock at $93.05 per share which is the average end of day price of our stock for the three trading days preceding and the three days following the announcement of the acquisition of BlueGill. Under the terms of the merger agreement, we are also issuing an estimated 243,263 CheckFree options to replace unvested BlueGill options. The value of the assumed CheckFree option grant is based on a Black-Scholes valuation model assuming a $93.05 stock price, an average strike price of $2.18, an average life of 2.9 years, a risk-free interest rate of 6.47% and volatility of 70%. The option value will vary from this estimate based on option grants and cancellations, resulting changes in the average strike price, changes in the fair market value of our stock, and changes in the risk-free rate and volatility of our stock between the date of the information statement/prospectus and the closing of the merger. The following table provides the allocation of the purchase price inherent in the adjusting entry: 41
43 (in thousands) 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 ======== 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. (in thousands) Accumulated deficit ............... $ 11,900 Capitalized software, net ....... $ 11,900 3. Adjustment to accrue the cost of registering CheckFree shares to be issued for BlueGill. (in thousands) Additional paid-in capital ........ $ 525 Accrued liabilities ............. $ 525 4. Adjustment to reflect additional amortization expense and the related income tax benefit associated with the intangible assets acquired from BlueGill. 42
44 (in thousands) 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 ========== ========== 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. 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) ========== NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION Note A: Management believes that the assumptions used in preparing the Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro Forma Condensed Combining Statement of Operations provide a reasonable basis for presenting the significant effects of the acquisition of BlueGill; that the pro forma adjustments give appropriate effect to those assumptions; and that the pro forma adjustments are properly applied in the Unaudited Pro Forma Condensed Combining Balance Sheet and Statement of Operations. Note B: The unaudited pro forma condensed balance sheet of CheckFree and BlueGill has been prepared as if the merger was completed as of December 31, 1999, and was accounted for as a purchase. The number of CheckFree common shares to be issued in the merger will depend on a number of factors as specified in the merger agreement. We have assumed for purposes of these pro forma financial statements that 3,205,128 shares of CheckFree common stock will be issued with a fair market value of $93.05 per share. The total purchase price of $308,215,000 was allocated to assets acquired and liabilities assumed based on BlueGill's December 31, 1999 balance sheet. The allocation of the BlueGill purchase price among the identifiable tangible and intangible assets and purchased in process research and development is based on preliminary estimates of the fair market value of those assets. Final determination of the allocation of the purchase price will be based on independent appraisals that we expect to have completed shortly after the merger is consummated. 43
45 BlueGill currently has five general technologies and application suites under development that meet the specific requirements of SFAS No. 2 for qualification as in-process research and development or IPRD. Critical elements of SFAS No. 2's definition of IPRD are that: o the product has not yet demonstrated its technological feasibility; and o the product does not have an alternative future use. These in-process technologies and applications include print and extraction technology, the Data Management Engine (DME) technology, API technology, web applications and OFX payment technology. Their descriptions are found below. Print and extraction technology. Print and extraction technology allows for the extraction and print parsing of a biller's legacy billing information through to BlueGill's products. The following features of the print / extraction technology are under development: o PDF Server, which converts line data input streams into PDF data output; o SmartXpress 2.2.0 that comprises updates to accommodate core changes to BlueGill's DME 2.2.0; and o SmartXpress 2.3.0 which comprises enhancements to SmartXpress user functionality. Data Management Engine (DME) technology. The DME technology allows for archiving of transactions and linkage of data to the necessary environment within the BlueGill network. The DME is the main translator of input data to output data. The following features are under development: o WebStream, which is a quick-to-market bill presentment system that is a repackaging of existing components; o Archive Interface, which is a generic archive interface to support linkage to OnDemand and INSCI; o Xerox Metacode Support, which is Xerox print support on the AIX, Solaris and HP-UX platforms; and o SQL Server Support, which is additional data base support. APIs. The API technology encompasses knowledge engineering procedures and expert system analysis, design and development. The API technology works in between the print/extraction and parsing modules and the web applications or templates. The API "surrounds" the DME as its interface to these other technologies. The following features are under development: o BlueGill Engine 2.2.0,which encompasses pre-requisites for Biller Direct and OFX; o BlueGill Engine 3.0.0 - Pure JAVA Interface, which provides a pure JAVA version of the public API set; and o CheckFree E-Bill 3.1 Format Support, which provides batch mode support for the CheckFree E-Bill 3.1 format. Web Applications. The web application technologies help in the design of industry specific templates for electronic billing and statement presentation. The following features are under development: o i-Biller Template for the utility industry billing statement templates; o i-Broker Template for the brokerage industry statement templates; o i-Telco Template for the telecommunications industry billing templates; o Control Center, which is the host for BlueGill Administration applications consisting of functions like relationship management, remote control execution of BlueGill programs, viewing of program execution reports, viewing of program execution logs, market direct, statement preview, and enrollment and activation of customers; and o Statement Counter, which accumulates transaction charges for statement viewing. Payments or OFX. The payments or OFX technology will allow for bill publishing services to be integrated with the i-Series products and bill consolidators. The following feature is under development: o OFX Bill Publisher Server, which is the core OFX engine integrated with the i-Series engine support and Bill Publisher component to link to consolidators. 44
46 There are risks and uncertainties associated with the completion of these in-process technologies. These risks include: o Not Technologically Feasible. The acquired IPRD had not demonstrated technological or commercial feasibility as of the transaction date for BlueGill. Significant risks exist because BlueGill is unsure of the obstacles it will encounter in the form of market acceptance, time and cost necessary to produce a technologically feasible product. SFAS No. 2 does not specifically require an analysis of the development effort expended relative to an acquisition date. It is reasonable to assume, however, that an IPRD project would require a significant amount of time and cost in order to modify for CheckFree's use in the marketplace. Should the proposed technology fail to become viable, it is unlikely that CheckFree would be able to realize any value from the sale of the technology to another party. o No Alternative Future Use. The acquired IPRD consists of BlueGill's work to date on its products. The products are very specific to the tasks and markets for which it is intended. As is typically the case with software, there are no alternative uses for the in-process work in the event that the product does not become feasible for CheckFree. The development effort for the acquired IPRD does not possess an alternative future use for CheckFree under the terms of SFAS No. 2. o If the BlueGill project underway fails, there will be a very limited life to the existing product because the continuing pace of technological developments in the marketplace will have rendered them non-competitive. In the event of a failure, the technology acquired, as embodied in either current or in-process products, will have no alternative use and would be written off as a loss by CheckFree. o As of the valuation date, all of the IPRD technologies were subject to numerous technological, timing, cost and market risks. In addition to these risks already mentioned, another major risk associated with the technologies pertains to the language it's written in. According to BlueGill management, all of the base code may go to the JAVA computer language, causing large sections of the codes to be re-written. The following table represents information regarding the status of the various in-process research and development projects to be acquired: 45
47 ESTIMATED EXPECTED STAGE OF ESTIMATED COST TO COMPLETION COMPLETION DATE COMPLETE VALUATION -------------- ------------------ -------------- ------------- (in thousands) 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 ======= ======= The method used to allocate the purchase consideration to IPRD was the modified income approach. Under the income approach, fair value reflects the present value of the projected free cash flows that will be generated by the IPRD projects and that is attributable to the acquired technology, if successfully completed. The modified income approach takes the income approach, modified to include the following factors: o analysis of the stage of completion of each project; o exclusion of value related to research and development yet-to-be completed as part of the on-going IPRD projects; and o the contribution of existing technologies and applications. The projected revenue used in the income approach are based upon the incremental revenues associated with a portion of the project related to BlueGill's technology likely to be generated upon completion of the project and the beginning of commercial sales, as estimated by management. The projections assume that the projects will be successful and the project's development and commercialization are as set forth by management. The discount rate used in this analysis is an after tax rate of 25%. Note C: CheckFree's statement of operations for the year ended June 30, 1999, has been combined with the BlueGill statement of operations for the twelve months ended June 30, 1999. Our statement of operations for the six month period ended December 31, 1999 has been combined with the BlueGill statement of operations for the six month period ended December 31, 1999. Actual income statements of CheckFree and BlueGill will be combined from the effective date of the merger, with no retroactive restatement. Note D: The unaudited pro forma condensed combining statement of operations for CheckFree and BlueGill have been prepared as if the merger was completed as of July 1, 1998, the beginning of the earliest period presented. The unaudited pro forma combined net income (loss) per share is based on the weighted average number of shares of our common stock outstanding during the periods, adjusted to give effect to shares assumed to be issued had the merger taken place as of July 1, 1998. Note E: The unaudited pro forma condensed combining statement of operations do not include a charge for the value of the estimated $11.9 million (no income tax effect) of purchased research and development arising from the merger, which will be expensed at acquisition, as this expense will not have a continuing impact. Note F: The merger agreement between CheckFree and BlueGill includes specific terms and conditions to address the impact on the purchase price and the relative number of shares of our common stock to be issued in the event of significant variation in the price of our common stock from the date of the merger agreement to the closing date. The initially agreed upon purchase price was $250 million, or 3,205,128 shares of our common stock when the market value of the stock was $78.00 per share. The following is a summary of the impact on the purchase price and/or the shares to be issued based on specified values of the average trading price of our common stock. The average trading price is defined in the agreement as the weighted average intraday trading price of our common stock on the Nasdaq National Market during the three days immediately preceding the closing date of the merger, as reported by Bloomberg. o If the average trading price is greater than or equal to $78.00 per share and less than or equal to $101.40 per share, the number of shares of our common stock shares to be issued as consideration will remain fixed at 3,205,128. To the extent that the ultimate purchase price exceeds $250 million, the additional amount, up 46
48 to $75 million, will be reflected on our balance sheet as additional goodwill. This additional goodwill will be amortized on a straight-line basis over an estimated life of five years commencing immediately upon the closing of the merger agreement. o If the average trading price is greater than $101.40 per share, the purchase price will be fixed at $325 million and the number of shares of our common stock to be issued as consideration will be reduced accordingly. At the baseline average trading price of $101.40 per share, we will issue 3,205,128 shares in consideration for BlueGill's stock. If the average trading price is $106.40, or $5.00 per share above the $101.40 baseline, the number of shares of our common stock shares will reduce by 150,617 to 3,054,511 and if the average trading price is $111.40, or $10.00 per share above the $101.40 baseline, the number of shares of our common stock will reduce by 287,723 to 2,917,415. The additional purchase price of $75 million from the baseline price of $250 million will be reflected on the balance sheet as goodwill and will be amortized on a straight-line basis over the next five years. o If the average trading price is greater than or equal to $50.00 per share and less than or equal to $78.00 per share, the purchase price will be fixed at $250 million and the number of shares of our common stock to be issued as consideration will increase accordingly. At a baseline average trading price of $78.00 per share, we again issue 3,205,128 shares in consideration for BlueGill's stock. If the average trading price is $73.00 per share, or $5.00 per share below the $78.00 baseline, the number of shares of our common stock issued will increase by 219,529 shares to 3,424,657 and if the average trading price is $68.00 per share, or $10.00 per share below the $78.00 baseline, the number of shares of our common stock issued will increase by 471,342 shares to 3,676,470. Because the price will remain fixed at $250 million, under this scenario there will be no added impact on the balance sheet or future statements of operations. o If the average trading price is less than $50.00 per share there are two options available: (1) We may terminate the merger. If BlueGill, however, elects to reinstate the merger agreement, the number of shares of our common stock to be issued as consideration will be fixed at 5,000,000. If the average trading price is $45.00 per share, the purchase price would become $225 million and if the average trading price is $40.00 per share, the purchase price would become $200 million. To the extent that the purchase price is lower than $250 million, the reduction will reflect itself in lower goodwill on the balance sheet and will result in lower straight-line goodwill amortization expense over the next five year period. (2) If we do not terminate the merger, the purchase price will be fixed at $250 million and the number of shares of our common stock issued in consideration will be determined by dividing $250 million by the average trading price. In this instance, if the average trading price is $45.00 per share, we would issue 5,555,555 shares in consideration for BlueGill's stock and if the average trading price is $40.00 per share, we would issue 6,250,000 shares in consideration for BlueGill's stock. Because the purchase price will remain fixed at $250 million, under this scenario there will be no added impact on the balance sheet or future statements of operations. 47
49 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET WITH THE TRANSPOINT ENTITIES AS OF DECEMBER 31, 1999 (IN THOUSANDS) HISTORICAL AMOUNTS ------------------------ PRO FORMA CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL ----------- ----------- ----------- ----------- Assets: Current assets: Cash and cash equivalents .......................... $ 152,779 $ 19,837 $ 100,000 (1) $ 272,616 Investments ........................................ 17,015 -- -- 17,015 Accounts receivable, net ........................... 46,780 -- -- 46,780 Prepaid expenses and other assets .................. 11,863 -- -- 11,863 Deferred income taxes .............................. 8,324 -- -- 8,324 ----------- ----------- ----------- ----------- Total current assets .......................... 236,761 19,837 100,000 356,598 Property and equipment, net ........................... 80,416 1,445 -- 81,861 Capitalized software, net ............................. 21,584 9,439 175,561 (1) 206,584 Goodwill, net ......................................... 30,559 -- 806,003 (1) 836,562 Other intangible assets, net .......................... 12,795 -- 548,000 (1) 560,795 Investments ........................................... 31,663 -- -- 31,663 Deferred income taxes ................................. 31,095 -- -- 31,095 Other noncurrent assets ............................... 12,855 -- -- 12,855 ----------- ----------- ----------- ----------- Total assets ................................... $ 457,728 $ 30,721 $ 1,629,564 $ 2,118,013 =========== =========== =========== =========== Liabilities and Stockholder's Equity: Current liabilities: Accounts payable ................................... $ 8,679 $ 12,181 $ -- $ 20,860 Accrued liabilities ................................ 37,494 1,246 3,325 (1) 42,740 675 (2) Deferred income taxes .............................. -- -- 79,120 (1) 79,120 Current portion of long-term obligations ........... 5,069 -- -- 5,069 Deferred revenue ................................... 25,840 250 -- 26,090 ----------- ----------- ----------- ----------- Total current liabilities ...................... 77,082 13,677 83,120 173,879 Accrued rent and other ................................ 4,862 -- -- 4,862 Obligations under capital leases - less current portion ............................................. 906 -- -- 906 Convertible subordinated notes ........................ 172,500 -- -- 172,500 Minority interest ..................................... -- 43,061 (43,061)(1) -- Deferred income taxes ................................. -- -- 214,080 (1) 214,080 ----------- ----------- ----------- ----------- Total liabilities .............................. 255,350 56,738 254,139 566,227 Stockholders' equity: Common stock ....................................... 524 -- 170 (1) 694 Additional paid-in capital ......................... 504,058 -- 1,349,913 (1) 1,853,296 (675)(2) Members' capital deficiency ........................ -- (26,017) 26,017 (1) -- Other .............................................. (299) -- -- (299) Accumulated deficit ................................ (301,905) -- -- (301,905) ----------- ----------- ----------- ----------- Total stockholder's equity ..................... 202,378 (26,017) 1,375,425 1,551,786 ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity ................................... $ 457,728 $ 30,721 $ 1,629,564 $ 2,118,013 =========== =========== =========== =========== See Notes to Unaudited Pro Forma Condensed Combining Financial Information 48
50 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH THE TRANSPOINT ENTITIES FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ------------------------ PRO FORMA CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL --------- ---------- ----------- --------- Revenues: Processing and servicing ...................... $ 201,059 $ -- $ -- $ 201,059 License fees .................................. 15,975 -- -- 15,975 Maintenance fees .............................. 17,746 -- -- 17,746 Other ......................................... 15,351 -- -- 15,351 --------- --------- --------- --------- Total revenues ........................... 250,131 -- -- 250,131 Expenses: Cost of processing, servicing and support ..... 146,704 3,062 -- 149,766 Research and development ...................... 21,085 26,560 -- 47,645 Sales and marketing ........................... 32,354 11,302 -- 43,656 General and administrative .................... 31,466 2,403 -- 33,869 Depreciation and amortization ................. 24,630 1,870 359,001 (3) 385,501 In-process research and development ........... 2,201 -- -- 2,201 --------- --------- --------- --------- Total expenses ........................... 258,440 45,197 359,001 662,638 Net gain on dispositions of assets ............ 4,576 -- -- 4,576 --------- --------- --------- --------- Loss from operations ............................. (3,733) (45,197) (359,001) (407,931) Other: Minority interest ............................. -- 2,063 (2,063)(4) -- Interest, net ................................. 2,181 464 -- 2,645 --------- --------- --------- --------- Loss before income taxes ......................... (1,552) (42,670) (361,064) (405,286) Income tax benefit ............................... (12,009) -- (79,120)(3) (91,129) --------- --------- --------- --------- Net income (loss) ................................ $ 10,457 $ (42,670) $(281,944) $(314,157) ========= ========= ========= ========= Basic earnings (loss) per share: Net income (loss) per common share ............ $ 0.20 $ (4.52) ========= ========= Equivalent number of shares ................... 52,444 17,000 (1) 69,444 ========= ========= ========= Diluted earnings (loss) per share: Net income (loss) per common share ............ $ 0.18 $ (4.52) ========= ========= Equivalent number of shares ................... 56,529 12,915 (5) 69,444 ========= ========= ========= See Notes to Unaudited Pro Forma Condensed Combining Financial Information 49
51 CHECKFREE HOLDINGS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS WITH THE TRANSPOINT ENTITIES FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AMOUNTS ------------------------ PRO FORMA CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL --------- ---------- ----------- --------- Revenues: Processing and servicing ...................... $ 120,931 $ 3 $ -- $ 120,934 License fees .................................. 6,197 -- -- 6,197 Maintenance fees .............................. 8,956 -- -- 8,956 Other ......................................... 5,905 -- -- 5,905 --------- --------- --------- --------- Total revenues ........................... 141,989 3 -- 141,992 Expenses: Cost of processing, servicing and support ..... 86,899 7,616 -- 94,515 Research and development ...................... 15,110 1,521 -- 16,631 Sales and marketing ........................... 18,577 7,799 -- 26,376 General and administrative .................... 19,287 1,267 -- 20,554 Depreciation and amortization ................. 14,756 1,610 165,000 (3) 181,366 In-process research and development ........... -- -- -- -- --------- --------- --------- --------- Total expenses ........................... 154,629 19,813 165,000 339,442 Net gain on dispositions of assets ............ -- -- -- -- --------- --------- --------- --------- Loss from operations ............................. (12,640) (19,810) (165,000) (197,450) Other: Minority interest ............................. -- 2,876 (2,876)(4) -- Interest, net ................................. 143 911 -- 1,054 --------- --------- --------- --------- Loss before income taxes ......................... (12,497) (16,023) (167,876) (196,396) Income tax benefit ............................... (4,592) -- (33,760)(3) (38,352) --------- --------- --------- --------- Net income (loss) ................................ $ (7,905) $ (16,023) $(134,116) $(158,044) ========= ========= ========= ========= Basic earnings (loss) per share: Net income (loss) per common share............. $ (0.15) $ (2.29) ========= ========= Equivalent number of shares.................... 52,023 17,000 (1) 69,023 ========= ========= ========= Diluted earnings (loss) per share: Net income (loss) per common share............. $ (0.15) $ (2.29) ========= ========= Equivalent number of shares.................... 52,023 17,000 (1) 69,023 ========= ========= ========= See Notes to Unaudited Pro Forma Condensed Combining Financial Information 50
52 CHECKFREE HOLDINGS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION WITH THE TRANSPOINT ENTITIES 1. Adjustment to reflect the issuance of CheckFree common stock and related acquisition expenses as the total purchase price for the net assets of TransPoint, and the revaluation of TransPoint's capitalized software costs and the elimination of TransPoint's minority interest and member's capital deficiency, net of a contractual infusion of $100 million of cash by TransPoint. The fair market values of intangible assets are preliminary estimates based on an independent appraisal, and current facts and circumstances. The final value of intangible assets will change with any change in the final purchase price and any resulting change could be material. (in thousands) Cash .................................................. $ 100,000 Capitalized software, net ............................. 175,561 Goodwill, net ......................................... 806,003 Other intangible assets, net .......................... 548,000 TransPoint minority interest .......................... 43,061 CheckFree common stock ........................ $ 170 CheckFree additional paid-in capital .......... 1,349,913 TransPoint member's capital deficiency ....... 26,017 Current deferred income tax liability ......... 79,120 Long term deferred income tax liability ....... 214,080 Accrued acquisition expenses .................. 3,325 ------------ ------------ Totals ................................................ $ 1,672,625 $ 1,672,625 ============ ============ The following chart indicates the components of the estimated purchase price inherent in the adjusting entry: (in thousands) CheckFree common stock ................. $ 1,350,083 TransPoint cash infusion ............... (100,000) Estimated direct acquisition costs ..... 3,325 ----------- Total estimated purchase price .... $ 1,253,408 =========== The estimated purchase price will be issued in exchange for the net assets of TransPoint on the closing date. The purchase price reflects the assumed issuance of 17,000,000 shares of our common stock at $79.42 per share, which is the average end of day price of our stock for the three trading days preceding and the three days following the announcement of the acquisition of TransPoint. Under the terms of the merger and contribution agreement, TransPoint is to be funded with $100 million in cash before the closing of the transaction. The following table provides the allocation of the purchase price inherent in the adjusting entry: 51
53 (in thousands) In-process research and development (Note B) $ 0 Current technology and products: BIS / communications (estimated life of 3 years)........ 26,000 Service center (estimated life of 3 years)........ 85,000 Delivery applications (estimated life of 3 years)........ 50,000 Payments / interface (estimated life of 3 years)........ 24,000 ----------- Sub-total IPRD and current technology and products ............................ 185,000 Goodwill (estimated life of 5 years)........ 806,003 Other intangible assets: Customer list (estimated life of 3 years)........ 25,000 Tradename (estimated life of 1 year )........ 29,000 Strategic agreements (estimated life of 5 years)........ 494,000 ----------- Sub-total other intangible assets............................................. 548,000 Deferred income taxes................................................................... (293,200) Net assets of TransPoint: Cash and cash equivalents............................................................ 19,838 Property and equipment............................................................... 1,445 Liabilities assumed.................................................................. (13,678) ----------- Sub-total net assets......................................................... 7,605 ----------- Total Purchase Price....................................................................$ 1,253,408 =========== 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. (in thousands) Additional paid-in capital.......... $ 675 Accrued liabilities............ $ 675 52
54 3. Adjustment to reflect additional amortization expense and the related income tax benefit associated with the intangible assets acquired from TransPoint. (in thousands) YEAR ENDED JUNE 30, 1999 Depreciation and amortization ........... $ 359,001 Current deferred income tax liability ... 79,120 Capitalized software, net ........... $ 61,667 Goodwill, net ....................... 161,201 Other intangible assets, net ........ 136,133 Income tax benefit................... 79,120 ----------- ----------- Total ................................... $ 438,121 $ 438,121 =========== =========== SIX MONTHS ENDED DECEMBER 31, 1999 Depreciation and amortization ........... $ 165,000 Current deferred income tax liability ... 33,760 Capitalized software, net ........... $ 30,833 Goodwill, net ....................... 80,600 Other intangible assets, net ........ 53,567 Income tax benefit .................. 33,760 ----------- ----------- Total ................................... $ 198,760 $ 198,760 =========== =========== 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. (in thousands) CheckFree common shares issued for TransPoint...... 17,000 Potentially dilutive securities: Options and warrants.......................... (4,085) --------- Net adjustment to dilutive shares outstanding...... 12,915 ========= NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION Note A: Management believes that the assumptions used in preparing the Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro Forma Condensed Combining Statement of Operations provide a reasonable basis for presenting the significant effects of the acquisition of TransPoint; that the pro forma adjustments give appropriate effect to those assumptions; and that the pro forma adjustments are properly applied in the Unaudited Pro Forma Condensed Combining Balance Sheet and Statement of Operations. Note B: The Unaudited Pro Forma Condensed Combining Balance Sheet of CheckFree and TransPoint has been prepared as if the transaction was completed as of December 31, 1999, and was accounted for as a purchase. We will issue 17,000,000 shares of our common stock valued at $79.42 for the net assets of TransPoint. Under the terms of the merger and contribution agreement, TransPoint is to be funded with $100 million of cash immediately prior to the closing of the transaction. We expect to incur approximately $3.3 million of direct acquisition costs. The total purchase price of $1,253,408,000 was allocated to assets acquired and liabilities assumed based on TransPoint's December 31, 1999 balance sheet. The allocation of the TransPoint purchase price among the identifiable tangible and intangible assets is based on preliminary estimates of the fair market value of those assets. Final determination of the allocation of 53
55 the purchase price will be based on independent appraisals that we expect to have completed shortly after the transaction is consummated. This transaction is expected to close within four to six months. TransPoint released the latest version of their electronic billing and payment processing system just one week prior to the announcement of this transaction. As a result, at this time, the value of in-process research and development is nominal and therefore not reflected. However, we will reassess the fair market value of the assets and liabilities assumed from TransPoint at the time of closing and we expect a portion of the purchase price to be allocated to in-process research and development at that time. Due to uncertainties regarding the specific products or technology enhancements that will be included in the next release and the specific date of the closing, we cannot currently provide a reasonable estimate of the expected value of in-process research and development. Note C: CheckFree's statement of operations for the year ended June 30, 1999, has been combined with the TransPoint statement of operations for the twelve months ended June 30, 1999. Our statement of operations for the six month period ended December 31, 1999 has been combined with the TransPoint statement of operations for the six months ended December 31, 1999. Actual income statements of CheckFree and TransPoint will be combined from the effective date of the transaction, with no retroactive restatement. Note D: The unaudited pro forma condensed combining statements of operations for CheckFree and TransPoint have been prepared as if the transaction was completed as of July 1, 1998, the beginning of the earliest period presented. The unaudited pro forma combined net income (loss) per share is based on the weighted average number of shares of our common stock outstanding during the periods, adjusted to give effect to shares assumed to be issued had the transaction taken place as of July 1, 1998. 54
56 THE MERGER BACKGROUND OF THE MERGER We develop and provide electronic billing and payment services and related products for financial institutions, businesses and their customers. Our services facilitate the electronic distribution and payment of bills as well as payment of any bill for financial institutions and portals and their customers. BlueGill develops, markets and supports electronic billing software designed to facilitate the creation and hosting of bills which can be distributed to consumers at their financial institution or portal web sites through services like those offered by us. Since 1998, CheckFree and BlueGill have had a cooperative business relationship through which billers using BlueGill software for creation and hosting of their bills have been able to distribute these bills to consumers at their financial institution or portal Internet financial services sites through our distribution, payment and tracking system. The billers have compensated BlueGill for software and services in a traditional software revenue model and CheckFree for distribution, payment and tracking services in a transaction fee revenue model. Given our existing commercial relationships, from time to time, we and BlueGill have discussed business opportunities, including utilizing BlueGill software in the CheckFree electronic billing offering and other opportunities, to advance the electronic billing and payment software and distribution market. On August 4, 1999, Mark Johnston, our vice chairman, Hal Davis, BlueGill's president, and Vinay Gupta, BlueGill's chief financial officer, met in Columbus, Ohio to discuss the possibility of an acquisition. On September 9, 1999, Pete Sinisgalli, Mark Johnson, Jim Douglass and David Odom on behalf of CheckFree and Hal Davis, Vinay Gupta, Ray Simonson and Richard Pickering on behalf of BlueGill met at BlueGill's offices in Ann Arbor, Michigan to discuss a tighter alliance between our organizations. These discussions included CheckFree investing in BlueGill as well as the possibility that CheckFree acquire BlueGill. At the September 9, 1999 meeting, the BlueGill representatives also made a presentation of BlueGill's business overview. On September 20, 1999, officers of both companies met in Ann Arbor, Michigan to further explore these opportunities. These discussions were later followed up with additional discussions on December 1, 1999 in BlueGill's office in Waterloo, Ontario. During this time period, CheckFree determined that to achieve the benefits of the BlueGill technology, an acquisition was more appropriate than a strategic alliance with BlueGill. CheckFree did not consider any other alternatives for the acquisition of the BlueGill technology. During 1999, BlueGill's board of directors considered ways to strengthen the company's management, technology and market position and to provide additional financing and stockholder liquidity. BlueGill identified and entered into preliminary discussions with a potential merger partner. It also held preliminary exploratory conversations with investment bankers to determine possible interest in a public offering of BlueGill common stock. At the time the CheckFree merger opportunity matured in December 1999, the BlueGill board of directors decided that on balance, after weighing the risks and opportunities of each alternative relative to the others, the merger with CheckFree was BlueGill's best alternative. Regarding the merger alternative, the merger partner did not have the breadth of product which CheckFree had and was not a public company, and the merger raised management, integration and control issues. Regarding the public offering alternative, BlueGill's board was concerned about BlueGill's short operating history, the need to build revenues and management to strengthen the interest of underwriters and the public, the receptivity of the market to a BlueGill offering in the latter part of 2000 and the diversion of management which would be involved in a public offering. On December 7, 1999, Pete Sinisgalli, Mark Johnson and Jim Douglass met with Hal Davis and Vinay Gupta in our Atlanta offices to begin the initial discussion and negotiation of the principal terms and structure under which we might effect the purchase of BlueGill. These conversations continued in a telephone conversation on December 8, 1999, between Jim Douglass and Vinay Gupta based upon an outline of an acquisition proposal from CheckFree. On December 9, 1999, BlueGill's board retained Broadview International, LLC to assist in the negotiations and as financial advisor. Broadview discussed with Pete Sinisgalli, Jim Douglass and Allen Shulman in telephone conversations on December 8, 9, 10 and 11, 1999 issues regarding price, collar, floor, ceiling, break-up fees and walking rights. In determining the fair consideration for the transaction, CheckFree considered the internal financial analysis prepared as a result of its due diligence review, valuations of public companies having businesses similar to BlueGill as well as discussions with BlueGill's management regarding recent valuations that BlueGill discussed with various investment banking firms, while exploring a possible initial public offering. CheckFree's board of directors did not consider BlueGill's net asset values, liquidation values or going concern values. On December 14, 1999, representatives of CheckFree and BlueGill met in Ann Arbor, Michigan to initiate a due diligence process. Concurrently, CheckFree's and BlueGill's management teams and their financial advisors and attorneys began negotiation of the definitive terms and conditions of the merger. BlueGill engaged Pepper Hamilton LLP as legal counsel on the transaction. CheckFree engaged Porter, Wright, Morris & Arthur LLP as legal counsel on the transaction. On December 15, 1999, Vinay Gupta and Jim Douglass, with their respective counsels, met in Detroit, Michigan to negotiate escrow, indemnification and operational provisions and BlueGill's representations. Negotiations on the terms and conditions of the merger agreement and due diligence continued in person until December 17, 1999. On December 18 and 19, 1999, the parties legal counsel negotiated via telephone regarding the details of a definitive merger agreement, a stock restriction agreement which limits the ability of Mr. Davis, Mr. Gupta and Mr. Simonson to sell shares of our common stock after the completion of the merger, employment agreements, and an escrow agreement. On Monday, December 20, 1999, the parties reached agreement on the terms and conditions of the merger agreement and the stock restriction and employment agreements. Peter Sinisgalli and Hal Davis met in Ann Arbor, Michigan on December 20, 1999 and signed the agreement. The amount of the consideration to be received by the BlueGill stockholders was based on negotiations of the parties and may not reflect the true value of the BlueGill stock being exchanged in the merger. Our board of directors approved the terms of the merger agreement and the structure of the acquisition on December 14, 1999, and BlueGill's board of directors approved the merger agreement and related agreements on December 20, 1999. The merger agreement was executed in the evening on December 20, 1999, and was announced on December 21, 1999. 55
57 APPROVAL BY BLUEGILL STOCKHOLDERS General BlueGill is furnishing this information statement/prospectus to holders of BlueGill common stock and BlueGill preferred stock in connection with the solicitation by BlueGill's board of directors of written consents. This information statement is first being furnished to BlueGill stockholders on or about April __, 2000. Matters with respect to which Consents Are Solicited BlueGill common and preferred stockholders, voting together as a single class, with preferred stock voting on an as converted basis, are being asked to consent to the Agreement and Plan of Merger, dated as of December 20, 1999, among BlueGill, CheckFree and CheckFree Acquisition. BlueGill Series A preferred stockholders and BlueGill Series B preferred stockholders, each voting separately as a class, are being asked to consent to: o the merger agreement; and o not treating the merger as a deemed liquidation under BlueGill's certificate of incorporation. Record Date BlueGill's board of directors has fixed the close of business on March 27, 2000 as the record date for determining the stockholders entitled to consent in writing to the corporate matters outlined above. Consents BlueGill's board requests that each of its common and preferred stockholders date and sign the accompanying form of Action by Written Consent of Stockholder and promptly return it to BlueGill's principal executive offices at: BlueGill Technologies, Inc., 935 Technology Drive, Ann Arbor, Michigan 48108; Attention Vinay Gupta, Corporate Secretary. IN ORDER TO EXPEDITE THE MERGER, BLUEGILL STOCKHOLDERS ARE REQUESTED TO RETURN THEIR CONSENTS BY OVERNIGHT DELIVERY SERVICE. Under Delaware law, no consent will be effective to approve the merger unless, within 60 days of the earliest dated consent, consents signed by a sufficient number of stockholders are delivered to BlueGill. A stockholder may consent to the merger after this 60-day period by delivering a dated and signed consent, but that consent will not be included in determining whether or not a sufficient number of consents have been received to approve the merger. A stockholder may revoke his, her or its consent at any time prior to the date consents signed by a sufficient number of holders to approve the merger are received by BlueGill. To revoke a consent, a stockholder must deliver to BlueGill's corporate secretary, at the above referenced address, a dated and signed revocation. Approval Required BlueGill's certificate of incorporation requires that the merger be approved by: o holders of two-thirds of the outstanding shares of BlueGill Series A preferred stock; o either: (1) holders of three-quarters of the outstanding shares of Series B preferred stock, or (2) holders of a majority of the outstanding shares of Series B preferred stock, including at least one Series B Institutional Investor; and o holders of a majority of the common stock and the preferred stock, voting on an as converted basis, voting together as a single class. 56
58 A Series B Institutional Investor is any institutional "accredited investor" who: o holds at least 1,000,000 shares of Series B Preferred Stock; o is not a holder of any shares of Series A preferred stock or a direct holder of any shares of common stock; o is not a "Strategic Investor;" and o is not an affiliate of BlueGill, any holder of Series A preferred stock, any holder of record of common stock or a "Strategic Investor." As used in the definition of a Series B Institutional Investor: o an institutional "accredited investor" is an entity that is a party as an "Investor" to BlueGill's Investor Rights Agreement dated as of June 9, 1999, as amended, and that is an accredited investor as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933 and is eligible under all applicable state and foreign securities laws to purchase offerings of new securities of BlueGill without the requirement for approval by or registration, qualification or filing, except a notice filing, with any governmental authority or any required furnishing of disclosure materials; and o an individual or entity will not be deemed an affiliate of BlueGill solely by virtue of ownership of 10% or more of the capital stock of BlueGill or by virtue of being or having the power to nominate and/or elect a director of BlueGill. A "Strategic Investor" means any investor in the capital stock of BlueGill that invests in this capital stock for any reason other than solely for the financial performance of the investment. Under BlueGill's certificate of incorporation, a merger in which BlueGill's stockholders immediately prior to the merger receive securities conferring less than 50% of the voting power of the surviving corporation or its parent is deemed a liquidation. The merger with CheckFree Acquisition would, consequently, be deemed a liquidation under this provision. If, however, both: o the holders of a majority of Series A preferred stock then outstanding, voting as a single class; and o the holders of either: (1) three-quarters of the Series B preferred stock then outstanding; or (2) a majority of the Series B preferred stock then outstanding, including at least one Series B Institutional Investor, as defined in the previous paragraph, in the case of clause (1) and (2) voting as a single class, vote not to treat the merger as a liquidation, then the merger will not be so treated. BlueGill's board is seeking consents from the holders of Series A preferred stock and holders of Series B preferred stock not to treat the merger as a liquidation. In a liquidation of BlueGill, the preferred stockholders receive a liquidation preference of $.5174 per share of Series A preferred stock and $1.52 per share of Series B preferred stock and then share remaining assets pro rata with the holders of common stock, treating preferred stock as if it were converted into common stock. If liquidation payments to holders of preferred stock would, absent the liquidation preferences, exceed $2.33 per share of Series A preferred stock and $3.04 per share of Series B preferred stock, then no liquidation preference would be paid and in the liquidation preferred stockholders on an as converted basis and common stockholders will share the assets available for distribution pro rata. The consideration that a BlueGill preferred stockholder will receive in the merger will exceed $2.33 per share of Series A and $3.04 per share of Series B. Treating the merger as a liquidation would, therefore, not result in the payment of preferential amounts to preferred stockholders. BlueGill believes that the securities to be delivered in the merger would be the value of the consideration available for distribution to BlueGill stockholders. Hence, the form and amount of consideration receivable by a BlueGill preferred stockholder would be the same whether or not the merger is treated as a deemed liquidation. 57
59 In a deemed liquidation, BlueGill preferred stockholders should not have appraisal rights. If this consent is not obtained, BlueGill's board will nevertheless proceed with the merger if it is approved. A condition in the merger agreement to CheckFree and CheckFree Acquisition closing the merger is that holders of not more than 10% of BlueGill's capital stock have notified BlueGill of their intention to assert appraisal rights under Delaware law. BlueGill is, therefore, seeking consents from holders of more than 90% of its capital stock. Stockholders Who Do Not Consent If BlueGill does not receive the consents from all its stockholders, BlueGill must provide prompt notice of the taking of the corporate action to the stockholders who did not consent in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for this meeting were as of the date consents signed by a sufficient number of stockholders to take the action were delivered. In addition, a BlueGill stockholder who has not consented to the merger will have appraisal rights to the extent these rights are perfected under Delaware law. Failure to Approve Under the merger agreement, if BlueGill or CheckFree terminates the merger agreement because BlueGill stockholders do not approve the merger on or before April 30, 2000, BlueGill must pay to CheckFree a termination fee of $7.5 million. In addition, BlueGill may be required to pay CheckFree an additional $17.5 million, if the merger agreement is terminated as provided in the prior sentence, if prior to that termination a third party has announced or begun negotiations with BlueGill of a superior acquisition proposal, as defined in the merger agreement, and if within 12 months of the termination a definitive agreement with respect to that superior acquisition is entered into. Solicitation Expenses BlueGill will bear the costs of the solicitation of consents. Board Recommendation THE BLUEGILL BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE ADVISABLE AND ARE FAIR TO, AND IN THE BEST INTERESTS OF, BLUEGILL AND ITS STOCKHOLDERS. ACCORDINGLY, THE BLUEGILL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS APPROVE THE MERGER AGREEMENT AND THE MERGER, AS WELL AS ELECT NOT TO TREAT THE MERGER AS A DEEMED LIQUIDATION UNDER BLUEGILL'S CERTIFICATE OF INCORPORATION. The merger is of great importance to all BlueGill stockholders. Each BlueGill stockholder is urged to read and carefully consider the information in this information statement and to complete, date, sign and promptly return the attached consent. BlueGill stockholders should not send any stock certificates with the consents, unless accompanied by a duly executed letter of transmittal and the other documents required by the transmittal letter. BLUEGILL'S REASONS FOR THE MERGER; RECOMMENDATION OF BLUEGILL'S BOARD OF DIRECTORS In reaching its determination that the merger with CheckFree will be beneficial to BlueGill and its stockholders, the BlueGill board of directors considered a number of potential benefits, including the following: o the strengthening of BlueGill's business, management, financial condition, earnings and prospects because of expected synergies with CheckFree; o the CheckFree common stock to be exchanged in the merger will be publicly listed on the Nasdaq Stock Market, providing liquidity for BlueGill stockholders; 58
60 o the merger is structured to qualify as a tax free exchange so that BlueGill stockholders will be able to convert their shares of BlueGill stock into CheckFree common stock without U.S. or Canadian taxpayers incurring any federal income tax liability, other than as a result of the receipt of cash in lieu of fractional shares; o the value of the consideration being offered by CheckFree and the terms of the merger agreement which protect that value; o the ability to realize benefits from the merger sooner than benefits from alternative strategies, like an IPO or merger with another private company; o Checkfree's willingness to maintain the independent operations of BlueGill and initially to retain the continued employment of all BlueGill employees following the merger, enhancing the career opportunities of BlueGill employees; o the belief that most BlueGill customers will continue to do business with the newly merged entity because of the reputation of CheckFree and the wider range of billing and payment services which that entity will be able to offer in the future; o BlueGill options outstanding at the effective time of the merger will be assumed by CheckFree so that the options will be exercisable for CheckFree common stock, but with an exercise price that maintains the intrinsic value of the options; and o the CheckFree stock being placed in escrow will be the limit of the liability of BlueGill stockholders. In reaching its determination that the merger with CheckFree will be beneficial to BlueGill and its stockholders, the BlueGill board considered a number of potential risks and detriments, including the following: o the long term value to BlueGill stockholders might be greater than that offered in the merger if BlueGill remained independent or merged with a similar size private company and in either case then went public; o the recent volatility in the market price of CheckFree common stock; o CheckFree's operating losses; o the termination fee BlueGill might be required to pay; o the precise merger consideration will not be known at the time of the BlueGill stockholder vote and will only be fixed on the evening before the merger; o increases in the value of BlueGill will not be reflected in the merger consideration payable; o the risks relating to the strategic option of BlueGill remaining independent, including the need to consummate additional financing rounds to provide additional capital for expansion, the possibility that companies with greater access to capital may seek to enter the BlueGill business or purchase its competitors and the management requirements of BlueGill as it grows; o harm to BlueGill's business from the length of time required for the closing of the merger; o CheckFree management's ability to integrate smoothly BlueGill and other subsequent acquisitions into CheckFree; o some BlueGill customers and potential customers may not wish to do business with BlueGill to the extent they consider CheckFree a competitor; and o the impact that a material merger between CheckFree and a third company might have on the ability to complete expeditiously the BlueGill-CheckFree merger. The Board did not factor into its analysis information concerning TransPoint's business, operations and finances or the possible impact of a CheckFree-TransPoint merger on the business, operations or finances of CheckFree or BlueGill. The benefits, risks and detriments set forth above are not intended to be exhaustive, but are intended to include substantially all of the material factors considered by the BlueGill board. In view of the complexity and variety of factors considered by the BlueGill board, the BlueGill board of directors did not quantify or otherwise attempt to 59
61 assign any relative or specific weights to the various factors considered. Individual directors may have given differing weights to the different factors. FOR THESE REASONS, THE BLUEGILL BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AND THE MERGER AGREEMENT WITH CHECKFREE. REPORT OF BLUEGILL'S FINANCIAL ADVISOR In deciding to recommend the merger, BlueGill's board of directors considered a report prepared by Broadview International LLC. The report was presented at BlueGill's December 12, 1999 board meeting. BlueGill's board did not adopt the report. The Broadview report summarized the CheckFree offer and included an overview of CheckFree and a valuation summary of BlueGill. A BlueGill stockholder can request a copy of the report from BlueGill's secretary at 935 Technology Drive, Ann Arbor, Michigan 48108. The Broadview valuation summary provided an analysis of BlueGill in comparison to similar public companies and analyzed the CheckFree offer in light of similar transactions. A summary of these analyses is shown in the tables presented below. However, the tables alone do not constitute a complete description of the financial analyses. Therefore, you must read the tables together with the text of each summary to understand fully the financial analyses used by Broadview. The Broadview report is neither an opinion on the fairness of the price offered by CheckFree in the merger nor a recommendation to any person on whether to vote to approve the merger. In preparing its report, Broadview did not make or obtain an independent appraisal or valuation of any of BlueGill's assets. The analyses performed by Broadview are not necessarily indicative of actual values or actual future results. The actual values or future results may be significantly more or less favorable than suggested by the analyses. In addition, Broadview's report was based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of Broadview's report. Therefore, any change since the date of the report may impact Broadview's report. Public Company Comparison Analysis Broadview considered ratios of share price and market capitalization to selected historical and projected operating results in order to derive multiples placed on a company in a particular market segment. Broadview adjusted market capitalization for cash and debt when necessary. In performing this analysis, Broadview compared BlueGill's financial information to publicly available information taken from a group of public companies in the web-based banking and payment processing software industry. The group consists of the following companies that Broadview considered comparable to BlueGill: o Trintech o Online Resources o Digital Insight o CheckFree Holdings o S1 Corp o Cybercash For this analysis, Broadview examined publicly available information, selected analyst projections and projections prepared by BlueGill management. BlueGill management prepared these projections by extrapolating historical growth trends. The projections were adjusted to account for the introduction of new products, anticipated changes to pricing, and additions to personnel and facilities. The following table presents the median multiples and the range of multiples for the group of companies for total market capitalization divided by selected operating metrics as of December 10, 1999. The total market capitalization is comprised of equity market capitalization plus total debt minus cash and cash equivalents: Median Multiple Range of Multiples --------------- ------------------ Total Market Capitalization to Projected Calendar Year 1999 Revenue........................ 23.99x 12.26x - 45.32x 60
62 Total Market Capitalization to Projected Calendar Year 2000 Revenue........................ 15.62x 6.19x - 33.88x 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: Median Implied Value Range of Implied Values -------------------- ----------------------- 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 No company in the comparable public company group is identical to BlueGill. In selecting and evaluating the companies in the group, Broadview made numerous assumptions, including the following: o Each company's SEC filings included accurate representations of that company's financials, o The analyst projections for each company were fair and accurate, o The business descriptions provided in each company's SEC filings and on their websites were fair and accurate representations of each company's business, and o The share prices reported publicly available quote sources were accurate representations of each company's actual stock price. Broadview also applied a private company discount 30% to account for the non-liquidity of BlueGill's shares and BlueGill's relative small size in relation to the average public company. Mathematical analysis, like determining the median, average or range, is not in itself a meaningful method of using comparable company data. As the value of the CheckFree shares payable as the merger consideration will vary between approximately $250 million and $325 million, the amount being paid, based upon the public company comparison analysis, would exceed the median implied value and would be toward the higher end of the range of implied values. Transaction Comparison Analysis Broadview considered ratios of equity purchase price to selected historical operating results to indicate multiples that strategic and financial acquirers have paid for companies in a particular market segment. When appropriate, the equity purchase price was adjusted for the seller's cash and debt. In performing this analysis, Broadview reviewed a number of transactions that they considered similar to the merger. Broadview selected transactions in 1999 involving sellers in the web-based e-business software industry. For this analysis, Broadview examined publicly available information, as well as information from Broadview's proprietary database of published and confidential merger and acquisition transactions in the IT, communication and media industries. The web-based e-business software transactions consisted of the following acquisitions: 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; 61
63 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: Median Multiple Range of Multiples --------------- ------------------ Adjusted Price to Last Reported Twelve Months Revenue............ 42.81x 8.14x - 100.70x 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: Median Implied Value Range of Implied Values -------------------- ----------------------- Adjusted Price to Last Reported Twelve Months Revenue............ $184,492,000 $50,388,000 - $408,408,000 No transaction considered in the transaction comparison analysis is identical to the merger. Broadview made numerous assumptions with respect to web-based e-business software and general economic conditions in selecting and evaluating the comparable transactions. You should be aware that many of these considerations are beyond the control of either BlueGill or CheckFree. Mathematical analysis, like determining the average, median, or range, is not in itself a meaningful method of using comparable transaction data. As the value of the CheckFree shares payable as the merger consideration will vary between approximately $250 million and $325 million, the amount being paid, based upon the transaction comparison analysis, would exceed the median implied multiple and would be toward the higher end of the range of implied values. Broadview is not updating its report. The BlueGill board of directors has not conducted any further analyses to determine whether there have been any subsequent events that would materially impact the factors it analyzed in December 1999 when it decided to recommend the merger. THE MERGER AGREEMENT The following is a summary of the material provisions of the merger agreement, a copy of which is attached as Appendix A to this information statement/prospectus. We urge you to read the merger agreement carefully. The merger agreement provides that, following its approval by BlueGill's stockholders and, if necessary, by our stockholders, and the satisfaction or waiver of the other conditions to the merger, CheckFree Acquisition will merge with and into BlueGill. BlueGill will continue as the surviving corporation of the merger, and become our wholly owned subsidiary, and CheckFree Acquisition will cease to exist. The merger will become effective once CheckFree and BlueGill file a certificate of merger with the Delaware Secretary of State, as required under the applicable Delaware law. We expect that this will occur in April 2000. Conversion of BlueGill Shares; Merger Consideration In the merger, all issued and outstanding shares of BlueGill common stock, Series A preferred stock, and Series B preferred stock, including shares of BlueGill common stock issuable upon the exercise of outstanding warrants and options, will convert into the right to receive fully paid and non-assessable shares of our common stock, as determined under the merger agreement. The number of shares of our common stock that we will issue to BlueGill's stockholders as merger consideration will be based on the average trading price of our common stock on the Nasdaq National Market during the three days immediately before the closing date of the merger and on the number of diluted shares of BlueGill common stock calculated according to the merger agreement. Specifically, if the average trading price of our common stock during the three days immediately before the closing date of the merger is: 62
64 o greater than $101.40 per share, we will issue the number of shares of our common stock equal to $325,000,000 divided by our average trading price; o $78.00 or more and is equal to or less than $101.40 per share, we will issue a total of 3,205,128 shares of our common stock to BlueGill's stockholders; o $50.00 or more but less than $78.00 per share, we will issue the number of shares of our common stock equal to $250,000,000 divided by our average trading price; o if: (1) less than $50.00 per share, (2) we exercise our right to terminate the merger agreement, and (3) BlueGill provides us with a reinstatement notice as discussed in greater detail below, then we will issue a total of 5,000,000 shares; or o if: (1) less than $50.00 per share, and (2) we do not exercise our right to terminate the merger agreement, then we will issue the number of shares of our common stock equal to $250,000,000 divided by our average trading price. The effect of these price thresholds on the BlueGill balance sheet, as adjusted for purchase accounting, with respect to the goodwill acquired, the assets acquired and the liabilities acquired will be as follows: o If the CheckFree share price is in excess of $101.40: (in thousands) Goodwill acquired $280,065 Assets acquired 343,724 Liabilities acquired 21,708 o If the CheckFree share price is between $78.00 and $101.40: (in thousands, except share price) $78.00 $101.40 -------- -------- Goodwill acquired $253,309 $253,309 Assets acquired 316,968 316,968 Liabilities acquired 21,708 21,708 o If the CheckFree share price is between $50.00 and $78.00: (in thousands, except share price) $50.00 $78.00 -------- -------- Goodwill acquired $205,065 $280,065 Assets acquired 268,724 268,724 Liabilities acquired 21,708 21,708 o If the CheckFree price per share is below $50.00, CheckFree elects to terminate, and BlueGill elects to accept 5 million shares, then for every $1.00 lower than the $50.00 price goodwill acquired will decline by $5.0 million from the $205.1 million level, assets acquired will decline by $5.0 million from the $268.7 million level and liabilities acquired will remain constant at the $21.7 million level. o If the CheckFree price per share is below $50.00 and CheckFree does not elect to terminate, then key components remain constant as follows: (in thousands) Goodwill acquired $280,065 Assets acquired 268,724 Liabilities acquired 21,708 Each outstanding share of BlueGill stock will be worth the total number of shares of our common stock that we issue divided by the number of diluted shares of BlueGill common stock outstanding immediately before the effective time of the merger. This number will represent the exchange ratio of BlueGill stock for our common stock. The number of diluted shares of BlueGill common stock will be computed based on the treasury stock method of accounting and will include BlueGill preferred stock, warrants and vested options, but exclude unvested common stock and unvested options. CheckFree common stock which will be delivered as the merger consideration will not have any of the rights, preferences or privileges which BlueGill preferred stock currently contain, including liquidation preferences, redemption rights and class voting. We will deposit 10% of the merger consideration issuable to each BlueGill stockholder with the escrow agent designated in the escrow agreement between us, BlueGill, the BlueGill stockholders, the agent of the BlueGill stockholders and the escrow agent. We may make a claim for indemnification for any losses, claims, damages or expenses we may incur arising from a breach or misrepresentation of any representations or warranties made by BlueGill in the merger agreement. We cannot make a claim for indemnification until our claim exceeds $1 million, thereafter we are entitled to a dollar for dollar offset against the escrow. The terms of the escrow are governed by an escrow agreement, a copy of which is attached as an exhibit to the merger agreement. Under the terms of the escrow agreement, a committee of five BlueGill stockholders, Harold N. Davis, Robert D. Pavey, Mark Siegel, John McIlwraith, and Thomas C. Kinnear, will act as shareholders' agent to authorize the payment of any indemnification claims out of the escrow. Any disputes between us and the shareholders' agent will be settled through arbitration. To the extent not needed to pay claims, these shares will be released from escrow and delivered to the BlueGill stockholders upon the first to occur of: o one year after the closing date of the merger; or o the completion of an audit on the merged companies and our filing of our Annual Report on Form 10-K with the Commission for the first fiscal year after the closing date of the merger. No fractional shares of our common stock will be issued to BlueGill stockholders. Instead, each BlueGill stockholder otherwise entitled to receive a fractional share will receive its cash value, as calculated according to the merger agreement. BlueGill stockholders will not receive interest with respect to any of these cash payments. 63
65 When the merger is completed, we will assume all warrants and options to purchase BlueGill common stock that have not been exercised or cancelled prior to the effective time of the merger. After the effective time, these warrants and options will represent warrants and options to purchase our common stock and will continue to have the same terms and conditions set forth in the applicable warrant or option agreement in effect before the merger, except that: o BlueGill options and warrants will be or become exercisable for the number of whole shares of our common stock equal to the number of BlueGill shares of common stock issuable upon the exercise of the BlueGill options and warrants immediately before the merger multiplied by the exchange ratio, rounded to the nearest whole number; and o the per share exercise price for shares issuable upon the exercise of the assumed BlueGill options and warrants will be equal to the per share exercise price immediately before the merger divided by the exchange ratio, rounded to the nearest whole cent. All unvested common stock, warrants, and options to purchase BlueGill common stock that are outstanding immediately before the effective time will automatically convert into unvested stock, warrants, and options to purchase our common stock. BlueGill stock that is restricted or subject to forfeiture or other condition, once converted into shares of our stock, warrants and options, will contain the same restrictions and conditions. Covenants and Conditions to Completion of the Merger The merger agreement contains covenants that CheckFree, CheckFree Acquisition, and BlueGill have made in connection with the merger. These covenants relate to: o the conduct of BlueGill's business before the completion of the merger; o the preparation and filing of a registration statement with the Securities and Exchange Commission; o the indemnification of directors, officers, employees, and agents of BlueGill for any claim against them concerning the merger; and o other customary covenants for agreements of this type. In addition, each of the parties have made representations and warranties about matters including our respective assets, liabilities, financial statements, and authority to enter into the merger. These representations and warranties are customary in this type of transaction. The merger agreement also contains conditions that CheckFree, CheckFree Acquisition, and BlueGill each must satisfy before any of us is obligated to complete the merger. The appropriate party may waive any of these conditions to the merger. If BlueGill waives a condition to the merger, it will then resolicit stockholder approval of the merger. These conditions require that: o BlueGill obtain approval of the merger agreement and merger from its stockholders, and if required, that we obtain the same approval from our stockholders; o the expiration or early termination of the waiting period under the Hart-Scott-Rodino Act; o no legal injunction, order or decree be in effect that would prevent completion of the merger as contemplated by the parties in the merger agreement; o the Securities and Exchange Commission declare effective the Form S-4 Registration Statement regarding the merger; and 64
66 o holders of not more than 10% of BlueGill's outstanding stock notify BlueGill in accordance with Delaware law of their intention to assert appraisal. In addition, the merger agreement provides conditions under which CheckFree or BlueGill may abandon the merger, several of which are customary in this type of transaction. The merger agreement also allows for termination under the following circumstances: o if the average trading price of our common stock on the Nasdaq National Market is less than $50.00, we may terminate the merger, provided that we: (1) provide BlueGill with written notice of termination by 6:00 p.m. E.S.T. on the business day immediately before the closing date of the merger; and (2) pay BlueGill a $7,500,000 termination fee. BlueGill, however, may reinstate the merger agreement by submitting to us a written notice of reinstatement by 11:59 p.m. the same day. If BlueGill opts to reinstate the merger agreement, it will be as if we never exercised our termination right, and the merger consideration that we will pay to BlueGill's stockholders will be 5,000,000 shares of our common stock. o if the BlueGill stockholders do not approve the merger on or before April 30, 2000, we will have the right to terminate the merger agreement and collect a termination fee of $7.5 million from BlueGill. In addition, BlueGill will be required to pay us an additional $17.5 million termination fee if: (1) a third party makes a superior acquisition proposal to BlueGill before termination of the merger agreement; and (2) within 12 months following termination of the merger agreement, BlueGill enters into a definitive agreement for this proposal. o if the merger is not completed by April 30, 2000, then either CheckFree or BlueGill may terminate the merger agreement provided the terminating party has not materially breached the agreement. If we provide BlueGill with a termination notice because the average trading price of our common stock is below $50.00, BlueGill's board of directors will meet to determine whether or not its is in the best interest of BlueGill and its stockholders to reinstate the agreement. At this meeting, BlueGill anticipates that the BlueGill board of directors will consider factors like: o the recent volatility of our common stock, including the extent to which that volatility is a reflection of general market and business conditions as compared to our business and prospects; o the amount by which our average trading price is below $50.00; o a reevaluation of the factors that BlueGill's board of directors considered in finding that the merger was fair and in the best interests of its stockholders; o the effects of not going forward with the merger on BlueGill's prospects, employees and customers; and o the benefits and detriments of proceeding and not proceeding with the merger. 65
67 EXCHANGE OF CERTIFICATES When the merger is completed, BlueGill common stock and preferred stock will automatically convert into the right to receive shares of our common stock. Therefore, BlueGill stockholders will need to exchange their old BlueGill stock certificates for new CheckFree stock certificates as a result of the merger. Our transfer agent, The Fifth Third Bank, will deliver to BlueGill's stockholders of record a letter of transmittal and instructions to facilitate the exchange of certificates. A BlueGill stockholder who surrenders his or her certificate to Fifth Third Bank, together with a duly executed letter of transmittal and a copy of the escrow agreement signed by the stockholder, will receive, in exchange therefor: o a certificate representing 90% of the shares of CheckFree common stock that the stockholder is entitled to receive; and o when applicable, a check representing cash in lieu of any fractional shares. The remaining 10% of the merger consideration will be placed in escrow under the terms of the escrow agreement. If a certificate representing shares of BlueGill stock has been lost, stolen or destroyed, the stockholder must submit to Fifth Third Bank an affidavit in a form that we and Fifth Third Bank have approved. Upon receipt of a properly executed affidavit, Fifth Third Bank will deem the lost, stolen or destroyed certificate to be cancelled. As a condition to issuing a new stock certificate, however, we may require the holder of any lost, stolen or destroyed certificate to provide us with a bond in any amount as we may direct. BLUEGILL STOCKHOLDERS SHOULD NOT SUBMIT ANY STOCK CERTIFICATES NOW, BUT RATHER SHOULD ONLY SUBMIT STOCK CERTIFICATES UPON RECEIPT OF, AND TOGETHER WITH, THE LETTER OF TRANSMITTAL AND ACCOMPANYING INSTRUCTIONS, AS WELL AS AN EXECUTED COPY OF THE ESCROW AGREEMENT. APPRAISAL RIGHTS Under Delaware law, BlueGill stockholders of record who have: o not voted their shares or executed written consents in favor of the merger; and o properly exercised and perfected appraisal rights with respect to the merger under Section 262 of the Delaware General Corporation Law, will not have their shares converted for shares of our common stock, but will have the right to receive payment of the appraised value of their shares under Section 262. Perfection of appraisal rights requires, among other actions, that the dissenting stockholder deliver a written demand for appraisal in accordance with Section 262. BlueGill stockholders who follow the procedures set forth in Section 262 will be entitled to have their shares appraised by the Delaware Chancery Court and to receive payment of the "fair value" of these shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, as determined by the court. A BlueGill stockholder, however, will forfeit all rights to appraisal if he or she: o subsequently delivers a written withdrawal of his demand for appraisal of his or her shares; o fails to perfect or loses his or her appraisal rights as provided in Section 262; or o fails to demand payment within the time period provided in Section 262. BlueGill shares that have lost their appraisal rights will be deemed to have been converted into and to have become exchangeable for the right to receive the merger consideration, without interest, at the effective time of the merger. 66
68 Section 262 provides that where a merger is approved and adopted by written consent of stockholders, as BlueGill has elected to do in this situation, the corporation must: o notify each of its stockholders entitled to appraisal rights that these appraisal rights are available; and o include in this notice a copy of Section 262. The corporation must provide this notification either before the effective time of the merger or within ten days thereafter. The notice to BlueGill's stockholders and the applicable statutory provisions of Delaware law are attached to this information statement/prospectus as Appendix B and will be sent to all holders of BlueGill stock as of the record date. Any BlueGill stockholder who wishes to exercise appraisal rights or who wishes to preserve the right to do so, should review the following discussion and Appendix B carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the Delaware law. A HOLDER OF SHARES WISHING TO EXERCISE APPRAISAL RIGHTS MUST DELIVER A WRITTEN DEMAND FOR APPRAISAL OF SHARES TO BLUEGILL NO LATER THAN 20 DAYS AFTER THE NOTICE DESCRIBED ABOVE IS MAILED. In addition, a holder of shares wishing to exercise appraisal rights must hold his shares of record: o on the date that the holder submits the written demand for appraisal; and o at the effective time. Only a holder of record of shares is entitled to assert appraisal rights for the shares registered in that holder's name. A demand for appraisal should be executed by or on behalf of the holder of record, fully and correctly, as his or her name appears on the stock certificates. If the shares are owned of record in a fiduciary capacity, like by a trustee, guardian or custodian, execution of the demand should be made in that capacity. If the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including one or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is agent for the owner or owners. A record holder who holds shares as nominee for several beneficial owners may exercise appraisal rights for the shares held on behalf of one or more beneficial owners while not exercising these rights for the shares held for other beneficial owners; in that case, the written demand should set forth the number of shares for which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner. BlueGill stockholders who hold their shares in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for the nominee's submission of a demand for appraisal. BlueGill stockholders should send or deliver all written demands for appraisal to BlueGill Technologies, Inc., c/o Vinay Gupta, 935 Technology Drive, Ann Arbor, Michigan 48108. Within 120 days after the effective time of the merger, any BlueGill stockholder who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from BlueGill, a written statement setting forth: o the aggregate number of shares not voted in favor of the merger and for which demands for appraisal have been received; and o the aggregate number of holders of these shares. BlueGill must mail these statements within 10 days after receiving a written request therefor or within 10 days after expiration of the period for delivery of demands for appraisal under Section 262, whichever is later. 67
69 In addition, within 120 days after the effective time, but not later, BlueGill or any BlueGill stockholder who has complied with the statutory requirements summarized above may file a petition with the Delaware Chancery Court demanding a determination of the fair value of the stockholder's shares. If a BlueGill stockholder files a petition, BlueGill will also receive a copy. BlueGill, however, is under no obligation to and has no present intention to file a petition for the appraisal of the fair value of the shares. It is the obligation of the BlueGill stockholders to initiate all necessary action to perfect their appraisal rights within the time prescribed in Section 262. If a BlueGill stockholder timely files a petition for appraisal, at the hearing on the petition, the court will determine the stockholders entitled to appraisal rights and will appraise the fair value of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. The court may appoint one or more appraisers to determine the fair value of the shares and to make a recommendation to the court. Stockholders considering seeking appraisal should be aware that: o the fair value of their shares as determined under Section 262 could be more than, the same as or less than the value of the consideration they would receive under the merger agreement if they did not seek appraisal of their shares; and o investment banking opinions as to fairness from a financial point of view are not necessarily opinions as to fair value under Section 262. In determining fair value, the court is required to take into account all relevant factors. In determining fair rate of interest, the court may consider all relevant factors, including the rate of interest that BlueGill would have had to pay to borrow money during the pendency of the appraisal proceeding. The Delaware Supreme Court has discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any technique or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in the appraisal proceeding and that "fair price obviously requires consideration of all relevant factors involving the value of a company." The Delaware Supreme Court has also stated that in determining fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which could be ascertained as of the date of the merger which throw light on future prospects of the merged corporation. Moreover, the Delaware Supreme Court has stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." Section 262, however, provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual instances, may or may not be a dissenter's exclusive remedy. The costs of the action may be determined by the court and taxed upon the parties as the court deems equitable. Upon a stockholder's application, the court may also order that all or a portion of the expenses incurred by any stockholder for an appraisal, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal. Any holder of shares who has duly demanded an appraisal in compliance with Section 262 will not, after the effective time, be entitled to vote the shares subject to the demand for any purpose or be entitled to the payment of dividends or other distributions on those shares, except dividends or other distributions payable to holders of record of shares as of a record date prior to the effective time. If any stockholder who properly demands appraisal of his shares under Section 262 fails to perfect, or effectively withdraws or loses, his right to appraisal, as provided under Delaware law, that stockholder's shares will convert into the right to receive the merger consideration provided for under the merger agreement. A stockholder will fail to perfect, or effectively lose or withdraw, his right to appraisal if, among other things: 68
70 o the stockholder fails to demand appraisal of his shares by the date which is 20 days after the notice is mailed; o no petition for appraisal is filed within 120 days after the effective time; or o the stockholder delivers to BlueGill a written withdrawal of his demand for appraisal and acceptance of the merger, except that any attempt to withdraw made more than 60 days after the effective time will require the written approval of BlueGill. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF THESE RIGHTS. CONFLICTS OF INTEREST OF DIRECTORS AND OFFICERS OF BLUEGILL IN THE MERGER In considering the recommendations of BlueGill's board of directors with respect to the merger agreement, BlueGill's stockholders should be aware that the some of the directors and members of management have interests in the merger that are different from, or in addition to, the interests of the BlueGill stockholders generally. A description of the interests of these individuals is set forth below. BlueGill's board of directors was aware of these interests and considered them, among other things, in approving the merger. Employment. The BlueGill stockholders who are also employees of BlueGill will continue to be employed by the combined company following the merger. At the closing of the merger, Mr. Davis, Mr. Gupta and Mr. Simonson, each a BlueGill officer, will have employment agreements with the combined company. These officers, as well as other BlueGill employees who continue their employment, will also be entitled to participate in CheckFree's employee benefit plans, including receiving the grant of stock options in CheckFree common stock. Stock Options. Pursuant to the terms of BlueGill's stock option grants, in connection with the merger, specified options will become fully vested and exercisable. Assuming the merger closes on March 31, 2000, the following table sets forth the number of BlueGill options that will become fully vested and exercisable at the closing for the BlueGill executives: NAME AND TITLE OPTIONS WHOSE VESTING ACCELERATE ------------------------------------------------------ --------------------------------- 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 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. 69
71 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: 70
72 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. 71
73 THE TRANSPOINT ACQUISITION THE DISCUSSION PROVIDED IN THIS "THE TRANSPOINT ACQUISITION" SECTION IS PROVIDED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO SOLICIT YOUR VOTE OR PROXY IN CONNECTION WITH THE TRANSPOINT ACQUISITION. PRIOR TO THE SOLICITATION OF YOUR VOTE OR PROXY FOR THE TRANSPOINT ACQUISITION, YOU WILL RECEIVE FROM US A PROXY STATEMENT/PROSPECTUS PREPARED IN ACCORDANCE WITH THE SECURITIES EXCHANGE ACT OF 1934. On February 15, 2000, we entered into a merger and contribution agreement with the entities that own the TransPoint business to purchase the TransPoint business on the terms and conditions described below. Throughout this information statement/prospectus, we refer to the merger and contribution agreement and the transactions related to that agreement as the "Transfers." GENERAL The TransPoint business is a joint activity of Microsoft Corporation, First Data Corporation, and Citibank, N.A. TransPoint operates an Internet based electronic bill presentment and payment service. This service allows businesses like utility companies, credit card issuers and mortgagees that have traditionally mailed their customers paper bills and/or statements, to contract with TransPoint to replace these paper bills and/or statements with electronic bills and/or statements delivered via the Internet and allows payment to be made on these electronic bills and/or statements. The TransPoint business is conducted through four limited liability companies: MSFDC, LLC; TransPoint, LLC; TransPoint Technology Services, LLC; and TransPoint Accounting, LLC; and a limited partnership, MSFDC International L.P. These companies collectively do business under the name "TransPoint." In this information statement/prospectus, we refer to these companies collectively as the "TransPoint Entities." CHECKFREE CORPORATION CheckFree Corporation is a newly formed corporation that currently is our wholly owned subsidiary and has not, to date, conducted any activities other than those incident to its formation and the matters contemplated by the merger and contribution agreement. Upon completion of the Transfers, we and the TransPoint Entities will become wholly owned subsidiaries of CheckFree Corporation. Accordingly, the business of CheckFree Corporation will be the combined businesses currently conducted by us, TransPoint and each of their subsidiaries. THE STRUCTURE OF THE TRANSPOINT ACQUISITION To accomplish the combination of the our and TransPoint businesses, we formed a new subsidiary, CheckFree Corporation, which currently has one subsidiary, Chopper Merger Corporation. At the time the Transfers are completed: o Chopper Merger Corporation will merge into us, and we will be the surviving corporation and a wholly owned subsidiary of CheckFree Corporation; and o the owners of the TransPoint Entities will contribute their equity interests in the TransPoint Entities to CheckFree Corporation, with the TransPoint Entities then being held as CheckFree Corporation's wholly owned subsidiaries. In connection with the Transfers, CheckFree Corporation will issue shares of its common stock as follows: o each of our stockholders will receive one share of CheckFree Corporation common stock for each share of our common stock that it holds; and o the owners of the TransPoint Entities, which include affiliates of Microsoft, First Data and Citibank, will together receive 17,000,000 shares of CheckFree Corporation common stock, or approximately 23% of CheckFree Corporation's outstanding common stock. 72
74 The organization and approximate ownership of the companies immediately before and after the Transfers are illustrated in the diagrams located at the end of this section entitled "The TransPoint Acquisition." RECOMMENDATION OF OUR BOARD OF DIRECTORS AND OPINION OF OUR FINANCIAL ADVISOR Our board of directors: o believes that the Transfers are fair to our stockholders and in their best interest; o unanimously voted to approve the merger and contribution agreement; and o will unanimously recommend that our stockholders vote for the adoption of the merger and contribution agreement. In deciding to approve the merger and contribution agreement, our board of directors considered an opinion of our financial advisor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as of February 11, 2000, that the Transfers and the consideration to be delivered to the TransPoint equity holders, taken as a whole, are fair from a financial point of view to CheckFree Holdings. This opinion, however, is not a recommendation to any of our stockholders as how to vote. A copy of the Merrill Lynch fairness opinion will be provided to the BlueGill stockholders in connection with our proxy solicitation for the TransPoint acquisition. The affirmative vote of the holders of a majority of the shares of our common stock outstanding as of the record date is required to adopt the merger and contribution agreement. APPRAISAL RIGHTS Under Delaware law, our stockholders will not be entitled to appraisal rights as a result of the TransPoint acquisition. BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE TRANSFERS We have agreed that after the Transfers are completed the CheckFree Corporation board of directors will be comprised of eight members, including our six current directors, one nominee named by Microsoft and one nominee named by First Data. Our executive officers immediately before the Transfers will be executive officers of CheckFree Corporation after the Transfers are completed. CONFLICTS OF INTERESTS OF DIRECTORS IN THE TRANSFERS Some of the directors of CheckFree Corporation have interests in the Transfers that are different from, or are in addition to, the interests of our stockholders, including the following: o Henry C. Duques, who will be a director of CheckFree Corporation upon completion of the Transfers, is the Chairman and Chief Executive Officer of First Data. First Data and its affiliates will receive 6,567,250 shares of CheckFree Corporation common stock and enter into a marketing agreement with CheckFree Corporation in connection with the Transfers. o Lewis Levin, who will be a director of CheckFree Corporation upon completion of the Transfers, is the President and Chief Executive Officer of the TransPoint Entities and a Vice President of Microsoft. Microsoft and its affiliates will receive 8,567,250 shares of CheckFree Corporation common stock and enter into a commercial alliance agreement with CheckFree Corporation in connection with the Transfers. TREATMENT OF STOCK OPTIONS AND WARRANTS When the Transfers are completed, each of our outstanding stock options will be converted into an option to purchase shares of CheckFree Corporation common stock at an exercise price per share equal to the exercise price 73
75 per share of our common stock subject to the option immediately before the conversion. In addition, each of our outstanding warrants will be converted into warrants to purchase shares of CheckFree Corporation common stock at an exercise price per share equal to the exercise price per share of our common stock subject to the warrant immediately before the conversion. Except for the changes discussed above, the Transfers will not result in any changes to the terms and conditions of our outstanding stock options and warrants. TREATMENT OF THE NOTES When the Transfers are completed, each of the $172.5 million aggregate principal amount of outstanding 6 1/2% subordinated convertible notes due 2006 issued by us will remain an obligation of CheckFree Holdings, but will be convertible into shares of CheckFree Corporation common stock. The merger, however, will constitute a change in control as defined in the indenture governing the notes, entitling the noteholders to require us to purchase their notes within 30 days of the completion of the Transfers. TAX CONSEQUENCES We expect the TransPoint merger to qualify as a tax-free reorganization for United States federal income tax purposes. In general, our stockholders will not recognize any gain or loss on the exchange of their CheckFree Holdings common stock for CheckFree Corporation common stock. ACCOUNTING TREATMENT CheckFree Corporation intends to account for the acquisition of the TransPoint Entities under the purchase method of accounting for business combinations. MARKET INFORMATION We intend to apply to list the CheckFree Corporation common stock to be issued in the Transfers on the Nasdaq National Market under our current symbol, "CKFR." Upon completion of the Transfers, the CheckFree Corporation common stock will continue to trade without interruption under the same symbol as our common stock traded prior to the Transfers. OVERVIEW OF THE MERGER AGREEMENT CONDITIONS TO THE COMPLETION OF THE TRANSFERS. Each of our and TransPoint's obligation to complete the Transfers is subject to the satisfaction or waiver of conditions, including those listed below: o adoption of the merger and contribution agreement by our stockholders; o termination of any waiting period under United States antitrust laws, receipt of all other required regulatory approvals and submission of all required filings with governmental authorities; o the absence of legal prohibitions to the Transfers; o the effectiveness under the Securities Act of 1933 of the registration statement to be filed with the Securities and Exchange Commission; o the authorization for listing on the Nasdaq National Market of the CheckFree Corporation shares to be issued in the Transfers; o the execution of the ancillary documents, including the Microsoft commercial alliance agreement and the First Data marketing agreement described below; o the other party's material compliance with its obligations under the merger and contribution agreement and the truth and accuracy of the representations made by this party under the merger and contribution agreement; and 74
76 o each party receiving from its counsel a written opinion regarding the tax-free nature of the Transfers. TERMINATION OF THE MERGER AND CONTRIBUTION AGREEMENT. We and the owners of the TransPoint Entities may agree to terminate the merger and contribution agreement at any time. In addition, either we or the owners of the TransPoint Entities may terminate the merger and contribution agreement under any of the following circumstances: o if the effective time of the Transfers has not occurred by February 15, 2001, except that this termination right will not be available to any party whose failure to fulfill any obligation under the merger and contribution agreement has resulted in the failure of the closing to occur on or prior to this date; o if any governmental entity has issued a final and nonappealable ruling or taken any other action restraining or prohibiting the Transfers; o if the other party breaches any of its representations, warranties, covenants or agreements under the merger and contribution agreement so that the closing conditions cannot be satisfied, subject to a 15-day cure period; o if the approval of our stockholders of the merger and contribution agreement is not obtained at a duly held stockholders meeting; or o if a governmental entity conditions its approval to the Transfers upon a limitation or restriction on one of the parties which that party is not required to take under the merger and contribution agreement. The owners of the TransPoint Entities also may terminate the merger and contribution agreement if our board of directors withdraws or adversely modifies its recommendation that our stockholders approve the merger and contribution agreement. TERMINATION FEES. We will be obligated to pay termination fees to the owners of the TransPoint Entities in the following amounts under the following circumstances: o an aggregate amount of $25 million if the merger and contribution agreement is terminated under circumstances related to our stockholders' failure to adopt the merger and contribution agreement or if our board of directors modifies its recommendation to our stockholders; o an aggregate amount of $12.5 million if we terminate the merger and contribution agreement because a governmental entity has conditioned the Transfers upon a limitation or restriction that we are not required to comply with under the merger and contribution agreement; and o an aggregate amount equal to 3.5% of the fair market value of the shares of the CheckFree Corporation common stock to be issued to the owners of the TransPoint Entities under the merger and contribution agreement if the merger and contribution agreement is terminated under specified circumstances after a third party makes a proposal to obtain control of CheckFree Holdings. COMPLETION AND EFFECTIVENESS OF THE TRANSFERS. We will complete the Transfers when all of the conditions to completion of the Transfers are satisfied or waived in accordance with the merger and contribution agreement. The Transfers will become effective when we file the certificate of merger with the State of Delaware. We expect to complete the Transfers during the summer of 2000. RELATED AGREEMENTS MICROSOFT COMMERCIAL ALLIANCE AGREEMENT Under the merger and contribution agreement, on the closing date CheckFree Corporation and Microsoft will execute a commercial alliance agreement that contains the provisions described below. 75
77 Microsoft's Exclusive Use of CheckFree Corporation's Platform and Services Under the commercial alliance agreement, Microsoft will agree to use CheckFree Corporation exclusively for all pay anyone and bill presentment and payment services offered by Microsoft, subject to various exceptions for types of services not available from CheckFree Corporation and the provision of technology in various circumstances related to Microsoft's current business and product lines. As part of this exclusivity obligation, Microsoft will create and implement a Web-based service targeted at individual consumers that will be offered in the MoneyCentral area of Microsoft's MSN Internet offering. This service will exclusively utilize our current platform for pay anyone and bill presentment and payment services. In addition, Microsoft will agree to use its commercially reasonable efforts to promote the use of the MSN payment service as a benefit that MSN users will be able to receive if they provide the additional authentication information to Microsoft that would be needed to access payment applications and services on MSN. Microsoft will agree that the MSN payment service will be displayed equally or more prominently on any area of MSN that includes choices among various providers of pay anyone and bill presentment and payment services. Microsoft will also agree that the MSN payment service will be the exclusive pay anyone and bill presentment and payment service that it promotes as a feature of its Hotmail email service. Preferred Supplier Status of CheckFree Corporation Microsoft will agree to grant CheckFree Corporation a 90-day exclusive negotiation period for the provision of our pay anyone and/or bill presentment and payment services targeted at businesses that may be offered by Microsoft. This will include services targeted at businesses offered by Microsoft's "bCentral" site. In addition, Microsoft will agree to grant to CheckFree Corporation a 90-day exclusive negotiation period for the provision of any future back end payment services for demand deposit accounts with financial statements that CheckFree Corporation then offers. With respect to back end services other than for payment services for demand deposit accounts with financial statements, CheckFree Corporation and Microsoft will agree to cooperate on jointly developing new payment capabilities. Integration of CheckFree Corporation Services To the extent that Microsoft provides payment, invoicing or bill presentment functionality in any generally available Microsoft Internet and electronic commerce platforms and tools, similar to Microsoft's BizTalk Server, and that functionality, incorporates, any third party's pay anyone and bill presentment and payment services, then Microsoft will integrate our "pay anyone" and bill presentment and payment services to this platform or tool or provide interoperability. CheckFree Corporation Support of Microsoft Platforms CheckFree Corporation will agree that the version of our biller premises software that is offered for Microsoft's Windows NT and SQL Server will be the most favorable version of this software in terms of price, functionality and performance, taking into account the functionality and its performance characteristics of these Microsoft platforms. In addition, the software version and will be commercially released at least 90 days prior to its commercial release for any other platform. CheckFree Corporation will also agree to grant a 90-day exclusive negotiation period to Microsoft regarding our use of Microsoft's enhanced user authentication credential services, like Passport, as a single sign-on authentication to access our services. Fees and Revenue Guarantees Beginning no later than 120 days after the closing of the merger and contribution agreement, Microsoft will begin to pay a quarterly fee to CheckFree Corporation for the services then provided by CheckFree Corporation to Microsoft, which will be based on pricing terms set forth in the agreement. CheckFree Corporation will agree that the pricing and 76
78 other material terms, in the aggregate, that it will offer Microsoft will be at least as favorable as the terms CheckFree Corporation offers to any third party. Microsoft will guarantee over the five year term of the agreement that it will make payments for CheckFree Corporation's services of at least $120 million in the aggregate. In addition, until this $120 million amount has been paid, the following monthly guarantee amounts will apply: Year 1 $1.0 million per month Year 2 $1.5 million per month Year 3 $2.0 million per month Year 4 $2.5 million per month Year 5 $3.0 million per month Microsoft will be entitled to receive a credit per bill for bill presentment services performed for billers for bills received by Microsoft customers using CheckFree Corporation's services. If during any month the amount actually paid by Microsoft is less than the applicable minimum monthly guarantee indicated above for the month, then Microsoft will owe the difference to CheckFree Corporation, less any credits earned by Microsoft during this monthly period. In various circumstances, to the extent Microsoft pays more to CheckFree Corporation than the monthly minimums, Microsoft will be entitled to carry-forward and carry-back these excess amounts to other monthly periods to offset amounts otherwise owed to us pursuant to the minimum guarantees. Non-Competition During the five year term of the commercial alliance agreement, Microsoft will generally agree that it will not engage in, license TransPoint intellectual property to anyone who engages in, or acquire or invest in, anyone who engages in the type of pay anyone and bill presentment and payment in which CheckFree Corporation currently engages, with the following general types of exceptions: o procuring or offering the types of products that are not offered by CheckFree Corporation; o continuing specified existing contractual arrangements that have been disclosed to CheckFree Corporation, with the obligation to switch to CheckFree Corporation when possible under these contracts; o licensing Microsoft technology that generally is of the type not specifically directed towards pay anyone or bill presentment and payment services; o (1) owning up to twenty percent (20%) of any company, provided that not more than twenty-five percent (25%) of that company's revenues come from bill payment services, up to a limit of $25 million; or (2) owning up to ten percent (10%) of any company, provided that not more than twenty-five percent (25%) of that company's revenues come from bill payment services (without dollar amount limit); or o acquiring a company providing otherwise prohibited services if these services are not more than 25% of the company's consolidated revenues at the time of acquisition and Microsoft divests the prohibited services within 12 months of the acquisition. Term and Termination The commercial alliance agreement will generally have a term of five years, but may be terminated earlier by Microsoft in the event of a change of control. A change of control is defined to have occurred if: (1) any person acquires more than 30%, or 20% if this person is a competitor to Microsoft, of CheckFree Corporation voting stock; or (2) if CheckFree Corporation stockholders own less than 70%, or 80% if this person is a competitor to Microsoft, of CheckFree Corporation voting stock after a transaction. Geographic Scope 77
79 Except for our obligation to support the Microsoft platform and the non-compete provision, which are world-wide obligations, all other provisions in the agreement apply only to the provision of services primarily targeted as users in the United States, Canada - excepting pay anyone services, Australia and New Zealand - excepting pay anyone services. MARKETING AGREEMENT WITH FIRST DATA Under the merger and contribution agreement, on the closing date, CheckFree Corporation and First Data will execute a marketing agreement that contains the provisions described below. CheckFree Corporation's Use of First Data Payment Processing Services and Official Check Product During the term of the marketing agreement, CheckFree Corporation will agree to use payment processing services from, and the Official Check product of, First Data. This obligation, however, in each case is conditioned on CheckFree Corporation's determination, using its reasonable business judgment, that it can not obtain substantially similar services from a third party at an overall economic cost that is less than the overall economic cost of First Data's services. If CheckFree Corporation is able to find substantially similar payment processing services at a lower overall economic cost from a third party, CheckFree Corporation will be required to give First Data the chance to meet these terms for provision of the services. When exercising its reasonable business judgment regarding the use of First Data's payment processing services or Official Check product, CheckFree Corporation will consider: o that First Data or its affiliates offers a directly competing product or service offered by CheckFree Corporation or its affiliates; and o that the use of First Data's or its affiliates' product or service by CheckFree Corporation or its affiliates would either: (1) allow First Data or its affiliates to achieve substantial competitive benefits due to increased volume; or (2) provide First Data or its affiliates with CheckFree Corporation and its affiliates' proprietary technology and thus with a substantial competitive advantage. Minimum Revenue Guarantees If: (1) the fees that CheckFree Corporation receives from First Data and from various billers for which First Data has played a role in obtaining; and (2) the expense savings that CheckFree Corporation receives from using First Data's services do not exceed the annual minimum for the first year of the agreement or the monthly minimums for the subsequent periods, then First Data will pay the difference to CheckFree Corporation after the first year or each monthly period, as applicable. The minimums for the five-year term of the agreement will be the following: Year 1 $6,000,000 in the aggregate Year 2 $750,000 per month Year 3 $1,000,000 per month Year 4 $1,250,000 per month Year 5 $1,500,000 per month 78
80 Use of CheckFree Corporation's Pay Anyone Services If First Data chooses to offer pay anyone services, it will agree to use CheckFree Corporation "pay anyone" services if in its reasonable business judgment substantially similar services could not be obtained at an equal or lesser overall economic cost from a third party. Reseller Agreement with First Data Contemporaneously with the signing of the marketing agreement, First Data will enter into a non-exclusive reseller agreement for the resale of CheckFree Corporation's payment processing services. Non-Competition First Data generally has agreed that it will not offer or provide an integrated interactive bill payment system for the delivery or payment of more than a specified ratio of household bills to an aggregation service company by means of any interactive service anywhere in the world. This obligation, however, is subject to exceptions that allow First Data to continue to conduct various types of payment processing activities during the term of the agreement. To the extent that First Data engages in an activity that would violate the general non-compete agreement indicated above, First Data may pursue these activities if: o First Data and it affiliates limit the gross revenues that they from these activities to $50,000,000 per year, with some exceptions; o except in some circumstances, 25% of all gross revenues derived solely from these activities will be paid to CheckFree Corporation, with these payments being counted against the minimum revenue guarantees owed by First Data to CheckFree Corporation; and o CheckFree Corporation is notified as soon as practicable after First Data signs an agreement to engage in these activities. The non-compete provision also contains customary exceptions for providing an integrated interactive bill payment system and for investments in persons that engage in activities that would otherwise violate the non-compete provision. Term and Termination The marketing agreement generally will have a term of 5 years, but may be terminated earlier by First Data if we undergo a change of control involving the First Data competitors named in the agreement. A change of control is defined to have occurred if any First Data competitor acquires more than 30% of CheckFree Corporation's voting stock or CheckFree Corporation's stockholders own less than 70% of CheckFree Corporation's voting stock after a transaction involving any specified First Data competitor. REGULATORY MATTERS Under United States antitrust laws, we may not complete the Transfers until we have notified the Antitrust Division of the Department of Justice and the Federal Trade Commission of the Transfers and filed the necessary report forms, and until a required waiting period has ended. We have filed the required information and materials with the Department of Justice and the Federal Trade Commission, and, on March 31, 2000, we received notice of early termination of the required waiting period. 79
81 ORGANIZATION AND APPROXIMATE OWNERSHIP IMMEDIATELY BEFORE AND AFTER THE TRANSFERS BEFORE THE TRANSFERS: - --------------------- CURRENT MICROSOFT FIRST DATA CITIBANK, CHECKFREE CORPORATION CORPORATION N.A. AND ITS HOLDINGS AND ITS AND ITS AFFILIATES STOCKHOLDERS AFFILIATES AFFILIATES 100% CHECKFREE TRANSPOINT ENTITIES HOLDINGS (INCLUDING DOMESTIC AND INTERNATIONAL) 100% CHECKFREE CORPORATION 100% CHECKFREE OPERATING CHOPPER MERGER SUBSIDIARIES CORPORATION AFTER THE TRANSFERS: - -------------------- CURRENT MICROSOFT FIRST DATA CITIBANK, CHECKFREE CORPORATION CORPORATION N.A. AND ITS HOLDINGS AND ITS AND ITS AFFILIATES STOCKHOLDERS AFFILIATES AFFILIATES 77.0% 11.6% 8.9% 2.5% CHECKFREE CORPORATION 100% 100% CHECKFREE TRANSPOINT ENTITIES HOLDINGS (INCLUDING DOMESTIC AND INTERNATIONAL) CHECKFREE OPERATING SUBSIDIARIES 80
82 CHECKFREE HOLDINGS CORPORATION GENERAL We are the leading provider of electronic billing and payment services. We operate our business through three independent but inter-related divisions: o Electronic Commerce; o Investment Services; and o Software. Our Electronic Commerce business provides services that allow consumers to: o receive electronic bills through the Internet; o pay any bill--electronic or paper--to anyone; and o perform customary banking transactions, including balance inquiries, transfers between accounts and on-line statement reconciliations. We currently provide electronic billing and payment services for approximately 3 million consumers. Our services are available through over 350 sources, including: o 23 of the 25 largest U.S. banks; o 8 of the top 10 U.S. brokerage firms; o Internet portals like Yahoo!; o Internet-based banks like WingspanBank.com; o Internet financial sites like Quicken.com; and o personal financial management software like Quicken and Microsoft Money. We have developed contracts with over 1,100 merchants nationwide that enable us to remit more than 50% of all of our bill payments electronically. During the three-month period ended December 31, 1999, we processed an average of nearly 14 million transactions per month and, for the year ended June 30, 1999, we processed more than 125 million transactions. In March 1997, we introduced electronic billing -"E-Bill"- which enables merchants to deliver billing as well as marketing materials interactively to their customers over the Internet. As of December 31, 1999, we had signed contracts for E-Bill services with 89 of the country's largest billers. In December 1999, we presented more than 38,000 electronic bills, which is nearly double the number of bills presented through E-Bill services in September 1999. Additionally, over 100 CheckFree distribution points are live with Internet billing and payment. For example, when a customer instructs us to pay a bill, we have the ability to process the payment either by electronic funds transfer, by paper check, or by draft drawn on the customer's account. Our patented bill payment processing system in Norcross, Georgia determines the preferred method of payment based on a credit analysis of the customer, assessing the customer's payment history, the amount of the bill to be paid and other relevant factors. If the results of the credit analysis are favorable, we will assume the risk of collection of the funds from the customer's account, and if we have an electronic connection to the merchant, the remittance will be sent electronically. Otherwise, the remittance will be sent to the merchant by a paper check or draft drawn directly on the customer's checking account. In an electronic remittance, the funds are transmitted electronically to the merchant with the customer's account number included as an addenda record. For a paper draft, the customer's name, address, and account number is printed on the face of the check. In addition, our processing system provides the ability to aggregate multiple electronic and paper remittances due to merchants. Thus, if multiple payments are going to the same merchant on the same day, we may send one check for the sum of these payments and include a remittance statement that provides the customers' names, addresses, account numbers, and payment amounts. Our strategy is to drive operational efficiency and improve profitability by increasing the percentage of transactions we process electronically. We are also a leading provider of institutional portfolio management and information services and financial application software. Our Investment Services business offers portfolio accounting and performance measurement 81
83 services to investment advisors, brokerage firms, banks and insurance companies and financial planning application software to financial planners. Our portfolio management system solution includes: o data conversion; o personnel training; o trading system; o graphical client reporting; o performance measurement; o technical network support and interface setup; and o Depository Trust Corporation processing. Our financial planning software applications include: o retirement and estate planning modules; o cash flow, tax and education planning modules; o asset allocation module; and o investment manager performance database system. Our fee-based money manager clients are typically sponsors or managers of wrap money management products or traditional money managers, managing investments of institutions and high net worth individuals. Our Software businesses provide electronic commerce and financial applications software and services for businesses and financial institutions. We design, market, license and support the following software applications, among others: o Electronic Funds Transfer. Through our Paperless Entry Processing System Plus software, we offer an online, real-time system providing an operational interface for originating and receiving payments through the automated clearinghouse. The automated clearinghouse is a nationwide electronic clearing and settlement system that processes electronically originated credit and debit transfers among participating depository institutions. These electronic transactions are substitutes for paper checks and are typically used for recurring payments like direct deposit payroll payments and corporate payments to contractors and vendors, debit transfers that consumers make to pay insurance premiums, mortgages, loans and other bills, and business to business payments. You may obtain additional information on the automated clearinghouse at the Federal Reserve Commission's website at http://www.federalreserve.gov. We do not maintain a direct connection with the automated clearinghouse, but rather, clear our electronic transactions through KeyBank, N.A., under the terms of an automated clearinghouse agreement. o Reconciliation. Through our ReconPlus software, we provide United States banks, international banks and corporate treasury operations with automated check and non-check reconciliations in high volume, multi-location environments. Some of the services provided by ReconPlus are automated deposit verification, consolidated bank account reconciliation and cash mobilization, immediate and accurate funds availability data and improved cash control. o Other. We also provide software solutions like regulatory compliance solutions for Form 1099 processing, safe box accounting and other applications. During the fiscal year ended June 30, 1999, Electronic Commerce accounted for 68% of our revenues and Software and Investment Services each accounted for 16% of our revenues. ELECTRONIC COMMERCE INDUSTRY BACKGROUND The majority of today's consumer bill payments are completed using traditional paper-based methods. According to the Gartner Group, of the estimated 17 billion consumer bills produced each year, 81% are paid by paper check, 12% are paid by electronic means and 7% by other means. Many traditional financial transactions, however, can now be completed electronically due to the emergence of new communications, computing and security technologies. Many financial institutions and businesses have invested in these technologies and are creating the infrastructure for recording, reporting and executing electronic transactions. We believe the broad impact of the Internet will increase the use of electronic methods to execute financial transactions. 82
84 Persistence of Traditional Financial Transaction Processes Many traditional methods of completing financial transactions still persist, including: o Paper Checks. It is estimated that 65 billion checks were written in the United States in 1998. The use of checks imposes significant costs on financial institutions, businesses and their customers. These costs include the writing, mailing, recording and manual processing of checks. o Paper Billing. It is estimated that over 17 billion paper bills are produced each year, with the cost of submitting a paper bill, including printing, postage and billing inserts, as high as $3.00 per bill. o Conventional Banking. Many financial transactions are conducted in person at banks. Banks incur substantial expenses in providing personnel and physical locations, while bank customers incur transportation costs and personal inconvenience when traveling to a bank facility. Over 90% of the 80 million banking households in the United States are still conducting most of their financial transactions using conventional banking methods. o Business-to-Business Payments. While consumers bear costs and inconvenience receiving and paying paper bills, businesses experience an even higher level of cost and inefficiency when receiving and paying paper bills. For businesses, issues like discounts for prompt payment, returns, allowances, disputed charges and other adjustments, as well as reconciliation to the business' own records, increase the costs of payment. The Internet's Role in Driving Electronic Commerce We believe the broad impact of the Internet is driving financial institutions, businesses and consumers to adopt practices of electronic billing and payment, banking and business-to-business payments. We expect that the growth in these electronic commerce activities will increase the need for services that support secure, reliable and cost-effective financial transactions between and among these market participants. We believe the combination of the following trends is driving adoption of electronic commerce: o Expanding Personal Computer Ownership. Declining prices for personal computers and rapid growth in the number of computer-literate consumers are driving increased penetration of personal computers in U.S. homes. o Increasing Internet Accessibility. Reduced communications costs, improved web browsers and faster connection speeds have made the Internet increasingly accessible to consumers and to businesses offering products and services on-line. International Data Corporation estimates that there were 52 million Internet users in the United States at the end of 1998 and that this figure will grow to 136 million by the end of 2002. o Increasing Acceptance of Electronic Commerce. Consumers have grown increasingly comfortable with the security of electronic commerce and are willing to conduct large transactions on-line. International Data Corporation estimates that the total value of goods and services purchased over the Internet in the United States will increase from approximately $26 billion in 1998 to over $269 billion in 2002. 83
85 o Emergence of New Industry Participants. New businesses have emerged which use the broad adoption of the Internet to compete with traditional businesses. Traditional financial institutions now compete with Internet-based banks, brokerages and other financial services companies. These companies do not offer consumers the possibility of traditional, manual financial transactions and are driving further adoption of electronic commerce. THE ELECTRONIC SOLUTION We believe that consumers will move their financial transactions from traditional paper-based to electronic transactions if they have an easy-to-access, easy-to-use, compelling, secure and cost-effective solution for receiving and paying their bills electronically. We believe that, compared with conventional paper-based transactions, electronic transactions cost much less to complete, give rise to far fewer errors and generate far fewer subscriber inquires. We believe that an electronic solution should allow consumers at their access point of choice to: o receive electronic bills through the Internet; o pay any bill--electronic or paper--to anyone; and o perform customary banking transactions, including balance inquiries, transfers between accounts and on-line statement reconciliations. We also believe that these functionalities must be delivered on a platform that: o is fully supported by end-to-end customer care; o is available 24 hours a day, 7 days a week; and o provides the highest level of security, availability and privacy. Over the past fifteen years, we have developed market leading expertise and technological capability to provide electronic commerce solutions with these functionalities. THE CHECKFREE ADVANTAGE Our experience as a leading provider of electronic billing and payment and banking services has facilitated the building of a state of the art infrastructure. We have leveraged this infrastructure by developing a full suite of electronic commerce services, all of which we offer in an integrated fashion through multiple distribution channels. Infrastructure Our infrastructure allows consumers to receive and pay both conventional and electronically presented bills and handle traditional banking transactions electronically. The key components of our infrastructure are: o Connectivity with Merchants. We have established electronic connectivity to over 1,100 merchants, which allows us to remit over 50% of all of our bill payments electronically. Electronic remittance may be accomplished at a lower cost than remittances using the traditional paper-based method. In addition, electronic remittance significantly reduces payment exceptions and related costs associated with customer care. o Scalable Genesis Platform. Our Genesis platform, completed in 1998, is an internally developed data processing system created by our in-house engineers to process electronic billings and payments. The Genesis platform was designed to be scaled to handle more than 30 million 84
86 consumers. We have made significant investments in processes and technologies supporting our Genesis platform to ensure that transactions are executed with the highest level of security, reliability and efficiency. o Connectivity to Billers. We believe that our ability to provide consumers with access to electronic bills will substantially spur adoption of the electronic solution. By targeting the largest billers in key industries and in selected population centers, we believe we can provide a significant number of bills to most consumers at their access point of choice. We have contracts with 89 billers, which represent the opportunity to deliver over 500 million bills per month, representing over 68% of the telecom bills, 24% of the utility bills, 35% of the mortgage bills and 30% of the credit card bills in the United States. Our goal is to distribute bills from over 90 billers by the end of fiscal 2000. To encourage billers to utilize our services, we anticipate funding a portion of some billers' set-up costs. o Experienced Customer Care Staff. We have approximately 825 trained, experienced customer care and merchant services staff that offer seamless end-to-end customer care. We believe that customer care that provides answers to all the questions that consumers may have about their transactions is a critical component of providing a compelling, easy-to-use solution that consumers will ultimately adopt. Distribution We believe that consumers are most attracted to an electronic solution that enables them to receive and pay all of their bills at a single site. For many consumers, the site they choose will be their financial institution's web site, while others will prefer Internet portals or sites operated by individual merchants. Through contracts with over 350 sources, we are able to distribute our services to whichever access and aggregation site the consumer prefers. Significant among these contracts are our agreements with: o 23 of the 25 largest banks in the United States; o 8 of the top 10 brokerage firms in the United States; o Internet portals like Yahoo!; o Internet-based banks like WingspanBank.com; o Internet financial sites like Quicken.com; and o personal financial management software like Quicken and Microsoft Money. OUR BUSINESS STRATEGY Our business strategy is to provide an expanding range of convenient, secure and cost-effective electronic commerce services and related products to financial institutions, Internet portals, businesses and their customers. We have designed our services and products to take advantage of opportunities we perceive in light of current trends and our fundamental strategy. The key elements of our business strategy are to: o Drive increased adoption of electronic commerce services by consumers. We believe that consumers will move their financial transactions from traditional paper-based methods to electronic transactions if they have an easy-to-access, easy-to-use, secure, compelling and cost-effective method for receiving and paying their bills electronically. Our strategy to drive adoption of our electronic services will focus on the following initiatives. We intend to use the broad adoption of the Internet by consumers to encourage the use of our web-based electronic commerce services by our financial institution and Internet portal customers. To further drive demand, we are also providing our services through Internet portals. This strategy should provide consumers with ready access to easy-to-use, cost-effective applications for receiving and paying their bills electronically. Part of our strategy to drive consumer adoption is working with Internet portals to offer our services to consumers on a free-trial basis. Initially, this strategy will result in foregone revenues, but we anticipate 85
87 converting a majority of these new customers to fee-based services at the end of the trial period. As consumers continue to adopt electronic commerce services, financial institutions and billers will see greater efficiencies from providing electronic billing and payment services to their customers. We are proposing new pricing structures to our financial institution customers to facilitate their offering electronic billing and payment to a broad spectrum of consumers. Our traditional financial institution pricing structure was based on subscriber fees, with an average cost to the financial institution of approximately $4 per subscriber per month. Under the old pricing structure, the costs to our financial institution customers grew roughly proportionally to the number of subscribers added, regardless of activity. Our new pricing programs include a monthly fixed fee to the financial institution to cover our infrastructure costs which helps our financial institution customers more accurately predict the costs, a small monthly per subscriber fee and a new fee based on the number of transactions processed. We believe the new pricing structure should allow our financial institution customers to justify promoting the service through free trials and other offers. Additionally, we believe that financial institutions and Internet portals that offer electronic banking will experience increased customer retention, have a superior marketing channel and be able to offer enhanced customer service. o Continue to distribute electronic commerce services through multiple channels. We maintain alliances with market-leading companies to achieve deeper market penetration and have begun an initiative to offer our electronic commerce services through Internet portals. To better reach smaller financial institutions, we have entered into distribution agreements with some independent firms that we believe can more efficiently address the needs of this industry segment. Additionally, by making services available to users of personal financial management software, like Quicken, Microsoft Money and Managing Your Money and of business management software, like QuickBooks, we expand public access to, and awareness of, our services. o Focus on customer care and technical support. We believe that providing superior quality and accessible and reliable customer care is essential to establishing and maintaining successful relationships with our customers. We support and service customers through numerous activities, including technical and non-technical support, through help desk, e-mail and facsimile, as well as through service implementation and training. We are enhancing our support of our services through advanced Internet-based communications technologies that enable us to efficiently respond to billing and payment inquiries made by financial institutions, billers and their customers. In anticipation of greater adoption of our electronic commerce services, we are increasing the number of our customer care personnel and focusing on our efficiency in handling customer care inquiries. Additionally, we established a third operational center in Phoenix, Arizona to house customer care and check printing and distribution functions. o Continue to improve operational efficiency and effectiveness. We believe that as our business grows and the number of transactions we process increases, we will be able to take advantage of operating efficiencies associated with increased volumes, thereby reducing our unit costs. We recently began an internal program called the "sigma challenge" which ties employee performance evaluations and compensation to the achievement of process and system improvements. Sigma is a measure of quality typically used by manufacturing firms to minimize defects. The sigma challenge applies sigma measurements as a barometer of our performance on our key metrics of system availability and payment timeliness. Small changes in our performance drive significant sigma movements, focusing our attention on critical tasks and peak performance. The sigma challenge is designed to take our quality performance from 99.0%, or 3.8 sigma, where we began our fiscal year 2000, to 99.9%, or 4.6 sigma, by the end of fiscal 2000. A 4.6 sigma is the quality standard set by the telecommunications industry for delivering their services to businesses and consumers or "dial-tone" quality. Additionally, we expect to derive further operational efficiency and effectiveness by increasing our electronic links with billers, enabling a larger percentage of our consumer transactions to be processed electronically. 86
88 o Drive new forms of electronic commerce services. Our electronic commerce services are currently applied to banking, billing and payment and brokerage transactions. We believe that new applications will be developed as a result of the growth in electronic commerce generally, and Internet-based commerce specifically. We intend to leverage our infrastructure and distribution to address the requirements of consumers and businesses in these new applications. For example, we plan to leverage our core payment and processing network to accomplish person-to-person and small business payments. PRODUCTS AND SERVICES Electronic Commerce Our electronic commerce services are primarily targeted to consumers through financial institutions and Internet portals. We believe that our services offer significant benefits to financial institutions and Internet portals, including an enhanced electronic relationship with their consumers under which they can market other products and services and, for financial institutions, a lower cost of providing traditional banking and bill payment services. We are continually developing new electronic commerce services and enhancing our existing services for each of our target markets. We have arrangements with more than 350 sources through which electronic payment services are provided to their customers. The following financial institutions and Internet portals are some of our largest customers of our electronic commerce services, as determined by the number of subscribers: o Bank of America; o Merrill Lynch & Co.; o Bank One; o NationsBank; o Charles Schwab & Co.; o U.S. Bancorp; o Chase Manhattan Bank; o Wells Fargo; o First Union; o WingspanBank.com; and o KeyCorp; o Yahoo! This list of our customers is not exhaustive and may not fully represent our customer base. Bill Payment and Banking. Our bill payment services enable financial institution and Internet portal customers, as well as direct consumer subscribers to pay bills electronically using a variety of devices like personal computers and touch-tone telephones. Bills paid by consumers using our bill payment services typically include credit card, monthly mortgage and utility bills, but a cornerstone of our services is that we can facilitate electronic payment by consumers to anyone, regardless of whether payment is ultimately made through an electronic or traditional paper method. Consumers can use our services to make any payment electronically from any checking account at any financial institution in the United States. Recurring bills like mortgages can be paid automatically and scheduled in advance, as specified by the consumer. As of December 31, 1999, we had approximately 3 million consumers using our bill payment and home banking services. We support home electronic banking services for financial institutions and their customers. Among these are balance inquiries, fund transfers, customer service, customer billing and marketing. Our service facilitates on-line reconciliation to personal computer and web-based account registers, matching cleared items with previously entered transactions. Revenues are generated through contracts with individual financial institutions. We historically negotiated with the financial institution an implementation fee, a base monthly fee per customer account on the service provided, and in some cases, a variable per transaction fee which may decrease based on the volume of transactions. We recently announced the adoption of new pricing programs that include a monthly fixed fee to the financial institution to cover our infrastructure costs which helps our financial institution customers more accurately predict the costs, a small monthly per subscriber fee and a new fee based on the number of transactions processed. Contracts typically have three to five year terms and generally provide for minimum fees if transaction volumes are not met. We utilize direct sales and distribution alliances to market to financial institutions and have the ability to customize services for each institution. Billing and Payment. Our electronic billing and payment service permits billers to deliver full-color electronic bills to their customers, together with detailed information and electronic promotional inserts. We also offer the opportunity to market interactively, and to use one-to-one marketing techniques. The recipients can use the service to electronically make the payment. We are marketing the service to be incorporated into our electronic banking and bill 87
89 payment services. We have entered into a variety of arrangements with financial institutions, Internet portals and billers to provide these services and, in some cases, will share revenue derived from billers with the financial institutions and the Internet portals. In the near term, we will offer free-trial periods for our electronic billing and payment services to accelerate the rate of adoption of our services. We believe that billers could eventually achieve substantial savings by utilizing our billing and payment service, but we believe that an even stronger incentive for billers to present bills electronically is the opportunity our system offers for more effective marketing to customers. Business Payments. We facilitate electronic payments for businesses through our offerings of business bill payment and banking and electronic accounts receivable processing services. As we do for consumers, we enable businesses to make payments to anyone. We employ a direct sales force to market the service through banks and others. Our electronic accounts receivable collections for businesses are provided to health and fitness and various other industries, enabling these businesses to collect monthly fees through electronic funds transfer or credit cards. Services are typically provided under contracts for three years with automatic renewals. For providing collection services, businesses pay us implementation fees, transaction fees and credit card discount fees. Investment Services We offer portfolio management and information services for fee-based money managers and financial planners within investment advisory firms, brokerage firms, banks and insurance companies. Our fee-based money manager clients are typically sponsors or managers of wrap money management products or traditional money managers, who manage investments of institutions and high net worth individuals. Our full range of portfolio management services provides our clients with portfolio management tools, tax lot reporting, trade modeling, performance measurement and reconciliation. Our information services and software allow traditional money managers and consultants to allocate client assets, select and benchmark performance of money managers and report on manager performance. Each of these features allows our clients to avoid spending time on these functions and focus on their key business. Revenues in our portfolio management services are generated through multiple year agreements that provide for monthly revenue on a volume basis. Revenue from our information services and software is typically generated through annual agreements. Our integrated outsourced solution utilizes a Unix platform. The system is highly scalable, making us the system of choice for firms managing a large number of portfolios. Software We are a leading provider of electronic commerce and financial applications software and services for businesses and financial institutions. We design, market, license and support software products for automated clearinghouse processing, reconciliation and regulatory compliance. In addition, we offer software consulting and training services. Our financial application software revenues are derived primarily from the sale of software licenses and software maintenance fees. Our software is sold under perpetual licenses, and maintenance fees are received through renewable agreements. In April 1998, we announced our intention to divest ourselves of many of our software products and businesses. By September 1998, we sold our item processing, wire transfer and cash management, leasing, mortgage, and imaging software products and businesses. Our retained software products provide systems that range from back office operations to front-end interface with the clients of our customers. Applications include automated clearinghouse origination and processing reconciliation, regulatory compliance and safe deposit box accounting. While we have no pending agreements to dispose of our remaining software businesses, we do receive offers for them from time to time. Automated Clearinghouse. The automated clearinghouse network was developed in the 1970s to permit the electronic transfer of funds, curtailing the growth in the number of paper checks in circulation. The automated clearinghouse network acts as the clearing facility for routing electronic funds transfer entries between financial institutions. All automated clearinghouse transfers are handled in a standard format established through the National Automated Clearing House Association. More than 15,000 financial institutions 88
90 participate in the automated clearinghouse system. There are 31 automated clearing houses, which geographically coincide with the twelve Federal Reserve Banks, their branches and processing centers. Our electronic funds transfer products are interrelated and may be used by either businesses or financial institutions depending on the services they offer their customers and employees. We developed the Paperless Entry Processing System Plus, with 46 of the top 50 originators utilizing the product to process approximately 74% of all automated clearinghouse transactions nationally, it is the most widely used, comprehensive automated clearinghouse processing system in the United States. Paperless Entry Processing System Plus is an on-line, real-time system providing an operational interface for originating and receiving electronic payments through the automated clearinghouse. Reconciliation. Our reconciliation products allows users to verify and compare their financial records, data and accounts against related information derived from third party sources. RECON-PLUS provides United States banks, international banks and corporate treasury operations with automated check and non-check reconciliations in high volume, multi-location environments. These systems are often tailored so that banks and multi-bank holding companies may deliver reconciliation services meeting the specific needs of corporate customers. Those reconciliation products are also designed for non-banking corporations that perform account reconciliation in-house as well as companies with many branch locations. Services provided by our reconciliation products include: o automated deposit verification; o consolidated bank account reconciliations and cash mobilization; o immediate and accurate funds availability data; and o improved cash control. In 1995, we introduced RECON-PLUS for Windows, a client/server based reconciliation system. RECON-PLUS for Windows is most frequently used for internal reconciliation by large businesses, financial service firms, and utilities, including the reconciliation of debit and credit card transactions, checks, automated teller machine transactions, automated clearinghouse transfers and securities transactions. Our account reconciliation package is one of the most widely used account reconciliation systems in the United States banking industry. The account reconciliation package/service management system which was developed in 1995 to replace and augment the existing package, is a fully integrated on-line and real time system that enables banks to immediately process their customer transactions to produce accurate, timely reconciliations while streamlining back-office processes. The account reconciliation package/service management system also groups accounts across banks within bank holding companies and allows banks to streamline their operations by reconciling their intra-bank transactions. Other Software Products. We also offer software products and services dealing with safe box accounting and compliance with government regulations. Licenses. We generally grant non-exclusive, non-transferable perpetual licenses to use our application software at a single site. Our standard license agreements contain provisions designed to prevent disclosure and unauthorized use of our software. License fees vary according to a number of factors, including the types and levels of services we provide. Multiple site licenses are available for an additional fee. In our license agreements, we generally warrant that our products will function in accordance with the specifications set forth in our product documentation. A significant portion of the license fee payable under our standard license agreement is due upon the delivery of the product documentation and software to the customer, with the balance of the license fee due upon installation. The standard license fee for most products covers the installation of our software and maintenance for the first three to twelve months. Maintenance and Support. Maintenance includes enhancements to our software. Customers who obtain maintenance generally retain maintenance service from year to year. To complement customer support, we frequently participate in user groups with our customers. These groups exchange ideas and techniques for using our products and provide a forum for customers to make suggestions for product acquisition, development and enhancement. 89
91 COMPETITION Electronic Commerce Portions of the electronic commerce market are becoming increasingly competitive. We face significant competition in all of our customer markets. First, we need to switch billers and consumers from paper bills sent by mail and paid by check to electronic bill presentment and payment. Second, a number of banks have developed, and others may in the future develop, home banking services in-house. For example, Chase Manhattan Corporation, First Union Corporation and Wells Fargo & Co. recently announced the formation of a new venture called Spectrum that will allow individuals and businesses to receive and pay bills electronically. To the best of our knowledge Spectrum has done limited electronic presentment of bills, and is developing a "pay anyone" capability. In addition, recently Mastercard International announced that it would begin offer online bill presentment to enable people to receive and pay bills over the Internet by September 2000. A number of relatively small companies, like Travelers Express, recently acquired by Marshall & Ilsley Bank Inc., compete with us in electronic bill payment. Additionally, TransPoint LLC, a joint venture among Microsoft Corporation, First Data Corporation and Citibank N.A., competes aggressively with us in the area of electronic billing and payment. TransPoint has entered into its own agreements with financial institutions to offer on-line home banking and electronic billing and payment to consumers. As previously announced, we have entered into an agreement to acquire TransPoint and its operations. We also compete for business bill payment customers with ACI and Deluxe Data, which provide automated clearinghouse processing. We also face increased competition from new competitors offering billing and payment services utilizing scan and pay technology. These "scan and pay" companies offer a service whereby a consumer's bill is received by the company, scanned to create an electronic image of the bill, and electronically delivered to the consumer who can elect to pay that bill either by writing a paper check or through an electronic transfer of funds. We believe that our competitors, however, will need to make substantial progress to able to offer electronic commerce services comparable to the services we currently offer to our customers through multiple distribution channels. Because the electronic commerce industry is expected to grow substantially in the coming years, we anticipate continued strong competition, but we believe that the increased attention and credibility this competition will bring to the industry may broaden the market and increase the percentage of financial transactions which are effected by electronic means. Investment Services Competition for portfolio services includes two main segments. We compete with providers of portfolio accounting software, including Advent Software, and PORTIA, a division of Thomson Financial. We also compete with service bureau providers like SunGard Portfolio Solutions and FMC Service Bureau. Software The computer application software industry is highly competitive. In the financial applications software market, we compete directly or indirectly with a number of firms, including large diversified computer software service companies and independent suppliers of software products. We believe that there is at least one direct competitor for most of our software products, but no competitor competes with us in all of our software product areas. Our product lines also have numerous competitors. The RECON-PLUS product competes with Chesapeake, Driscoll and Geac. We believe that the major factors affecting customer decisions in our market, in addition to price, are product availability, flexibility, the comprehensiveness of offered products, and the availability and quality of product maintenance, customer support and training. Our ability to compete successfully also requires that we continue to develop and maintain software products and respond to regulatory change and technological advances. We believe that we currently compete favorably in the marketplace with respect to these criteria. See "Risk Factors--Competitive pressures we face may have a material adverse effect on us." BlueGill is expanding into international markets where we may discover new local competitors that have the advantages of existing relationships with customers, local technical support staff, and local language support. SALES, MARKETING AND DISTRIBUTION Our sales, marketing and distribution efforts are designed to maximize access to potential customers. We market and support our services both directly and indirectly through a direct sales and technical sales support force of over 100 employees and, to achieve deeper market penetration, through select distribution alliances with companies which are involved in our target customer markets. In order to foster a better understanding of the needs of our larger bank customers, and to help us respond to identified needs, we employ a number of account managers assigned to specific banks. We solicit billers for our electronic billing and payment services through a regionally assigned sales force. 90
92 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 91
93 individually assigned to business customers in order to provide high-level customer service and technical support. Our consumer care group provides various levels of support that depend upon the customer's requirements. This includes providing direct customer care on a private label basis as well as research and support. In order to maintain the ability to provide quality customer service as our subscriber base increases, we established a third operational center in Phoenix, Arizona to house customer care, check printing and distribution functions. This center, when fully staffed, will house up to 800 associates focused on customer care services. To maintain our customer care standards, we employ extensive internal monitoring systems and conduct ongoing customer surveys. The feedback from these sources is used to identify areas of strength and opportunities for improvement in customer care and to aid in adjusting resources to a level commensurate with efficient response. REMITTANCES Payment Systems. Across our various electronic commerce service offerings, we utilize the Federal Reserve's Automated Clearing House for electronic funds transfers, and the conventional paper check clearing systems for settlement of payments by check or draft. Like other users of these payment clearance systems, we access these systems through contractual arrangements with processing banks. For access to conventional paper check clearing systems, we do not need a special contractual relationship, except for contractual relationships with the processing bank and its customers. These users are subject to applicable federal and state laws and regulations, Federal Reserve Bank operating letters, and the National Automated Clearing House Association Operating Rules. There are risks typically faced by companies utilizing each of these payment clearance systems, and we have our own set of operating procedures and proprietary risk management systems and practices to mitigate credit-related risks. See "Risk Factors--The transactions we process expose us to credit risks" and "--Our business could become subject to increased government regulation, which could make our business more expensive to operate." Automated Clearinghouse. The automated clearinghouse is used by banks, corporations and governmental entities for electronic settlement of transactions, direct deposits of payroll and government benefits and payment of bills like mortgages, utility payments and loans. We use the automated clearinghouse to execute some of our customers' payment instructions. Like other users of the automated clearinghouse, we bear credit risk resulting from returned transactions caused by insufficient funds, stop payment orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or fraud. See "Risk Factors--The transactions we process expose us to credit risks" and "--Our business could become subject to increased government regulation, which could make our business more expensive to operate." Paper Drafts. We use conventional check clearance methods for paper drafts to execute some customers' payment instructions. We bear no credit risk with paper drafts written on a customer's checking account returned for insufficient funds, stop payment orders, closed accounts or frozen accounts. Nonetheless, we may bear other risks for theft or fraud associated with paper drafts due to unauthorized use of our services. When a customer instructs us to pay a bill, we have the ability to process the payment either by electronic funds transfer or by paper draft, drawn on the customer's checking account, on which the customer's pre-authorized signature is laser imprinted. We manage the risk we assume by adjusting the mix of electronic and paper draft transactions in individual cases and overall. Regardless of whether we use paper drafts or electronic funds transfers, we retain all risks associated with transmission errors when we are unable to have erroneously transmitted funds returned by an unintended recipient. Other Clearance Systems. While we presently utilize the two principal payment clearance systems, we intend to use other clearance systems like automated teller machine networks to provide balance inquiry and fund transfers functions, and other clearance systems that may develop in the future. Risk Mitigation. Our patented bill payment processing system determines the preferred method of payment to balance processing costs, operational efficiencies and risk of loss. We manage our risks associated with the use of the various payment clearance systems through risk management systems, internal controls and system security. We also maintain a reserve for these risks, which reserve was $1.2 million at December 31, 1999, and we have not incurred losses in excess of 0.93% of our revenues in any of the past five years. As further protection against losses due to transmission errors, we maintain errors and omissions insurance. See "Risk Factors -- The transactions we process expose us to credit risks" and "--We may be unable to protect our proprietary technology, permitting competitors to duplicate our products and services." 92
94 TECHNOLOGY Our historical approach to technology has been to utilize a combination of hardware, networks, proprietary software and databases to solve our customer needs and to meet the varying requirements of the electronic commerce market. Electronic Commerce. Our core technology capabilities were developed to handle settlement services, merchant database services and on-line inquiry services on a traditional mainframe system with direct communications to businesses. We have implemented a logical, nationwide client-server system. Consumer, business and financial institution customers all act as clients communicating across dial-up telephone lines, private leased lines, various types of networks or the Internet to our computing complex in Norcross, Georgia. Within this complex, there is a wide variety of application servers that capture transactions and route them to our back-end banking, billing and payment applications for processing. The back-end applications are run on IBM mainframes, Tandems or Unix servers. We have developed proprietary databases within our client-server system, including a financial institution file that allows accurate editing and origination of automated clearinghouse and paper transactions to financial institutions. We have also developed a merchant information file consisting of over 1 million companies that allows accurate editing and initiation of payments to billers. These databases have been constructed over the past 15 years as a result of our transaction processing experience. Platform Integration: The Genesis Project. In 1998, we integrated the existing legacy data processing sites and platforms operated in Columbus, Ohio, Aurora, Illinois, and Austin, Texas, into our central processing site at our headquarters in Norcross, Georgia. We recently completed the planned migrations of our customers to the new Genesis platform from our Aurora, Illinois and Columbus, Ohio platforms. We have designated this integration the Genesis Project. The integration has required the acquisition of, and investment in, extensive hardware and in operating and system software, as well as extensive communications links and systems. The Genesis Project requires substantial engineering and development of proprietary software. Redundancy, anomaly monitoring, and off-site backup and recovery systems are planned as a part of the project. See "Risk Factors--We may experience breakdowns in our payment processing system that could damage customer relations and expose us to liability." The Austin platform was designated to host subscribers using a particular personal financial management product that is not expected to be supported indefinitely. We expect that these financial institutions will migrate these subscribers to different software, which will prompt further migrations to Genesis. Significant numbers of high-level employees have been and will be hired to facilitate the accomplishment of the Genesis Project, and to manage the integrated site. We intend to operate the legacy platforms without substantial disruption until all of our customers have been migrated to the Genesis platform. To date, over 2 million of our nearly 3 million customers have been migrated to the Genesis platform. Redundancy and Back-up Systems. We believe that we have implemented appropriate back-up and recovery procedures to ensure against any loss of data on any platform. To maximize availability, we have redundant computer systems to ensure that financial transaction requests can always be honored. Archival storage is kept on site as well as off site in fireproof facilities. Diesel generators provide power to the computing facilities in the event of a power disruption. Our operations are dependent on our ability to protect our computer equipment against damage from fire, earthquake, power loss, telecommunications failure or similar event. Although we have contracted for the emergency provision of an alternate site to aid in disaster recovery, this measure will not eliminate the significant risk to our operations from a natural disaster or system failure. Any damage or failure that causes interruptions in our operations could have a material adverse effect on our business, operating results and financial condition. Our property and business interruption insurance may not be adequate to compensate us for all losses that may occur. See "Risk Factors --We may experience breakdowns in our payment processing system that could damage customer relations and expose us to liability." Sigma Challenge. We recently began an internal program called the "sigma challenge" which ties employee performance evaluations and compensation to the achievement of process and system improvements. Sigma is a 93
95 measure of quality typically used by manufacturing firms to minimize defects. The sigma challenge applies sigma measurements as a barometer of our performance on our key metrics of system availability and payment timeliness. Small changes in our performance drive significant sigma movements, focusing our attention on critical tasks and peak performance. The sigma challenge is designed to take our quality performance from 99.0%, or 3.8 sigma, where we began our fiscal year 2000, to 99.9%, or 4.6 sigma, by the end of fiscal 2000. A 4.6 sigma is the quality standard set by the telecommunications industry for delivering their services to businesses and consumers or "dial-tone" quality. Financial Application Software. Our financial application suite of software products offers a wide range of software addressing both end user access and back room operational systems located in the customer data centers. Every effort is taken to insure that each system is targeted for the appropriate platform to optimize the characteristics of available technology with the business requirements of each application and its market. Investment Services. Investment Services employs advanced technology for its portfolio management services and utilizes IBM RS/6000's to process the portfolio management software. Services are provided primarily as a service bureau offering with the data center residing at our Chicago office. This data center functions seven days a week, twenty-four hours a day. Clients can obtain access from their personal computers either through a dedicated circuit or through dial-up applications. The Chicago data center is the communication center for more than 70 dedicated links together with four concentration hub sites located in New Jersey, New York, Boston and San Diego. Each of these hub sites supports the concentration of local dedicated links plus dial-up access. In addition to the dedicated private network, clients use frame relay services from several companies to access services. Research and Development We maintain a research and development group with a long-term perspective of planning and developing new services and related products for the electronic commerce, financial application software and investment services markets. We have established the following guidelines for pursuing the development of new services: o distinctive benefits to customers; o ability to establish a leadership position in the market served; o sustainable technological advantages; and o first to market. We believe that in the emerging electronic commerce market it will be critical to rapidly develop, test and offer new services and enhancements. To that end, our goal for the time period from conceptualization to commercial availability of new services is less than one year. As of December 31, 1999, our research and development group consisted of approximately 246 employees. Additionally, we use independent third party software development contractors as needed. We spent 19.4% of revenues during the six-month transition period ended June 30, 1996, 18.6% of revenues during the fiscal year ended June 30, 1997, 15.5% of revenues during the fiscal year ended June 30, 1998, 8.4% of revenues during the fiscal year ended June 30, 1999 and 10.6% of revenues during the six months ended December 31, 1999 on research and development. These research and development expenses have been reduced for capitalized software development costs of $1.3 million in the six-month transition period ended June 30, 1996, none in the fiscal year ended June 30, 1997, $0.7 million in the fiscal year ended June 30, 1998, $7.4 million in the fiscal year ended June 30, 1999 and $3.2 million for the six months ended December 31, 1999. We anticipate that we will continue to commit substantial resources to research and development activities for the foreseeable future. GOVERNMENT REGULATION We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, the Federal Reserve Board, or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services. The Office of the Comptroller of the Currency, however, periodically audits us, since we are a supplier of products and services to financial institutions. There can be no assurance that a federal or state agency will not attempt to regulate us, which could impede our ability to do business in the regulator's jurisdiction. A number of states have legislation regulating or licensing check sellers, money transmitters or service providers to banks, and we have registered under this legislation in specific instances. We do not believe that any state or federal legislation of this type materially affects us. In addition, through our processing agreements, we agree to comply with the data, recordkeeping, processing, and other requirements of applicable federal and state laws and regulations, Federal Reserve Bank operating letters, and the National Automated Clearing House Association Operating Rules imposed on our processing banks. We may be subject to audit or examination under any of these requirements. Violations of these requirements could limit or further restrict our access to the payment clearance systems or our ability to obtain access to these systems from banks. Further, the Federal Reserve rules 94
96 provide that we can only access the Federal Reserve's automated clearinghouse through a bank. If the Federal Reserve rules were to change to further restrict our access to the automated clearinghouse or limit our ability to provide automated clearinghouse transaction processing services, our business could be materially adversely affected. In conducting various aspects of our business, we are subject to laws and regulations relating to commercial transactions generally, like the Uniform Commercial Code, and are also subject to the electronic funds transfer rules embodied in Regulation E, promulgated by the Federal Reserve Board. The Federal Reserve's Regulation E implements the Electronic Fund Transfer Act, which was enacted in 1978. Regulation E protects consumers engaging in electronic transfers, and sets forth the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer services and of financial institutions that offer these services. For us, Regulation E sets forth disclosure and investigative procedures. For consumers, Regulation E establishes procedures and time periods for reporting unauthorized use of electronic money transfer services and limitations on the consumer's liability if the notification procedures are followed within prescribed periods. These limitations on the consumer's liability may result in liability to us. Given the expansion of the electronic commerce market, it is possible that the Federal Reserve might revise Regulation E or adopt new rules for electronic funds transfer affecting users other than consumers. Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market, and it is possible that Congress or individual states could enact laws regulating the electronic commerce market. If enacted, these laws, rules, and regulations could be imposed on our business and industry and could have a material adverse effect on our business, operating results and financial condition. See "Risk Factors--Our business could become subject to increased government regulation, which could make our business more expensive to operate." Proprietary Rights We own the following federally registered trademarks and service marks: 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); 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) 95
97 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. 96
98 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. NAME AGE POSITION - ---- --- -------- Peter J. Kight ................. 44 Chairman and Chief Executive Officer Mark A. Johnson ................ 47 Vice Chairman, Corporate Development and Marketing and Director William P. Boardman ............ 58 Director George R. Manser ............... 68 Director Eugene F. Quinn ................ 46 Director Jeffrey M. Wilkins ............. 55 Director Peter F. Sinisgalli ............ 44 President and Chief Operating Officer Allen L. Shulman ............... 51 Executive Vice President, Chief Financial Officer and General Counsel Lynn D. Busing ................. 48 Executive Vice President, Corporate Banking James S. Douglass .............. 34 Executive Vice President, Corporate Development Ravi Ganesan ................... 34 Executive Vice President and Chief Technology Officer Matthew S. Lewis ............... 34 Executive Vice President, EC Product Management and Marketing John J. Limbert ................ 52 Executive Vice President, EC Customer Operations Curtis A. Loveland ............. 53 Secretary Gary A. Luoma, Jr. ............. 43 Vice President, Chief Accounting Officer and Assistant Secretary Keven M. Madsen ................ 40 Vice President and Treasurer David Mangum ................... 34 Senior Vice President, Finance and Accounting Randal A. McCoy ................ 37 Executive Vice President, EC Software Development Terrie O'Hanlon ................ 38 Senior Vice President, Communications and Media Relations Stephen Olsen .................. 39 Executive Vice President, EC Information Technology Operations Harley J. Ostis ................ 43 Senior Vice President, Human Resources Francis X. Polashock ........... 45 Executive Vice President and President, CheckFree Investment Services Glen Sarvady ................... 37 Vice President, Operations Strategy and Planning Thomas Stampiglia .............. 44 President, Software Division 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. 97
99 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. 98
100 Mr. Busing was Senior Vice President of Servantis Systems Holdings, Inc. from 1993 to 1996. From 1987 to 1993, Mr. Busing held various management positions with Digital Equipment Corporation. James S. Douglass has served as our Executive Vice President since December 1997. He has also served as Executive Vice President, Corporate Development of CheckFree Corporation since August 1999. Prior to that, Mr. Douglass served as Executive Vice President, Mergers and Acquisitions of CheckFree Corporation from August 1998 to August 1999. From September 1996 to August 1998, he served as Executive Vice President and Chief Financial Officer of CheckFree Holdings Corporation and CheckFree Corporation. From 1994 to 1996, Mr. Douglass was Vice President, Corporate Controller and Chief Accounting Officer for Medaphis Corporation. From 1988 to 1994, Mr. Douglass served in various capacities with KPMG Peat Marwick LLP, finally as senior manager. Ravi Ganesan has served as our Executive Vice President since December 1997. He has also served as Executive Vice President and Chief Technology Officer of CheckFree Corporation since January 1997. From 1990 to 1997, Mr. Ganesan held various positions with Bell Atlantic, most recently as Vice President, Distributed Operations & Information Technology from 1995 to 1997. Matthew S. Lewis has served as our Executive Vice President since August 1999. He has also served as Executive Vice President, EC Product Management and Marketing of CheckFree Corporation since January 1998. Prior to that, Mr. Lewis served as our Senior Vice President from December 1997 to August 1999, and as Vice President, Corporate Strategy and Communications for CheckFree Corporation from March 1996 to December 1997. From 1988 to 1996, Mr. Lewis held various positions at BankSouth Corporation, including Vice President, Corporate Affairs, Director of Compliance and Director of Communications and Manager of Public Relations. John J. Limbert has served as our Executive Vice President since August 1998. He has also served as Executive Vice President, EC Customer Operations since May 1998. From 1977 to 1997, Mr. Limbert was employed at Banc One Corporation in various capacities, most recently as the head of its Eastern Region Consumer Banks. Curtis A. Loveland has served as our Secretary since December 1997. He also serves as Secretary of CheckFree Corporation, a position he has held since 1983, CheckFree Investment Corporation, CheckFree Investment Services Corporation, and CheckFree Management Corporation. Mr. Loveland has been associated with the law firm of Porter, Wright, Morris & Arthur LLP since 1973 and a partner since 1979. Gary A. Luoma, Jr. has served as our Vice President, Chief Accounting Officer and Assistant Secretary since December 1997. He has also served as Vice President, Chief Accounting Officer and Assistant Secretary of CheckFree Corporation, a position he has held since April 1997, as Vice President and Assistant Secretary of CheckFree Investment Corporation and CheckFree Management Corporation, and as Assistant Secretary of CheckFree Investment Services Corporation. Mr. Luoma is also a director of CheckFree Management Corporation. From 1995 to 1997, Mr. Luoma served as Vice President of Finance, Americas Operations and Assistant Secretary and, from 1990 to 1995, as Director of Finance, Planning and Analysis at Dun & Bradstreet Software. From 1983 to 1990, Mr. Luoma held various financial positions with the American Security Group, including Assistant Treasurer, Assistant Controller and Internal Audit Manager. From 1980 to 1983, Mr. Luoma served as a Certified Public Accountant on the audit staff of Ernst & Whinney. Keven M. Madsen has served as our Vice President since December 1997 and as Treasurer since August 1998. He has also served as Vice President and Treasurer of CheckFree Corporation, a position he has held since July 1997, as Vice President and Treasurer of CheckFree Investment Corporation, and as Vice President and Assistant Treasurer of CheckFree Management Corporation. Mr. Madsen also serves as a director of CheckFree Management Corporation. From December 1997 to August 1998, he served as our Assistant Treasurer. From 1996 to 1998, Mr. Madsen served as 99
101 Director of Tax & Treasury and Assistant Treasurer of CheckFree Corporation. From 1990 to 1996, Mr. Madsen served as Manager of Corporate Tax and Treasury for Dun & Bradstreet Software. Prior to 1990, Mr. Madsen was a Certified Public Accountant in the audit and tax divisions of Arthur Andersen & Co. David Mangum has served as our Senior Vice President, Finance and Accounting since September 1999. From July 1998 to September 1999, he worked as Vice President, Finance and Administration, Managed Systems Division for Sterling Commerce, Inc. Prior to that, Mr. Mangum worked as the Director of Finance for XcelleNet, Inc. from February 1997 to July 1998. From May 1993 to January 1997, Mr. Mangum served as Director of Finance for Dun & Bradstreet Software. Randal A. McCoy has served as our Executive Vice President since August 1999. He has also served as Executive Vice President, EC Software Development of CheckFree Corporation since August 1999. Prior to that, Mr. McCoy served as Senior Vice President, Electronic Commerce Development of CheckFree Corporation from February 1998 to August 1999, and as Vice President, Genesis Platform Development of CheckFree Corporation from May 1997 to February 1998. From 1990 to 1997, Mr. McCoy was Vice President, Corporate Banking Development at Servantis Systems, Inc. Prior to that, Mr. McCoy worked as a large systems architect at BellSouth Corporation. Terrie O'Hanlon has served as our Senior Vice President, Communications and Media Relations since June 1998. She has also served as Senior Vice President, Corporate Communications and Investor Relations of CheckFree Corporation since August 1999. From June 1998 to August 1999, she served as Senior Vice President, Communications and Media Relations of CheckFree Corporation. From 1997 to 1998, Ms. O'Hanlon served as Vice President, Corporate Communications at Medaphis Corporation. From 1995 to 1997, Ms. O'Hanlon was Corporate Communications Director of Dun & Bradstreet Software. From 1990 to 1995, Ms. O'Hanlon served as Vice President of Crescent Communications. Stephen Olsen has served as our Executive Vice President since August 1999. He has also served as Executive Vice President, EC Information Technology Operations of CheckFree Corporation since August 1999. Prior to that, Mr. Olsen served as our Senior Vice President from December 1997 to August 1999, and as Senior Vice President and Chief Information Officer of CheckFree Corporation from March 1997 to August 1999. From 1996 to 1997, Mr. Olsen served as Vice President, Chief Information Officer of Geac Computer Corporation. From 1990 to 1996, Mr. Olsen served as Vice President, Chief Information Officer of Dun & Bradstreet Software. Harley J. Ostis has served as our Senior Vice President since January 1999. He has also served as Senior Vice President, Human Resources of CheckFree Corporation since January 1999. From 1981 to 1999, Mr. Ostis held various positions with Harris Corporation, most recently as Vice President, Human Resources and Quality for Lanier Worldwide, a division of Harris Corporation. Francis X. Polashock has served as our Executive Vice President since December 1997. He also serves as Executive Vice President and President, CheckFree Investment Services of CheckFree Corporation, a position he has held since June 1999, and as President of CheckFree Investment Services Corporation. From May 1997 to June 1999, Mr. Polashock served as Executive Vice President and General Manager, Investment Services Division of CheckFree Corporation. From 1981 to 1993, Mr. Polashock held several management positions within Dun & Bradstreet Corporation, most recently as General Manager of Asia Pacific and Latin America. From 1993 to 1997, Mr. Polashock was involved with several entrepreneurial ventures targeted at the Chinese marketplace. Glen Sarvady has served as our Vice President, Operations Strategy and Planning since August 1999. He has also served as Vice President, Operations Strategy and Planning of CheckFree Corporation since August 1999. Prior to that, Mr. Sarvady served as Vice President, Financial Planning and Analysis of CheckFree Corporation from August 1998 to August 1999, and as Vice President, Business Development of CheckFree Corporation from 1997 to 1998. From 1988 to 1997, Mr. Sarvady held a variety of financial management positions with Dun & Bradstreet Corporation, most recently as Vice President, Finance of Dun & Bradstreet Software. Thomas Stampiglia has served a President, Software Division since January 2000. Prior to that, Mr. Stampiglia spent 20 years with Lanier Worldwide, a division of Harris Corporation, in various capacities, most recently as Vice President, International Sales 100
102 COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has two standing committees: a Stock Option and Compensation Committee and an Audit Committee. Our Stock Option and Compensation Committee has the authority to: o administer our stock option plans, including the selection of optionees and the timing of option grants; and o review and monitor key employee compensation policies and administer our management compensation plans. The members of our Stock Option and Compensation Committee are Messrs. Quinn (Chairman), Boardman and Manser. Our Stock Option and Compensation Committee had a total of four meetings during Fiscal 1999. Our Audit Committee recommends: o the annual appointment of our independent public accountants with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees; o the accounting principles used by us in financial reporting; o internal financial auditing procedures; and o the adequacy of our internal control procedures. Messrs. Manser (Chairman), Quinn, and Wilkins serve as members of our Audit Committee. Our Audit Committee had a total of four meetings during Fiscal 1999. DIRECTOR COMPENSATION As compensation for their services, each non-employee director receives annually, stock options under our 1995 Stock Option Plan to acquire 8,000 shares of our common stock, which options will vest 100% after one year and terminate ten years after grant. In addition, each non-employee director receives out-of-pocket expenses incurred in connection with attendance at board and committee meetings. On May 7, 1999, Messrs. Boardman, Manser, Quinn, and Wilkins were each granted stock options to acquire 8,000 shares of our common stock at an exercise price of $44.4375 per share. EXECUTIVE COMPENSATION The following table sets forth information regarding compensation paid during our fiscal years ended June 30, 1997, 1998 and 1999 to our chief executive officer and each of our four other highest compensated executive officers. 101
103 SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION ----------------- AWARDS ----------------- SECURITIES UNDERLYING SALARY BONUS OPTIONS NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1) ---- ------------- --------------- ------- ------------- 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 - ---------------------- (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 $92,400 for Mr. Sinisgalli over and above the fiscal 2000 bonus that they may earn will be paid only if we hit our performance targets for fiscal 2000. (3) Mr. Sinisgalli was employed by us effective November 3, 1996. (4) Includes options granted in fiscal 1999 due to Repricing of options granted in fiscal years 1998 and 1997 as reflected in the Ten Year Option Repricing Section on pages 13 and 14. (5) Mr. Feeney was employed by us effective February 15, 1997. (6) Mr. Polashock was employed by us effective May 28, 1997. 102
104 The following table provides information regarding the number and value of stock options held by our Named Executive Officers at June 30, 1999. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT (#) FISCAL YEAR-END ($)(2) ----------------------------- ------------------------------ SHARES ACQUIRED ON VALUE EXERCISE REALIZED NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------- ---------- ----------- ------------ -------------- ------------- --------------- 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 - -------------------- (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 103
105 was replaced in its entirety by the 1993 Plan. The 1983 Non-Statutory Option Plan terminated on December 19, 1993, and we have not granted any options since the termination. 1993 Stock Option Plan. Our board of directors adopted our 1993 Stock Option Plan on April 28, 1993, and our stockholders approved it as of the same date. Our board and the stockholders subsequently amended the 1993 Plan on April 14, 1994. The 1993 Plan provides for the grant of options to key associates, officers, directors, consultants and advisers who render services to CheckFree for the purchase of up to 4,077,585 shares of our common stock. This number of shares may be reduced from time to time, however, by the aggregate number of shares of our common stock issued upon the exercise of options granted under the 1983 Incentive Stock Option Plan and the 1983 Non-Statutory Stock Option Plan. The options may be either incentive options or nonqualified options. The 1993 Plan replaced in their entirety the 1983 Incentive Option Plan and the 1983 Non-Statutory Stock Option Plan. Our board of directors administers the 1993 Plan and has the authority to determine: o to whom and at what time the stock options may be granted; o the designation of the option as either an incentive option or nonqualified option; o the per share exercise price; o the duration of each option; o the number of shares subject to each option and any restrictions on these shares; o the rate and manner of exercise; and o the timing and form of payment. An incentive option may not have an exercise price less than the fair market value of our common stock on the date of grant, or an exercise period more than ten years from the date of grant. In addition, an incentive option is subject to other limitations that allow the optionholder to qualify for favorable tax treatment. None of these restrictions applies to the grant of nonqualified options, which may have an exercise price less than the fair market value of the underlying CheckFree common stock on the date of grant and may be exercisable for an indeterminate period of time. Under the 1993 Plan, an optionholder may pay the exercise price of an option in cash or, with the consent of our board of directors: o by delivery of previously acquired shares of our common stock, valued at their fair market value on the date they are tendered; o by delivery of a full recourse promissory note for the portion of the exercise price that exceeds the par value of the shares subject to the option, the terms and conditions of which will be determined by our board of directors, along with cash for the par value of the shares; o by any combination of the foregoing methods; or o by delivery of: (1) written instructions to forward the notice of exercise to a broker or dealer and to deliver to a specified account a certificate for the shares purchased upon exercise of the option, and (2) a copy of irrevocable instructions to the broker or dealer to deliver the purchase price of the shares to CheckFree. An option granted under the 1993 Plan may not be transferred except by will or by the laws of descent and distribution and may be exercised, during the lifetime of the optionee, only by the optionee or by the optionee's guardian or legal representative. Any option granted under the 1993 Plan will terminate automatically: 104
106 o 30 days after the employee's termination of employment with us other than by reason of death or disability or for cause; and o one year after the employee's death or termination of employment by reason of disability, unless the option expires earlier by its terms. Options not exercisable as of the date of a change in control of CheckFree will become exercisable immediately as of that date. Shares of our common stock issued pursuant to options exercised under the 1993 Plan are subject to restrictions and limitations on any sale, transfer, assignment, or other disposition of these shares. The 1993 Plan terminates on April 28, 2003, unless our board of directors terminates it earlier. The 1993 Plan terminated on September 28, 1995 and we have not granted any options since the termination. 1995 Stock Option Plan. Our board of directors adopted the 1995 Stock Option Plan on August 8, 1995, and our stockholders approved it as of the same date. Our board subsequently amended the 1995 Plan on October 18, 1996, May 1, 1997, September 15, 1997, and August 14, 1998, and our stockholders approved these amendments on January 27, 1997, October 30, 1997, and November 9, 1998. The 1995 Plan provides for the grant of options to key associates, officers, directors, consultants and advisers who render services to CheckFree. The options may be either incentive options or nonqualified options. While our board of directors bears responsibility for administering the 1995 Plan, it has delegated all of its powers under the 1995 Plan to the Stock Option and Compensation Committee. This committee has the authority to determine: o to whom and at what time the stock options may be granted; o the designation of the option as either an incentive option or nonqualified option; o the per share exercise price; o the duration of each option; o the number of shares subject to each option and any restrictions on these shares; o the rate and manner of exercise; and o the timing and form of payment. Currently, there are 8,000,000 shares of our common stock available for issuance under the 1995 Plan. The maximum number of stock options that may be granted to an individual under the 1995 Plan in any calendar year is 500,000 shares. The committee may adjust the number and class of shares available under the 1995 Plan and subject to outstanding options to prevent dilution or enlargement of rights if we experience various changes in our capitalization. Shares of our common stock attributable to unexercised options that expire or are terminated may be available for reissuance under the 1995 Plan. Eligibility to participate in the 1995 Plan extends to all of executive, administrative, operational and managerial employees of CheckFree, including any of our current or future subsidiaries or parent. Currently, approximately 2,162 of CheckFree and our subsidiaries' associates qualify for participation. We anticipate that approximately one-third of those employees eligible will participate in the 1995 Plan. Participation is at the committee's discretion, and will depend on each associate's present and potential contributions to the success of CheckFree and our subsidiaries and other factors as the committee deems relevant. No associate may be granted in any calendar year options covering more than 500,000 shares of our common stock. The committee may determine at the time of grant and thereafter the terms under which options shall vest and become exercisable. Options not exercisable as of the date of a change in control of CheckFree will become exercisable immediately as of that date. A change in control of CheckFree shall be deemed to have occurred as of the first day that either of the following has occurred: 105
107 o a person not in control of CheckFree on the effective date of the 1995 Plan becomes the beneficial owner, directly or indirectly, of securities representing a majority of the combined voting power of our then outstanding securities, or o our stockholders approve a plan of complete liquidation, a sale of all or substantially all of our assets, or a merger, consolidation, or reorganization of CheckFree with or involving another corporation, other than a merger, consolidation, or reorganization that would result in our voting securities outstanding immediately prior thereto continuing to represent at least a majority of the combined voting power of our or a surviving entity's voting securities outstanding immediately after a merger, consolidation, or reorganization. The committee may not grant incentive options to an associate who owns, at the time of the grant, stock representing more than 10% of the total combined voting power of all classes of stock of CheckFree, any parent or subsidiaries, unless: o the exercise price per share of common stock for the shares subject to these incentive options is at least 110% of the fair market value per share of our common stock on the date of grant; and o the incentive options are not exercisable for more than five years after their date of grant. In addition, the total fair market value of shares of our common stock subject to incentive options which are exercisable for the first time by an eligible associate in a given calendar year may not exceed $100,000, valued as of the date of the incentive options' grant. Incentive options: o may not have an exercise price exceeding ten years from the date of grant; o may not have an exercise price less than the fair market value of our common stock on the date of grant; and o are subject to other limitations that allow the option holder to qualify for favorable tax treatment. None of these restrictions, however, applies to the grant of non-statutory options, which may: o have an exercise price less than the fair market value of the underlying common stock on the date of grant; o have a total fair market value of shares subject thereto which are valued in excess of $100,000 in any given calendar year; and o be exercisable for an indeterminate period of time. In practice, however, the committee has generally granted non-statutory options at the fair market value of our common stock on the date of grant. An optionholder may exercise an option by sending written notice to our chief financial officer or other officer designated by the committee. An optionholder may pay the exercise price of an option in cash or, with the committee's consent: o by delivery of previously acquired shares of our common stock, which have been held for at least six months, valued at their fair market value on the date they are tendered; o by delivery of a full recourse promissory note for the portion of the exercise price that exceeds the par value of the shares subject to the option, the terms and conditions of which will be determined by the committee, along with cash for the par value of the shares; 106
108 o by any combination of the foregoing methods; or o by delivery of: (1) written instructions to forward the notice of exercise to a broker or dealer and to deliver to a specified account a certificate for the shares purchased upon exercise of the option, and (2) a copy of irrevocable instructions to the broker or dealer to deliver the purchase price of the shares to CheckFree. An option granted under the 1995 Plan may not be transferred except by will or by the laws of descent and distribution, and may be exercised, during the optionee's lifetime, only by the optionee or by the optionee's guardian or legal representative. Notwithstanding the foregoing, an optionee may transfer a non-statutory option to members of his or her immediate family, to one or more trusts for the benefit of family members or to partnerships in which the family members are the only partners if: o the stock option agreement covering the non-statutory option as approved by the committee expressly so provides; and o the optionee does not receive any consideration for the transfer. Non-statutory options held by these transferees are subject to the same terms and conditions that applied to these non-statutory options immediately prior to transfer. Options granted under the 1995 Plan will expire at the time as the committee determines at the date of grant; provided, however, that no incentive options may be exercised more than ten years from the date of grant, unless incentive options are held by a 10% stockholder, in which case these incentive options may not be exercised more than five years from the date of grant. Any option granted under the 1995 Plan will, subject to earlier termination by its terms, terminate automatically if not exercised: o within 30 days after the optionee's termination of employment with us other than by reason of death, disability, retirement, or for cause; o within one year after the employee's death or termination of employment by us by reason of disability, as defined in the 1995 Plan; o within three years after an employee's retirement, as defined in the 1995 Plan; and o prior to termination by us for cause, as defined in the 1995 Plan. The 1995 Plan will terminate on August 8, 2005, unless our board of directors terminates it earlier. 107
109 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth information as of January 31, 2000, relating to the beneficial ownership of our common stock by: o each person known to us to own beneficially more than 5% of the outstanding shares of our common stock; o each of our directors; o each of our executive officers; and o all current directors and executive officers as a group. SHARES BENEFICIALLY OWNED (1)(2) -------------------------------------- STOCKHOLDER NUMBER PERCENT ----------- ---------- --------- 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) - ---------------------- o Represents beneficial ownership of less than 1% of our outstanding common stock. 108
110 (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those shares. (2) Includes shares purchasable within 60 days after January 31, 2000 pursuant to the exercise of options covering: o 626,741 shares for Mr. Kight at a weighted average exercise price of $3.72 per share, o 29,495 shares for Mr. Johnson at a weighted average exercise price of $17.95 per share, o 118,241 shares for Mr. Sinisgalli at a weighted average exercise price of $17.70 per share, o 33,881 shares for Mr. Feeney at a weighted average exercise price of $16.22 per share, o 0 shares for Mr. Polashock, o 25,000 shares for Mr. Boardman at a weighted average exercise price of $18.09 per share, o 42,307 shares for Mr. Manser at a weighted average exercise price of $8.17 per share, o 26,785 shares for Mr. Quinn at a weighted average exercise price of $13.32 per share, o 16,000 for Mr. Wilkins at a weighted average exercise price of $20.25 per share, and o 1,138,579 shares for all directors and executive officers as a group at a weighted average exercise price of $8.73 per share. (3) Includes 8,600 shares held by the Peter J. Kight and Teresa J. Kight 1995 Children's Trust and 1,006,255 shares held by The PJK GRAT 97-1, The PJK GRAT 97-2, The PJK GRAT 98-1, The PJK GRAT 98-2, The PJK GRAT 98-3 and The PJK GRAT 98-4. Mr. Kight disclaims ownership of these shares in which he has no pecuniary interest. Does not include 54,850 shares held by a charitable foundation of which Mr. Kight is the trustee and disclaims any beneficial ownership. (4) Based on information contained in Schedule 13G filed with the Securities and Exchange Commission on January 29, 1998. Robert M. Gintel, Chief Executive Officer and 100% stockholder of Gintel Asset Management, Inc., is also controlling partner of Gintel & Co. Limited Partnership and Gintel-Ray Ltd. Partnership. In addition, Gintel Asset Management, Inc. has discretionary power over the accounts for which it acts as investment advisor. As a result, Gintel Asset Management, Inc. may be deemed to be the beneficial owner of the shares owned by these other entities. (5) Based on information contained in Schedule 13G filed with the Securities and Exchange Commission on February 17, 1999. (6) Based on information contained in Schedule 13G filed with the Securities and Exchange Commission on February 8, 1999. (7) Includes 8,786 shares held by the Mark A. Johnson 1997 Irrevocable Children's Trust. Mr. Johnson disclaims ownership of these shares in which he has no pecuniary interest. (8) Includes 1,800 shares held by Mr. Polashock's minor children which Mr. Polashock disclaims any beneficial ownership. (9) Includes 1,000 shares held by Mr. Manser's spouse which Mr. Manser disclaims any beneficial ownership. 109
111 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. 110
112 Miscellaneous Curtis A. Loveland, our Secretary, is a partner in the law firm of Porter, Wright, Morris & Arthur LLP, which firm serves as our outside general counsel. Mr. Loveland owns less than 1% of our outstanding common stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CHECKFREE OVERVIEW We operate our business through three independent but inter-related divisions: o Electronic Commerce; o Investment Services; and o Software. During the fiscal year ended June 30, 1999, Electronic Commerce accounted for 68% of our revenues and Investment Services and Software each accounted for 16% of our revenues. Our current business was developed through expansion of our core Electronic Commerce business and the acquisition of companies operating in similar or complementary businesses. Our major acquisitions include Servantis Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit Services Corporation in January 1997 and Mobius Group, Inc. in March 1999. On December 21, 1999 we announced the planned acquisition of BlueGill Technologies, Inc. and expect this transaction to close in the quarter ended June 30, 2000. During fiscal 2000, we announced a new pricing structure to our financial institution customers. The new pricing program includes a fee based on the number of transactions processed, a small per subscriber fee and a fixed monthly fee to cover our infrastructure costs. Our traditional financial institution pricing structure was based primarily on subscriber fees, which grew roughly proportionally to the number of subscribers added, regardless of activity. Both programs provide for monthly minimum fees. Until we see significant increases in the number of electronic billing and payment customers enrolling through financial institutions, we do not anticipate that this pricing change will have a significant impact on our revenues. Once the subscriber growth rates begin to accelerate and financial institutions adopt the new pricing program, revenue growth will become more dependent upon consumer usage of our services. As of December 31, 1999, only one financial institution had adopted the new pricing program. From an efficiency perspective, electronic payment of bills is significantly less expensive than traditional paper based payments. Since June 1998 we have increased our electronic payments ratio from 32% of total payments processed to over 52% by December 1999. Improvement in this important metric drives down our variable costs and results in increased gross profits in our electronic payment business. In March 1997 we introduced electronic billing -- "E-Bill" -- which enables merchants to deliver billing information as well as marketing materials to their customers electronically over the Internet. Through December 1999 we have placed 62 billers into production and are now delivering in excess of 38,000 electronic bills monthly through E-Bill. We derive revenue from our billers on a per bill presented basis. During fiscal 1998, we made the decision to sell some of our software businesses that did not directly promote our strategic direction. These divestitures included the sale of our recovery management business in August 1997, our item processing business in March 1998, our wire and electronic banking businesses in April 1998, our leasing business in July 1998, our mortgage business in September 1998 and our imaging business in October 1998. While we have no pending agreements to dispose of our remaining software businesses, we do receive offers for them from time to time. 111
113 The following table sets forth percentages of revenue represented by consolidated statements of operations data: THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------------------- ------------------- ------------------- 1997 1998 1999 1998 1999 1998 1999 ------- ------- ------- ------- ------- ------- ------- 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)% ======= ======= ======= ======= ======= ======= ======= 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 112
114 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. 113
115 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 114
116 interest expense on outstanding capital lease obligations, resulting in net interest income of $0.4 million for the three months ended December 31, 1998 and $1.2 million for the six months ended December 31, 1998. On November 29, 1999, we received net proceeds of approximately $166.9 million from the issuance of $172.5 million of 6 1/2% subordinated convertible notes. Additionally, in October 1999, we received approximately $9.8 million from the direct purchase of 250,000 shares of our common stock, at market value, by Bank One and, in December 1999, we received approximately $6.2 million from the exercise of outstanding common stock warrants. Direct interest expense and amortization of issuance costs resulting from the convertible debt combined with interest expense from capital leases exceeded the interest income earned on cash, cash equivalents and invested assets for the quarter resulting in net interest expense of $0.1 million for the three months ended December 31, 1999. For the six months ended December 31, 1999 our interest income exceeded interest expense by $0.1 million. Income Taxes. We recorded an income tax benefit of $12.4 million for the three months ended December 31, 1998 (effective rate not meaningful) and an income tax benefit of $2.4 million or an effective tax rate of 37.8% for the three months ended December 31, 1999. We recorded an income tax benefit of $13.6 million for the six months ended December 31, 1998 (effective rate not meaningful) and an income tax benefit of $4.6 million or an effective tax rate of 36.8% for the six months ended December 31, 1999. In the quarter ended December 31, 1998 we recorded a one-time tax benefit of approximately $12.2 million arising out of our medical benefits management subsidiary. Net of this one-time benefit, the reported effective rates differ from the blended statutory rate of 40% in all periods due to goodwill and other non-deductible expenses, jobs credits and tax exempt interest income. YEARS ENDED JUNE 30, 1998 AND 1999 Revenues. Our total reported revenue increased by $16.2 million, or 7%, from $233.9 for the year ended June 30, 1998 to $250.1 million for the year ended June 30, 1999. This increase in revenue was due to growth in our Electronic Commerce and Investment Services segments, offset by a decrease in our Software segment. The decrease in our Software segment revenue was the result of our divestitures of some of our software businesses. We divested our recovery management business in August 1997, our item processing business in March 1998, our wire and electronic banking businesses in April 1998, our leasing business in July 1998, our mortgage business in September 1998 and our imaging business in October 1998. On a pro forma basis, excluding the impact of our divested software businesses, the discontinuance of our web investor business in our Electronic Commerce segment in June 1998, and revenue from the Mobius Group acquisition in our Investment Services segment in March 1999, our total revenue increased 21%, from $204.4 million for the year ended June 30, 1998 to $246.4 million for the year ended June 30, 1999. The increase in our pro forma revenue from fiscal 1998 to fiscal 1999 was driven by increases of 23% in our Electronic Commerce segment, 26% in our Investment Services segment and 6% in our Software segment. Our growth in pro forma Electronic Commerce revenue was driven primarily by subscriber growth from approximately 2.4 million at June 30, 1998 to nearly 3.0 million at June 30, 1999. Our growth in pro forma Investment Services revenue was driven primarily by an increase in portfolios managed from approximately 500,000 at June 30, 1998 to approximately 700,000 at June 30, 1999, offset by lower average revenue per portfolio, as marketing efforts have shifted the mix of new business toward retail versus institutional portfolios. Although demand has been somewhat dampened due to customer focus on Year 2000 projects, in our Software segment we had moderate pro forma revenue growth, primarily due to increased implementations in our automated clearinghouse product line. Our reported processing and servicing revenue increased by $41.8 million, or 26%, from $159.3 million for the year ended June 30, 1998 to $201.1 million for the year ended June 30, 1999. On a pro forma basis, adjusted for revenue contributed by our acquisition of Mobius Group in March 1999 and the discontinuance of our web investor business in our Electronic Commerce segment in June 1998, revenue increased by 26% from $158.4 million for the year ended June 30, 1998 to $199.2 million for the year ended June 30, 1999. This growth was primarily the result of increases in our subscribers in our Electronic Commerce segment and the number of portfolios managed in our Investment Services segment as discussed in the foregoing paragraph. In January 1999, we announced the signing of a material Internet distribution agreement with Yahoo! Although there are no guarantees in the timing or extent of its success, we believe this agreement has the potential to provide significant increases in the number of our subscribers over the next year and beyond. Due to introductory promotional pricing incentives, we do not expect 115
117 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. 116
118 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 117
119 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. 118
120 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 119
121 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 120
122 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: 121
123 YEAR ENDED JUNE 30, ----------------------------------- 1997 1998 1999 --------- --------- --------- (in thousands) 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) ========= ========= ========= THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------------- 1998 1999 1998 1999 --------- --------- --------- --------- (in thousands) 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) ========= ========= ========= ========= 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 122
124 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. 123
125 Reported operating income in our Software segment decreased from $3.7 million for the three months ended December 31, 1998 to $2.3 million for the three months ended December 31, 1999 and decreased slightly from $4.9 million for the six months ended December 31, 1998 to $4.8 million for the six months ended December 31, 1999. On a pro forma basis, net of divestitures, operating income decreased from $3.7 million for the three months ended December 31, 1998 to $2.3 million for the three months ended December 31, 1999 and decreased from $6.6 million for the six months ended December 31, 1998 to $4.8 million for the six months ended December 31, 1999. The decrease in operating margins reflects investments in new initiatives like the recent launch of missingmoney.com, a state-sponsored Internet site we developed with the National Association of Unclaimed Property to enable customers to find and claim money owed to them from non-refunded deposits, unclaimed securities, and other accounts held by states. Additional resources have also been assigned to our new automated clearinghouse alliance services program that carries a profit margin that is inherently lower than that of our traditional product offerings in this area. Reported revenue in our Investment Services segment increased by 50%, from $8.8 million for the three months ended December 31, 1998 to $13.2 million for the three months ended December 31, 1999 and by 47%, from $17.3 million for the six months ended December 31, 1998 to $25.4 million for the six months ended December 31, 1999. This increase is partially due to our acquisition of Mobius Group in March of 1999. On a pro forma basis, adjusting for the impact of the Mobius Group acquisition, revenue increased 27% from $10.4 million for the three months ended December 31, 1998 to $13.2 million for the three months ended December 31, 1999 and by 23%, from $20.7 million for the six months ended December 31, 1998 to $25.4 million for the six months ended December 31, 1999. Growth in pro forma revenue is driven primarily by an increase in portfolios managed from approximately 573,000 at December 31, 1998 to approximately 820,000 at December 31, 1999. A major portion of portfolio growth over the past year has occurred in retail versus institutional accounts that carry a lower unit price. In October 1999 we launched our new M-Plan product from Mobius. Consultants, plan sponsors, investment managers and financial planners use Mobius M-Plan for integrating retirement, capital needs, tax, education and real estate planning needs for their customers. Operating income in our Investment Services segment increased from $0.9 million for the three months ended December 31, 1998 to $3.1 million for the three months ended December 31, 1999 and from $2.7 million for the six months ended December 31, 1998 to $5.4 million for the six months ended December 31, 1999. On a pro forma basis, adjusting for the acquisition of Mobius Group, operating income increased from $0.9 million for the three months ended December 31, 1998 to $3.1 million for the three months ended December 31, 1999 and from $2.9 million for the six months ended December 31, 1998 to $5.4 million for the six months ended December 31, 1999. In the quarter ended December 31, 1998 we incurred one time charges of $0.6 million related to real estate transactions in this business unit. Additionally, increases in operating income are due to the marginal profit inherent in the increase in portfolios managed and synergies realized in the integration of Mobius Group into the operations of the business segment. The Corporate segment represents charges for legal, human resources, accounting and finance and various other of our unallocated overhead charges. Our Corporate segment incurred an operating loss of $5.2 million, or 9% of total revenue for the three months ended December 31, 1998 versus an operating loss of $6.6 million, or 9% of total revenue for the three months ended December 31, 1999. Our Corporate segment incurred an operating loss of $11.0 million, or 9% of total revenue for the six months ended December 31, 1998 versus an operating loss of $12.0 million, or 8% for the six months ended December 31, 1999. The unallocated portions of our expenses have remained fairly consistent as a percentage of revenue. As subscriber price promotions allowing for free trial periods begin to expire and related customers begin paying for various related electronic billing and bill payment services, we believe our corporate costs will begin to decline as a percentage of revenue as we regain the leverage inherent in our normalized business model. The net gain on dispositions of assets of $3.9 million in the six months ended December 31, 1998 is the net result of the gain on the sale of our mortgage business of approximately $6.3 million, offset by the loss on the sale of our imaging business of approximately $2.4 million. 124
126 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 125
127 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 126
128 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. YTD FISCAL FISCAL FISCAL FISCAL COST TO BUSINESS SEGMENT 1997 1998 1999 2000 COMPLETE TOTAL - -------------------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) 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 ========= ========= ========= ========= ========= ========= 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: 127
129 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) 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 ============= ============= ============= ============= ============= 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. 128
130 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. 129
131 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. 130
132 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. 131
133 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. 132
134 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; 133
135 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 134
136 conferred in our by-laws, including rights to the advancement of expenses and the evidentiary, procedural, and other provisions of our by-laws, shall be contract rights. We may, by action of our board of directors, indemnify our officers, employees, agents, attorneys and representatives to the same scope and extent as provided for directors. The right of indemnification, including the right to receive payment in advance of expenses, conferred by our by-laws is not exclusive of any other rights to which any person seeking indemnification may otherwise be entitled. Our by-laws also specify specific procedures, presumptions and remedies that apply to the right to indemnification and the advancement of expenses provided for in our by-laws. We have entered into separate indemnification agreements with each of our directors and some of our executive officers, in which we agreed, among other things: o to indemnify them to the fullest extent permitted by Delaware law, subject to limitations against various liabilities that they actually and reasonably incur in any proceeding in which they are a party that may arise because of their status as directors, officers, employees or agents or that may arise because of their serving in that capacity at our request for another entity; o to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and o to obtain directors' and officers' insurance if available at reasonable terms. There is no pending litigation or proceeding involving a director, officer, employee or other agent of CheckFree for which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director, officer, employee or other agent, other than as described in this information statement/prospectus. We maintain directors' and officers' liability insurance. DESCRIPTION OF NOTES The notes were issued under an indenture between us and Fifth Third Bank, as trustee, dated as of November 29, 1999, as supplemented by a supplemental indenture dated as of November 29, 1999, among us, our subsidiaries and the trustee. We refer to the indenture and the first supplemental together as the indenture. The following summaries of specific provisions of the notes and the indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the notes and the indenture. General The notes are CheckFree Holdings' unsecured, subordinated obligations to $172,500,000 aggregate principal amount and will mature on December 1, 2006. The principal amount of each note is $1,000 and will be payable at the office of the paying agent, which initially will be the trustee, or an office or agency maintained by CheckFree Holdings for that purpose in the Borough of Manhattan, New York, New York. The notes bear interest at the rate of 6 1/2% per annum on the principal amount from the date of issuance, or from the most recent date to which interest has been paid or provided for until the notes are paid in full or funds are made available for payment in full of the notes in accordance with the indenture. Interest is payable at maturity, or earlier purchase, redemption or, in some circumstances, conversion, and semiannually on June 1 and December 1 of each year, commencing on June 1, 2000, to holders of record at the close of business on May 15 or November 15 immediately preceding each interest payment date. Each payment of interest on the notes will include interest accrued through the day before the applicable interest payment date or the date of maturity, or earlier purchase, redemption or, in some circumstances, conversion, as the case may be. Any payment of principal and cash interest required to be made on any day that is not a business day will be made on the next succeeding business day. CheckFree Holdings currently expects to fund interest 135
137 payments through our working capital. CheckFree Holdings cannot assure you that its working capital will be adequate to fund the interest payments or that alternative sources of financing will be available to fund the interest payments. In the event of the maturity, conversion, purchase by CheckFree Holdings at the option of a holder or redemption of a note, interest will cease to accrue on the note, under the terms and subject to the conditions of the indenture. CheckFree Holdings may not reissue a note that has matured or been converted, redeemed or otherwise cancelled. You may present the notes for conversion at the office of the conversion agent and for exchange or registration of transfer at the office of the registrar. Each agent shall initially be the trustee. Form, Denomination and Registration CheckFree Holdings initially issued the notes in the form of global notes. The global notes are deposited with, or on behalf of, the clearing agency registered under the Securities Exchange Act of 1934 that is designated to act as depositary for the notes and registered in the name of the depositary or its nominee. The Depository Trust Company is the initial depositary. Book Entry System Upon the issuance of a global note, the depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the debt securities represented by the global note to the accounts of institutions or persons, commonly known as participants, that have accounts with the depositary or its nominee. The accounts to be credited will be designated by the initial purchasers, dealers or agents. Ownership of beneficial interests in a global note will be limited to participants or persons that may hold interests through participants. Ownership of interests in the global note will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the depositary, with respect to participants' interests, and the participants, with respect to the owners of beneficial interests in the global note. The laws of some jurisdictions may require that some purchasers of securities take physical delivery of the securities in definitive form. These limits and laws may impair the ability to transfer beneficial interests in a global note. So long as the depositary, or its nominee, is the registered holder and owner of the global note, the depositary or its nominee, as the case may be, will be considered the sole owner and holder for all purposes of the debt securities and for all purposes under the indenture. Except as set forth below, owners of beneficial interests in a global note will not be entitled to have the notes registered in their names, will not receive or be entitled to receive physical delivery of the notes in definitive form and will not be considered to be the owners or holders of any notes or the global note. Accordingly, each person owning a beneficial interest in a global note must rely on the procedures of the depositary and, if the person is not a participant, on the procedures of the participant through which the person owns its interest, to exercise any rights of a holder of the notes. CheckFree Holdings understands that under existing industry practice, in the event it requests any action of holders of the notes or if an owner of a beneficial interest in a global note desires to take any action that the depositary, as the holder of the global note, is entitled to take, the depositary would authorize the participants to take that action, and that the participants would authorize beneficial owners owning through the participants to take the actions or would otherwise act upon the instructions of beneficial owners owning through them. Payments of principal of and premium, if any, and interest, if any, on the notes represented by a global note will be made to the depositary or its nominee, as the case may be, as the registered owner and holder of the global note, against surrender of the notes at the principal corporate trust office of the trustee. Interest payments will be made at the principal corporate trust office of the trustee or by a check mailed to the holder at its registered address. CheckFree Holdings expects that the depositary, upon receipt of any payment of principal, premium, if any, of interest, if any, in respect of a global note, will credit immediately participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the global note as shown on the records of the depositary. CheckFree Holdings expects that payments by participants to owners of beneficial interests in a global note held through the participants will be governed by standing instructions and customary practices, as is now the case with securities held for accounts of customers in bearer-form or registered in "street name," and will be the responsibility of the participant. Neither CheckFree Holdings nor the trustee nor any of CheckFree Holdings' agents or the trustee will have any responsibility or liability for any aspect of the records 136
138 relating to, or payments made on account of, beneficial ownership interests in a global note or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests or for any other aspect of the relationship between the depositary and its participants or the relationship between the participants and the owners of beneficial interests in the global note owning through the participants. Unless and until it is exchanged in whole or in part for the notes in definitive form, a global note may not be transferred except as a whole by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary. Notes represented by a global note will be exchangeable for the notes in definitive form of like tenor as the global note in denominations of $1,000 and in any greater amount that is an integral multiple thereof if: o the depositary notifies us and the trustee that it is unwilling or unable to continue as depositary for the global note or if at any time the depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934 and a successor depositary is not appointed by CheckFree Holdings within 90 days; o CheckFree Holdings, in our sole discretion, determine not to have all of the notes represented by a global note and notify the trustee thereof; or o there shall have occurred and be continuing an event of default or an event which, with the giving of notice or lapse of time, or both, would constitute an event of default with respect to the notes. Any note that is exchangeable pursuant to the preceding sentence is exchangeable for the notes registered in the names as the depositary shall instruct the trustee. It is expected that these instructions may be based upon directions received by the depositary from its participants with respect to ownership of beneficial interests in the global note. Subject to the foregoing, a global note is not exchangeable except for a global note or global notes of the same aggregate denominations to be registered in the name of the depositary or its nominee. Subsidiary Guarantee Each of CheckFree Holdings' subsidiaries, jointly and severally, has fully and unconditionally guaranteed, on a subordinated basis, our obligations under the notes. The subsidiary guarantee is subordinated to the prior payment in full in cash or cash equivalents of all senior indebtedness of that subsidiary. The subordination provisions applicable to the subsidiary guarantee will be substantially similar to the subordination provisions applicable to the notes. The obligations of each subsidiary under the subsidiary guarantee are limited as necessary to seek to prevent that subsidiary guarantee from constituting a fraudulent conveyance under applicable law. Additionally, CheckFree Holdings' future subsidiaries may also be required to guarantee the notes, including BlueGill and TransPoint upon completion of each of those acquisitions. A subsidiary guarantor may not sell or otherwise dispose of all or substantially all of its assets, or consolidate with or merge with or into, another person unless: o immediately after giving effect to that transaction, no default or event of default exists under the indenture; and o the person acquiring the property in any similar sale or disposition or the person formed by or surviving any similar consolidation or merger assumes all the obligations of that subsidiary guarantor pursuant to a supplemental indenture satisfactory to the trustee. A subsidiary will be released from the subsidiary guarantee: o in connection with any sale or other disposition of all or substantially all of the assets of that subsidiary, if the disposition is to CheckFree Holdings or another subsidiary guarantor; or 137
139 o in connection with any sale of all of the capital stock of a subsidiary guarantor, if the person acquiring the capital stock assumes all the obligations of that subsidiary guarantor pursuant to a supplemental indenture satisfactory to the trustee. Since CheckFree Holdings has no assets separate from our investment in our subsidiaries, except for an insignificant amount of cash, and no operations, CheckFree Holdings has not included audited financial information of CheckFree Holdings' subsidiary guarantors in this information statement/prospectus. Subordination of the Notes The notes and the subsidiary guarantee are unsecured obligations of CheckFree Holdings and are subordinated in right of payment, as set forth in the indenture, to the prior payment in full in cash or other payment satisfactory to holders of senior indebtedness of all CheckFree Holdings existing and future senior indebtedness and that of CheckFree Holdings' subsidiaries. At December 31, 1999, CheckFree Holdings had no senior indebtedness outstanding and CheckFree Holdings' subsidiaries had $10.5 million of senior indebtedness outstanding. The indenture does not restrict the incurrence by CheckFree Holdings or its subsidiaries of senior indebtedness or other obligations. The term "senior indebtedness" means: (1) the principal, premium, if any, interest and all other amounts owed in respect of all our indebtedness: (a) for money borrowed, and (b) evidenced by securities, debentures, bonds or other similar instruments; (2) all CheckFree Holdings' capital lease obligations; (3) all CheckFree Holdings' obligations issued or assumed as the deferred purchase price of property, all our conditional sale obligations and all CheckFree Holdings' obligations under any title retention agreement; (4) all CheckFree Holdings' obligations for the reimbursement of any letter of credit, banker's acceptance, security purchase facility or similar credit transaction; (5) all obligations of the type referred to in clauses (1) through (4) above of other persons for the payment of which CheckFree Holdings is responsible or liable as obligor, guarantor or otherwise; and (6) all obligations of the type referred to in clauses (1) through (5) above of other persons secured by any lien on any property or asset of CheckFree Holdings, whether or not this obligation is assumed by CheckFree Holdings, except for: (a) any indebtedness that is by its terms subordinated to or pari passu with the notes; and (b) any indebtedness between or among CheckFree Holdings or its affiliates, including all other debt securities and guarantees in respect of those debt securities issued to any trust, or trustee of a trust, partnership or other entity affiliated with CheckFree Holdings that is, directly or indirectly, a financing vehicle of CheckFree Holdings in connection with the issuance by a similar financing vehicle of preferred securities or other securities that rank pari passu with, or junior to, the notes or the subsidiary guarantee. The senior indebtedness shall continue to be senior indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of that senior indebtedness. By reason of this subordination, in the event of dissolution, insolvency, bankruptcy or other similar proceedings, upon any distribution of CheckFree Holdings' assets: 138
140 o the holders of the notes are required to pay over their share of that distribution to the trustee in bankruptcy, receiver or other person distributing our assets for application to the payment of all senior indebtedness remaining unpaid, to the extent necessary to pay all holders of senior indebtedness in full in cash or other payment satisfactory to the holders of senior indebtedness; and o unsecured creditors of CheckFree Holdings who are not holders of the notes or holders of senior indebtedness of CheckFree Holdings may recover less, ratably, than holders of senior indebtedness of CheckFree Holdings and may recover more, ratably, than the holders of the notes. In addition, no payment of the principal amount, redemption price, change in control purchase price or interest with respect to any of the notes may be made by CheckFree Holdings, nor may we acquire any of the notes for cash or property, except as set forth in the indenture, if: o any payment default on any senior indebtedness has occurred and is continuing beyond any applicable grace period; or o any default, other than a payment default, with respect to senior indebtedness occurs and is continuing that permits the acceleration of the maturity thereof and the default is either the subject of judicial proceedings or CheckFree Holdings receives a written senior indebtedness default notice. Notwithstanding the foregoing, payments with respect to the notes may resume and CheckFree Holdings may acquire the notes for cash when: o the default with respect to the senior indebtedness is cured or waived or ceases to exist; or o CheckFree Holdings receive a senior indebtedness default notice and 179 or more days pass after notice of the default is received by CheckFree Holdings, provided that the terms of the Indenture otherwise permit the payment or acquisition of the notes at that time. If CheckFree Holdings receives a senior indebtedness default notice, then a similar notice received within nine months thereafter relating to the same default on the same issue of senior indebtedness shall not be effective to prevent the payment or acquisition of the notes as provided above. In addition, no payment may be made on the notes if any notes are declared due and payable prior to their stated maturity by reason of the occurrence of an event of default until the earlier of: o 120 days after the date of the acceleration; or o the payment in full of all senior indebtedness, but only if the payment is then otherwise permitted under the terms of the indenture. Upon any payment or distribution of CheckFree Holdings' assets or those of CheckFree Holdings' subsidiaries to creditors upon any dissolution, winding up, liquidation or reorganization of CheckFree Holdings, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other similar proceedings, the holders of all senior indebtedness shall first be entitled to receive payment in full, in cash or other payment satisfactory to the holders of senior indebtedness, of all amounts due or to become due thereon, or payment of the amounts shall have been provided for, before the holders of the notes shall be entitled to receive any payment or distribution with respect to any of the notes or the subsidiary guarantee. Conversion Rights A holder of a note is entitled to convert the note into shares of our common stock at any time before the close of business on November 30, 2006; provided, however, that if a note is called for redemption, the holder is entitled to convert it at any time before the close of business on the redemption date. A note in respect of which a holder has delivered a change in control purchase notice exercising the holder's option to require us to purchase the holder's note may be converted only if that notice is withdrawn by a written notice of withdrawal delivered by the holder to the 139
141 paying agent prior to the close of business on the change in control purchase date, in accordance with the terms of the indenture. The initial conversion rate for the notes is 13.6612 shares of our common stock per $1,000 principal amount, or $73.20 per share of our common stock, subject to adjustment upon the occurrence of specific events described below. A holder otherwise entitled to a fractional share of our common stock will receive cash in an amount equal to the market value of the fractional share based on the closing sale price on the trading day immediately preceding the conversion date. A holder may convert a portion of its notes so long as the portion is $1,000 principal amount or an integral multiple thereof. To convert a note, a holder must: o complete and manually sign the conversion notice on the back of the note and deliver the notice to the conversion agent, which initially will be the trustee, at the office maintained by the conversion agent for that purpose; o surrender the note to the conversion agent; o if required, furnish appropriate endorsements and transfer documents; and o if required, pay all transfer or similar taxes. Pursuant to the indenture, the date on which all of the foregoing requirements have been satisfied is the conversion date. Upon conversion of a note, a holder will not receive, except as provided below, any cash payment representing accrued interest thereon. CheckFree Holdings' delivery to the holder of the fixed number of shares of its common stock into which the note is convertible, together with the cash payment, if any, in lieu of any fractional shares, will satisfy CheckFree Holdings' obligation to pay the principal amount of the note, and the accrued and unpaid interest to the conversion date. Thus, the accrued interest will be deemed to be paid in full rather than cancelled, extinguished or forfeited. Notwithstanding the foregoing, accrued but unpaid cash interest will be payable upon any conversion of the notes at the option of the holder made concurrently with or after acceleration of the notes following an event of default. The notes surrendered for conversion during the period from the close of business on any regular record date next preceding any interest payment date to the opening of business on the interest payment date, except the notes to be redeemed on a date within that period, must be accompanied by payment of an amount equal to the interest thereon that the registered holder is to receive. Except where the notes surrendered for conversion must be accompanied by payment as described above, no interest on the converted notes will be payable by CheckFree Holdings on any interest payment date subsequent to the date of conversion. The conversion rate will not be adjusted at any time during the term of the notes for accrued interest. A certificate for the number of full shares of our common stock into which any note is converted, and cash in lieu of any fractional shares, will be delivered as soon as practicable, but in any event no later than the seventh business day following the conversion date. The conversion rate is subject to adjustment in some events, including: o the issuance of shares of our common stock as a dividend or a distribution with respect to our common stock; o subdivisions, combinations and reclassification of our common stock; o the issuance to all holders of our common stock of rights or warrants entitling them to subscribe for shares of our common stock at less than the then market price of our common stock; o the distribution to holders of our common stock of evidences of our indebtedness, securities or capital stock, cash or assets; 140
142 o the payment of dividends and other distributions on our common stock paid exclusively in cash, excluding cash dividends if the aggregate amount thereof, when taken together with: (a) other all-cash distributions made within the preceding 12 months not triggering a conversion rate adjustment and (b) any cash and the fair market value, as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by CheckFree Holdings or one of its subsidiaries for its common stock concluded within the preceding 12 months not triggering a conversion rate adjustment, does not exceed 10% of CheckFree Holdings' aggregate market capitalization, the aggregate market capitalization being the product of the current market price of our common stock as of the trading day immediately preceding the date of declaration of the dividend multiplied by the number of shares of our common stock then outstanding, on the date of the distribution; and o payment to holders of its common stock in respect of a tender or exchange offer, other than an odd-lot offer, by CheckFree Holdings or one of its subsidiaries for its common stock as of the trading day next succeeding the last date tenders or exchanges may be made pursuant to the tender or exchange offer which involves an aggregate consideration that, together with (a) any cash and the fair market value of other consideration payable in respect of any tender or exchange offer by CheckFree Holdings or one of its subsidiaries for its common stock concluded within the preceding 12 months and (b) the aggregate amount of any all-cash distributions to all holders of our common stock made within the preceding 12 months, exceeds 10% of our aggregate market capitalization. No adjustment, however, need be made if holders may participate in the transactions otherwise giving rise to an adjustment on a basis and with notice that our board of directors determines to be fair and appropriate, or in some other cases specified in the indenture. In cases where the fair market value of the portion of assets, debt securities or rights, warrants or options to purchase CheckFree Holdings' securities applicable to one share of its common stock distributed to stockholders exceeds the average sale price, as defined, in the indenture per share of its common stock, or the average sale price exceeds the fair market value of the portion of assets, debt securities or rights, warrants or options so distributed by less than $1.00, rather than being entitled to an adjustment in the conversion rate, the holder of a note upon conversion thereof will be entitled to receive, in addition to the shares of its common stock into which the note is convertible, the kind and amounts of assets, debt securities or rights, options or warrants comprising the distribution that the holder would have received if the holder had converted the note immediately prior to the record date for determining the stockholders entitled to receive the distribution. The indenture permits us to increase the conversion rate from time to time. In the event that we become a party to any transaction, including, and with some exceptions: o any recapitalization or reclassification of our common stock; o any consolidation of us with, or merger of us into, any other person, or any merger of another person into us; o any sale, transfer or lease of all or substantially all of our assets; or o any compulsory share exchange, pursuant to which our common stock is converted into the right to receive other securities, cash or other property, then the holders of the notes then outstanding will have the right to convert the notes into the kind and amount of securities, 141
143 cash or other property receivable upon the consummation of any transaction by a holder of the number of shares of our common stock issuable upon conversion of the notes immediately prior to the transaction. In the case of a transaction, each note will become convertible into the securities, cash or property receivable by a holder of the number of shares of our common stock into which the note was convertible immediately prior to the transaction. This change could substantially lessen or eliminate the value of the conversion privilege associated with the notes in the future. For example, if CheckFree Holdings was acquired in a cash merger, each note would become convertible solely into cash and would no longer be convertible into securities whose value would vary depending on CheckFree Holdings' future prospects and other factors. In the event of a taxable distribution to holders of CheckFree Holdings' common stock which results in an adjustment of the conversion rate or in the event the conversion rate is increased at CheckFree Holdings' discretion, the holders of the notes may, in some circumstances, be deemed to have received a distribution subject to United States Federal income tax as a dividend. Moreover, in some other circumstances, the absence of an adjustment to the conversion rate may result in a taxable dividend to holders of CheckFree Holdings' common stock. Redemption of the Notes at CheckFree Holdings' Option No sinking fund is provided for the notes. Prior to December 1, 2002, CheckFree Holdings will not be entitled at its option to redeem the notes. On and after that date, CheckFree Holdings will be entitled to redeem the notes for cash as a whole at any time, or from time to time in part, upon not less than 30 days' nor more than 60 days' notice of redemption given by mail to holders of the notes, unless a shorter notice shall be satisfactory to the trustee, at the redemption prices set forth below plus accrued cash interest to the redemption date. Any redemption must be in integral multiples of $1,000 principal amount. The table below shows redemption prices of a note per $1,000 principal amount if redeemed during the twelve-month periods set forth below. Period Redemption Price ------ ---------------- 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% If fewer than all of the notes are to be redeemed, the trustee will select the notes to be redeemed in principal amounts at maturity of $1,000 or integral multiples thereof by lot, pro rata or by another method the trustee considers fair and appropriate. If a portion of a holder's notes is selected for partial redemption and that holder converts a portion of those notes prior to the redemption, the converted portion shall be deemed, solely for purposes of determining the aggregate principal amount of the notes to be redeemed by CheckFree Holdings, to be of the portion selected for redemption. Change in Control Permits Purchase of the Notes at the Option of the Holder In the event of any change in control of CheckFree Holdings, each holder of the notes will have the right, at the holder's option, subject to the terms and conditions of the indenture, to require CheckFree Holdings to purchase all or any part of the holder's notes on the change in control purchase date that is 30 business days after the occurrence of the change in control at a cash price equal to 100% of the principal amount of the holder's notes plus accrued cash interest to the change in control purchase date. This amount is called the change in control purchase price. Within 15 business days after the change in control, CheckFree Holdings will mail to the trustee and to each holder a notice regarding the change in control, which notice shall state, among other things: o the date of the change in control and, briefly, the events causing the change in control; o the date of which the change in control purchase notice must be given; o the change in control purchase date; 142
144 o the change in control purchase price; o the name and address of the paying agent and the conversion agent; o The conversion rate and any adjustments thereto; o the procedures that holders must follow to exercise these rights; o the procedures for withdrawing a change in control purchase notice; o that holders who want to convert notes must satisfy the requirements set forth in the notes; and o briefly, the conversion rights of the holders of the notes. CheckFree Holdings will cause a copy of this notice to be published in The Wall Street Journal or another daily newspaper of national circulation. To exercise the purchase right, the holder must deliver a written change in control purchase notice of the exercise of the right to the paying agent in the Borough of Manhattan, New York, New York, prior to the close of business, on the change in control purchase date. Any change in control purchase notice must provide: o the certificate numbers of the notes to be delivered by the holder thereof for purchase by CheckFree Holdings; o the portion of the principal amount of the notes to be purchased, which portion must be $1,000 or an integral multiple thereof; and o that the notes are to be purchased by us pursuant to the applicable provisions of the notes. Any change in control purchase notice may be withdrawn by the holder by a written notice of withdrawal delivered to the paying agent prior to the close of business on the change in control purchase date. The notice of withdrawal shall state the principal amount and the certificate numbers of the notes as to which the withdrawal notice relates and the principal amount, if any, which remains subject to a change in control purchase notice. Payment of the change in control purchase price for a note for which a change in control purchase notice has been delivered and not withdrawn is conditioned upon delivery of the note to the paying agent or an office or agency maintained by CheckFree Holdings for that purpose in the Borough of Manhattan, New York, New York, at anytime after the delivery of a change in control purchase notice. Payment of the change in control purchase price for the note will be made promptly following the later of the business day following the change in control purchase date and the time of delivery of the note. If the paying agent holds, in accordance with the terms of the indenture, money sufficient to pay the change in control purchase price of the note on the business day following the change in control purchase date, then, immediately after the change in control purchase date, the note will cease to be outstanding and interest on the note will cease to accrue and will be deemed paid, whether or not the note is delivered to the paying agent, and all other rights of the holder shall terminate, other than the right to receive the change in control purchase price upon delivery of the note. Under the indenture, a "change in control" is deemed to have occurred upon the occurrence of any of the following events: o any "person" or "group," other than permitted holder, is or becomes the beneficial owner, directly or indirectly, of more than 40% of CheckFree Holdings' total outstanding voting stock; o CheckFree Holdings consolidates with, or merges with or into another person or conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with or merges with or into CheckFree Holdings, in any event pursuant to a transaction in which our outstanding voting stock is converted into or exchanged for cash, securities or other property, other than any transaction where: (1) CheckFree Holdings' voting stock is not converted or exchanged at all, except to the extent necessary to reflect a change in its jurisdiction of incorporation, or in converted into or exchanged for: (a) voting stock, other than redeemable capital stock, of the surviving or transferee corporation or 143
145 (b) voting stock, other than redeemable capital stock, of the surviving or transferee corporation, and (2) immediately after the transaction, no "person" or "group" is the beneficial owner, directly or indirectly, of more than 40% of CheckFree Holdings' total outstanding voting stock of the surviving or transferee corporation; o during any consecutive two-year period, individuals who at the beginning of that period constituted CheckFree Holdings' board of directors, together with any new directors whose election to its board of directors, or whose nomination for election by its stockholders, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of CheckFree Holdings' board of directors then in office; or o CheckFree Holdings is liquidated or dissolved or a special resolution is passed by its stockholders approving the plan of liquidation or dissolution other than in a transaction that complies with the provisions described in the indenture. "Redeemable capital stock" means any class or series of capital stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to the final stated maturity of the notes or is redeemable at the option of the holder thereof at any time prior to the final stated maturity, or is convertible into or exchangeable for debt securities at anytime prior to the final stated maturity; provided, however, that redeemable capital stock shall not include any of CheckFree Holdings' common stock the holder of which has a right to put to CheckFree Holdings upon terminations of employment. The indenture does not permit CheckFree Holdings' board of directors to waive its obligation to purchase the notes at the option of a holder in the event of a change in control. CheckFree Holdings will comply with the tender offer rules under the Securities Exchange Act of 1934 which may then be applicable, and will file a Schedule 13E-4 or any other schedule required thereunder in connection with any offer by CheckFree Holdings to purchase the notes at the option of the holders thereof upon a change in control. In some circumstances, the change in control purchase feature of the notes may make more difficult or discourage a takeover of CheckFree Holdings and, thus, the removal of incumbent management. The change in control purchase feature, however, is not the result of CheckFree Holdings' knowledge of any specific effort to accumulate shares of its common stock or to obtain control of CheckFree Holdings by means of a merger, tender offer, solicitation or otherwise, or part of a plan by management to adopt a series of anti-takeover provisions. Instead, the change in control purchase feature is the result from negotiations between CheckFree Holdings and the initial purchasers. If a change in control were to occur, there can be no assurance that CheckFree Holdings would have funds sufficient to pay the change in control purchase price for all of the notes that might be delivered by holders seeking to exercise the purchase right, because CheckFree Holdings or its subsidiaries might also be required to prepay indebtedness or obligations having financial covenants with change of control provisions in favor of the holders thereof. In addition, CheckFree Holdings' other indebtedness may have cross-default provisions that could be triggered by a default under the change in control provisions thereby possibly accelerating the maturity of the indebtedness. In that case, the holders of the notes would be subordinated to the prior claims of the holders of the indebtedness. In addition, CheckFree Holdings' ability to purchase the notes with cash may be limited by the terms of its then-existing borrowing agreements. None of the notes may be purchased pursuant to the provisions described above if there has occurred and is continuing an event of default. Consolidation, Merger and Sale or Lease of Assets CheckFree Holdings, without the consent of any holders of the outstanding notes, are entitled to consolidate with or merge into or transfer or lease its assets substantially as an entirety to, any individual, corporation, partnership, limited liability company, joint venture, association joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof, each a person, and any person is entitled to consolidate with or merge into, or transfer or lease its assets substantially as an entirety to us, provided that: o the person formed by the consolidation or into which we are merged or the person which acquires or leases our assets substantially as an entirety is a corporation, partnership, limited liability company or trust organized 144
146 and existing under the laws of any United States jurisdiction and expressly assumes our obligations on the notes and under the indenture; o immediately after giving effect to the transaction, no event of default, and no event which, after notice or lapse of time or both, would become an event of default, happened and is continuing; and o other conditions described in the indenture are met. Events of Default; Notice and Waiver The indenture provides that, if an event of default specified in the indenture occurs and is continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the notes then outstanding may declare the principal amount of and accrued interest to the date of the declaration of all the notes to be immediately due and payable. In the case of some events of bankruptcy or insolvency, the principal amount of and accrued interest on all the notes to the date of the occurrence of the event shall automatically become and be immediately due and payable. Upon any acceleration, the subordination provisions of the Indenture preclude any payment being made to holders of the notes until the earlier of: o 120 days or more after the date of the acceleration; and o the payment in full of all senior indebtedness, but only if the payment is then otherwise permitted under the terms of the indenture. Under some circumstances, the holders of a majority in aggregate principal amount of the outstanding notes may rescind any acceleration with respect to the notes and its consequences. Interest shall accrue and be payable on demand upon a default in the payment of principal interest when due, redemption price, change in control purchase price or shares of CheckFree Holdings' common stock, or cash in lieu of fractional shares to be delivered on conversion of the notes, in each case to the extent that the payment of the interest shall be legally enforceable. Under the indenture, events of default include: o default in payment of the principal amount, interest when due, if the default in payment of interest shall continue for 31 days, redemption price, or change in control purchase price with respect to any note, when the same becomes due and payable; o failure by CheckFree Holdings to deliver shares of its common stock when our common stock is required to be delivered following the conversion of a note and continuation of the default for 10 days; o failure by CheckFree Holdings to comply with any of its other agreements in the notes or the indenture upon CheckFree Holdings' receipt of notice of its default from the trustee or from holders of not less than 25% in aggregate principal amount of the notes then outstanding and CheckFree Holdings' failure to cure the default within 90 days after its receipt of the notice; o default under any bond, note or other evidence of indebtedness for money borrowed by CheckFree Holdings having an aggregate outstanding principal amount in excess of $10 million, which default shall have resulted in the indebtedness being accelerated, without the indebtedness being discharged or the acceleration having been rescinded or annulled within 20 days after receipt of notice thereof by CheckFree Holdings from the trustee or CheckFree Holdings and the trustee from the holders of not less than 25% in aggregate principal amount of the notes then outstanding; or o some events of bankruptcy or insolvency. The trustee will, within 90 days after the occurrence of any default, mail to all holders of the notes notice of all defaults of which the trustee is aware, unless the defaults have been cured or waived before the giving of the notice; provided that the trustee may withhold the notice as to any default other than the payment default, if it determines in good faith that withholding the notice is in the interests of the holders. 145
147 The holders of a majority in aggregate principal amount of the outstanding notes may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee, provided that the direction shall not be in conflict with any law or the indenture and subject to some other limitations. The trustee may refuse to perform any duty or exercise any right of power or extend or risk its own funds or otherwise incur any financial liability unless it receives indemnity satisfactory to it against any loss, liability or expense. No holder of any note will have any right to pursue any remedy with respect to the Indenture or the notes, unless: o the holder shall have previously given the trustee written notice of a continuing event of default; o the holders of at least 25% in aggregate principal amount of the outstanding notes shall have made written request to the trustee to pursue the remedy; o the holder or holders shall have offered to the trustee reasonable security or indemnity against any loss, liability or expense satisfactory to it; o the trustee shall have failed to comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity; and o the holders of a majority in aggregate principal amount of the outstanding notes shall not have given the trustee a direction inconsistent with the request within 60 days after receipt of the request. The right of any holder: o to receive payment of principal, the redemption price, change in control purchase price or interest in respect of the notes held by the holder on or after the respective due dates expressed in the notes, o to convert the notes, or o to bring suit for the enforcement of any payment on or after the respective dates or the right to convert, shall not be impaired or adversely affected without the holder's consent. The holders of a majority in aggregate principal amount of the notes at the time outstanding may waive any existing default and its consequences except: o any default in any payment on the notes; o any default with respect to the conversion of the notes; or o any default in respect of some covenants or provisions in the indenture that may not be modified without the consent of the holder of each note. When a default is waived, it is deemed cured and will cease to exist, but no waiver shall extend to any subsequent or other default or impair any consequent right. CheckFree Holdings will be required to furnish to the trustee annually a statement as to any default by CheckFree Holdings in the performance and observance of its obligations under the Indenture. In addition, CheckFree Holdings will be required to file with the trustee written notice of the occurrence of any default or event of default within five business days of its becoming aware of the default or event of default. 146
148 Modification The indenture or the notes may be modified or amended by CheckFree Holdings and the trustee with the consent of the holders of not less than a majority in aggregate principal amount of the notes then outstanding. Without the consent of each holder affected thereby, however, no amendment may, among other things: o reduce the principal amount, change in control purchase price or redemption price with respect to any note, or extend the stated maturity of any note or alter the manner of payment or rate of interest or any note or make any note payable in money or securities other than that stated in the note; o make any reduction in the principal amount of notes whose holders must consent to an amendment or any waiver under the indenture or modify the indenture provisions relating to the amendments or waivers; o make any change that adversely affects the right of a holder to convert any note; o modify the provisions of the indenture relating to the ranking of the notes in a manner adverse to the holders of the notes; or o impair the right to institute suit for enforcement of any payment with respect to, or conversion of, the notes. Without the consent of any holder of notes, CheckFree Holdings and the trustee may amend the indenture to: o cure any ambiguity, defect or inconsistency; provided, however, that the amendment does not materially adversely affect the rights of any holder of the notes; o provide for the assumption by a successor to CheckFree Holdings of its obligations under the indenture; o provide for uncertificated notes in addition to certificated notes, as long as these uncertificated notes are in registered form for United States Federal income tax purposes; o make any change that does not adversely affect the rights of any holder of the notes; o make any change to comply with any requirement of the Commission in connection with the qualification of the indenture under the Trust Indenture Act of 1939; or o add to CheckFree Holdings' covenants or obligations under the indenture for the protection of the holders of the notes or surrender any right, power or option conferred by the indenture on it. Discharge of the Indenture CheckFree Holdings may satisfy and discharge its obligations under the indenture by delivering to the trustee for cancellation all of the outstanding notes or by depositing with the trustee, the paying agent or the conversion agent, if applicable, after the notes have become due and payable, whether at stated maturity, or any redemption date, or any purchase date, or a change in control purchase date, or upon conversion or otherwise, cash sufficient to pay all of the outstanding notes and paying all other sums payable under the indenture by CheckFree Holdings. No Recourse Against Others The indenture provides that CheckFree Holdings' directors, officers, employees, representatives, advisors or stockholders shall not have any liability for any of its obligations under the notes or the indenture or for any claim based on, in respect of or by reason of the obligations or their creation. 147
149 Registration Rights CheckFree Holdings and its subsidiaries have entered into a registration rights agreement with the initial purchasers for the benefit of the holders of the notes and our common stock issuable upon their conversion. The registration rights agreement obligates CheckFree Holdings, at its sole expense, as follows: o to file a shelf registration statement as soon as practicable, but in no event more than 60 days after the closing of the issue of the notes, covering resales of CheckFree Holdings' registerable securities. We use the term "registerable securities" to refer to all outstanding notes, and CheckFree Holdings' common stock issuable upon conversion of the notes, that have not been registered and sold pursuant to the shelf registration statement, that have not been distributed to the public pursuant to Rule 144 under the Securities Act of 1933 or that are not saleable pursuant to Rule 144(k) under the Securities Act of 1933 or successor provisions; o to use its reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act of 1933 within 120 days after the closing; and o to use its reasonable best efforts to keep the shelf registration statement effective and usable until the time that all the notes, and CheckFree Holdings' common stock issuable upon conversion of the notes, shall no longer qualify as registerable securities. CheckFree Holdings will be permitted to suspend the use of the shelf registration statement for limited periods of time under some circumstances if it provides the holders of the registerable securities with written notice of the suspension. CheckFree Holdings will, when the shelf registration is filed: o provide each holder of registerable securities with copies of the prospectus that is part of the shelf registration statement; o notify each holder when the shelf registration statement for the registerable securities has become effective; and o take other actions as are required to permit unrestricted resales of the registerable securities. A holder that sells registerable securities pursuant to a shelf registration statement: o will usually be required to be named as a selling security holder in the related prospectus and to deliver the prospectus to the purchasers; o will be subject to some of the civil liability provisions of the Securities Act of 1933 in connection with those sales; and o will be bound by the provisions of the registration rights agreement that are applicable to a holder, including indemnification rights and obligations. Holders who wish to sell registerable securities will be required to make representations and to provide some information to CheckFree Holdings, as described in the registration rights agreement. If a registration default occurs, then additional cash interest will accrue and become payable on the notes at a rate equal to 0.50% per annum, which rate will be increased by an additional 0.25% per annum for each 90-day period that the registration default has not been cured. The aggregate additional cash interest shall in no event exceed one percent per annum. All additional interest payments shall be paid to the holders of the registerable securities in the same manner as regular interest payments on the notes on semi-annual payment dates which correspond to interest payment dates on the notes. Following the cure of a registration default, additional interest will no longer accrue in connection with that registration default. We use the term "registration default" to mean if: 148
150 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: 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 149
151 BlueGill Technologies, Inc. General BlueGill provides software used for Internet billing and statement delivery. BlueGill's products and services allow customers to: o install and launch an electronic bill presentment product; o send e-mail notifications and present electronic bills through the Internet; o connect to a variety of bill aggregators and payment methods; and o establish an interactive on-line relationship with customers. BlueGill currently has in excess of 50 entities that have chosen to rely on Internet billing and statement services powered by BlueGill software. Its products are available from the following resellers: o IBM o Xerox o Lasercom o Check Solutions, Inc. o Ultradocs o AST Group o M&I Data Services o BroadVision o EDS BlueGill currently markets its software products directly to individual bill and statement providers, as well as to outsourcing companies that operate its software to provide billing services for other institutions. These outsourcing companies include traditional print and mail service bureaus, Internet billing services and banks. With respect to the individual billers, BlueGill's products are targeted primarily at large corporate billers, including telephone companies, utilities, and financial services institutions. BlueGill has in excess of 25 of these customers. BlueGill also has in excess of 10 customers that in turn provide Internet billing and other document delivery services to over 30 of their own customers. ELECTRONIC COMMERCE INDUSTRY BACKGROUND The majority of today's financial transactions are completed using traditional paper-based methods. Many traditional financial transactions, however, can now be completed electronically due to the emergence of new communications, computing and security technologies. Many financial institutions and businesses have invested in these technologies and are creating the infrastructure for recording, reporting and executing electronic transactions. BlueGill believes the broad impact of the Internet will increase the use of electronic methods to execute financial transactions. Persistence of Traditional Financial Transaction Processes Many traditional methods of completing financial transactions still persist, including: o Paper Checks. It is estimated that 65 billion checks were written in the U.S. in 1998. The use of checks imposes significant costs on financial institutions, businesses and their customers. These costs include the writing, mailing, recording and manual processing of checks. o Paper Billing. It is estimated that over 18 billion paper bills are produced each year, with the cost of submitting a paper bill, including printing, postage and billing inserts, as high as $3.00 per bill. 150
152 o Conventional Banking. Many financial transactions are conducted in person at banks. Banks incur substantial expenses in providing personnel and physical locations, while bank customers incur transportation costs and personal inconvenience when traveling to a bank facility. Over 90% of the 80 million banking households in the United States are still conducting most of their financial transactions using conventional banking methods. o Business-to-Business Payments. While consumers bear costs and inconvenience receiving and paying paper bills, businesses experience an even higher level of cost and inefficiency when receiving and paying paper bills. For businesses, issues like discounts for prompt payment, returns, allowances, disputed charges and other adjustments, as well as reconciliation to the business' own records, increase the costs of payment. The Internet's Role in Driving Electronic Commerce BlueGill believes the broad impact of the Internet is driving financial institutions, businesses and consumers to adopt practices of electronic billing and payment, banking and business-to-business payments. BlueGill expects that the growth in these electronic commerce activities will increase the need for services that support secure, reliable and cost-effective financial transactions between and among these market participants. BlueGill believes the combination of the following trends is driving adoption of electronic commerce: o Expanding Personal Computer Ownership Declining prices for personal computers and rapid growth in the number of computer-literate consumers are driving increased penetration of personal computers in United States homes; o Increasing Internet Accessibility. Reduced communications costs, improved web browsers and faster connection speeds have made the Internet increasingly accessible to consumers and to businesses offering products and services on-line. International Data Corporation estimates that there were 52 million Internet users in the U.S. at the end of 1998 and that this figure will grow to 136 million by the end of 2002; o Increasing Acceptance of Electronic Commerce. Consumers have grown increasingly comfortable with the security of electronic commerce and are willing to conduct large transactions on-line. International Data Corporation estimates that the total value of goods and services purchased over the Internet in the United States will increase from approximately $26 billion in 1998 to over $269 billion in 2002; and o Emergence of New Industry Participants. New businesses have emerged which use the broad adoption of the Internet to compete with traditional businesses. Traditional financial institutions now compete with Internet-based banks, brokerages and other financial services companies. These companies do not offer consumers the possibility of traditional, manual financial transactions and are driving further adoption of electronic commerce. The Electronic Solution BlueGill believes that consumers and businesses will move their financial transactions from traditional paper-based to electronic transactions if they have an easy-to-access, easy-to-use, compelling, secure and cost-effective product for receiving and paying their bills electronically. BlueGill also believes that, compared with conventional paper-based transactions, electronic transactions cost much less to complete, give rise to far fewer errors and generate 151
153 far fewer subscriber inquires. BlueGill believes that an electronic solution should allow consumers and businesses at their access point of choice to: o receive electronic bills through the Internet; and o pay any bill--electronic or paper--to anyone. BlueGill also believes that these functionalities must be delivered by a product that: o is scalable to accommodate future growth; o is flexible to accommodate future functionality; and o provides the highest level of security, availability and privacy. Over the past three years, BlueGill has developed software that enables electronic commerce solutions with these functionalities. PRODUCTS BlueGill customers have made investments in mainframe computers used to print bills and other paper documents that are mailed to their customers. These computers generate billing data in formats required by printing systems. BlueGill software transforms this data into formats that allow the billing information to be presented electronically. As a result, BlueGill customers are able to deliver bills and other documents to their customers over the Internet without having to replace their existing mainframe computer systems. The BlueGill i-Series is a set of software products developed for various industry segments. This product set includes i-Banker, i-Broker, i-Biller, i-Telco, and i-Insurance. Each product includes an electronic billing web site template that is unique to the specific industry segments. Using the template as a sample design of their Internet billing site, BlueGill customers spend less time developing and designing the look and feel of their Internet billing sites, speeding the implementation process. Each of the i-Series products may be used in conjunction with other software modules and products that enhance the functionality of the i-Series product. In addition, BlueGill and/or its value added resellers typically provide implementation and customization services along with the licensing of BlueGill software. TECHNOLOGY The strength of BlueGill's product derives from a powerful "Smart Object" architecture that manages complex customer data using XML and an object oriented database model. XML allows very complex data to be portable; object architecture means that BlueGill's solution is inherently scalable with high performance. BlueGill's product includes a robust application programming interface set that exposes the customer data to web development environments, data-mining applications, payment methods, billing systems, customer service applications, document archiving systems, and other critical business applications. These application programming interfaces allow for rapid implementation in complex environments. The "alpha" version of BlueGill's software was tested in the fourth quarter of 1996. "Beta" software was rolled out in March 1997 and tested by several customers. The first commercial release was shipped in October 1997. Version 2.0 was released April 20, 1999. Most customers are currently running Version 2.0. BlueGill software products are available on NT, AIX, HP-UX, and Solaris operating systems. COMPETITION BlueGill competes in the market of providers of electronic bills and statements. 152
154 BlueGill's principal competitors consist of edocs, Just In Time Solutions, Novazen, Oracle, Interface Systems, Netscape and @Works Technologies. BlueGill is expanding into international markets where it may discover new local competitors that have the advantage of existing relationship with customers, local technical support staff, and local language support. SALES, MARKETING AND DISTRIBUTION BlueGill's sales, marketing and distribution efforts are designed to maximize access to potential customers. BlueGill markets and supports its products both directly and indirectly through a direct sales and technical sales support force and, to achieve deeper market penetration, through select distribution alliances with companies which provide value added services. In order to foster a better understanding of the needs of its customers, and to help respond to identified needs, BlueGill employs a number of account managers assigned to specific customers and has organized its product marketing organization with specialists in telecommunications, insurance, and banking vertical segments. RESEARCH AND DEVELOPMENT BlueGill maintains a strong research and development group with a long-term perspective of planning and developing new products and enhancements for electronic document presentment applications. BlueGill Technologies Corp., an Ontario corporation that is wholly owned by BlueGill, is responsible for BlueGill's research and development. BlueGill has established the following guidelines for pursuing the development of new services: o distinctive benefits to customers; o ability to establish a leadership position in the market served; o sustainable technological advantages; and o first to market. BlueGill spent approximately $480,000 in 1997, $895,000 in 1998 and $2,123,000 in 1999 on research and development activities. EMPLOYEES BlueGill has approximately 125 employees principally located at its Ann Arbor, Michigan headquarters and its development offices in Waterloo, Ontario. BlueGill has recently commenced operations in Europe through a United Kingdom branch office of its BlueGill Technologies International, Inc. subsidiary and is in the process of establishing operations in the Far East. TRADING OF BLUEGILL SECURITIES There is no established public trading market for any BlueGill securities. BlueGill has never paid dividends on any class or series of its stock. STOCK OWNERSHIP As of January 31, 2000, there were 29 holders of record of the 12,503,301 outstanding shares of BlueGill Series A preferred stock, 15 holders of record of the 12,825,651 outstanding shares of BlueGill Series B preferred stock and 26 holders of record of the 6,207,834 outstanding shares of BlueGill common stock. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BLUEGILL The following discussion and analysis should be read in conjunction with the BlueGill Consolidated Financial Statements and notes. 153
155 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 $250,000 depending on the number of servers at the customer site. In addition, list prices also include additional fees for each outsourcing partner's customer added to the system and incremental recurring fees per statement viewed over the Internet. Enterprise licenses are priced on a case-by-case basis. BlueGill offers significant discounts to resellers off BlueGill's list price. 154
156 RESULTS OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 The following table sets forth in thousands of dollars and as a percentage of revenue, consolidated statements of operating data: TWELVE MONTHS TWELVE MONTHS ENDING ENDING DECEMBER 31, DECEMBER 31, ($ in thousands) 1998 1999 1998 1999 ---------- ---------- ---------- ---------- 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% 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 155
157 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 $539,000 in debt to preferred stock in 1998. TWELVE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 The following table sets forth in thousands of dollars and as a percentage of revenue, consolidated statements of operating data: 156
158 TWELVE MONTHS TWELVE MONTHS ENDING ENDING DECEMBER 31, DECEMBER 31, ($ in thousands) 1997 1998 1997 1998 ---------- ---------- ---------- ---------- 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% 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. 157
159 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. 158
160 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. 159
161 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. 160
162 BOARD OF DIRECTORS The BlueGill certificate of incorporation provides that the board of directors shall consist of six members. The BlueGill by-laws state that the board of directors will consist of not less than 3 nor more than 7 directors as determined from time to time by the board of directors. The BlueGill certificate of incorporation provides that holders of common stock are entitled to elect two directors to the board of directors, but only one of those directors may be an employee of BlueGill. The holders of BlueGill common stock are also entitled, voting together as a single class with the holders of preferred stock, voting on an as converted basis, to elect an additional director. A director may be removed, with or without cause, upon the affirmative vote of a majority of the stockholders entitled to vote for the election of that director. A vacancy on the board of directors occurring for any reason may be filled only by the vote of the holders of a majority of the shares of the specified group of holders who are entitled to elect the director to fill that vacancy. Our by-laws provide that our board of directors shall consist of 3 to 15 members, as determined from time to time in our by-laws. The current number of directors established in the CheckFree by-laws is 7. Each director must be nominated in accordance with the procedures set forth in our by-laws before he or she can be elected as a director, unless the person can be nominated by the holders of our preferred stock. Our certificate of incorporation provides for a staggered board that means that only a portion of the directors are elected each year. Pursuant to our certificate of incorporation, approximately one third of the directors are elected each year to serve three-year terms. One or all of the member of the board of directors may be removed for cause upon the affirmative vote of at least 80% of the stockholders entitled to vote on the election of the directors or upon the affirmative vote of a majority of the stockholders entitled to vote on the election of the directors if at least 66-2/3% of the board of directors recommend the removal of the directors to the stockholders. LIMITATION OF DIRECTORS' LIABILITY Pursuant to the BlueGill certificate of incorporation, a BlueGill director shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent provided by Delaware law. Similarly, our certificate of incorporation provides that a director shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty. This provision does not eliminate or limit a director's liability for a breach of the director's duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for any transaction from which the director derived an improper personal benefit, or for the payment of a dividend or payment for the purchase or redemption of stock in violation of Delaware law. INDEMNIFICATION OF DIRECTORS AND OFFICERS BlueGill's certificate of incorporation provides that BlueGill may indemnify any person to the fullest extent permitted by law by reason of the person serving or having served as a director, officer or employee of BlueGill or at the request of BlueGill any other corporation. BlueGill's by-laws provide that BlueGill will indemnify its directors, officers, employees, or agents against expenses, judgements, fines, or fees paid in settlement if the person is a party or is threatened to be named as a party to any threatened, pending or completed civil or criminal action, suit, or proceeding by reason of the fact that the person is or was a director, officer, employee, or agent of BlueGill or, at the request of BlueGill, of any other corporation or other entity, provided the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was lawful. In addition, BlueGill will indemnify its directors, officers, employees or agents against expenses if the person is a party or threatened to be named a party to any threatened, pending or completed action or suit by or in the right of BlueGill to procure a judgment in its favor by reason of the fact that the person is or was serving as a director, officer, agent or employee of BlueGill or, at the request of BlueGill, of any other corporation or other entity, provided the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of BlueGill or its stockholders; however, no indemnification shall be made if the person shall be adjudged liable for negligence or misconduct in the performance of his duty to BlueGill, except if the court where the action or suit was brought determines that, despite the adjudication of liability but in light of all the 161
163 circumstances, the person is fairly and reasonably entitled to indemnity for these expenses. A determination that indemnification of a person is proper in the circumstances because the applicable standard of conduct was met shall be made either by the board of directors by a majority vote of a quorum consisting of directors who were not a party to the action, suit or proceeding, or if a quorum is not obtainable or even if obtainable a quorum of disinterested directors so directs by independent legal counsel in a written opinion or by the stockholders. BlueGill may advance expenses incurred in defending any of this type of action, suit or proceeding upon receipt of an undertaking by or on behalf of the person involved to repay the amount unless it shall ultimately be determined that the person is entitled to indemnification. Our by-laws state that the corporation shall indemnify a person who is a party to an action by reason of the fact that the person is or was a director of CheckFree or was serving as a director or officer of another company at our request. Indemnification may be provided to our officers, employees, agents, representative, or attorneys upon the approval of the board of directors. ACTION WITHOUT A MEETING Under Delaware law, any action that may be taken by the stockholders of a corporation may be taken without a meeting or prior notice if a written consent to the action is signed by the holders of the minimum number of votes required to take similar action. Additionally, Delaware law provides that any action that may be taken by the board of directors may be taken without a meeting if all members of the board consent to the action in writing and the consent if filed with the corporate minutes. The BlueGill by-laws provide that stockholders may take any stockholder action without a meeting or prior notice if a written consent is signed by stockholders holding the minimum number of votes that is required to take the action at a meeting at which all shares entitled to vote were present and voted. The BlueGill by-laws also provide that directors may take any director action without a meeting or prior notice if all of the directors entitled to vote on the matter sign a written consent to take this action. Our by-laws allow the stockholders to take stockholder action without a meeting if all of the holders of stock entitled to notice of the meeting sign a written consent authorizing the action. Our by-laws also permit directors to take action by written consent if all of the directors consent and the consent is filed with the corporate minutes. AMENDMENT OF CERTIFICATE OF INCORPORATION Delaware law provides that a certificate of incorporation may be amended upon the resolution the corporation's directors and the approval by the holders of the majority of the corporation's stock and the holders of the majority of the outstanding stock of each class entitled to vote on the amendment as a class. An amendment of the BlueGill certificate of incorporation requires the vote set forth in the subsection entitled "Voting Rights Generally" above. In addition, the BlueGill certificate of incorporation may require separate class votes by holders of two-thirds of the outstanding shares of BlueGill Series A Preferred Stock and by holders of up to three-quarters of the outstanding shares of Series B Preferred Stock. Our certificate of incorporation provides for amendments, alterations, or repeals of the provisions regarding amendment of the certificate, nominations of directors, amendment of our by-laws by our board of directors, the board of director's response to an acquisition proposal, personal liability of a director, or action taken by written consent may not be adopted without the approval of the holders of at least 80% of our outstanding stock or the holders of a majority of our outstanding stock if at least 66-2/3% of our board of directors recommends the amendment. AMENDMENT OF BY-LAWS Under Delaware law, the by-laws of a corporation may not be amended, altered, or repealed without stockholder approval unless the corporation's certificate of incorporation provides that the directors of the corporation may also amend the by-laws. The BlueGill certificate of incorporation does not confer upon our board 162
164 of directors the right to amend, alter, or repeal the BlueGill by-laws. The BlueGill by-laws provide that the by-laws may be amended by the stockholders or the board of directors at any properly held meeting provided that the notice of the meeting contains the proposed amendment, alteration, or repeal and provided that the proposed amendment, alteration, or repeal does not affect the holders of preferred stock. Any amendment of BlueGill's by-laws relative to BlueGill's Series A Preferred Stock or relative to BlueGill's Series B Preferred Stock may require a separate vote by each series. Our certificate of incorporation expressly confers upon our board of directors the right to amend the by-laws. Our by-laws provide that the by-laws may generally be amended or repealed or new provisions adopted upon the vote by the majority of the holders of record, however, amendments, alterations, or repeals to some provisions regarding amendment to by-laws, meetings of stockholders, nomination and number of directors, or the indemnification of directors require the approval of holders of 80% of the outstanding stock entitled to vote on the matter or the approval of the holders of a majority of the outstanding stock entitled to vote on the matter if 66-2/3% of our board of directors recommend to the stockholders the amendment. BLANK CHECK PREFERRED STOCK The BlueGill board of directors is not vested by the BlueGill certificate of incorporation with the right to establish by resolution and without stockholder approval a series of preferred stock, the number of shares in that series, or the rights, preferences and privileges of that series. We have 13,500,000 shares of authorized and undesignated preferred stock. Our board of directors may by resolution, without the approval or consent of any stockholders, establish one or more additional series from these undesignated preferred shares and fix the designation, powers, preferences and other rights or restrictions of each series. DIVIDENDS AND RELATED RIGHTS The holders of CheckFree Class A preferred stock shall be entitled to receive dividends four times a year. If dividends on the Class A preferred stock are not paid or declared in an amount equal to six quarterly dividends, the Class A preferred stockholders shall have the right, voting as a class, to elect one special director to our board of directors. The special voting for directors by the Class A preferred stockholders shall continue until all dividends in default shall be paid. EXPERTS The consolidated financial statements of CheckFree and TransPoint included in this information statement/ prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing in this information statement/prospectus, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of BlueGill included in this information statement/prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included in this information statement/prospectus in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. LEGAL MATTERS We have engaged Porter, Wright, Morris & Arthur LLP to assist us with legal matters concerning the merger. Partners of Porter, Wright, Morris & Arthur LLP who participated in the preparation of this information statement/prospectus beneficially own an aggregate of 26,507 shares of our common stock consisting of a combination of stock and options exercisable within 60 days after the date of this information statement/prospectus 163
165 CHECKFREE HOLDINGS COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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 F-1
166 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of CheckFree Holdings Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of CheckFree Holdings Corporation (the "Company") and its subsidiaries as of June 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 1997, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at June 30, 1998 and 1999, and the results of their operations and their cash flows for the years ended June 30, 1997, 1998 and 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP -------------------------------------- Deloitte & Touche LLP Atlanta, Georgia August 9, 1999 F-2
167 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1999 1998 1999 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ========= ========= See notes to consolidated financial statements. F-3
168 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED JUNE 30, ----------------------------------------- 1997 1998 1999 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 =========== =========== =========== See notes to consolidated financial statements. F-4
169 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 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) 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 ========== ==== ======== ========== ======== ========= ========= See notes to consolidated financial statements. F-5
170 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED JUNE 30, ------------------------------- 1997 1998 1999 --------- -------- -------- (IN THOUSANDS) 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 ========= ======== ======== See notes to consolidated financial statements. F-6
171 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization -- CheckFree Holdings Corporation (the "Company") is the parent company of CheckFree Corporation ("CFC"), the principal operating company of the business. CFC was organized in 1981 and is a leading provider of transaction processing services, software and related products to financial institutions and businesses and their customers throughout the United States. See Note 19 for a description of the Company's business segments. Following a number of acquisitions and divestitures, CFC reorganized its corporate structure on December 22, 1997. In connection with the reorganization, holders of common stock ("Common Stock") of CFC became holders of an identical number of shares of Common Stock of the Company. The restructuring was effected by a merger conducted pursuant to Section 251(g) of the Delaware General Corporation Law, which provides for the formation of a holding company structure without a vote of the stockholders of the Company. Principles of Consolidation -- The accompanying consolidated financial statements include the results of operations of the Company, its wholly-owned subsidiaries, and CheckFree Management Corporation, of which the Company is the majority owner. All significant intercompany transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Processing Agreements -- The Company has agreements with transaction processors to provide origination and settlement services for the Company. Under the agreements, the Company must fund service fees and returned transactions when presented. These agreements expire at various dates. Transaction Processing -- In connection with the timing of the Company's financial transaction processing, the Company is exposed to credit risk in the event of nonperformance by other parties, such as returns and chargebacks. The Company utilizes credit analysis and other controls to manage its credit risk exposure. The Company also maintains a reserve for future returns and chargebacks. Cash and Cash Equivalents -- The Company considers all highly liquid debt instruments (primarily United States government agency obligations and commercial paper) purchased with maturities of three months or less to be cash equivalents. Substantially all cash and cash equivalents are on deposit with six financial institutions. Investments -- The Company's investments consist primarily of United States government, government agency or state obligations. The Company classifies these investments as available-for-sale, trading or held-to-maturity securities in accordance with Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities." Investments classified as available-for-sale are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity. Trading securities are carried at market value and unrealized holding gains and losses are included in income. Held-to-maturity securities are carried at amortized cost. Property and Equipment -- Property and equipment are stated at cost. Property and equipment are depreciated using the straight-line method over the estimated useful lives as follows: land improvements, building and building improvements, 15 to 30 years; computer equipment, software, and furniture, 3 to 7 years. Equipment under capital leases are amortized using the straight-line method over the lesser of their estimated useful lives or the terms of the leases. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease periods. F-7
172 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Capitalized Software Costs -- Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Software development costs incurred after the technological feasibility of the subject software product has been established are capitalized in accordance with SFAS 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Capitalized software development costs are amortized on a product-by-product basis using either the estimated economic life of the product on a straight-line method over three to five years, or the ratio of current year gross product revenue to current and anticipated future gross product revenue, whichever is greater. Unamortized software development costs in excess of estimated future net revenues from a particular product are written down to estimated net realizable value. Amortization of software costs totaled $7,687,000, $5,198,000 and $2,567,000, for the years ended June 30, 1997, 1998 and 1999, respectively. Intangible Assets -- The costs of identified intangible assets are generally amortized on a straight-line basis over periods from 8 months to 15 years. Goodwill is amortized on a straight-line basis over 10 to 15 years. The company periodically reviews goodwill to evaluate whether changes have occurred that would suggest that goodwill may be impaired based on the estimated undiscounted cash flows of the assets to which goodwill relates over the remaining amortization period. If this review indicates that the remaining useful life of goodwill requires revision or that the goodwill is not recoverable, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows on a discounted basis. Other intangible assets are also evaluated periodically for impairment using undiscounted cash flows over the remaining useful life of the respective asset. If this review indicates that the remaining useful life of the respective intangible asset requires revision, the carrying amount of the asset is reduced by the estimated shortfall of cash flows on a discounted basis. Capital Stock -- The Company is authorized to issue up to 150,000,000 shares of $.01 par value Common Stock. In addition, the Company is authorized to issue up to 15,000,000 shares of $.01 par value preferred stock in one or more series and to establish such relative voting, dividend, redemption, liquidation, conversion and other powers, preferences, rights, qualifications, limitations and restrictions as the Board of Directors may determine without further stockholder approval. No preferred shares have been issued. Basic and Diluted Earnings (Loss) Per Share -- The Company reports Basic and Diluted Earnings (Loss) Per Share in accordance with the provisions of SFAS 128 "Earnings Per Share." Basic earnings (loss) per common share is determined by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted per-common-share amounts assume the issuance of common stock for all potentially dilutive equivalent shares outstanding. Impairment of Long-Lived Assets -- In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company periodically assesses the likelihood of recovering the cost of long-lived assets based on its expectations of future profitability and undiscounted cash flows of the related business operations. If such assets are considered to be impaired, the carrying amount is reduced by the estimated shortfall of cash flows on a discounted basis. During 1998, in conjunction with the Company's platform integration efforts referred to as project Genesis, the Company consolidated three processing centers from Chicago, Illinois, Austin, Texas, and Columbus, Ohio, into one processing center located in Norcross, Georgia. As a result of this consolidation and a physical inventory of fixed assets at the related business units, all identified assets which were determined to have no alternative use or value were written off. Of the total write-off of $4.0 million, $3.0 million was recorded in the quarter ended September 30, 1997 and the remaining $1.0 million in the quarter ended June 30, 1998. Comprehensive Income -- On July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income." The Statement requires disclosure of total non-shareowner changes in equity and its components. Total non-shareowner changes in equity includes all changes in equity during a period except those resulting F-8
173 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from investments by and distributions to shareowners. The only component of other comprehensive income applicable to the Company would be unrealized holding gains or losses on the Company's available-for-sale securities. There were no available-for-sale securities held during the year ended June 30, 1999 and the carrying value of available-for-sale securities held during the years ended June 30, 1998 and 1997 approximated market value. As a result, there were no reported unrealized gains or losses on available-for-sale securities during the years ending June 30, 1997, 1998 and 1999. Business Segments -- On July 1, 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement defines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The adoption of SFAS 131 did not have a material impact on the Company's financial statement disclosures. Recent Accounting Pronouncements -- In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. The Statement distinguishes accounting for the costs of computer software developed or obtained for internal use from guidance under SFAS 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The adoption of SOP 98-1 is not expected to have a material impact on the Company's software capitalization policies or financial statement disclosures. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will require that all derivative financial instruments be recognized as either assets or liabilities in the balance sheet. SFAS 133 will be effective for the Company's first quarter of fiscal 2001. The Company is in the process of evaluating the effects of this new statement. Reclassifications -- Certain amounts in the prior years' financial statements have been reclassified to conform to the 1999 presentation. REVENUE RECOGNITION - - Processing and Servicing -- Processing and servicing revenues include revenues from transaction processing, electronic funds transfer and monthly service fees on consumer funds transfer services. The Company recognizes revenue when the services are performed. As part of processing certain types of transactions, the Company earns interest from the time money is collected from its customers until the time payment is made to the applicable merchants. These revenues, which are generated from trust account balances not included on the Company's balance sheet, are included in processing and servicing and totaled $3,228,000, $9,676,000 and $11,846,000, for the years ended June 30, 1997, 1998 and 1999, respectively. - - Merchant Discount -- Merchant discount revenues are recognized when the services are performed. Interchange fees incurred in the settlement of merchant credit card transactions are included in processing and servicing expenses. - - License Fees -- On July 1, 1998, the Company adopted SOP 97-2, "Software Revenue Recognition." The Statement provides guidance for recognizing revenue on software transactions and supersedes SOP 91-1, "Software Revenue Recognition." In accordance with the provisions of SOP 97-2, the Company recognizes revenue from software license agreements when there is persuasive evidence that an arrangement exists, the fee is fixed and determinable, collectibility is probable and the software has been shipped, provided that no significant obligation remains under the contract. - - Maintenance Fees -- Maintenance fee revenue is recognized ratably over the term of the related contractual support period, generally 12 months. F-9
174 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 Automated Clearinghouse transaction fees. - - Research and Development -- Research and development expenses consist primarily of salaries and consulting fees paid to software engineers and business development personnel, and are reported net of applicable capitalized development costs. - - Sales and Marketing -- Sales and marketing expenses consist primarily of salaries and commissions of sales employees, public relations and advertising costs, customer acquisition fees and royalties paid to distribution partners. - - General and Administrative -- General and administrative expenses consist primarily of salaries for administrative, executive, finance, and human resource employees. - - Depreciation and Amortization -- Depreciation and amortization on capitalized assets is recorded on a straight-line basis over the appropriate useful lives. - - In-process Research and Development -- In-process research and development consists of charges resulting from acquisitions whereby the purchase price allocated to in-process software development was based on the determination that in-process research and development had no alternative future use after taking into consideration the potential for usage of the software in different products, resale of the software, or other internal use. - - Charge for Stock Warrants -- Charge for stock warrants consists of noncash charges for vested warrants issued to third parties under agreements whereby issued warrants vest upon achievement of certain strategic objectives. - - Exclusivity Amortization -- Exclusivity amortization consists of the amortization of an intangible asset established in conjunction with a marketing agreement with a strategic partner whereby the Company retains certain exclusive rights to bill payment processing through the partner's financial management software over a specific period of time. 2. ACQUISITIONS AND DISPOSITIONS On March 8, 1999, the Company acquired Mobius Group, Inc. ("Mobius Group") for a total of $19.1 million, consisting of 537,314 shares of common stock valued at $18 million, $0.2 million of acquisition costs, and $0.9 million of assumed debt. The acquisition was treated as a purchase for accounting purposes, F-10
175 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES 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: INTANGIBLE ASSET USEFUL LIFE ---------------- ----------- (IN THOUSANDS) Goodwill................................................... $10,392 15 Customer base.............................................. 4,429 15 Tradenames................................................. 3,709 10 Existing product technology................................ 1,864 5 Workforce.................................................. 940 5 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
176 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: ESTIMATED STAGE EXPECTED EXPECTED COST OF COMPLETION RELEASE TO COMPLETE VALUATION --------------- -------------- -------------- -------------- (IN THOUSANDS) (IN THOUSANDS) 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 ==== ====== 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
177 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
178 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): YEAR ENDED JUNE 30, -------------------- 1998 1999 -------- -------- 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 ======== ======== 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
179 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): JUNE 30, ------------------ 1998 1999 ------- ------- 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 ======= ======= 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: Due after one year through five years....................... $1,875 ====== 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): JUNE 30, ------------------ 1998 1999 ------- ------- 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 ======= ======= Trade accounts receivable represents amounts billed to customers. Unbilled trade accounts receivable result from extended payment terms on software license agreements or services agreements and are recorded at the time of contract execution. Revenue is recognized and customers are billed under service agreements as the services are performed. For software contracts, revenue is recognized under the provisions of SOP 97-2 as described in Note 1, and unbilled amounts under those software contracts are billed on specific dates according to contractual terms. Other receivables are comprised primarily of amounts due from employees for travel and other advances. The allowance for doubtful accounts represents management's estimate of uncollectible accounts receivable. F-15
180 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): YEAR ENDED JUNE 30, ------------------------------- 1997 1998 1999 -------- ------- -------- 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) ======== ======= ======== F-16
181 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): YEAR ENDED JUNE 30, ------------------------------- 1997 1998 1999 -------- ------- -------- 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) ======== ======= ======== 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): JUNE 30, ------------------ 1998 1999 ------- ------- 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 ======= ======= 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
182 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): JUNE 30, ------------------- 1998 1999 ------- -------- 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 ======= ======== 9. OTHER INTANGIBLE ASSETS The components of other intangible assets are as follows (in thousands): JUNE 30, ------------------ 1998 1999 ------- ------- 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 ======= ======= 10. ACCRUED LIABILITIES The components of accrued liabilities are as follows (in thousands): JUNE 30, ------------------ 1998 1999 ------- ------- 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 ======= ======= 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
183 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. LINE OF CREDIT In May 1997, the Company obtained a working capital line-of-credit, which enables the Company to borrow up to $20 million, based on the collateral of eligible accounts receivable. The line expires in October 1999, and contains certain restrictive covenants, including defined quarterly operating results, minimum tangible net worth requirements, and the prohibition of dividend payments. No amounts were outstanding under the line at June 30, 1998 and 1999. 12. OBLIGATIONS UNDER CAPITAL LEASES During 1993, the Company entered into a 20-year lease with the Department of Development of the State of Ohio for land and an office building located in Columbus, Ohio. The Company had the option to purchase the land and building for $1 at the termination of the lease and thus, the Company recorded the transaction as a capital lease. In June 1999, the Company completed a tax-free exchange of property involving the land and building under this capital lease. In order to exercise its purchase option and complete the transaction, the Company paid $2.5 million of principal obligations under the lease, and placed an additional $3.6 million in escrow. The Company and the State of Ohio entered into an escrow agreement whereby the funds deposited will be used to make scheduled principal and interest payments through September 1, 2000, and retire the remaining principal obligation at that date. The net gain resulting from the sale of the property amounted to $1.1 million and is included in the Net Gain on Dispositions of Assets in the Company's Consolidated Statement of Operations. Amounts deposited with the escrow trustee and the related obligations are included in current and noncurrent assets and liabilities, based on the respective principal repayment dates, in the Company's June 30, 1999 Consolidated Balance Sheets. The Company also leases certain computer equipment, furniture and telephone equipment under capital leases. The Company is required to pay certain taxes, insurance and other expenses related to the leased property. The following is a summary of property under capital leases included in the accompanying balance sheets (in thousands): JUNE 30, ----------------- 1998 1999 ------- ------ 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 ======= ====== F-19
184 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments required by the capital leases and the net future minimum lease payments are as follows (in thousands): FISCAL YEAR ENDING JUNE 30, - --------------- 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 ====== 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): FISCAL YEAR ENDING JUNE 30, - --------------- 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 ======= 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
185 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's June 30, 1999 Consolidated Balance Sheet. Total expense under the DCP for the period ended June 30, 1999 amounted to $40,000. Group Medical Plans -- The Company has a group medical self-insurance plan covering certain of its employees. The Company has employed an administrator to manage this plan. Under terms of this plan, both the Company and eligible employees are required to make contributions to this plan. The administrator reviews all claims filed and authorizes the payment of benefits. The Company has stop-loss insurance coverage on all individual claims exceeding $100,000. In addition, the Company offers medical insurance coverage under managed care health plans. Total expense for medical insurance coverage amounted to $3,458,000, $3,752,000 and $4,430,000, for the years ended June 30, 1997, 1998 and 1999, respectively. Under the self-insurance plan, the Company expenses amounts as claims are incurred and recognizes a liability for incurred but not reported claims. At June 30, 1998 and 1999, the Company accrued $308,000 and $315,000 respectively, as a liability for costs incurred but not paid under this plan. In December 1998, a subsidiary, CheckFree Management Corporation, was created to administer the Company's employee medical benefits program. The Company owns a controlling interest in the subsidiary, and therefore, the accompanying consolidated financial statements include the subsidiary's results of operations. 15. COMMON STOCK During 1995, the company adopted the 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan (the "1993 Plan"). The options granted under the 1995 and 1993 Plans may be either incentive stock options or non-statutory stock options. The terms of the options granted under the 1995 and 1993 Plans are at the sole discretion of a committee of members of the Company's Board of Directors, not to exceed ten years. Generally, options vest at either 33% or 20% per year from the dated of grant. The 1995 Plan originally provided that the Company may grant options for not more than 5,000,000 shares of common stock to certain key employees, officers and directors. In November 1998, the 1995 Plan was amended by a vote of the Company's shareholders to extend the maximum option grants to not more than 8,000,000 shares. Options granted under the 1995 and 1993 Plans are exercisable according to the terms of each option, however, in the event of a change in control or merger as defined, the options shall become immediately exercisable. At June 30, 1999, 2,920,684 additional shares are available for grant in the aggregate for all Plans. Previously, the Company had adopted the 1983 Incentive Stock Option Plan and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983 Plans"), which provided that the Board of Directors may grant options for shares of common stock to certain employees and directors. Under the terms of the 1983 Plans, options are exercisable over a period up to ten years from the grant date. In the event the Company is sold, options outstanding under the 1983 Plans must be repurchased at a price calculated as if the options had been fully exercised. All options granted under the 1983 Plans, the 1993 Plan and the 1995 Plan were granted at exercise prices not less than the fair market value of the underlying common stock at the date of grant. In the event that shares purchased through the exercise of incentive stock options are sold within one year of exercise, the Company is entitled to a tax deduction. The tax benefit of the deduction is not reflected in the consolidated statements of operations but is reflected as an increase in additional paid-in capital. F-21
186 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes stock option activity from July 1, 1996 to June 30, 1999: 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 --------- -------- --------- -------- --------- -------- 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 ====== ====== ====== The following table summarizes information about options outstanding at June 30, 1999: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE --------------------------- -------------------- REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE - ----------------------- --------- ---------------- -------- --------- -------- $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 ========= ====== ========= ====== 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
187 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) this look-back option estimated on the grant date using the Black-Scholes option pricing model, and the related assumptions used: SIX MONTH PERIOD ENDED --------------------------------------------------------------- JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, 1997 1997 1998 1998 1999 --------- ------------ --------- ------------ --------- 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% 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): YEAR ENDED JUNE 30, ------------------------------ 1997 1998 1999 --------- ------- ------ 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 ========= ======= ====== 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
188 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) volatility rate of 56.4%. The remaining seven million warrants are to vest upon achievement of specific performance targets set forth in the agreement. Any shares acquired by the strategic partner under the terms of this agreement are subject to certain transfer and other restrictions. In March 1997, the Company entered into a consulting agreement with a third party. Under the terms of the agreement the consultant acquired 5-year options exercisable at $13.00 for up to 50,000 shares of the Company's Common Stock. In June 1998, upon the execution of a processing agreement with a key customer, 25,000 of the options vested, which resulted in the Company recording a non-cash charge of $418,000. The charge was based on a Black-Scholes option pricing model valuation of $16.73 per vested share using the following assumptions: risk-free rate of 5.6%, expected life of 4 years, and volatility rate of 56.4%. The remaining 25,000 options are to vest upon achievement of specific performance targets by key customers set forth in the agreement. Any shares acquired by the consultant under the terms of the agreement are subject to certain transfer restrictions. In accordance with the terms of a joint marketing agreement, a strategic partner has warrants to purchase up to 650,000 shares of the Company's Common Stock should the partner attain certain customer acquisition targets. In January 1997, the Board of Directors approved an amendment to the Company's 401(k) plan which authorized up to 1,000,000 shares of Common Stock for the Company's matching contribution. The Company issued 78,257 shares in September 1997 and 74,981 shares in August 1998 out of treasury to fund its 401(k) match that had accrued during the years ended June 30, 1997 and 1998, respectively. At June 30, 1996, certain stockholders had an option to sell up to 280,565 shares of common stock to the company at $19.00 per share, which expired on September 30, 1996. Of the eligible shares, 276,469 were sold to the Company and were recorded as treasury stock. 16. PREFERRED STOCK In January 1997, the Company's Board of Directors declared a dividend distribution of Preferred Share Purchase Rights to protect its stockholders in the event of an unsolicited attempt to acquire the Company. On February 14, 1997, the Rights were issued to the Company's stockholders of record, with an expiration date of 10 years. Until a person or group acquires 15% or more of the Company's Common Stock, the Rights will automatically trade with the shares of Common Stock. Only when a person or group has acquired 15% or more of the Company's Common Stock, will the Rights become exercisable and separate certificates issued. Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company's Common Stock, the Rights are redeemable for $.001 per Right at the option of the Board of Directors. 17. EARNINGS PER SHARE The following table reconciles the differences in income and shares outstanding between basic and dilutive for the periods indicated (in thousands, except per share data): YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1998 --------------------------------------- --------------------------------------- LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- 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) ========= ====== ====== ======= ====== ====== YEAR ENDED JUNE 30, 1999 --------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- 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 ======= ====== ===== 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
189 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION YEAR ENDED JUNE 30, ----------------------------- (IN THOUSANDS) 1997 1998 1999 -------- ------ ------- 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 ======== ====== ======= 19. BUSINESS SEGMENTS The Company operates in three business segments -- Electronic Commerce, Software, and Investment Services. These reportable segments are strategic business units that offer different products and services. A further description of each business segment along with the Corporate services area follows: - Electronic Commerce -- Electronic commerce includes electronic home banking, electronic billing, electronic bill payment and business payments. These services are primarily directed to financial institutions and businesses and their customers. - Software -- Software services includes end-to-end software products for Automated Clearinghouse processing, account reconciliation, wire transfer, mortgage loan origination and servicing, lease accounting and debt recovery. These products and services are primarily directed to financial institutions and large corporations. - Investment Services -- Investment services includes investment portfolio management services and investment trading and reporting services. These products and services are primarily directed to institutional investment managers. - Corporate -- Corporate services include human resources, legal, accounting and various other of the Company's unallocated overhead charges. The accounting policies of the segments are the same as those described in Note 1 "Summary of Significant Accounting Policies." The Company evaluates performance based on revenues and operating income (loss) of the respective segments. No single customer accounted for 10% or more of consolidated revenues for the years ended June 30, 1997, 1998 and 1999. Foreign sales for the periods presented are insignificant. There are no intersegment sales. F-25
190 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth certain financial information attributable to the Company's business segments for the years ended June 30, 1997, 1998 and 1999 (in thousands): YEAR ENDED JUNE 30, --------------------------------- 1997 1998 1999 --------- -------- -------- 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 ========= ======== ======== F-26
191 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial information for the years ended June 30, 1998 and 1999 includes all adjustments necessary for a fair presentation of quarterly results of operations: (In thousands except per share data): QUARTER ENDED -------------------------------------------------- SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- -------- ------- 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 ======= ======= ======== ======= 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
192 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. COMMITMENTS In June 1999, the Company entered into a five-year agreement for software to be used in conjunction with its electronic commerce business. The software is to be licensed in incremental units over the term of the agreement to coincide with the growth of the Company's business. Total commitments under the agreement amount to $10 million over the five-year term. F-28
193 [This page left intentionally blank] F-29
194 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31, 1999 1999 ----------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ========= ========= See notes to interim unaudited condensed consolidated financial statements. F-30
195 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- -------------------- 1998 1999 1998 1999 -------- ------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ======== ======= ======== ======== See notes to interim unaudited condensed consolidated financial statements. F-31
196 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 30, --------------------- 1998 1999 -------- --------- (IN THOUSANDS) 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 ======== ========= See notes to interim unaudited condensed consolidated financial statements. F-32
197 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 1. The accompanying condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting. The results of operations for the six months ended December 31, 1998 and 1999 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair representation of financial results for the interim periods presented. 2. The following table reconciles the differences in income and shares outstanding between basic and dilutive for the periods indicated (in thousands except per share data): 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 ----------- ------------- ------ ----------- ------------- ------ 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) ======= ======= ===== ======= ====== ====== 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 ----------- ------------- ------ ----------- ------------- ------ 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) ======= ======= ===== ======= ====== ====== 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
198 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 DECEMBER 31, 1999 --------------------------- --------------------------- INCOME SHARES INCOME SHARES (NUMERATOR) DENOMINATOR (NUMERATOR) DENOMINATOR ----------- ------------- ----------- ------------- Six Month Period Ended........................ $-- 4,198 $687 5,108 == ====== ==== ====== Three Month Period Ended...................... $-- 3,751 $687 6,381 == ====== ==== ====== 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
199 CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) the purchase method of accounting and is expected to include a charge for in-process research and development which is currently estimated at approximately $7.6 million. BlueGill provides software that facilitates Web based electronic billing and bill payment. 11. During the quarter ended December 31, 1999, the Company received notification and payment for the exercise of warrants for 300,000 shares of the Company's common stock at an exercise price of $20.9375. Of the 300,000 total shares, 150,000 shares were not issued until February 2000, therefore, the amount received is included in accrued liabilities in the Company's December 31, 1999 Condensed Consolidated Balance Sheets. The exercise of these warrants resulted in an increase in deferred tax benefit and additional paid-in capital as a result of the differences in the book versus tax accounting treatment of these transactions. 12. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will require that all derivative financial instruments be recognized as either assets or liabilities in the balance sheet. SFAS 133 will be effective for the Company's first quarter of fiscal 2001. The Company is in the process of evaluating the effects of this new statement. 13. On February 15, 2000, the Company entered into a definitive agreement to purchase MSFDC L.L.C. (TransPoint) in exchange for 17 million shares of the Company's common stock. TransPoint is a joint venture between Microsoft, First Data Corporation and Citibank. The acquisition, which is expected to close within four to six months, will be accounted for under the purchase method of accounting and is expected to include a charge for in-process research and development. As part of the agreement, the selling parties will fund the joint venture with $100 million of cash immediately prior to closing. A related commercial agreement with Microsoft provides for specific monthly minimum revenue guarantees totaling $120 million over the next five years in exchange for CheckFree providing electronic billing and payment services to Microsoft's Money Central customers at prevailing market rates for such services. CheckFree will recognize revenue ratably over the life of the commercial agreement, taking the minimum monthly revenue guarantee into consideration as it provides such services. A related marketing agreement with First Data Corporation provides for specific annual minimum revenue/cost reduction guarantees totaling $60 million over the next five years in exchange for CheckFree providing electronic billing and payment services to their customers at prevailing market rates for such services, and/or utilizing First Data Corporation's payment services to reduce CheckFree's payment processing costs. CheckFree will recognize revenue and/or expense savings ratably over the life of the marketing agreement taking the minimum monthly guarantees into consideration. The value of the commercial and marketing agreements will be considered in determining the fair value of intangible assets acquired in the acquisition. TransPoint provides electronic billing and payment processing services. 14. Certain amounts in the prior years' financial statements have been reclassified to conform to current year presentation. F-35
200 [BLUEGILL TECHNOLOGIES LOGO] CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-36
201 Report of Independent Public Accountants To the Stockholders of BlueGill Technologies, Inc.: We have audited the accompanying consolidated balance sheets of BLUEGILL TECHNOLOGIES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BlueGill Technologies, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Ann Arbor, Michigan, February 28, 2000. F-37
202 BLUEGILL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS December 31, December 31, 1998 1999 ------------ ------------ 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 =========== ============ The accompanying notes are an integral part of these consolidated balance sheets. F-38
203 BLUEGILL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, -------------------------------------------------------- 1997 1998 1999 ----------- ----------- ------------ 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 =========== =========== ============ The accompanying notes are an integral part of these consolidated statements. F-39
204 BLUEGILL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Additional Deferred ---------------------- Paid-In Stock-based Shares Amount Capital Compensation --------- ------ ----------- ------------ 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) ========= ======= =========== ========= Accumulated Total Other Stockholders' Accumulated Comprehensive Equity Deficit Income (Deficit) ------------ ------------- ------------- 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) ============ ======== =========== Comprehensive Loss ------------- 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 The accompanying notes are an integral part of these consolidated statements. F-40
205 BLUEGILL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, -------------------------------------------- 1997 1998 1999 --------- ----------- ----------- 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 ========= =========== =========== The accompanying notes are an integral part of these consolidated statements. F-41
206 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS BlueGill Technologies, Inc. ("BlueGill") and its wholly-owned subsidiaries (collectively, the "Company") develop, market and support electronic document transmission software technology. In addition, the Company provides consulting, training and maintenance services to customers. The Company is in the early phases of implementing its operating strategy. The Company's future success is subject to several technical and business risks including customer acceptance, availability and retention of key employees, competition and technological changes. Since inception, the Company's revenues have been derived from a limited number of customers located primarily in the United States. In December 1999, the Company signed an agreement and Plan of Merger with Checkfree Acquisition Corporation III, a publicly held Delaware corporation and a wholly-owned subsidiary of Checkfree Holdings Corporation (the "Parent"). The merger agreement provides for all of the outstanding capital shares of BlueGill Technologies, Inc. to be exchanged for approximately 3,205,000 shares of the Parent's common stock, subject to adjustment, depending on the average trading price of Parent's common stock and the diluted number of shares of BlueGill common stock outstanding. (2) SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of BlueGill and its wholly owned subsidiaries, BlueGill Technologies Corporation (an Ontario, Canada Corporation, "BlueGill Canada")and BlueGill Technologies International, Inc. (a Michigan corporation, "BlueGill International"). BlueGill Canada is a research and development center that conducts development activities solely for BlueGill. Prior to 1998, BlueGill owned a 49% interest in BlueGill Canada. In 1998, the Company purchased the remaining 51% interest in BlueGill Canada for $51. A minority stockholder of BlueGill held the 51% interest. BlueGill International engages in sales and marketing efforts in Europe and Asia. All significant intercompany balances and transactions have been eliminated in the consolidation. Foreign Currency Translation The assets and liabilities of BlueGill Canada and BlueGill International are translated using exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are included in accumulated other comprehensive income in the accompanying consolidated financial statements. Revenue Recognition Revenue consists primarily of license fees for the Company's software products. Revenue is recognized only when a customer contract is fully executed, the software is delivered and no significant remaining obligations to the customer exist. F-42
207 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue related to advance payments received under software maintenance agreements is deferred and amortized over the terms of the respective agreements. Revenue from other services is recognized upon performance of the service. Research and Development Research and development expenses include all payroll costs attributable to product development activities and an allocation of overhead expenses incurred by the Company. Product Development Under the criteria set forth in Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of software development costs begins upon the establishment of technological feasibility of the product (defined as a working model). The ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenue, estimated economic product lives and changes in software and hardware technology. Amounts that would have been capitalized under this Statement after consideration of the above factors were immaterial, and therefore no software development costs have been capitalized by the Company. Cash and Cash Equivalents The Company considers highly liquid investments with a maturity of 90 days or less to be cash equivalents. Property and Equipment Additions to property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets generally ranging from three to five years. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the date of the grant over the amount the employee must pay to acquire the stock. As supplemental information, the Company has provided pro forma disclosure of the fair value at the date of grant of stock options granted during 1997, 1998 and 1999 in Note 7, in accordance with the requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." F-43
208 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Comprehensive Loss Comprehensive loss is the total of net loss and all other non-owner changes in equity. The difference between net loss, as reported in the accompanying consolidated statements of operations, and comprehensive loss is the foreign currency translation adjustment for the period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments. The Company has not yet quantified the impact of this statement on the Company's financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition", which provides guidance on when revenue should be recognized. This bulletin did not have a material impact on the accompanying financial statements. Reclassifications Certain amounts from the 1997 and 1998 financial statements have been reclassified to conform with the 1999 presentation. (3) LINE OF CREDIT In 1998, the Company entered into a line-of-credit agreement with a bank whereby the Company may borrow up to $750,000. Outstanding borrowings bear interest at the bank's prime rate plus 0.25% (effective rate of 8% and 8.75% as of December 31, 1998 and 1999, respectively) which is payable monthly. Outstanding borrowings are collateralized by substantially all assets of the Company. The agreement expires on April 29, 2002. F-44
209 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: Year Ended December 31, ------------------------- 1998 1999 ------- -------- Accrued Royalties $34,000 $ 62,300 Accrued Professional fees -- 221,252 Other 27,870 287,229 ------- -------- Total $61,870 $570,781 ======= ======== (5) INCOME TAXES The components of the benefit for income taxes are as follows: Year Ended December 31, --------------------------------------------------- 1997 1998 1999 --------- --------- ----------- Tax benefit $(334,000) $(656,000) $(2,419,000) Change in valuation Allowance 334,000 656,000 2,419,000 --------- --------- ----------- Total benefit $ -- $ -- $ -- ========= ========= =========== 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
210 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 1997, 1998 and 1999, the Company has a deferred income tax asset prior to the valuation allowance totaling $276,000, $1,054,000 and $3,445,000, respectively, consisting primarily of the tax benefit of net operating loss carryforwards. (6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK In June 1998, the Company amended its Certificate of Incorporation in order to affect a 1000-to-1 common stock split and increased the authorized shares of common stock to 30,000,000 from 12,000,000 (post-split). All information in the accompanying consolidated financial statements has been restated to reflect the stock split. Later in June 1998, the Company amended and restated its Certificate of Incorporation pursuant to which it authorized 12,500,000 shares of Series A convertible preferred stock. In December 1998, the Company amended its Certificate of Incorporation pursuant to which the Company increased the authorized shares of Series A convertible preferred stock to 13,250,000 shares from 12,500,000. At various times during the period from June 1, 1998 through December 31, 1998, the Company issued an aggregate of 12,503,301 shares of Series A convertible preferred stock at $0.5174 per share for cash and conversion of a note payable. Certain holders of common stock were permitted to exchange that stock for Series A convertible preferred stock. In June 1999, the Company amended and its Certificate of Incorporation pursuant to which the Company authorized 12,000,000 shares of Series B convertible preferred stock, authorized 12,000,000 shares of Series B-1 convertible preferred stock, reduced the number of authorized shares of Series A convertible preferred stock to 12,505,000 and increased the number of authorized shares of common stock to 40,000,000 from 30,000,000. In September 1999, the Company amended its Certificate of Incorporation pursuant to which the Company increased the number of authorized shares of Series B convertible preferred stock to 13,000,000 shares from 12,000,000 shares, Series B-1 convertible preferred stock to 13,000,000, from 12,000,000 and common stock to 41,000,000 from 40,000,000. At various times during the period from June 1, 1999 through September 30, 1999, the Company issued an aggregate of 12,825,651 shares of Series B convertible preferred stock at $1.52 per share. Common Stock The Company and its founding stockholders (the "Founders") have entered into agreements generally providing the Company the right of first refusal to repurchase any shares of common stock offered for sale by the Founders or upon termination of a Founder's employment with the Company. The holder of each outstanding share of common stock is entitled to one voting right per share. F-46
211 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Common Stock Warrants In June 1997, the Company received $500,000 from the issuance of convertible notes with detachable warrants to purchase 300,000 shares of common stock at $0.375 per share. Accordingly, the proceeds were allocated to the note and warrants based on their relative fair values. The fair value of the warrants was estimated using the Black-Scholes valuation model using the following assumptions: estimated volatility of 0.70, risk-free interest rate of 6.5%, no dividend yield and an expected life of the warrants of three years. Based on the resulting fair value of the warrants and their fair value relative to that of the note, $18,768 of the proceeds was recorded for the warrants as additional paid-in capital in the accompanying consolidated balance sheets. The balance of the proceeds of $481,232 was recorded as the initial carrying value of the note. The resulting discount on the note was being amortized using the effective interest method through December 31, 1998. However, in June 1998 the note and accrued interest converted into 1,042,794 shares of Series A preferred stock. Concurrently, the unamortized discount on the note of $8,769 was expensed. Total amortization expense was $4,277 in 1997 and $14,491 in 1998 which is included in interest expense in the accompanying consolidated statements of operations. The note bore interest at a stated rate of 15% and the effective interest rate was 18.19%. The common stock warrants are exercisable at any time through the earlier of July 24, 2002, or consummation of an initial public offering. As of December 31, 1999, the warrants had not been exercised. Preferred Stock The holders of Series A, Series B and Series B-1 convertible preferred stock have certain rights, privileges and preferences which include the following: Dividends The holders are entitled to receive dividends before any dividend is declared or paid on shares of common stock. Such dividends are payable only when declared by the Board of Directors and are noncumulative. After payment of the preferential dividends, no dividends are paid to common stockholders unless an equivalent dividend is made on the preferred stock. Conversion At the holder's option, each share of preferred stock is convertible into shares of common stock. Each series of preferred stock is automatically converted into common stock upon a public offering of common stock of a certain size and a specified percentage vote of holders of that series. The preferred stock has antidilution protection for issuances below the specified conversion prices, as defined, which is initially equal to $0.5174 per share for the Series A preferred stock and $1.52 for the Series B preferred stock. F-47
212 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Voting Rights Except with respect to the election of the directors, the holders of preferred stock (voting on an as-converted basis) vote with the holders of common stock. Certain actions require separate approvals by the holders of each series of preferred stock, each voting separately as a class. Redemption Rights The holders of at least 75% of the outstanding shares of the Series A convertible preferred stock and the holders of 75% of the outstanding Series B convertible preferred stock may each require the Company to repurchase such shares of that series at any time after June 15, 2003. The redemption prices for the Series A preferred stock and Series B preferred stock are equal to $0.5174 and $1.52 per share, respectively. Liquidation Preference In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holder of each share of Series A convertible preferred stock and each share of Series B convertible preferred stock are entitled to receive, prior to and in preference to any distributions to the holders of common stock, an amount equal to $0.5174 and $1.52 per share, respectively. The liquidation preference of a particular series will not be applicable if the Series A preferred stock will receive more than $2.33 per share and the Series B preferred stock will receive more than $3.04 per share. Registration Rights The holders of Series A and Series B convertible preferred stock have demand "piggyback" registration rights. (7) STOCK OPTION PLANS 1997 Stock Option Plan In April 1997, the Company established a stock option plan (the "1997 Plan") to increase its ability to attract and retain key employees, consultants and directors. Options granted are nonqualified stock options, which may be granted at less than the fair market value of the common stock on the date of grant. All options are granted at the discretion of the Board of Directors. The maximum number of shares that may be granted under the 1997 Plan is 3,200,000, except that upon establishment of the 1998 Stock Option Plan (see below), the remaining 525,000 ungranted options under the 1997 Plan can no longer be granted. Options granted generally become exercisable over a period of two years from the date of grant except that 450,000 options granted vested immediately. Outstanding options expire ten years after the date of grant. F-48
213 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In June 1998, the Company cancelled and re-granted 1,125,000 options for which the exercise price of the options being cancelled were significantly in excess of the estimated fair value of the underlying common stock. The replacement options were granted with an exercise price equal to the estimated fair value of the underlying common stock. In June 1998, the Company also extended the vesting period for 1,100,000 options that were fully vested with an exercise price of $0.001 per share. Under the new vesting schedule, one-third of the options vested immediately, one-third vested on September 30, 1998, and one-third will vest on June 30, 2000. The Company accounted for this event as a cancellation and re-grant of these options. The Company recorded deferred compensation expense totaling $64,900 for the difference between the exercise price and the estimated fair value of the underlying common stock which is being amortized over the revised vesting period. As a result, the Company recorded compensation expense of approximately $48,898 in 1998 and $10,669 in 1999 related to these options. 1998 Stock Option Plan In June 1998, the Company established a stock option plan (the "1998 Plan") to increase its ability to attract and retain key employees, consultants and directors. Options granted may be either incentive stock options, which are granted at not less than the fair market value of the common stock on the date of grant (as determined under the plan), or nonqualified stock options, which may be granted at less than the fair market value of the common stock on the date of grant. All options are granted at the discretion of the Board of Directors. The maximum number of shares that may be granted under the 1998 Plan is 6,000,000. Options granted generally become exercisable over a period of five years from the date of grant except that 200,000 options granted vest over two years and 650,000 options granted vest over four years. Outstanding options expire ten years after the date of grant. F-49
214 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other information concerning all stock options is as follows: Weighted Price Average Number of per Exercise Expiration Shares Share Price Date --------- ----------- --------- ---------- 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 ========== 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
215 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company accounts for stock options granted to non-employees under SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18. In January 1999, the Company granted 50,000 options to an outside consultant in exchange for services to be rendered over a five-year period. The options are exercisable at $0.06 per share and vest 20% on March 31, 1999, 20% on April 26, 2000 and 5% each quarter thereafter. The Company initially measured the estimated fair value of these options at the grant date using the Black-Scholes valuation model with the following assumptions--risk-free interest rate of 5.25%, estimated volatility of 0.89, no dividend yield and an expected life of five years. Under SFAS No. 123 and EITF 96-18, the Company accounts for these options as a variable award and re-measures the estimated fair value of these stock options at each balance sheet date. Accordingly, compensation expense is adjusted at each balance sheet date for any change in the estimated fair value of the stock options. At December 31, 1999, compensation related to this stock option grant totaled $357,675. Compensation expense recognized on these stock options totaled $65,574 in 1999 and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The unamortized balance of compensation related to these stock options totaling $292,101 at December 31, 1999, is included as a separate component of stockholders' equity in the accompanying consolidated balance sheets. The estimated fair value of these options at the date of grant was $0.04 per share. In June 1997, the Company granted an aggregate of 150,000 stock options to two outside consultants in exchange for past services rendered and for services to be rendered through September 1997. The options are exercisable at $0.001 per share and vested immediately upon issuance. The Company initially measured the estimated fair value of these options at the grant date using the Black-Scholes valuation model with the following assumptions--risk-free interest rate of 6.52%, estimated volatility of 0.70, no dividend yield and an expected life of three years. Under SFAS No. 123 and EITF 96-18, the Company accounted for these options as a variable award and re-measured the estimated fair value of these stock options upon completion of the services in September 1997. Compensation expense recognized on these stock options totaled $56,100 in 1997 and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The estimated fair value of these options at the date of grant was $0.374 per share. Had compensation expense for all stock option grants been determined based on the fair value at the date of grant consistent with SFAS 123, the reported net loss would have increased by $122, $7,378 and $35,454 in 1997, 1998 and 1999, respectively. The reported net loss per share would not have changed in 1998 but would have increased to $(1.44) in 1999. This pro forma compensation expense may not be representative of that to be expected in future years. The pro forma fair value of options was estimated at the date of grant using the minimum value option valuation method under SFAS 123 with the following assumptions: Weighted average risk-free interest rate of 5.12%; dividend yield of 0%; and expected life of options of five years. Option valuation models require the input of highly subjective assumptions. Because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options. F-51
216 BLUEGILL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (8) RELATED PARTY TRANSACTIONS The holder of the note payable, who subsequently became a stockholder of the Company in 1998, provided consulting services to the Company in 1998. Payments for these consulting services totaled approximately $35,000 in 1998. (9) COMMITMENTS The Company leases its office space under operating lease agreements, which expire at various dates through July 2001. Total rent expense was approximately $12,000, $33,000 and $423,000 in 1997, 1998 and 1999, respectively. Minimum future rental payments under noncancellable operating lease agreements as of December 31, 1999, are as follows: 2000 $ 436,786 2001 442,198 2002 430,466 2003 431,664 Thereafter 107,916 ---------- $1,849,030 ========== F-52
217 INDEPENDENT AUDITORS' REPORT MSFDC, L.L.C. Redmond, Washington We have audited the accompanying consolidated balance sheets of MSFDC, L.L.C. and subsidiaries, a development stage company (the Company), as of July 2, 1999, and July 3, 1998, and the related consolidated statements of operations, members' capital deficiency, and cash flows for the year ended July 2, 1999, and the periods from June 18, 1997 (inception) to July 3, 1998, and from June 18, 1997 (inception) to July 2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 2, 1999, and July 3, 1998, and the results of its operations and its cash flows for the year ended July 2, 1999, and for the periods from June 18, 1997 (inception) to July 3, 1998, and from June 18, 1997 (inception) to July 2, 1999, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Seattle, Washington October 22, 1999 (February 15, 2000, as to Note 4) F-53
218 MSFDC, L.L.C. AND SUBSIDIARIES - ------------------------------ (a development stage company) CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ December 31, July 2, July 3, ASSETS 1999 1999 1998 - ------ ---- ---- ---- (unaudited) 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 ============ ============ ============ See notes to consolidated financial statements. F-54
219 MSFDC, L.L.C. AND SUBSIDIARIES - ------------------------------ (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- 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) 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 ============ ============ ============ ============ ============ ============ See notes to consolidated financial statements. F-55
220 MSFDC, L.L.C. AND SUBSIDIARIES - ------------------------------ (a development stage company) CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL DEFICIENCY - ------------------------------------------------------------------------------- MS member FDC member Total --------- ---------- ----- 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) ============ ============ ============ See notes to consolidated financial statements. F-56
221 MSFDC, L.L.C. AND SUBSIDIARIES - ------------------------------ (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ 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) 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 ============ =========== ============ ============ ============ ============ See notes to consolidated financial statements. F-57
222 MSFDC, L.L.C. AND SUBSIDIARIES - ------------------------------ (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS DESCRIPTION OF BUSINESS: The purpose of the business is to provide electronic statement presentment and electronic remittance services to consumers and businesses using the Internet. The business has been in the development stage and commenced commercial operations in July 1999. ORGANIZATION: MSFDC, L.L.C. is a Delaware limited liability company and was formed pursuant to the Limited Liability Company Agreement of MSFDC, L.L.C. dated as of June 18, 1997 (inception) (the LLC Agreement). The members of MSFDC, L.L.C. are MS II, L.L.C., a Delaware limited liability company (the MS member), and First Data L.L.C., a Delaware limited liability company (the FDC member). The MS member is a wholly owned subsidiary of Microsoft Corporation (MS). The FDC member is a wholly owned subsidiary of First Data Corporation (FDC). In September 1998, MSFDC, L.L.C. entered into an arrangement whereby the electronic bill presentment and payment service business in the United States previously under development by MSFDC, L.L.C. was contributed to a newly formed entity, Newco L.L.C. (TransPoint). The members of TransPoint are MSFDC, L.L.C. and Citicorp Electronic Commerce Inc. (the Citicorp member). The Citicorp member of TransPoint is a wholly owned subsidiary of Citicorp. In connection with this new arrangement, two additional entities were formed: New MSFDC, L.L.C. (TransPoint Technologies and Services) and Jointco L.L.C. (TransPoint Accounting). The Citicorp member interest in TransPoint Technologies and Services and TransPoint is 25% and 5%, respectively, with MSFDC, L.L.C. holding the remaining interests. TransPoint Technologies and Services and TransPoint each hold 50% capital interests in TransPoint Accounting. These three new entities are collectively referred to as the TransPoint limited liability companies. The TransPoint limited liability companies collectively have rights to all future domestic revenues generated by the electronic bill presentment and payment service previously under development by MSFDC, L.L.C. The MS and FDC members have established a new limited partnership, MSFDC International L.P., to account for the future international revenues and related costs. CONTRIBUTIONS: Upon formation of MSFDC, L.L.C. in 1997, the MS member contributed $50,000 in cash. First Data Resources, Inc. contributed $40,000 in cash, and Integrated Payment Systems, Inc. contributed $10,000 as initial capital contributions. Immediately following the initial capital contribution, Integrated Payment Systems, Inc. transferred its membership interest to First Data Resources, Inc. These interests were then transferred to First Data L.L.C. In connection with the formation of the new TransPoint limited liability companies, Citicorp contributed $48,000,000 in cash as its initial contribution and MSFDC, L.L.C. contributed $37,529,933. MSFDC, L.L.C. and the Citicorp member also made nonmonetary contributions to the TransPoint limited liability companies with a stated value of $446,250,000 and $30,750,000, respectively. The MSFDC, L.L.C. nonmonetary contribution was in the form of software development, goodwill, and tangible and intangible assets. The Citicorp member nonmonetary contribution represented an option to obtain a license of software and intangible assets and no value has been ascribed to this contribution in the accompanying consolidated financial statements. F-58
223 LOSS AND CASH FLOW ALLOCATIONS: The allocation of profit and loss and cash flow of MSFDC, L.L.C. and the TransPoint limited liability companies is defined in the respective limited liability company agreements. These agreements generally result in a sharing of ongoing capital contribution requirements and profit and loss based on initial membership interests. Cash distributions are to be made annually in an amount equal to the assumed tax liability of the entities, or if greater, excess cash flow. For financial reporting purposes, losses from the TransPoint limited liability companies have been allocated to MSFDC, L.L.C. and the Citicorp member based on their respective capital account interests of 85% and 15%, respectively. Citicorp loss allocations commenced upon the date of their capital contribution in April 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim financial information contained herein is unaudited but, in the opinion of management, reflects all adjustments which are necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. Results of operations for interim periods presented herein are not necessarily indicative of results of operations for the entire year. The unaudited interim financial statements of MSFDC L.L.C. include the accounts of MSFDC International, L.P., which was formed in April 1999. The accounts of MSFDC International, L.P. have been combined with those of MSFDC L.L.C. due to common ownership, and because the entity is being acquired under the same transaction as MSFDC L.L.C. (See Note 4). NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION: The financial statements include all majority and wholly owned subsidiaries (collectively, the Company). Intercompany balances and transactions have been eliminated in consolidation. MINORITY INTEREST: Citicorp's capital contributions and share of losses in the TransPoint limited liability companies has been recorded as a minority interest. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT: Property and equipment is carried at cost, less accumulated depreciation, and consists primarily of computers and related technical equipment. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets, which range from one year to 3 years. The carrying value of equipment is reviewed periodically for impairment. If the carrying amount of the asset is not recoverable, the asset is considered to be impaired and the value is adjusted to the estimated fair value. INCOME TAXES: As a limited liability company, the Company is treated as a partnership for federal and state income tax purposes and its income or loss is taxable directly to its members. Accordingly, the accompanying financial statements do not include any income tax provisions. PRODUCT DEVELOPMENT: Product development costs are expensed as incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, does not materially affect the Company. RECENT ACCOUNTING PRONOUNCEMENT: In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Cost of Computer Software Developed of Obtained for Internal Use. SOP 98-1 requires capitalization and amortization of costs relating to internal-use software, and was adopted by the Company beginning July 3, 1999. The adoption of SOP 98-1 resulted in the capitalization of approximately $9.4 million in costs through December 31, 2000 (unaudited). Capitalized costs include direct labor and related overhead for software developed by the Company and the cost of software purchased from third parties. As of December 31, 2000, the Company has not yet commenced amortization of any of its capitalized software costs as the software is not ready for its intended use. Amortization of capitalized software costs will be calculated using the straight-line method commencing when the software is ready for its intended use. Quarterly, the Company reviews and measures any impairment in accordance with the provisions of SFAS No. 121, Accounting for the impairment of long-lived assets and for long-lived assets to be disposed of. F-59
224 NOTE 3: RELATED PARTY TRANSACTIONS AND COMMITMENTS OPERATING COSTS AND REIMBURSEMENTS: The MS member and the FDC member provide certain operational services, some of which are reimbursed by the Company. Selling, general, and administrative expenses related to these services provided by the MS member and the FDC member for the year ended July 2, 1999, totaled $2,248,000 and $11,601,000, respectively, and $7,338,000 and $7,080,000, respectively, for the period from June 18, 1997 (inception) to July 3, 1998. Services related to selling, general, and administrative expenses for the six-month periods ended December 31, 1999 and 1998 (unaudited) totaled $10,461,000 and $895,000, respectively, for the MS member and $2,798,000 and $5,809,000, respectively, for the FDC member. RESEARCH AND DEVELOPMENT COSTS AND REIMBURSEMENTS: The MS member and the FDC member perform certain research and development activities, some of which are reimbursed by the Company. Research and development expenses related to these activities performed by the MS member and the FDC member for the year ended July 2, 1999, and the period from June 18, 1997 (inception) to July 3, 1998, totaled $18,886,000 and $4,279,000, respectively, and $6,502,000 and $3,155,000, respectively. Research and development costs for the six-month periods ended December 31, 1999 and 1998 (unaudited) totaled $10,522,000 and $-0-, respectively, for the MS member and $8,422,000 and $2,022,000, respectively, for the FDC member. Of research and development costs incurred during the six-month period ended December 31, 1999, $9,439,000 (unaudited) was capitalized under SOP 98-1 as software developed for internal use. ACCOUNTS PAYABLE: Accounts payable includes $11,722,000 and $4,407,000 to the MS member and the FDC member, respectively, as of July 2, 1999, and $2,569,000 and $2,582,000 to the MS member and the FDC member, respectively, as of July 3, 1998. Accounts payable as of December 31, 1999 (unaudited) includes $11,352,000 and $956,000 for the MS member and FDC member, respectively. NOTE 4: SUBSEQUENT EVENT On February 15, 2000, the Company entered into an agreement to be acquired. Under the terms of the agreement, the members have agreed to fund the Company with $100 million in cash before the closing of the transaction. F-60
225 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Article IX of the Registrant's By-Laws (the "By-Laws") provides that the Registrant shall, to the fullest extent permitted by applicable law as then in effect, indemnify any person who is or was involved or threatened to be made so involved in any action by reason of the fact that he is or was a director or officer of the Registrant, or is or was serving at the request of the Registrant as a director or officer of another entity. The right to indemnification includes the right to receive payment of expenses in advance of the final disposition of the proceeding. All indemnification rights in Article IX are contract rights. The Registrant also may provide indemnification for employees, agents, attorneys and representatives of the Registrant by action of its board of directors. Article IX expressly states that no amendment to the By-Laws or the Certificate of Incorporation shall adversely affect any right to indemnification for acts occurring prior to that amendment. The right of indemnification is not exclusive of any other rights of indemnification that may be available. In determining the right to indemnification under Article IX, the Registrant has the burden of proof that the indemnitee has not met the applicable standard of conduct. If successful in whole or in part in such a proceeding, the indemnitee is entitled to be indemnified for expenses incurred in connection with such proceeding. All reasonable expenses incurred by an indemnitee in connection with any proceeding shall be advanced by the Registrant after receipt of a statement from the indemnitee requesting such advance. Article IX provides that the Registrant may purchase and maintain insurance in connection with any expenses, liability or loss relating to any proceeding, whether or not the Registrant would have the power to indemnify the officer, director, employee, agent, attorney, trustee or representative. The Registrant also may enter into indemnification contracts with any of the foregoing persons, which contracts are deemed specifically approved and authorized by the stockholders and not subject to invalidity by reason of any interested directors. If any provision of Article IX is held invalid, illegal or unenforceable, the remaining provisions of Article IX shall not be affected. An indemnitee also may elect, as an alternative to the Article IX procedures, to follow procedures authorized by applicable corporate law or statute. Article IX sets forth specific procedures for the advancement of expenses and for the determination of entitlement to indemnification. Entitlement to indemnification shall be determined by a majority vote of disinterested directors, by a written opinion of independent counsel under specific circumstances or by the Registrant's stockholders if a majority of the disinterested directors determines the issue should be submitted to the stockholders, or, if none of the persons empowered to make a determination have been appointed and have made a determination within 60 days after the receipt of a request for indemnification, the indemnitee is deemed to be entitled to indemnification unless the indemnitee misrepresented or omitted a material fact in making or supporting his request for indemnification or the indemnification is prohibited by law. The termination of an action by judgment, order, settlement or conviction or upon a plea of nolo contendere does not adversely affect the right of an indemnitee to indemnification or create any presumption with respect to any standard of conduct. An indemnitee is entitled to indemnification for expenses if he is successful on the merits, if the action is terminated without a determination of liability on the part of the indemnitee or if the indemnitee was not a party to the action. An indemnitee who is determined not to be entitled to indemnification may appeal such determination either through the courts or by arbitration. (b) Under Section 145 of the Delaware General Corporation Law, indemnification of any person who is or was a party or threatened to be made so in any action by reason of the fact that he is or was a director, officer, employee or agent of the corporation or was serving as such for another corporation or enterprise at the request of the corporation is permitted against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the indemnified person in such proceeding where the indemnified person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the II-1
226 corporation, and in criminal actions, where he had no reasonable cause to believe his conduct was unlawful. Indemnification is also permitted in lawsuits brought by or on behalf of the corporation if the standards of conduct described above are met, except that no indemnification is permitted in respect to any matter in which the person is adjudged to be liable to the corporation unless a court shall determine that indemnification is fair and reasonable in view of all the circumstances of the case. Indemnification against expenses (including attorneys' fees) actually and reasonably incurred by directors, officers, employees and agents is required under Section 145 of the Delaware Law in those cases where the person to be indemnified has been successful on the merits or otherwise in defense of a proceeding of the type described above. In cases where indemnification is permissive, a determination as to whether the person met the applicable standard of conduct must be made (unless ordered by a court) by majority vote of the disinterested directors, by a committee of the disinterested directors designated by a majority vote of such directors, even though less than a quorum, by independent legal counsel, or by the stockholders. Such indemnification rights are specifically not deemed to be exclusive of other rights of indemnification by agreement or otherwise and the corporation is authorized to advance expenses incurred prior to the final disposition of a matter upon receipt of an undertaking to repay such amounts on a determination that indemnification was not permitted in the circumstances of the case. (c) Under Section 145 of the Delaware Law and Article IX of the By-Laws, the Registrant may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Registrant, or who, while serving in such capacity, is or was at the request of the Registrant, a director, officer, employee or agent of another corporation or other enterprise, against liability asserted against or incurred by such person in any such capacity whether or not the Registrant would have the power to provide indemnity under Section 145 or the By-Laws. The Registrant has obtained insurance which, subject to specific exceptions, insures the directors and officers of the Registrant and its subsidiaries (d) The Registrant has entered into indemnification contracts with its directors and some officers which provides that such directors and officers will be indemnified to the fullest extent provided by Section 145 of the Delaware Law (or such other future statutory provision authorizing or permitting indemnification) against all expenses (including attorneys' fees), judgments, fines and settlement amounts, actually and reasonably paid or incurred by them in any action or proceeding, including any action by or in the right of the Registrant, by reason of the fact that they were a director, officer, employee or agent of the Registrant, or were serving at the request of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. No indemnity will be provided under such indemnification contracts (i) except to the extent that the aggregate losses to be indemnified pursuant thereto exceed the amount for which the indemnitee is indemnified pursuant to any directors and officers liability insurance purchased and maintained by the Registrant; (ii) in respect to remuneration paid to an indemnitee if it shall be determined by a final judgment that such remuneration was in violation of law; (iii) on account of any suit in which judgment is rendered against an indemnitee for an accounting of profits made from the purchase or sale by indemnitee of securities of the Registrant pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iv) on account of the indemnitee's act or omission being finally adjudged to have been not in good faith or involving intentional misconduct or a knowing violation of law; or (v) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. (e) Article EIGHTH of the Registrant's Restated Certificate of Incorporation provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for any unlawful payment of a dividend or unlawful stock purchase or redemption; or (iv) for any transaction from which the director derived any improper personal benefit. II-2
227 The above discussion of the Registrant's By-Laws, Restated Certificate of Incorporation, indemnification agreements, and of Section 145 of the Delaware Law is not intended to be exhaustive and is respectively qualified in its entirety by such By-Laws, Restated Certificate of Incorporation and statutes. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. EXHIBIT EXHIBIT NUMBER DESCRIPTION ------- ----------- 2(a) Agreement and Plan of Merger, dated as of December 20, 1999, among CheckFree Holdings Corporation, CheckFree Acquisition Corporation IV, and BlueGill Technologies, Inc. (Incorporated by reference to Appendix A of Form S-4 Registration Statement (333-32644)). 2(b) Agreement and Plan Merger and Contribution Agreement, dated as of February 15, 2000, among Microsoft Corporation, First Data Corporation, Citibank, N.A., MS II, LLC, First Data, L.L.C., H & B Finance, Inc., First Data International Partner, Inc., MSFDC International, Inc., Citicorp Electronic Commerce, Inc., CheckFree Holdings Corporation, Chopper Merger Corporation, and CheckFree Corporation (Attached as Appendix A to the Proxy Statement/Prospectus that is part of this Registration Statement.) 3(a) * Certificate of Incorporation of CheckFree Corporation. 3(b) * By-Laws of CheckFree Corporation. 3(c) * Form of Specimen Stock Certificate. 3(d) Form of Restated Certificate of Incorporation of CheckFree Corporation (included as Appendix C to the proxy statement/prospectus forming a part of this registration statement). 3(e) Form of Restated By-Laws of CheckFree Corporation (included as Appendix D to the proxy statement/prospectus forming a part of this registration statement). 3(f) Restated Certificate of Incorporation of CheckFree Holdings Corporation. (Reference is made to Exhibit 3(a) to the Current Report on Form 8-K, dated December 22, 1997, filed with the Securities and Exchange Commission on December 30, 1997, and incorporated herein by reference.) 3(g) By-Laws of CheckFree Holdings Corporation. (Reference is made to Exhibit 3(b) to the Current Report on Form 8-K, dated December 22, 1997, filed with the Securities and Exchange Commission on December 30, 1997, and incorporated herein by reference.) 3(h) Form of Specimen Stock Certificate of CheckFree Holdings Corporation. (Reference is made to Exhibit 3(c) to the Current Report on Form 8-K, dated December 22, 1997, filed with the Securities and Exchange Commission on December 30, 1997, and incorporated herein by reference.) 4(a) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of CheckFree Corporation's Restated Certificate of Incorporation (contained in the Company's Restated Certificate of Incorporation filed as Exhibit 3(d) hereto) and Articles II, III, IV, VI and VIII of CheckFree Corporation's By-Laws (contained in the Company's By-Laws filed as Exhibit 3(e) hereto). II-3
228 4(b) * Form of Rights Agreement, dated as of [ ], 2000, by and between the CheckFree Corporation and The Fifth Third Bank, as Rights Agent. 4(c) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of CheckFree Holdings Corporation's Restated Certificate of Incorporation (contained in CheckFree Holdings Corporation's Restated Certificate of Incorporation filed as Exhibit 3(f) hereto) and Articles II, III, IV, VI and VIII of CheckFree Holdings Corporation's By-Laws (contained in CheckFree Holdings' By-Laws filed as Exhibit 3(g) hereto). 4(d) Rights Agreement, dated as of December 16, 1997, by and between CheckFree Holdings Corporation and The Fifth Third Bank, as Rights Agent. (Reference is made to Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 12, 1999, and incorporated herein by reference.) 5 * Opinion of Porter, Wright, Morris & Arthur LLP regarding legality. 10(a) CheckFree Holdings Corporation Amended and Restated Associate Stock Purchase Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as amended (Registration No. 333-21795), filed with the Securities and Exchange Commission on January 14, 1998, and incorporated herein by reference.) 10(b) CheckFree Holdings Corporation Amended and Restated 1995 Stock Option Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as amended (Registration No. 33-98446), filed with the Securities and Exchange Commission on January 9, 1998, and incorporated herein by reference.) 10(c) CheckFree Holdings Corporation Amended and Restated 1993 Stock Option Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as amended (Registration No. 33-98442), filed with the Securities and Exchange Commission on January 9, 1998, and incorporated herein by reference.) 10(d) CheckFree Holdings Corporation Amended and Restated 1983 Non-Statutory Stock Option Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as amended (Registration No. 33-98440), filed with the Securities and Exchange Commission on January 9, 1998, and incorporated herein by reference.) 10(e) CheckFree Holdings Corporation Second Amended and Restated 1983 Incentive Stock Option Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as amended (Registration No. 33-98444), filed with the Securities and Exchange Commission on January 9, 1998, and incorporated herein by reference.) 10(f) Form of Agreement. (Reference is made to Exhibit 10(a) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(g) Schedule identifying material details of Indemnification Agreements substantially identical to Exhibit 10(f). (Reference is made to Exhibit 10(g) to CheckFree Holdings Corporation's Form 10-K for the year ended June 30, 1997, filed with the Securities and Exchange Commission on September 26, 1997, and incorporated herein by reference.) 10(h) Noncompete, Nondisclosure, and Assignment Agreement, dated February 1, 1990, between Peter J. Kight and CheckFree Holdings Corporation. (Reference is made to Exhibit 10(i) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(i) Noncompete, Nondisclosure, and Assignment Agreement, dated February 1, 1990, between Mark A. Johnson and CheckFree Holdings Corporation. (Reference is made to Exhibit 10(j) to Registration Statement on Form S-1, as amended (Registration No. 33- II-4
229 95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(j) Electronic Bill Payment Services Agreement, dated March 10, 1995, between the CheckFree Holdings Corporation and FiTech, Inc. (Reference is made to Exhibit 10(gg) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.)** 10(k) Amendment to Bill Payment and Remote Banking Services Agreement, dated July 1, 1995, between CheckFree Holdings Corporation and FiTech, Inc. (Reference is made to Exhibit 10(hh) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.)** 10(l) Automated Clearinghouse Operations Agreement, dated April 1, 1994, between CheckFree Holdings Corporation and Society National Bank. (Reference is made to Exhibit 10(ii) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(m) Merchant Processing Agreement, dated March 13, 1995, between CheckFree Holdings Corporation and Society National Bank. (Reference is made to Exhibit 10(jj) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(n) Lease, dated August 1, 1993, between CheckFree Holdings Corporation and the Director of Development of the State of Ohio. (Reference is made to Exhibit 10(rr) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(o) Guaranty Agreement, dated August 1, 1993, between CheckFree Holdings Corporation and The Provident Bank. (Reference is made to Exhibit 10(ss) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(p) Demand Mortgage Note, dated August 25, 1993, of CheckFree Holdings Corporation. (Reference is made to Exhibit 10(tt) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(q) Irrevocable Letter of Credit from Society National Bank for CheckFree Holdings Corporation, dated August 25, 1993 (including second renewal thereof). (Reference is made to Exhibit 10(uu) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(r) Open-End Mortgage, Assignment of Rents and Security Agreement, dated August 25, 1993, with CheckFree Holdings Corporation as mortgagor and Society National Bank as mortgagee. (Reference is made to Exhibit 10(vv) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) II-5
230 10(s) Loan and Security Agreement, dated August 25, 1993, between CheckFree Holdings Corporation and Society National Bank. (Reference is made to Exhibit 10(ww) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(t) Commercial Note Variable Rate, dated January 3, 1995, of CheckFree Holdings Corporation. (Reference is made to Exhibit 10(xx) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(u) Reimbursement Agreement, dated August 25, 1993, between CheckFree Holdings Corporation and Peter J. Kight. (Reference is made to Exhibit 10(yy) to Registration Statement on Form S-1, as amended (Registration No. 33-95738), filed with the Securities and Exchange Commission on August 14, 1995, and incorporated herein by reference.) 10(v) License Agreement, dated October 27, 1995, between CheckFree Holdings Corporation and Block Financial Corporation. (Reference is made to Exhibit 10(ddd) to CheckFree Holdings Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Securities and Exchange Commission, and incorporated herein by reference.)** 10(w) Joint Marketing and Trademark License Agreement, dated December 28, 1995, between CheckFree Holdings Corporation and Electronic Data Systems Corporation. (Reference is made to Exhibit 10(eee) to CheckFree Holdings Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Securities and Exchange Commission, and incorporated herein by reference.)** 10(x) Joint Marketing Agreement, dated November 3, 1995, between CheckFree Holdings Corporation and Fiserv, Inc. (Reference is made to Exhibit 10(fff) to CheckFree Holdings Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Securities and Exchange Commission, and incorporated herein by reference.)** 10(y) Payment Services, Software Development and Marketing Agreement, dated as of February 27, 1996, between CheckFree Holdings Corporation and CyberCash. (Reference is made to Exhibit 10(a) to the Form 10-Q for the quarter ended March 31, 1996, filed with the Securities and Exchange Commission, and incorporated herein by reference.) ** 10(z) Executive Employment Agreement between CheckFree Holdings Corporation and Peter J. Kight. (Reference is made to Exhibit 10(z) to CheckFree Holdings Corporation's Form 10-K for the year ended June 30, 1997, filed with the Securities and Exchange Commission on September 26, 1997, and incorporated herein by reference.) 10(aa) Executive Employment Agreement between CheckFree Holdings Corporation and Lynn D. Busing. (Reference is made to Exhibit 10(f) to the Form 10-Q for the quarter ended March 31, 1996, filed with the Securities and Exchange Commission, and incorporated herein by reference.) 10(bb) Agreement for Automated Clearinghouse Services between CheckFree Holdings Corporation and The Chase Manhattan Bank, N.A., dated as of July 1, 1996. (Reference is made to Exhibit 10(qqq) to the Form 10-K for the transition period ended June 30, 1996, filed with the Securities and Exchange Commission, and incorporated herein by reference.) 10(cc) Loan and Security Agreement, dated as of May 13, 1997, among KeyBank National Association, CheckFree Holdings Corporation, CheckFree Software Solutions, Inc., CheckFree Services Corporation, Security APL, Inc., Servantis Systems, Inc., and II-6
231 Servantis Services, Inc. (Reference is made to Exhibit 10(ee) to CheckFree Holdings Corporation's Form 10-K for the year ended June 30, 1997, filed with the Securities and Exchange Commission on September 26, 1997, and incorporated herein by reference.) 10(dd) First Amendment to Loan and Security Agreement by and between KeyBank National Association, as Lender, and CheckFree Corporation, as Borrower, dated as of December 9, 1998. (Reference is made to Exhibit 10.1 to CheckFree Holdings Corporation's Form 10-Q for the quarter ended March 31, 1999, filed with the Securities and Exchange Commission on May 17, 1999, and incorporated herein by reference.) 10(ee) CheckFree Corporation Incentive Compensation Plan. (Reference is made to Exhibit 10(ff) to CheckFree Holdings Corporation's Form 10-K for the year ended June 30, 1997, filed with the Securities and Exchange Commission on September 26, 1997, and incorporated herein by reference.) 10(ff)*** Form of Commercial Alliance Agreement to be entered into between CheckFree Corporation and Microsoft Corporation.**** 10(gg)*** Form of Marketing Agreement to be entered into between CheckFree Corporation and First Data Corporation.**** 21(a) * Subsidiaries of CheckFree Corporation. 21(b) Subsidiaries of CheckFree Holdings Corporation. (Reference is made to Exhibit 21 of CheckFree Holdings Corporation's Form 10-K for the year ended June 30, 1999, filed with the Securities and Exchange Commission on September 27, 1999, and incorporated herein by reference). 23(a) Consent of Porter, Wright, Morris & Arthur LLP (included in Exhibit 5). 23(b)*** Consent of Deloitte & Touche LLP. 23(c)*** Consent of Deloitte & Touche LLP. 23(d)*** Consent of Arthur Andersen LLP. 24 * Powers of Attorney. ------------------------ * Previously filed with this report. ** Portions of this Exhibit have been given confidential treatment by the Commission. *** Filed with this report. **** We have requested that the Securities and Exchange Commission give confidential treatment to portions of this Exhibit. II-7
232 ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of the Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Registration Statement, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-8
233 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Norcross, State of Georgia, on April 17, 2000. CHECKFREE CORPORATION By: /S/ ALLEN L. SHULMAN ------------------------------------ Allen L. Shulman, Vice President, Treasurer, and Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 17th day of April, 2000. Signature Title *PETER J. KIGHT President, Chief Executive Officer - -------------------------------- and Director Peter J. Kight (Principal Executive Officer) /S/ALLEN L. SHULMAN Vice President and Treasurer - -------------------------------- (Principal Financial and Accounting Officer) Allen L. Shulman *By: /S/ CURTIS A. LOVELAND - -------------------------------- Curtis A. Loveland, Attorney-in-Fact II-9
1 Exhibit 10(ff) CONFIDENTIAL TREATMENT - Asterisked material has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. Note: this draft may be restated by agreement of the parties to correct typos and other minor errors. MICROSOFT COMMERCIAL ALLIANCE AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into by and between CHECKFREE CORPORATION ("CHECKFREE"), a Delaware corporation, and MICROSOFT CORPORATION ("MICROSOFT"), a Washington, U.S.A. corporation. The "Effective Date" of this Agreement shall be immediately after the Effective Time of the Merger Agreement (defined below). RECITALS i. CHECKFREE is a provider of consumer electronic payment services. ii. MICROSOFT is a provider of software for personal computers, and has an online presence through its MSN network. iii. CHECKFREE, MICROSOFT, and other entities are parties to that certain Agreement and Plan of Merger and Contribution Agreement dated February 15, 2000 (the "Merger Agreement"). Effective upon consummation of the transactions contemplated by the Merger Agreement, CHECKFREE and MICROSOFT desire to enter into a long-term relationship, the terms of which are set forth in this Agreement. AGREEMENT For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS 1.1 "Automated Clearinghouse" shall mean automated clearing house. 1.2 "API" shall have the meaning set forth in Section 2.3. 1.3 "Applicant" shall have the meaning set forth in Exhibit 2. 1.4 "Arbitration Panel" shall have the meaning set forth in Exhibit 2. 1.5 "Banking Business Day" shall have the meaning set forth in Exhibit 3. 1.6 "Bill Presentment and Payment" or "BPP" shall mean an Interactive Service (i) by which the user is presented with a bill [(including amount due, biller name, due date, user's account number with payee if any) for goods or services together with a means to pay or order payment of that bill pursuant to payment instructions entered by the user including amount of payment, date and source account, and (ii) which Interactive Service provides bills from two or more separate sources. 1.7 "Business Day" shall have the meaning set forth in Exhibit 2. 1
2 1.8 "Businesses" shall mean small businesses, sole proprietorships, partnerships, corporations, limited liability companies, or other such entities. 1.9 "Capital Stock" shall the meaning set forth in Section 12.1(b) of the Merger Agreement. 1.10 "Change of Control" shall have the meaning set forth in Section 18.4. 1.11 "CheckFree Error" shall have the meaning set forth in Exhibit 3. 1.12 "CHECKFREE Indemnified Claims" shall have the meaning set forth in Section 15.2(a). 1.13 "CHECKFREE PA and BPP Services" shall mean the back end services for Pay Anyone and Bill Presentment and Payment that CHECKFREE offers to Internet portal providers or to other providers of interactive services as of the Effective Date of this Agreement, and for which wholesale pricing is listed in Exhibit 1 hereto. CHECKFREE PA and BPP Services shall also include improved versions thereof released by CHECKFREE during the Term, but shall specifically exclude any new services added after the Effective Date. For example (but without limitation), future versions of CHECKFREE PA and BPP Services relating to Pay Anyone shall be deemed CHECKFREE PA and BPP Services despite changes to such services to improve the speed of paper check production, but CHECKFREE PA and BPP Services shall not include back end support for person-to-person electronic payments because CHECKFREE does not offer such services as of the Effective Date. CHECKFREE PA and BPP Services shall include support services delivered in connection therewith as set forth in Exhibit 1. 1.14 "CHECKFREE Patents" shall mean any and all patents owned or licensable by CHECKFREE during the Term of this Agreement. 1.15 "CHECKFREE Services" shall mean the CHECKFREE PA and BPP Services, plus any future back end DDA to DDA payment services delivered by CHECKFREE to MICROSOFT that may be agreed upon by the parties pursuant to this Agreement. 1.16 "Confidential Information" shall have the meaning set forth in Exhibit 4. 1.17 "Consumers" shall mean individual persons, and shall not include small businesses, sole proprietorships, partnerships, corporations, limited liability companies, or other such entities. 1.18 "CSP" shall have the meaning set forth in Section 9.2. 1.19 "DDA" shall mean a demand deposit account with a financial institution. 1.20 "Designated Group" shall have the meaning set forth in Section 12.1(d) of the Merger Agreement. 1.21 "Dispute" shall have the meaning set forth in Exhibit 2. 2
3 1.22 "Exclusive Services" shall mean CHECKFREE PA and BPP Services, excluding the services that MICROSOFT may procure from third parties (or itself provide) pursuant to the exceptions referenced and/or included in Section 3. 1.23 "First Tier Support" shall have the meaning set forth in Exhibit 1 hereto. 1.24 "First Version" shall have the meaning set forth in Section 9.1. 1.25 "Hosting" shall have the meaning set forth in Section 3(d). 1.26 "Included Services" shall have the meaning set forth in Exhibit 1 hereto. 1.27 "Indemnified Party" shall have the meaning set forth in Section 15.3. 1.28 "Indemnifying Party" shall have the meaning set forth in Section 15.3. 1.29 "Intellectual Property Arbitrator" shall have the meaning set forth in Exhibit 2. 1.30 "Interactive Service" shall mean a service accessed with electronic devices (whether now known or hereafter developed) which devices allow the user to view information and respond with additional information, whether during a single session or at additional future sessions. Such devices shall include, without limitation, computers, personal digital assistants, automated teller machines, screen telephones, mobile screen telephones, and Internet-enabled televisions. 1.31 "Knowledge" shall have the meaning set forth in Section 12.1(h) of the Merger Agreement. 1.32 "License Agreement" shall have the meaning set forth in the Merger Agreement. 1.33 "MICROSOFT Customer Information" shall have the meaning set forth in Section 12.1. 1.34 "MICROSOFT Indemnified Claims" shall have the meaning set forth in Section 15.1(a). 1.35 "MICROSOFT Platforms" shall have the meaning as set forth in Section 9.2 herein. 1.36 "MICROSOFT Services" shall mean any and all services and products offered by MICROSOFT, or by third parties pursuant to an agreement with MICROSOFT, that utilize CHECKFREE Services. 1.37 "MSN Payment Service" shall have the meaning set forth in Section 2.1 herein. 1.38 "Pay Anyone" or "PA" shall mean an Interactive Service through which the user may make payment(s) from the user's DDA to any other person without the need for the electronic presentment of a bill in connection with such payment, where the user enters payment instructions including payment amount, source account, date of payment, payee, account number of payee (if any), and the Interactive Service accepts and completes the payment per the instructions. 3
4 1.39 "Payment Research Case" shall have the meaning set forth in Exhibit 3. 1.40 "Penalties" shall have the meaning set forth in Exhibit 7. 1.41 "Preferred Platform" shall have the meaning as set forth in Section 9.1 herein. 1.42 "Preferred Supplier" shall mean a supplying party that has a ninety (90) day exclusive negotiation period in which to execute an agreement with the receiving party to provide a given service to a receiving party, provided that the receiving party shall have the ultimate discretion to select its supplier (and/or to provide such services itself). Such 90 day period shall be conducted as in the following example: if the receiving party desires services or products for which the supplying party is the Preferred Supplier pursuant to the terms of this Agreement, the receiving party shall notify the supplying party thereof in writing setting forth in reasonable detail the particular services or products desired, and the parties shall have a 90 day exclusive negotiation period thereafter in which to reach agreement. 1.43 "Second Tier Support" shall have the meaning set forth in Exhibit 1 hereto. 1.44 "Subsidiary" shall mean any corporation, partnership, joint venture or other entity in which a party (i) owns, directly or indirectly, greater than fifty percent (50%) of the outstanding voting securities or equity interests, or (ii) is a general partner. "Subsidiary" shall not include any entity that would otherwise be a Subsidiary, but such entity is registered under the Securities Exchange Act of 1934, as amended, and such entity is operated as a separate company (e.g., Expedia, Inc. is operated by MICROSOFT as a separate company), unless such entity is a successor to MICROSOFT, or unless such entity is MSN or a successor to all or substantially all of the business of MSN. 1.45 "[*] Credit" shall have the meaning set forth in Section 7.3(a). 1.46 "Term" shall have the meaning set forth in Section 18.1. 1.47 "Year 1", "Year 2" etc. shall have the meaning set forth in Section 7.2. 1.48 All other initially capitalized terms (except capitalized proper names) shall have the meanings assigned to them in this Agreement. 2. MICROSOFT'S INTEGRATION AND USE OF CHECKFREE SERVICES 2.1 MSN Payment Service. MICROSOFT shall create and implement a Web-based payment service targeted at Consumers to be offered by MICROSOFT within the MoneyCentral area of MSN that utilizes the CHECKFREE PA and BPP Services (the "MSN Payment Service"). MICROSOFT shall offer the MSN Payment Service directly to Consumers on MSN, and may distribute and/or offer the MSN Payment Service to or through any third party intermediaries, either under the MSN brand, other MICROSOFT brand(s), and/or third party brands. In addition, MICROSOFT may (but shall not be required to) integrate or utilize the CHECKFREE PA and BPP Services with other services on MSN, and with such other products and services as determined by MICROSOFT. * Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 4
5 2.2 Passport. MICROSOFT shall utilize its Passport service for authentication of users of the MSN Payment Service as offered on MSN. Users, at their option, may elect to provide the additional authentication information required to access payment applications and services. MICROSOFT shall use all commercially reasonable efforts to promote the availability of the MSN Payment Service as a benefit of providing the additional authentication information. The parties acknowledge that use of Passport's support of the CHECKFREE PA and BPP Services is non-exclusive, and that third party applications or services that include payment functionality (which payment functionality may include, without limitation, credit cards and merchant-provided payment such as "one click shopping") may also request that users provide additional authentication information which will be stored and accessed via Passport. 2.3 Hotmail. MICROSOFT anticipates that the Hotmail electronic mail system may be used for secure delivery and payment of bills in future versions of the MSN Payment Service. MICROSOFT agrees that the MSN Payment Service will be the exclusive Pay Anyone and Bill Presentment and Payment service it promotes as a feature of Hotmail. The parties acknowledge and agree that except as to promotions, there is no exclusivity with respect to Hotmail, and further that such exclusive promotion obligation shall not include any obligation to place any restrictions on a user's Hotmail account relating to receiving and paying bills from any source. Further, MICROSOFT shall not be restricted from implementing an open applications programming interface ("API") or other open system for secure email that may be used by third party providers of Pay Anyone and/or Bill Presentment and Payment as long as MICROSOFT does not promote as a feature of Hotmail any third party Pay Anyone and/or Bill Presentment and Payment service that uses such API or other open system as a feature of Hotmail. 2.4 bCentral and Business Services. With respect to Pay Anyone and/or Bill Presentment and Payment services targeted at Businesses that may be offered by MICROSOFT (including without limitation on its "bCentral" site), MICROSOFT agrees that CHECKFREE shall be its Preferred Supplier of CHECKFREE Services for such solutions (but, for the avoidance of doubt, not its exclusive supplier). The parties acknowledge that in connection with such service MICROSOFT may offer an array of biller services, including without limitation (i) services to allow a business to pay invoices or bills it has received and make other payments from its DDA, and (ii) services to allow a business to issue its own invoices and bills. 2.5 Transition Plan. The parties acknowledge that, as of the Effective Date, MICROSOFT has various existing plans, agreements, and strategies in place relating to Pay Anyone and Bill Presentment and Payment services that do not contemplate the relationship with CHECKFREE created by this Agreement. In connection with such transition, CHECKFREE shall support retention and transfer of user names, Automated Clearinghouse enrollments, and biller lists. On or before thirty (30) days after the Effective Date of this Agreement, MICROSOFT shall deliver to CHECKFREE a written transition plan detailing how MICROSOFT shall transition within a commercially reasonable time from its current strategies to meet its obligations under this Agreement. Notwithstanding anything to the contrary herein, MICROSOFT's obligations under this Agreement shall be subject to such transition plan, with the exception of MICROSOFT's revenue obligations as set forth in Section 7 herein (which obligations MICROSOFT shall meet regardless of the transition plan). 2.6 Covenant Not to Sue For CHECKFREE Patents. CHECKFREE hereby covenants not to sue or otherwise bring or assert any claim against MICROSOFT that any MICROSOFT Services infringe any CHECKFREE Patent. In addition, CHECKFREE represents and warrants that no entity controlled by CHECKFREE shall sue or otherwise bring or assert any claim against MICROSOFT that any MICROSOFT Services infringe any CHECKFREE Patent. 5
6 2.7 Business Judgment. Subject only to Section 2.8 below, MICROSOFT may determine in its sole discretion (i) the design, features, and functionality of the MSN Payment System and all other MICROSOFT Services, and (ii) the nature and levels of development, implementation, integration, marketing, positioning, and commercial exploitation of the MSN Payment System and all other MICROSOFT Services. 2.8 Prominence of MSN Payment System. MICROSOFT shall cause the MSN Payment System to be displayed equally or more prominently on MSN than any other competing Pay Anyone and/or Bill Presentment and Payment system(s) that may be hosted, distributed, or otherwise featured on MSN; provided, however, that such obligation shall not apply to banner advertisements, advertising sponsorships, and other such promotional placement opportunities of the type that MICROSOFT offers to third parties. 3. EXCLUSIVITY During the term of this Agreement, MICROSOFT shall use the CHECKFREE PA and BPP Services on an exclusive basis in connection with any and all Pay Anyone and/or Bill Presentment and Payment services offered by MICROSOFT (or offered by a third party but branded by MICROSOFT), subject to the limitations set forth in Sections 2.2, 2.3, 2.4, and 2.5 above, and the following exceptions: (a) If bills from a particular biller are not available from CHECKFREE, then nothing herein shall restrict MICROSOFT from acquiring and utilizing such bills from any available source. If such bills are delivered with accompanying payment functionality, MICROSOFT shall restrict such functionality to payment of the delivered bills to the extent feasible. If such bills are not delivered with accompanying payment functionality, MICROSOFT shall use the CHECKFREE PA and BPP Services for the payment of such bills to the extent possible. (b) Nothing herein shall restrict MICROSOFT from developing, selling, and/or licensing tools, operating systems, applications, client-server platforms, and other services and technologies that may be used by licensees in connection with Pay Anyone and/or Bill Presentment and Payment services that such licensees develop or offer, but which products have not been designed specifically for such purpose. For example (but without limitation), Passport, BackOffice, and FrontPage are examples of technologies of this type. (c) Subject to Section 5 herein, nothing herein shall restrict MICROSOFT from developing, selling, and/or licensing computer software products, including without limitation, operating systems, applications, client-server platforms, and networking products (e.g., MICROSOFT's Site Server Commerce Edition and BizTalk Server), that incorporate any functionality, including without limitation payment, invoicing, and/or bill presentment functionality. For example (but without limitation), nothing herein shall restrict MICROSOFT from developing, selling, and/or licensing a version of Site Server that contains payment functionality (although pursuant to Section 5, such product may need to integrate or otherwise interoperate with the CHECKFREE PA and BPP Services pursuant to the provisions of that section). (d) Subject only to Sections 2.3 and 2.8, nothing herein shall restrict MICROSOFT from Hosting, distributing, advertising, or cross-promoting the Pay Anyone and/or Bill Presentment and Payment services of a third party, via distribution or transmission of 6
7 computer software and/or informational content of such third party, where such Hosting, distributing, advertising, or cross-promotional activities are generally conducted for other parties and the fee or consideration arrangements therefor are arms' length transactions of the type generally made. As used herein, "Hosting" means the transmission or publication of another's products or services, which may be accomplished through use of the Hosting party's equipment and facilities, where the Hosting party does not create or control the hosted products or services, but rather is acting as a transmitter or publisher of such products or services. Examples of such Hosting, distributing, advertising, or cross-promotion include, without limitation, MICROSOFT's distribution of client software for online services such as AOL in MICROSOFT Windows, MICROSOFT's arrangement of cross-promotional access to products and services such as the Wall Street Journal, cross-promotions in connection with Internet Explorer, MSN banner advertisements and content sponsorships, and MICROSOFT's Hosting on The MICROSOFT Network (MSN) of independently produced Web sites. (e) Nothing herein shall restrict MICROSOFT from providing a service or product where the Bill Presentment and Payment system is an ancillary feature of an electronic merchandising business offered, operated or supported by MICROSOFT (e.g., an online shopping mall, etc.); or using a Bill Presentment and Payment system to provide bills to MICROSOFT's own customers for the product or service sold or provided by MICROSOFT or its Subsidiaries to such customers. (f) Nothing herein shall restrict MICROSOFT from providing consulting services to any party in the ordinary course of its MICROSOFT Consulting Services business. The ordinary course of business for MICROSOFT Consulting Services involves implementation of MICROSOFT commercial software products, and does not include consulting on the overall design or overall development of a BPP or PA service. (g) Nothing herein shall restrict MICROSOFT from fulfilling the obligations of any contract entered into prior to the Effective Date of this Agreement; provided, however, that MICROSOFT shall not make any discretionary renewal of any such prior contract that would otherwise violate the exclusivity provisions of this Agreement. (h) Nothing here shall restrict MICROSOFT from acquiring any third party services or products for any MICROSOFT service or product that uses for its back end payment service requirements the CHECKFREE PA and BPP Services pursuant to this Agreement. (i) Notwithstanding anything to the contrary herein, this Section 3 shall be subject to the provisions of Section 18.6 (Performance Remedies). 4. FUTURE SERVICES 4.1 Future Services. Sections 2 and 3 herein set forth the agreement of the parties with respect to how MICROSOFT will use the CHECKFREE PA and BPP Services. This Section 4 sets forth the agreement of the parties with respect to whether and how MICROSOFT will use certain future CHECKFREE Services other than the CHECKFREE PA and BPP Services. 4.2 Services Unavailable from CHECKFREE. MICROSOFT shall not be restricted from performing or securing any services from any third party provider if such services are unavailable from CHECKFREE. As used herein, services shall be deemed to be "unavailable 7
8 from CHECKFREE" if, in response to MICROSOFT's request, CHECKFREE is not able to make a legally binding offer to perform such services to MICROSOFT's requirements at pricing specified by CHECKFREE, which offer commits CHECKFREE to deliver such services to MICROSOFT within ninety (90) days of MICROSOFT's request. Section 4.3 below sets forth the restriction in the event that such services are not unavailable from CHOPPPER. 4.3 Services Available from CHECKFREE. MICROSOFT hereby agrees that CHECKFREE shall be the Preferred Supplier to the MSN Payment Service of CHECKFREE Services (other than CHECKFREE PA and BPP Services), if such services are available from CHECKFREE. As used herein, services shall be deemed to be "available from CHECKFREE" if, in response to MICROSOFT's request, CHECKFREE is able to make a legally binding offer to perform such services to MICROSOFT's requirements at pricing specified by CHECKFREE, which offer commits CHECKFREE to deliver such services to MICROSOFT within ninety (90) days of MICROSOFT's request. The following example illustrates this procedure: if MICROSOFT implements a feature of the MSN Payment System that requires back end DDA to DDA payment services (and CHECKFREE does not already exclusively provide such service as part of the CHECKFREE PA and BPP Services), then MICROSOFT shall notify CHECKFREE of its requirements in writing setting forth in reasonable detail the particular services desired, and CHECKFREE shall promptly respond whether such services are available from CHECKFREE. If they are, then the parties shall have the 90 day exclusive negotiation period in which to come to a written service level agreement therefor. If the parties agree thereon, then CHECKFREE shall supply such services to MICROSOFT pursuant to the terms of the service level agreement, which shall be executed as an addendum to this Agreement. 4.4 Cooperation On Other Payment Capabilities. With respect to back end services other than for DDA to DDA payments, CHECKFREE and MICROSOFT agree to cooperate wherever commercially reasonable on jointly developing such new payment capabilities (e.g., "person to person" electronic payments, or forms of payment other than via the Automated Clearinghouse from a user's DDA) and making such new capabilities available for MICROSOFT Platforms and Web services. The parties must agree in writing prior to commencing any joint development work. All such cooperation is on a non-exclusive basis for both parties, unless otherwise agreed upon in writing for a particular project. In the event that the parties' agreed upon joint development results in services that CHECKFREE desires to sell to other customers, MICROSOFT agrees to cooperate wherever commercially reasonable with CHECKFREE to develop licensing terms which enable CHECKFREE to offer the MICROSOFT-developed portions as part of the product or service CHECKFREE sells to others. 4.5 Annual PA and BPP Services Meetings. At least once per year, or by the request of either party twice per year, the parties shall meet to discuss MICROSOFT's anticipated needs for new PA and BPP services in the coming period, and CHECKFREE's plans to make new PA and BPP back end services available in that period. MICROSOFT shall in good faith disclose its plans to add PA and BPP services. After such meeting, CHECKFREE shall have the opportunity to implement commercial versions of such service(s) in light of MICROSOFT's plans, and, if CHECKFREE does implement such versions, Section 4.3 shall pertain as applicable. 4.6 New CHECKFREE Features and Functionality. During the term of this Agreement, CHECKFREE shall offer to MICROSOFT all new services, features, and functionality that CHECKFREE makes available to any third party. Pricing and other material terms for such new services, features, and functionality shall be as set by CHECKFREE, subject to the provisions of Section 8.2. 8
9 5. MICROSOFT PLATFORM INTEGRATION OF CHECKFREE SERVICES To the extent that MICROSOFT provides payment, invoicing, and/or bill presentment functionality in any generally available MICROSOFT Internet and electronic commerce platforms and tools (e.g., MICROSOFT's Site Server Commerce Edition and BizTalk Server), and that functionality integrates or interoperates with third party services equivalent to the CHECKFREE PA and BPP Services, then MICROSOFT shall integrate or otherwise provide for interoperability with CHECKFREE PA and BPP Services on a non-exclusive basis, provided that: (i) CHECKFREE provides an Internet-based protocol for such purpose reasonably suitable to MICROSOFT's requirements, (ii) CHECKFREE utilizes a Windows NT-based re-distributable module with suitable APIs, or (iii) MICROSOFT and CHECKFREE agree on another method of interoperability. 6. CHECKFREE PROTOCOLS CHECKFREE shall provide and maintain during the term of this Agreement suitable protocols as agreed upon by CHECKFREE and MICROSOFT, to enable MICROSOFT to develop, implement, and operate the MSN Payment Service, including without limitation protocols to communicate payment requests, access bill data, and submit bill data, etc. Except as otherwise agreed by the parties in writing, CHECKFREE shall grant to MICROSOFT functional access to the same protocol and/or functionality that it makes available to any third party, and make available to MICROSOFT all information related to such protocol no later than it makes such access and information available to any third party. 7. FEES AND REVENUE GUARANTEE 7.1 Fees. Actual fees owed by MICROSOFT for CHECKFREE PA and BPP Services shall be calculated according to the prices referenced in Section 8 herein, or as subsequently agreed in writing by the parties with respect to the CHECKFREE Services other than the CHECKFREE PA and BPP Services. 7.2 Revenue Guarantee Amount. MICROSOFT guarantees minimum revenues to CHECKFREE from MICROSOFT's use of all CHECKFREE services in the total amount of One Hundred Twenty Million Dollars (US$120,000,000.00), with monthly guarantee amounts as follows: Year 1 $1.0 million per month Year 2 $1.5 million per month Year 3 $2.0 million per month Year 4 $2.5 million per month Year 5 $3.0 million per month "Year 1" shall mean a one year period commencing on the earlier of general public availability of the MSN Payment Services or one hundred twenty (120) days after the Effective Date, "Year 2" shall mean the one year period immediately following Year 1, and so forth. 7.3 Minimum Guarantee Payments. The following shall apply in calculating amounts payable to CHECKFREE: 9
10 (a) [*] Credit. MICROSOFT shall receive a credit during any month for revenue earned by CHECKFREE for bill presentment services in the amount of [*] for each bill that is delivered during such month to a MICROSOFT Services customer where CHECKFREE Services are used in paying that bill (the "[*] Credit"). In each month after the general public availability of the MSN Payment Services, the [*] Credit shall be applied to reduce the amount that would otherwise be owed to CHECKFREE attributable to such month. (b) Carry Forward of Surpluses. To the extent that actual fees paid by MICROSOFT to CHECKFREE in any month exceed the applicable monthly revenue guarantee amount (without giving any effect to the application of the [*] Credit), MICROSOFT shall be entitled to apply the surplus amount to reduce the minimum guarantee amount in any future month. (c) "Carry Back" or Shortfall Credit. To the extent that in any month MICROSOFT is required hereunder to pay to CHECKFREE any shortfall between actual fees payable and the applicable monthly revenue guarantee (after all adjustments allowed hereby, including application of the [*] Credit), such shortfall amounts may be applied by MICROSOFT as a credit against amounts payable in excess of the applicable monthly guarantee amount in any future month; provided, however, that no such credit shall be used more than 12 months after it accrued. 7.4 Reports and Payments. As soon as practicable after the end of each month, but in no event later than thirty (30) days after the end of each month, CHECKFREE shall deliver in writing to MICROSOFT (i) an invoice for actual fees payable for CHECKFREE services for that month, and (ii) a report to MICROSOFT detailing the total number of bills that CHECKFREE delivered in that month to users of MICROSOFT Services. The amount payable from MICROSOFT to CHECKFREE, if any, shall be the shortfall, if any, between the amount of actual fees payable for CHECKFREE Services during such month and the amount of the revenue guarantee for such month, reduced by the [*] Credit, if applicable. MICROSOFT shall calculate the amount payable to CHECKFREE for each month, but MICROSOFT shall pay CHECKFREE therefor on a calendar quarterly basis, with payments due net 30 days after the end of each calendar quarter. 7.5 Conditions. MICROSOFT's obligation to make payments for shortfalls to CHECKFREE pursuant to Section 7.4 herein is conditioned on: (i) CHECKFREE performing all of its obligations under this Agreement in good faith; and (ii) CHECKFREE not taking any action that materially interferes with MICROSOFT's ability to commercially exploit the CHECKFREE PA and BPP Services; provided, however, that in the event of failure of any of conditions (i) or (ii) above, MICROSOFT shall be relieved of its obligation only to the extent that such actions or occurrences result in lower revenues generated than would otherwise have been the case but for such actions or occurrences. With respect to condition (ii) of this Section 7.5, MICROSOFT acknowledges that CHECKFREE will be in the business of providing payment services to customers in competition with the MICROSOFT Services, among others, and that such business activities conducted in the normal course shall not be considered actions that materially interfere with MICROSOFT's ability to commercially exploit the CHECKFREE PA and BPP Services. In the event MICROSOFT ceases or decreases such payments pursuant to an alleged violation of (i) or (ii), CHECKFREE may refer the matter as a Dispute under Section 21.11. *Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 10
11 8. PRICING 8.1 Wholesale Pricing. CHECKFREE shall supply to MICROSOFT the CHECKFREE PA and BPP Services at the wholesale pricing set forth in Exhibit 1 to this Agreement. As part of the CHECKFREE PA and BPP Services, CHECKFREE shall supply to MICROSOFT the Included Services (including customer support services) set forth in Exhibit 1. 8.2 [*] 9. CHECKFREE SUPPORT OF MICROSOFT PLATFORMS 9.1 Biller Premises Software. CHECKFREE shall offer its biller premises software with Windows NT and SQL Server as its "Preferred Platform." "Preferred Platform" means that the version of CHECKFREE's biller premises software for Windows NT and SQL Server is (i) the most favorable version in terms of price, functionality, and performance characteristics (including functional capabilities) versus other versions that CHECKFREE may offer, and (ii) the First Version that CHECKFREE offers in the market (but only where such platform is available from MICROSOFT sufficiently in advance to give CHECKFREE a commercially reasonable opportunity to develop its products for such platform). "First Version" means that, subject to the limitations of this Section 9.1, CHECKFREE shall commercially release its biller premises software for Windows NT and SQL Server at least ninety (90) days in advance of commercially releasing any version of such software for any other platform. CHECKFREE's obligation under Section 9.1 shall be excused in regard to particular functionality and performance characteristics to the extent they are beyond CHECKFREE's reasonable control and are dictated by the corresponding functionality and performance in the Windows NT and SQL Server platform being sub-optimal as compared to competing operating system and database platforms. 9.2 Bill Presentment and CSP Interface. CHECKFREE shall base a portion of its bill presentment or Consumer Services Provider ("CSP") interface (at its option) data center software on the following MICROSOFT platforms ("MICROSOFT Platforms"): Windows NT (including Windows 2000, which is the successor thereto for all purposes under this Agreement), SQL Server, COM (and other components of Windows 2000), and the BackOffice line of products. * Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 11
12 9.3 Enhanced CSP Offerings. CHECKFREE and MICROSOFT agree to cooperate on developing and offering enhanced CSP capabilities to CHECKFREE customers, such as entering bill due dates in user's online calendar, delivering reminder notices and/or bills via email, managing user authentication via Passport, and other such capabilities as may be made generally available in MICROSOFT platform products or service offerings. 9.4 Passport. MICROSOFT shall be CHECKFREE's Preferred Supplier for enhanced user authentication credential services (i.e., Passport), for use as a single sign-on authentication to access CHECKFREE services, to such CHECKFREE customers that wish to support user authentication usable by their customers at multiple Web sites in addition to or as an alternative to user authentication only honored at a single site. 9.5 Access to Technical Information and Marketing Materials. MICROSOFT shall make available to CHECKFREE all reasonable technical information and marketing materials for the MICROSOFT Platforms to assist CHECKFREE in its development and market efforts. In addition, MICROSOFT shall allow CHECKFREE to participate in all technical and marketing programs for the MICROSOFT Platforms that are offered to MICROSOFT's best similarly-situated customers. 10. NON-COMPETE 10.1 Non-Compete. During the period beginning on the Effective Date and ending on the fifth anniversary of the Effective Date, and subject to the limitations set forth in Sections 2.2, 2.3, 2.4, and 2.5, MICROSOFT shall not, and shall ensure that its Subsidiaries do not: (a) engage in any Exclusive Service; (b) license any trademarks or trade names of MICROSOFT or its Subsidiaries for use, or permit any of trademarks or trade names of MICROSOFT or its Subsidiaries to be used in connection with any Exclusive Service; (c) hold or acquire Capital Stock in any Person that is engaged in any Exclusive Service pursuant to the Agreement. 10.2 Exceptions. Notwithstanding Section 10.1 herein, nothing herein shall restrict MICROSOFT from: (a) owning solely as a passive investment not in excess of five percent (5%) in the aggregate of any class of Capital Stock of any corporation if such stock is publicly traded and listed on any national or regional stock exchange or quoted on the NASDAQ National Market, regardless of whether or not such corporation is engaging in Exclusive Services; or (b) either: (i) owning not in excess of twenty percent (20%) in the aggregate of any class of Capital Stock of any Person, provided that not more than twenty-five percent (25%) of such Person's consolidated revenues for its most recently completed fiscal year are derived from or directly supported by Exclusive Services, up to a limit of $25 million; or (ii) owning not in excess of ten percent (10%) in the aggregate of any class of Capital Stock of any Person, provided that not more than twenty-five percent (25%) of such Person's consolidated revenues for its most recently completed fiscal year are derived from or directly supported by 12
13 Exclusive Services (without dollar amount limit). In the event that the limits in (i) or (ii) of this Section 10.2(b) are exceeded, then within one hundred eighty (180) days after publication of such Person's financial statement for such fiscal year, MICROSOFT shall divest its interest in such Person; or (c) purchasing and, following such purchase actively engaging in, any business that has a subsidiary, division, group, franchise or segment that is engaged in Exclusive Services so long as on the date of such purchase: (i) not more than twenty-five percent (25%) of the consolidated revenues of such business are derived from Exclusive Services and (ii) MICROSOFT divests itself of the Exclusive Services within twelve (12) months after the date of such purchase; (d) fulfilling the obligations of any contract entered into prior to the Effective Date of this Agreement; provided, however, that: (i) Exhibit 5 sets forth the names of the contracts that would conflict with Section 3 (Exclusivity) or Section 10 (Non-Compete) but for this Section 10.2(d), to the Knowledge of the MICROSOFT members of the Designated Group (as that term is defined in the Merger Agreement); and (ii) in the event that after entering into this Agreement MICROSOFT discovers contracts that so conflict, MICROSOFT agrees that it shall not make any discretionary renewal of any such prior contract; or (e) engaging in any activity in connection with a service or product that uses for its back end payment service requirements the CHECKFREE PA and BPP Services pursuant to this Agreement. 10.3 Injunctive Relief. MICROSOFT acknowledges that monetary damages may not be a sufficient remedy for breach of this Section 10 and that CHECKFREE shall be entitled, without waiving any other rights or remedies, to seek injunctive or equitable relief from the arbitrator pursuant to Section 21.11. 10.4 Performance Remedies. Notwithstanding anything to the contrary herein, this Section 10 shall be subject to the provisions of Section 18.6 (Performance Remedies). 11. BRANDING 11.1 MICROSOFT Branding. MICROSOFT, in its sole discretion, shall brand and market the MICROSOFT Services. 11.2 No Trademark License. Nothing herein shall constitute a license to use the other party's trademarks or trade names. Neither party shall use any trademark or trade name owned by the other party in a manner prohibited by applicable law without the other party's prior written consent. 12. MICROSOFT CUSTOMER INFORMATION 12.1 MICROSOFT Customer Information. As between MICROSOFT and CHECKFREE, MICROSOFT is the sole owner of the names, identities, account information, transaction information, and all other information relating in any way to the end users of the MICROSOFT Services ("MICROSOFT Customer Information"). CHECKFREE agrees that it 13
14 shall use the MICROSOFT Customer Information for the sole purpose of providing the CHECKFREE Services, and for no other purposes whatsoever. CHECKFREE agrees that it shall not send electronic mail to end users of the MICROSOFT Services as part of providing the CHECKFREE Services, except as is required by this Agreement or as may be consented to by MICROSOFT. CHECKFREE shall not sell, license, rent, disclose, or otherwise transfer any MICROSOFT Customer Information except to the extent actually necessary to perform the CHECKFREE Services and to comply with all applicable laws and regulations. CHECKFREE shall provide all reasonable assistance to MICROSOFT in complying with and enforcing MICROSOFT's then-current privacy policy(ies) for the MICROSOFT Services. 12.2 Return Upon Termination. Upon termination of this Agreement for any reason, upon request from MICROSOFT, CHECKFREE shall promptly deliver to MICROSOFT or destroy (at MICROSOFT's election) all MICROSOFT Customer Information, and certify in writing to MICROSOFT that CHECKFREE has not retained any such information except as required to comply with applicable laws and regulations. Upon the termination of this Agreement for any reason, at MICROSOFT's request, CHECKFREE shall use commercially reasonable efforts to enable the transition of MICROSOFT customers to MICROSOFT or MICROSOFT's designee. 13. GEOGRAPHIC SCOPE 13.1 General. Except for the obligations set forth in Sections 9 and 10 (which shall be worldwide in scope), all obligations under this Agreement shall apply only to the provision of services primarily targeted at users in (a) the United States (with respect to Pay Anyone and BPP services), (b) Canada (with respect to BPP services but not Pay Anyone services), and (c) Australia and New Zealand (with respect to BPP services but not Pay Anyone services). 13.2 Platform Support and Noncompete. The obligations of each party under Sections 9 and 10 shall apply to the provision of services to users worldwide. 14. REPRESENTATIONS AND WARRANTIES 14.1 MICROSOFT Representations and Warranties. MICROSOFT hereby represents and warrants as follows: (a) MICROSOFT is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) MICROSOFT is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement is a legal and valid obligation binding upon MICROSOFT and enforceable according to its terms. The execution, delivery and performance of this Agreement according to its terms by MICROSOFT does not conflict with any agreement, instrument or understanding, oral or written, to which MICROSOFT is a party or by which MICROSOFT may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 14
15 (d) Any information, materials, software or services furnished by MICROSOFT to CHECKFREE pursuant to this Agreement are on an "as is" basis, and MICROSOFT MAKES NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER INCLUDING, BUT NOT LIMITED TO, A WARRANTY OF FITNESS FOR PURPOSE OR OF MERCHANTABILITY, OR OF RESULTS OBTAINED BY A PARTY'S USE OF ANY INTELLECTUAL PROPERTY DEVELOPED OR LICENSED UNDER THIS AGREEMENT. 14.2 CHECKFREE Representations and Warranties. CHECKFREE hereby represents and warrants as follows: (a) CHECKFREE is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) CHECKFREE is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement is a legal and valid obligation binding upon CHECKFREE and enforceable according to its terms. The execution, delivery and performance of this Agreement according to its terms by CHECKFREE does not conflict with any agreement, instrument or understanding, oral or written, to which CHECKFREE is a party or by which CHECKFREE may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. (d) CHECKFREE warrants the CHECKFREE PA and BPP Services as set forth in Exhibit 3. The CHECKFREE warranties of the CHECKFREE Services other than the CHECKFREE PA and BPP Services shall be as agreed by the parties. (e) Except as provided in Section 14.2(d) herein, any information, materials, software or services furnished by CHECKFREE to MICROSOFT pursuant to this Agreement are on an "as is" basis, and CHECKFREE MAKES NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER INCLUDING, BUT NOT LIMITED TO, A WARRANTY OF FITNESS FOR PURPOSE OR OF MERCHANTABILITY, OR OF RESULTS OBTAINED BY A PARTY'S USE OF ANY INTELLECTUAL PROPERTY DEVELOPED OR LICENSED UNDER THIS AGREEMENT. 15. INDEMNIFICATION 15.1 Intellectual Property Indemnification by MICROSOFT. (a) MICROSOFT agrees to defend CHECKFREE against, and pay the amount of any adverse final judgment or settlement to which MICROSOFT consents resulting from, any third party claim(s) ("MICROSOFT Indemnified Claims") that any MICROSOFT Services, or any portion thereof, infringes any third party patent, copyright, trademark or trade secret right; provided that MICROSOFT is notified promptly in writing of the MICROSOFT Indemnified Claim and has sole control over its defense and settlement, and CHECKFREE provides reasonable assistance in the defense and/or settlement of such claim. 15
16 (b) Notwithstanding Section 15.1(a) or 15.2(b), MICROSOFT shall have no liability for any intellectual property infringement claim (including a MICROSOFT Indemnified Claim) that arises as a result of (i) CHECKFREE's use of MICROSOFT Services after a reasonable time from MICROSOFT's written notice that CHECKFREE should cease such use due to such a claim; or (ii) CHECKFREE's combination of MICROSOFT Services with non-MICROSOFT intellectual property, to the extent such claim results from such combination; or (iii) CHECKFREE's adaptation or modification of any MICROSOFT Services. For all claims described in subsections (i)-(iii) of this Section 15.1(b), CHECKFREE agrees to defend MICROSOFT against, and pay the amount of any adverse final judgment or settlement to which CHECKFREE consents resulting from, such claims, provided that CHECKFREE is notified promptly in writing of such a claim and CHECKFREE has sole control over its defense or settlement, and MICROSOFT provides reasonable assistance in the defense and/or settlement of such claim. (c) In the event MICROSOFT receives information concerning an intellectual property infringement claim (including a MICROSOFT Indemnified Claim) related to MICROSOFT Services, MICROSOFT may at its expense, without obligation to do so, either (i) procure for CHECKFREE the right to continue to use the alleged infringing portion thereof, or (ii) replace or modify the MICROSOFT Services so as to make them non-infringing, and in which case, CHECKFREE shall thereupon cease use of the alleged infringing version of the MICROSOFT Services. (d) This Section 15.1 shall have no application to any claim against CHECKFREE arising out of or in any way connected with any use or sublicense by CHECKFREE of technology and intellectual property licensed by MICROSOFT to CHECKFREE pursuant to the License Agreement (as defined in the Merger Agreement) to which MICROSOFT is a party. 15.2 Intellectual Property Indemnification by CHECKFREE. (a) CHECKFREE agrees to defend MICROSOFT against, and pay the amount of any adverse final judgment or settlement to which CHECKFREE consents resulting from, any third party claim(s) ("CHECKFREE Indemnified Claims") that any CHECKFREE Services, or any portion thereof, infringes any third party patent, copyright, trademark or trade secret right; provided that CHECKFREE is notified promptly in writing of the CHECKFREE Indemnified Claim and has sole control over its defense and settlement, and MICROSOFT provides reasonable assistance in the defense and/or settlement of such claim. (b) Notwithstanding Section 15.2(a) or 15.1(b), CHECKFREE shall have no liability for any intellectual property infringement claim (including a CHECKFREE Indemnified Claim) that arises as a result of (i) MICROSOFT's use of CHECKFREE Services after a reasonable time from CHECKFREE's written notice that MICROSOFT should cease such use due to such a claim; or (ii) MICROSOFT's combination of CHECKFREE Services with non-CHECKFREE intellectual property; or (iii) MICROSOFT's adaptation or modification of any CHECKFREE Services. For all claims described in subsections (i)-(iii) of this Section 15.2(b), MICROSOFT agrees to defend CHECKFREE against, and pay the amount of any adverse final judgment or settlement to which MICROSOFT consents resulting from, such claims, provided that MICROSOFT is notified promptly in writing of such a claim and MICROSOFT has sole control over its defense or settlement, and CHECKFREE provides reasonable assistance in the defense and/or settlement of such claim. 16
17 (c) In the event CHECKFREE receives information concerning an intellectual property infringement claim (including a CHECKFREE Indemnified Claim) related to CHECKFREE Services, CHECKFREE may at its expense, without obligation to do so, either (i) procure for MICROSOFT the right to continue to use the alleged infringing portion thereof, or (ii) replace or modify the CHECKFREE Services so as to make them non-infringing, and in which case, MICROSOFT shall thereupon cease use of the alleged infringing version of the CHECKFREE Services. 15.3 General Indemnification. Except with respect to any third party claims addressed by Sections 15.1 or 15.2 (Intellectual Property Indemnification), each party (the "Indemnifying Party") shall indemnify and hold harmless the other party (the "Indemnified Party") against all losses, liabilities, damages, claims, suits, costs, or expenses (including reasonable outside attorney's fees) for third party claims arising out of the Indemnifying Party's products and services performed pursuant to this Agreement, except to the extent that such claims arise from the gross negligence or willful misconduct of the Indemnified Party. 16. LIMITATION OF LIABILITY Notwithstanding anything to the contrary contained in this Agreement, the following limitations of liability shall apply to this Agreement: (a) Except for MICROSOFT's liability to CHECKFREE pursuant to Section 15 (Indemnification) herein, liability to CHECKFREE for breach of Sections 3 (Exclusivity) and 10 (Non-Compete), and except for actual amounts payable by MICROSOFT to CHECKFREE pursuant to Section 7 (Fees and Revenue Guarantee), MICROSOFT's liability to CHECKFREE arising out of this Agreement or any transaction contemplated hereby, regardless of whether such claim is made on the basis of contract, tort, or other theory, shall be limited to [*]. (b) Except for CHECKFREE's liability to MICROSOFT pursuant to Section 15 (Indemnification) herein, CHECKFREE's liability to MICROSOFT arising out of this Agreement or any transaction contemplated hereby, regardless of whether such claim is made on the basis of contract, tort, or other theory, shall be limited to the greater of [*] or [*] percent ([*]%) of total amounts paid by MICROSOFT under this Agreement. (c) MICROSOFT's aggregate liability to CHECKFREE for claims covered by Section 15 (Indemnification) shall be limited as follows: (i) liability for copyright claims shall be limited to [*] (ii) liability for patent claims shall be limited to [*] and (iii) liability for all other claims shall be limited to [*]. (d) CHECKFREE's aggregate liability to MICROSOFT for claims covered by Section 15 (Indemnification) shall be limited as follows: (i) liability for copyright claims shall be limited to [*] (ii) liability for patent claims shall be limited to the greater of [*] or [*] percent ([*]%) of total amounts paid by MICROSOFT under this Agreement; and (iii) liability for all other claims shall be limited to the greater of [*] or [*] percent ([*]%) of total amounts paid by MICROSOFT under this Agreement. * Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 17
18 (e) MICROSOFT's aggregate liability to CHECKFREE for breach of Sections 3 (Exclusivity) and 10 (Non-Compete) shall be limited as follows: (i) MICROSOFT shall not be liable for any breach of Sections 3 (Exclusivity) and 10 (Non-Compete) that is cured within six (6) months of CHECKFREE's notice to MICROSOFT thereof; (ii) MICROSOFT shall not be liable for any breach of Sections 3 (Exclusivity) or 10 (Non-Compete) unless CHECKFREE's damages resulting from any and all such breaches exceed [*] and then only to the extent of such excess, subject to Section 16(e)(iii). (iii) In no event shall MICROSOFT's aggregate liability for breaches of Sections 3 (Exclusivity) and 10 (Non-Compete) [*]. (f) Each Indemnified Party releases each Indemnifying Party from all obligations, liability, claims or demands in excess of the applicable limitation. The parties acknowledge that other parts of this Agreement rely upon the inclusion of this Section 16. EXCEPT (i) WITH RESPECT TO BREACHES OF SECTION 17.3, AND (ii) FOR lost profits (but no other consequential, incidental, or special damages) RESULTING FROM MICROSOFT's BREACH OF SECTIONS 3 (EXCLUSIVITY) AND 10 (NON-COMPETE), To the maximum extent permitted by law, neither party shall be liable to the other for any indirect, special, consequential, or punitive damages of any nature, even if advised of the possibility thereof. (g) Where commercially reasonable, each party shall use good faith efforts to notify the other in the event of liabilities that would exceed the liability limits of this Section 16. Each party shall use reasonable efforts to mitigate damages for which the other party is responsible. 17. PUBLIC ANNOUNCEMENTS, AND NON-DISCLOSURE 17.1 Joint Announcement on Agreement. The parties agree that any announcement concerning the execution of the Agreement shall be a mutually agreed upon joint announcement. 17.2 Legally Required Announcements. Either of the parties may at any time make announcements which are required by applicable law, regulatory bodies, or stock exchange or stock association rules, so long as the party so required to make the announcement, promptly upon learning of such requirement, notifies the other party of such requirement and discusses with the other party in good faith the exact wording of any such announcement. 17.3 Non-Disclosure Agreement. MICROSOFT and Checkfree Corporation have entered into a Non-Disclosure Agreement dated November 2, 1999 (attached as Exhibit 4). The terms of such non-disclosure agreement (other than Sections 4(f) and 4(g)) shall be deemed to apply to the parties to this Agreement and incorporated herein, and all terms and conditions of this Agreement shall be deemed Confidential Information as defined therein. The terms of this Agreement shall control over any conflicting terms of the Non-Disclosure Agreement. * Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 18
19 18. TERM, RENEWAL, TERMINATION, CHANGE OF CONTROL, SURVIVAL, AND PERFORMANCE REMEDIES 18.1 Term. The Agreement shall commence on the Effective Date, and shall continue until after the earlier of (a) five (5) years after the general public availability of the MSN Payment Services, or (b) five (5) years and one hundred twenty (120) days after the Effective Date (the "Term"). 18.2 Renewal. This Agreement may be renewed by the mutual written agreement of the parties. 18.3 Termination for Cause. In the event either party shall materially fail to perform or comply with this Agreement or any provision thereof, the other party may give notice of default to the breaching party, in which case the parties shall immediately confer in good faith to discuss resolution of the default. If, however, the breaching party fails to remedy the default within sixty (60) days after the receipt of notice thereof, then the other party shall have the right, at its sole option and upon written notice to the defaulting party, to terminate this Agreement. Any notice of default hereunder shall be prominently labeled "NOTICE OF DEFAULT," and delivered as required by Section 21.5 herein. The rights and remedies provided in this section shall not be exclusive and are in addition to any other rights and remedies provided by law or this Agreement. 18.4 Change of Control. MICROSOFT shall have the right (but not the obligation) to terminate this Agreement in the event of a Change of Control of CHECKFREE. "Change of Control" shall mean any of the following with respect to CHECKFREE or any of its Subsidiaries: (i) the acquisition either directly or indirectly, by any third person other than the entities named in Exhibit 6 hereto or successors thereto, of more than thirty percent (30%) of the Capital Stock regularly entitled to vote on all matters subject to stockholder vote; (ii) any merger or consolidation with a third person other than the entities named in Exhibit 6 hereto or successors thereto whereby the stockholders of CHECKFREE or any of its Subsidiaries, as applicable, as of the Effective Date, cease to own at least seventy percent (70%) of the Capital Stock of the surviving entity regularly entitled to vote on all matters subject to stockholder vote; (iii) the acquisition either directly or indirectly, by any entity named in Exhibit 6 hereto or successors thereto, of more than twenty percent (20%) of the Capital Stock regularly entitled to vote on all matters subject to stockholder vote; (iv) any merger or consolidation with an entity named in Exhibit 6 hereto or successors thereto whereby the stockholders of CHECKFREE or any of its Subsidiaries, as applicable, as of the Effective Date, cease to own at least eighty percent (80%) of the Capital Stock of the surviving entity regularly entitled to vote on all matters subject to stockholder vote; or (v) the transfer (or attempted transfer) to any third person of this Agreement, or of all, or substantially all, of the assets of CHECKFREE or any of its Subsidiaries, as applicable. In the event that MICROSOFT elects to terminate the Agreement pursuant to this Section 18.4, MICROSOFT shall pay to CHECKFREE fifty percent (50%) of the then-remaining revenue guarantee amounts, payable within sixty (60) days of the effective date of such termination. 18.5 Survival. The following sections shall survive any expiration or termination of this Agreement: 12, 15, 16, 17.3, 18.4, 19, 20 (with respect to fees occurring prior to expiration or termination), and 21. To the extent any fees payable to CHECKFREE under Section 7 have accrued prior to such expiration or termination, such fees shall remain due and payable to CHECKFREE after such expiration or termination. 19
20 18.6 Performance Remedies. In addition to all other rights and remedies in this Agreement, MICROSOFT shall be entitled to the performance remedies set forth in Exhibit 7. 19. RIGHTS AND OBLIGATIONS ON EXPIRATION Upon expiration of this Agreement at the end of the Term, the following provision shall apply: in order to assure reasonable continuity of service for consumers, MICROSOFT shall be entitled to at least 180 days notice from CHECKFREE (i) prior to the end of the Term if CHECKFREE does not intend to renew this Agreement, or (ii) prior to any termination of the CHECKFREE Services, beginning on the date that CHECKFREE notifies MICROSOFT thereof. If CHECKFREE fails to provide such 180 day notice, then CHECKFREE shall continue to provide the CHECKFREE Services for a period after the expiration of the Term or the termination of this Agreement equal to the difference between 180 days and the number of days prior to such expiration or termination that CHECKFREE in fact gave notice to MICROSOFT. 20. AUDITS 20.1 Records. MICROSOFT agrees to keep proper records and books of account and all proper entries therein relating to fees due CHECKFREE for the CHECKFREE Services. CHECKFREE agrees to keep proper records and books of account and all proper entries therein relating to the number of bills attributable to MICROSOFT users pursuant to Section 7.4 herein. 20.2 Audits of MICROSOFT. CHECKFREE may cause an audit to be made, at CHECKFREE's expense, of MICROSOFT's applicable records in order to verify statements rendered hereunder. Any such audit shall be conducted only by a third party independent certified public accountant (other than on a contingency fee basis) after prior written notice to MICROSOFT, and shall be conducted during regular business hours at MICROSOFT's offices and in such a manner as not to interfere with MICROSOFT's normal business activities. In no event shall an audit with respect to any statement commence later than eighteen (18) months from the date of the statement involved, nor shall the audits be made hereunder more frequently than once annually, nor shall the records supporting any statements be audited more than once. The results of any such audit shall be subject to the nondisclosure obligations set forth in this Agreement. In the event that CHECKFREE makes any claim against MICROSOFT with respect to such audit, CHECKFREE hereby agrees to make available to MICROSOFT, upon request, the detailed results of the audit as prepared for CHECKFREE by its accountant. 20.3 Audits of CHECKFREE. MICROSOFT may cause an audit to be made, at MICROSOFT's expense, of CHECKFREE's applicable records in order to verify statements rendered hereunder. Any such audit shall be conducted only by a third party independent certified public accountant (other than on a contingency fee basis) after prior written notice to CHECKFREE, and shall be conducted during regular business hours at CHECKFREE's offices and in such a manner as not to interfere with CHECKFREE's normal business activities. In no event shall an audit with respect to any statement commence later than eighteen (18) months from the date of the statement involved, nor shall the audits be made hereunder more frequently than once annually, nor shall the records supporting any statements be audited more than once. The results of any such audit shall be subject to the nondisclosure obligations set forth in this Agreement. In the event that MICROSOFT makes any claim against CHECKFREE with respect 20
21 to such audit, MICROSOFT hereby agrees to make available to CHECKFREE, upon request, the detailed results of the audit as prepared for MICROSOFT by its accountant. 21. GENERAL 21.1 Compliance with Laws. Each party shall bear the obligation of its own compliance with applicable laws and regulations, provided that each party shall communicate to the other any relevant legal issues of which it becomes aware. 21.2 Applicability To Subsidiaries. Each of MICROSOFT and CHECKFREE shall cause its Subsidiaries to comply with all of the terms of this Agreement, subject to all geographic and scope limitations as set forth herein. 21.3 Governing Law. This Agreement shall be construed and controlled by the laws of the State of New York. 21.4 Attorneys' Fees. If either MICROSOFT or CHECKFREE employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs, including expert witness fees. 21.5 Notices and Requests. All notices and requests in connection with this Agreement shall be deemed given as of the day they are sent by overnight courier, charges prepaid, with a confirming fax; and addressed as follows: CHECKFREE: CHECKFREE CORPORATION 411 E Jones Bridge Road Norcross, GA 30092 Attention: Chief Executive Officer Fax: (678) 375-3010 Phone: (678) 375-1600 With a cc to: General Counsel Fax: (678) 375-3633 Phone: (678) 375-3632 With a cc to: SIMPSON THACHER & BARLETT 3373 Hillview Avenue Suite 250 Palo Alto, CA 94304 Attn: Daniel Clivner Rich Capelouto Fax: (650) 251-5002 Phone: (650) 251-5000 21
22 MICROSOFT: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 Attention: Senior VP, Consumer Group with a cc to: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 Attention: Law & Corporate Affairs Department Product Development and Marketing Group Fax: (425) 936-7329 or to such other address as the party to receive the notice or request so designates by written notice to the other. 21.6 No Assignment. Neither MICROSOFT nor CHECKFREE may assign this Agreement, or any portion thereof, to any third party unless the other party expressly consents to such assignment in writing. Any attempted assignment without such consent shall give the non-assigning party the right to terminate this Agreement effective upon written notice. Notwithstanding the foregoing, but subject to termination pursuant to Section to 18.4, either party hereto may assign this Agreement to a third party successor as part of the merger with, sale to, or transfer of substantially all of the assets of the assigning party to such third party. Subject to the provisions of this Section 21.6, this Agreement shall be binding upon and will inure to the benefit of any successor entity that carries on the business that is the subject of this Agreement. 21.7 Legal Relationship. The parties to this Agreement are independent contractors, and no partnership, joint venture, employment, agency, franchise, or other form of agreement or relationship is intended. 21.8 Severability. In the event that any provision of this Agreement is found invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. The parties intend that the provisions of this Agreement be enforced to the fullest extent permitted by applicable law. Accordingly, the parties agree that if any provisions are deemed not enforceable, they shall be deemed modified to the extent necessary to make them enforceable. 21.9 Entire Agreement, Modifications, No Offer. The parties hereto agree that this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement dated subsequent hereto and signed on behalf of CHECKFREE and MICROSOFT by their duly authorized representatives. Neither this Agreement nor any written or oral statements related hereto constitute an offer, and this Agreement shall not be legally binding until executed by both parties hereto. 21.10 Binding Effect. Subject to the limitations herein before expressed, this Agreement shall inure to the benefit of and be binding upon the parties, their successors, administrators, heirs, and permitted assigns. 22
23 21.11 Dispute Resolution. The parties shall resolve all Disputes according to the provisions as set forth in Exhibit 2 hereto. 21.12 Force Majeure. If either party to this Agreement is effectively prevented from performing any of its obligations as a result of an event or circumstance, other than economic factors, that is beyond its reasonable control (including without limitation fire, flood, earthquake, elements of nature, acts of God, acts of war, terrorism, riots, civil disorders, rebellions, and power outages) and which event or circumstance was either (i) unforeseeable, or (ii) foreseeable, but could not have been avoided, prevented or overcome through the exercise of reasonable diligence, then those obligations so affected shall be suspended for the duration of such contingency, but in no event longer than ninety (90) days. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date. MICROSOFT CORPORATION CHECKFREE CORPORATION - ----------------------------- ------------------------------------ By (sign) By (sign) - ----------------------------- ------------------------------------ Name (Print) Name (Print) - ----------------------------- ------------------------------------ Title Title - ----------------------------- ------------------------------------ Date Date 23
1 Exhibit 10(gg) CONFIDENTIAL TREATMENT - Asterisked material has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. MARKETING AGREEMENT THIS MARKETING AGREEMENT (the "Agreement") by and between Chopper Corporation, a Delaware corporation, and First Data Corporation, a Delaware corporation, is made this ___ day of , ____. BACKGROUND WHEREAS, FDC, Chopper and certain other Persons are parties to an Agreement and Plan of Merger and Contribution Agreement, dated as of February 15, 2000 (the "Merger Agreement"), and upon the consummation of the transactions contemplated by the Merger Agreement, including the contribution of the Tank Entities (as defined in the Merger Agreement) to Chopper pursuant to the Tank Contributions (as defined in the Merger Agreement), Chopper and FDC desire to begin a long term relationship through which the parties, INTER ALIA, leverage their existing assets and relationships to provide products and services to each other and to cross market and cross promote each other's products and services, all upon the terms and conditions set forth herein; and WHEREAS, FDC has previously entered into a covenant not to compete with the Tank Entities and Chopper and FDC desire to amend, restate and confirm FDC's pre-existing covenant not to compete with the Tank Entities. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For the purposes of this Agreement, the following terms shall have the definitions indicated below, and shall be equally applicable to the singular and plural forms. Any agreement (including this Agreement) referred to herein shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof. When a reference is made in this Agreement to an article, section, schedule or exhibit, such reference shall be to an article, section, schedule or exhibit of this Agreement unless otherwise indicated. Whenever the words "include," "includes," or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 1.1 "AAA" shall have the meaning set forth in Exhibit 13.9(a). 1.2 "Active Consumer" shall mean, with respect to an Aggregation Service Company, a Consumer who pays at least one Household Bill during the applicable calendar month using such Aggregation Service Company; provided, however, that such Consumer shall not be considered an Active Consumer in any calendar month if the sole Household Bill paid by the Consumer during the applicable month is a Household Bill paid to an Page 1
2 Affiliate of the Aggregation Service Company (such excluded Consumer being an "Excepted Consumer"). 1.3 "Affiliate" of a Person shall mean any corporation, partnership, joint venture, limited liability company or other entity in which such Person (a) Beneficially Owns, directly or indirectly, 50% or more of the outstanding voting securities or equity interests, only so long as such Beneficial Ownership continues, (b) is a general partner, only so long as such Person remains a general partner or (c) is a managing member, only so long as such Person remains a managing member. 1.4 "Agreement" shall have the meaning set forth in the first paragraph of this Agreement. 1.5 "Aggregation Service Company" shall have the meaning set forth in Section 3.1. 1.6 "Alliance" shall mean any venture (in any form, including in corporate, partnership or limited liability company form) or contractual alliance now or hereafter entered into between FDC (or any of its Affiliates) and one or more third parties pursuant to which the third party venturer has the contractual or other legal right to block major business and/or corporate actions by such venture. 1.7 "Beneficially Own" shall have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, except that a Person shall be deemed to "Beneficially Own" all securities that such Person has a right to acquire, whether such right is exercisable immediately or only after the passage of time (and without any additional condition) (and such ownership may be referred to herein as "Beneficial Ownership"). 1.8 "Bill" shall mean a bill presented to a Consumer for products sold, leased, rented or licensed or services rendered. 1.9 "Bill Presentment and Payment Service" shall mean an Interactive Service by which the user is presented with a bill for goods or services together with a means to pay or order payment of that bill. 1.10 "Change of Control" shall mean any of the following with respect to Chopper: (a) the acquisition either directly or indirectly, by any third Person of the Beneficial Ownership of more than thirty percent (30%) of the capital stock regularly entitled to vote on all matters subject to stockholder vote (the foregoing shall not include a transaction in which a holding company is used and the stockholders of the original company own at least 70% of the stock of the holding company after such transaction); (b) any merger, consolidation or other business combination or transaction whereby the stockholders of Chopper immediately prior to the effective date of such merger, consolidation or other business combination or transaction cease to own at least seventy percent (70%) of the capital stock of the surviving entity (or its 100% controlling parent) regularly entitled to vote on all matters subject to stockholder vote following such merger, consolidation or other business combination or transaction; or (c) the transfer to any Person who is not a party to Page 2
3 this Agreement of all or substantially all of the assets of Chopper or any of its Affiliates, as applicable. 1.11 "Chopper" shall mean Chopper Corporation, a Delaware corporation, and its permitted successors and permitted assigns. 1.12 "Chopper Indemnified Persons" shall have the meaning set forth in Section 9.2. 1.13 "Client" means clients of FDC and its Affiliates and other third Persons, excluding the Top Billers. 1.14 "Chopper Patents" shall mean any and all patents that Chopper or any of its Affiliates has rights to assert during the term of this Agreement. 1.15 "Confidential Information" shall have the meaning set forth in Section 7.1. 1.16 "Consumer" shall have the meaning set forth in Section 3.1. 1.17 "DDA" shall mean a demand deposit account with a financial institution. 1.18 "Dispute" shall mean any and all disputes, controversies and claims between the parties arising from or in connection with this Agreement or the relationship of the parties under this Agreement, whether based on contract, tort, common law, equity, statute, regulation, order or otherwise. 1.19 "Effective Date" shall mean the date of the consummation of the transactions contemplated by the Merger Agreement. 1.20 "Existing Alliance" shall mean an Alliance of FDC or any of its Affiliates existing on the date hereof. 1.21 "Expense Savings" shall mean the savings realized or achieved by Chopper and its Affiliates (i) that result from its use of FDC's or its Affiliates' products and services and (ii) that result from its use of products and services used or resold by FDC or its Affiliates and provided by third party vendors or suppliers, which products or services are purchased by, through or through arrangements made by, FDC or its Affiliates. It being understood that notwithstanding the foregoing, Expense Savings include any relative reduction in costs associated with payment processing, customer service and exemption processing/handling. 1.22 "Fees" shall have the meaning set forth in Section 3.2(a). 1.23 "Fifth Year Monthly Minimum" shall have the meaning set forth in Section 3.2(e). 1.24 "First Year Minimum" shall have the meaning set forth in Section 3.2(a). 1.25 "Fourth Year Monthly Minimum" shall have the meaning set forth in Section 3.2(d). Page 3
4 1.26 "FDC" shall mean First Data Corporation, a Delaware corporation, and its permitted successors and permitted assigns. 1.27 "FDC Business Services" shall have the meaning set forth in Section 3.1. 1.28 "FDC Indemnified Persons" shall have the meaning set forth in Section 9.1. 1.29 "Future Alliance" shall mean an Alliance of FDC or any of its Affiliates entered into after the date hereof. 1.30 "Household Bills" shall have the meaning set forth in Section 3.1. 1.31 "Infringement Claims" shall have the meaning set forth in Section 9.1(a). 1.32 "Integrated Interactive Bill Payment System" shall have the meaning set forth in Section 3.1. 1.33 "Interactive Service" means a service accessed with electronic devices (whether now known or hereafter developed) that devices allow the user to view information and respond with additional information. Such devices include, without limitation, computers, personal digital assistants, "screen" telephones, and Internet-enabled televisions. 1.34 "Internet Site" means a Uniform Resource Locator (URL), or group of URLs which are designed to be perceived by the user as being operated by, or on behalf of, a single commercial business entity. 1.35 "Losses" shall have the meaning set forth in Section 9.1 . 1.36 "Losses and Expenses" shall have the meaning set forth in Section 10.1. 1.37 "Merchant Acquiring Services" shall mean the provision of any of the following services or products, directly or indirectly, to merchants in respect of Transaction Cards: (i) the authorization and capture of transactions, (ii) the submission of such transactions for interchange settlement or other settlement, (iii) the preparation of statements or reports based on such transactions, chargebacks and other exception items (including by electronic access), (iv) the provision of customer service or other back office services in respect of any of such transactions, (v) the sale, lease or rental of point of sale (POS) hardware relating to any of the foregoing and (vi) clearing and settlement services. 1.38 "Merger Agreement" shall have the meaning set forth in the second paragraph of this Agreement. 1.39 "Minimums" shall mean the First Year Minimum, Second Year Monthly Minimum, Third Year Monthly Minimum, Fourth Year Monthly Minimum or Fifth Year Monthly Minimum, as the case may be. Page 4
5 1.40 "Monthly Consumer Bill Payment Ratio" shall mean, with respect to any Aggregation Service Company in a calendar month, an amount equal to (A) the total number of Household Bills paid by FDC and its Affiliates for such Aggregation Service Company excluding any Household Bills paid for Excepted Consumers, utilizing an Integrated Interactive Bill Payment System owned or operated by FDC or its Affiliates, using an Interactive Service during the applicable calendar month; divided by (B) the aggregate number of Active Consumers for such Aggregation Service Company during the applicable calendar month. For purposes of calculating the total number of Household Bills paid by FDC and its Affiliates, all of a Consumer's Household Bills paid in a single payment to a Single Payee shall count as a single Household Bill. 1.41 "Pay Anyone Service" shall mean an Interactive Service through which the user may make payment(s) from the user's DDA to any other Person without the need for the electronic presentment of a bill in connection with such payment, where the user enters the payment instructions including payment amount, source account, date of payment, payee, account number of payee (if any), and the Interactive Service accepts and completes the payment per the instructions. 1.42 "Payment Processing" shall mean the processing of any method a Person may now or hereafter use to pay an obligation, including Transaction Card, electronic check, Internet check, paper check, EFT, Automated Clearinghouse or wallet technology. 1.43 "Payee" shall have the meaning set forth in Section 3.1. 1.44 "Person" shall mean an individual, partnership, corporation, limited liability company, trust, joint stock company, association, joint venture, or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. 1.45 "Restricted Activity" shall have the meaning set forth in Section 3.1. 1.46 "Revenue Shortage" shall mean the amount by which the First Year Minimum, Second Year Monthly Minimum, Third Year Monthly Minimum, Fourth Year Monthly Minimum or Fifth Year Monthly Minimum (as applicable) is greater than the sum of the Fees and Expense Savings during the applicable monthly or twelve (12) month period. 1.47 "Second Year Monthly Minimum" shall have the meaning set forth in Section 3.2(b). 1.48 "Specified Processors" shall mean those entities identified in Schedule 1.48 and their Affiliates and their respective successors and assigns. 1.49 "Sponsor" shall have the meaning set forth in Section 3.1. 1.50 "Statement" shall mean a statement of account presented to a Consumer containing information about the Consumer's account. 1.51 "Term" shall have the meaning set forth in Section 5. Page 5
6 1.52 "Third Year Monthly Minimum" shall have the meaning set forth in Section 3.2(c). 1.53 "Top Billers" shall mean each of the entities set forth in Schedule 1.37. 1.54 "Voting Stock" shall mean securities of a Person having the ordinary power to vote in the election of members of the board of directors or board of managers or equivalent governing body. 2. Chopper Obligations. As of the Effective Date and during the Term: 2.1 Payment Processing. (a) Chopper shall use and shall cause its Affiliates to use FDC and its Affiliates to provide all Payment Processing used by Chopper and its Affiliates; provided, however, that neither Chopper nor any of its Affiliates shall be required to use FDC and its Affiliates to provide Payment Processing if, in the reasonable business judgment of Chopper, Chopper or its Affiliates, as applicable, can obtain substantially similar Payment Processing on substantially the same terms offered by FDC and its Affiliates at an overall economic cost that is less than the overall economic cost FDC and its Affiliates offered to provide the same to Chopper and its Affiliates; provided, however, that "reasonable business judgment" may take into consideration the fact that FDC or its Affiliates offers a directly competing product or service offered by Chopper or any of its Affiliates and the use of FDC's or its Affiliates' product or service by Chopper or its Affiliates would either (i) allow FDC or its Affiliates to achieve substantial competitive benefits due to increased volume or (ii) provide FDC or its Affiliates with proprietary technology of Chopper and its Affiliates that provides FDC or its Affiliates with a substantial competitive advantage. (b) Notwithstanding Section 2.1(a), if Chopper or any of its Affiliates are able to obtain from a third Person substantially similar Payment Processing on substantially the same terms offered by FDC or its Affiliates at an overall economic cost that is less than the overall economic cost that FDC and its Affiliates offered to provide such Payment Processing to Chopper and its Affiliates, Chopper shall permit and shall cause its Affiliates to permit FDC and its Affiliates to provide such Payment Processing to Chopper and its Affiliates on overall terms that are at least as favorable as those offered by such third Person, in which case Chopper or its Affiliate, as applicable, shall obtain such services from FDC and its Affiliates. (c) FDC and its Affiliates shall offer to provide to Chopper and its Affiliates, in connection with the services Chopper is then offering to Aggregation Service Companies, Payment Processing of the type FDC and its Affiliates is then offering generally in the marketplace. In determining the price, level of service and other specific terms of the Payment Processing to be offered to Chopper and its Affiliates, FDC shall take into account (i) its then current equity interest in Page 6
7 Chopper, (ii) the anticipated volumes, any exclusivity arrangements and minimum revenue commitments either of the parties or their respective Affiliates are bound by, the marketing commitments involved and (iii) the terms and conditions of the current form of customer contract. If either Chopper or its Affiliates chooses to purchase such Payment Processing from FDC or its Affiliates, it shall execute FDC's current form of customer contract with appropriate terms and conditions. (d) To facilitate the provision of Payment Processing by FDC and its Affiliates to Chopper and its Affiliates, within 60 days following the Effective Date, and thereafter as FDC may reasonably request (but at least annually), Chopper and its Affiliates shall provide FDC and its Affiliates with such information as FDC may reasonably request relating to the then current and anticipated use of Payment Processing by Chopper and its Affiliates, including the specific terms of existing third-party contracts relating to Payment Processing (subject to any existing confidentiality requirements). (e) If Chopper shall breach this Section 2.1, the parties agree that FDC shall be entitled to 200% of any lost profits of FDC and its Affiliates. 2.2 Official Check. When commercially reasonable, Chopper and its Affiliates shall use FDC's product commonly known as Official Check in connection with the Pay Anyone Service. In connection therewith, Chopper shall enter into a customary processing agreement relating to the use of the Official Check product. For purposes of this Section 2.2, it shall be deemed commercially reasonable for Chopper and its Affiliates to use FDC's product commonly known as Official Check when, in the reasonable business judgement of Chopper, services of equal or superior quality as compared to the offerings of third Persons may be thereby obtained at an equal or lesser overall economic cost from FDC or its Affiliates than such third Person; provided, however, that "reasonable business judgment" may take into consideration the fact that FDC or its Affiliates offers a directly competing product or service offered by Chopper or any of its Affiliates and the use of FDC's or its Affiliates' product or service by Chopper or its Affiliates would either (i) allow FDC or its Affiliates to achieve substantial competitive benefits due to increased volume or (ii) provide FDC or its Affiliates with proprietary technology of Chopper and its Affiliates that provides FDC or its Affiliates with a substantial competitive advantage. 2.3 Covenant Not to Sue For Chopper Patents. Chopper hereby covenants not to sue or otherwise bring or assert any claim against FDC or any of its Affiliates that any service or product offered by FDC or any of its Affiliates infringe any Chopper Patent which is based upon or utilizes any intellectual property constituting works derivative of intellectual property licensed pursuant to the [Technology and Intellectual Property License Agreements], dated the date hereof, between FDC and Chopper and Missile and Chopper. Page 7
8 3. FDC Obligations. As of the Effective Date and during the Term (except as provided in Section 3.1): 3.1 Noncompete. (a) Subject to the exceptions set forth below, FDC agrees that, subject to Section 6, beginning on the Effective Date and for a period ending on the fifth anniversary of the Effective Date, (1) in no month will the Monthly Consumer Bill Payment Ratio of any Aggregation Service Company (including an Aggregation Service Company owned or operated by FDC), to which FDC or its Affiliates provides an Integrated Interactive Bill Payment System using an Interactive Service anywhere in the world, exceed three (the "Restricted Activity") or (2) neither FDC or its Affiliates shall acquire the Voting Stock of any Person conducting Restricted Activities. (b) An "Integrated Interactive Bill Payment System" is a combination of applications, databases and processing infrastructure which together, coupled with connectivity, provide the necessary intelligence to receive and convert Consumer payment instructions for online bill payments into credits (to a Payee DDA), debits (from a Consumer DDA) and exceptions, and which can be amended and corrected on a transaction-by-transaction basis as exceptions are processed and remediated. In order to be an Integrated Interactive Bill Payment System, the system also must have all of the following features: (1) A database utilized by FDC or its Affiliates in connection with an Integrated Interactive Bill Payment System that contains files with information regarding Sponsors. A "Sponsor" is a financial institution, personal financial management software provider, or internet site operator which offers electronic bill delivery and payment, or bill payment, electronically to its customers or patrons. A Sponsor file is consulted to determine connectivity, communications windows, or business rules influencing debit method with respect to a Sponsor. (2) A database utilized by FDC or its Affiliates in connection with an Integrated Interactive Bill Payment System that contains a database of files with information regarding Payees. A "Payee" is the receiver of payments, including both funds and remittance information. A Payee file must contain all of the following fields: (i) name; (ii) telephone numbers; (iii) preferred remittance method; (iv) bank account information; and (v) risk-related information. (3) A database utilized by FDC or its Affiliates in connection with an Integrated Interactive Bill Payment System that contains files with information regarding Consumers. A "Consumer" is an individual person (and shall not include small businesses, sole proprietorships, partnerships, corporations, limited liability companies, or other such entities) that is the Page 8
9 holder of one or more bank accounts from which bills are to be paid through the system. A Consumer file must contain all of the following fields: (i) name; (ii) address; (iii) unique alphanumeric identifier; (iv) bank account information; and (v) Payee files, including account numbers. (4) A system for recognizing disparities or anomalies in Payee account information submitted by and automatically makes appropriate corrections or changes; (5) A system for programmatically choosing a method of debit, among Automated Clearing House debit, or paper draft on the Consumer's account, through an arrangement with a Sponsor, and not as a result of choice by the Consumer, to obtain good funds, or other debit method, influenced by business rules and information contained in Sponsor, Payee, or Consumer files; (6) A system for programmatically choosing a method of credit, including both funds transfer and remittance information transmission among Automated Clearinghouse, e-Pay, RPS, Direct Send, Managed or Unmanaged paper check, paper draft, or other method, depending upon information contained in Consumer, Sponsor, or Payee files; (7) A system for determining the format of and formatting remittance information in a manner consistent with information contained in Payee files; and (8) A system for updating information contained in Payee, Sponsor, and Consumer files as a result of a payment which is initially rejected or returned, and reprocessing the payment. The parties recognize that activities that include one or more, but not all, of the foregoing components do not constitute an Integrated Interactive Bill Payment System, and that the provision of all the components set forth in (1) through (8) are required in order for a system to be considered an Integrated Interactive Bill Payment System. (c) "Household Bills" are defined as only those bills which have customarily been received at home by a Consumer through the United States Postal Service which seek payment for services or goods which have been provided in the past, or will be provided in the future, usually as part of an ongoing relationship between the Payee and the Consumer, or, as in the case of a credit card statement, as part of a credit relationship established in the past. Examples of Household Bills are utility bills, credit card bills, insurance bills, loan payments, magazine or newspaper subscriptions, and recurring home delivery of milk, bottled water, or other products or services such as gardening, home maintenance, or snow removal. Household Bills do not include requests for payment made in connection with a Page 9
10 non-recurring purchase of goods or services, such as purchases made over the Internet, through mail order or telephone order, nor do they include requests for payment which are made at a location which is open to the general public or which is a place of public accommodation. The term Household Bills does not include payments made to an individual from an individual other than in furtherance of a regularly-conducted business, trade, or profession by either of them (Person-to-Person Payments). (d) An "Aggregation Service Company" is an entity which itself provides to Consumers, or through an intermediary provides to Consumers, a service whereby electronic bills presented by more than three Single Payees may be accessed and paid at a single Internet Site, or through personal financial management client software used principally for accounting, investing, budgeting, maintaining or monitoring a Consumer's personal finances, with a single authentication procedure. An entity which provides an Internet Site which provides hyperlinks to multiple Internet Sites or URLs each operated by, hosted by, or established for, a Single Payee shall not be considered to be an Aggregation Service Company provided that payment is effectuated through the same initiation method and process as would be applied to payments effectuated on behalf of users who access the hyperlinked Internet Site or URL directly; provided, however, that solely with respect to hyperlinked URLs, such hyperlinked URLs do not appear to the Consumer to be under the same sponsor. A "Single Payee" is a business entity which (a) controls, is controlled by, or under common control of the entity represented at the site or (b) payees which voluntarily (or pursuant to governmental requirement) combine in a single Bill or Statement, Bills or Statements from one or more sources that are to be discharged by a single payment (e.g., a phone bill or credit card bill). FDC and its Affiliates shall be free to offer electronic billing and Payment Processing through Internet Sites and URLs offering billing from, or payment to, a Single Payee. (e) Notwithstanding the foregoing, nothing herein shall be construed as to prohibit FDC from offering business-to-business Payment Processing, or person-to-person Payment Processing whether through an Integrated Interactive Bill Payment System or otherwise. (f) FDC and its Affiliates may conduct Restricted Activities, provided, that: (1) FDC and its Affiliates limit the gross revenues derived solely from all such Restricted Activities to $50,000,000 per calendar year; (2) Except as provided in Sections (h)(4), (h)(5), (h)(6) and (h)(13), FDC pays to Chopper 25% of all gross revenues derived solely from the Restricted Activities, which payment shall be counted as Fees for purposes of Section 3.2; provided, however, that the maximum amount of any such payments which can be counted as Fees in any calendar year Page 10
11 cannot exceed 50% of the sum of the Minimums required to be generated for such year; and (3) FDC gives notice to Chopper and Chopper as soon as practicable after signing an agreement to engage in such activities. (g) Under no circumstances, however, shall FDC agree to construct or cause to be constructed, or operate, an Integrated Interactive Bill Payment System for [*]. (h) Nothing contained herein shall be interpreted to prohibit: (1) the development, sale, or licensing of stand-alone tools, productivity applications and/or client or server platforms, that can be used to facilitate aggregation by client software of Bills, Statements or payments; (2) providing electronic Bills or Statements to any Person; (3) owning (i) not in excess of 20% in the aggregate of the Voting Stock of any Person (including a Person engaged in a Restricted Activity, but excluding any Existing Alliance or Future Alliance covered in Section 3.1(h)(6) or (h)(13)); or (ii) owning Voting Stock of Chopper; provided, however, that, with respect to clause (i), if the investment represents in excess of 10% of the Voting Stock of any such Person, then an amount equal to (A) FDC's or its Affiliates' percentage of Voting Stock, multiplied by (B) the gross revenues derived solely from the Restricted Activities of such investment, shall be included in gross revenues for purposes of clause (f)(1) of Section 3.1 (but none of such gross revenues shall be counted for purposes of calculating gross revenues for purposes of clause (f)(2) of Section 3.1); (4) acquiring, and following such acquisition, actively engaging in, any business that has a subsidiary, division, group, franchise or segment that is engaged in any Restricted Activity ("Competing Unit"), so long as on the date of such acquisition, not more than the lesser of 20% or $50,000,000 of the annual consolidated revenues of such business are derived solely from Restricted Activities; provided, however, that if FDC or any of its Affiliates acquire a Competing Unit, then the gross revenues derived solely from the Restricted Activities conducted by the Competing Unit shall be included in gross revenues for purposes of clause (f) of Section 3.1; provided, further, that if FDC or its Affiliates agree to divest of such Competing Unit in the manner set forth in clause (h)(5) of Section 3.1, then only 15% of the gross revenues derived solely from the Restricted Activities of the Competing Unit shall be included in gross revenues for purposes of clause (f)(2) of Section 3.1 for so long as FDC and its * Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. Page 11
12 Affiliates are complying with clause (h)(5) of Section 3.1 (but none of such gross revenues shall be counted for purposes of calculating gross revenues for purposes of clause (f)(1) of Section 3.1); (5) acquiring and, following such acquisition, actively engaging in, any business that has a Competing Unit if on the date of such purchase more than the lesser of 20% or $50,000,000 of the consolidated revenues of such business are derived from a Restricted Activity so long as such business divests itself of the Competing Unit promptly after the date of such acquisition, and in no case greater than two years, accompanied by public announcement of the requirement to divest, so that on the date of such divestiture not more than the lesser of 20% or $50,000,000 of the consolidated revenues of such business are derived from Restricted Activities; provided, however, that with respect to any purchase intended to be treated for federal income tax purposes as a tax-free reorganization, no such divestiture shall be required until, in the reasonable opinion of FDC, such divestiture would no longer endanger the treatment for federal income tax purposes of such acquisition as a tax-free reorganization; provided, further, that for so long as FDC or any of its Affiliates holds a Competing Unit it is required to divest, then 15% of the gross revenues derived solely from the Restricted Activities conducted by the Competing Unit shall be included in gross revenues for purposes of clause (f)(2) of Section 3.1 (but none of such gross revenues shall be counted for purposes of calculating gross revenues for purposes of clause (f)(1) of Section 3.1). (6) engaging in a Future Alliance, provided, that, subject to any applicable fiduciary obligation, FDC shall, and shall cause its Affiliates to, vote against, not support and oppose any proposal on the part of any Future Alliance to (A) acquire or invest in the Voting Stock of a business performing Restricted Activities, or (B) otherwise enter into a contract, arrangement or understanding with a Person engaged in Restricted Activities to engage in Restricted Activities, which, in the case of the Restricted Activities referred to in (A) and (B), FDC would be prohibited from engaging in pursuant to this Section 3.1 during the applicable non-compete period; provided, however, that 15% of FDC's allocable share (which allocable share shall equal FDC's percentage ownership interest in the Future Alliance) of the gross revenues derived solely from the Restricted Activities conducted by such Alliance shall be included in gross revenues for purposes of clause (f)(2) of Section 3.1 (but none of such gross revenues shall be included for purposes of calculating gross revenues for purposes of clause (f)(1) of Section 3.1); (7) performing any services pursuant to this Agreement or any other agreement entered into in connection with the performance of this Agreement; Page 12
13 (8) providing a service or product where the electronic payment and presentment system is an ancillary feature of an electronic merchandising business offered, operated or supported by FDC or any of its Affiliates (e.g., an on-line shopping mall, etc.); provided that FDC or its Affiliates provide such payment and/or presentment services to purchasers only with respect to the services or products offered by such electronic merchandising business; (9) providing a service or product whereby payment and/or presentment can only be made at a physical location which is open to the general public or a place of public accommodation (e.g., grocery stores, check cashing locations or the post office); (10) providing a service or product for payment or presentment of taxes and fees to government entities; (11) providing an Interactive Service which is designed and marketed to provide for the last minute or emergency payment of Bills or Statements; (12) providing a payment gateway using proprietary software that enables the transmission of payment transaction information via the Internet for a Payee conducting business on the Internet or through mail order-telephone order, thereby allowing the Payee to process transactions electronically; (13) providing any service which FDC or its Affiliates is contractually obligated to provide to an Existing Alliance; provided, however, that 15% of FDC's allocable share (which allocable share shall equal FDC's percentage ownership interest in the Existing Alliance) of the gross revenues derived solely from the Restricted Activities conducted by such Alliance shall be included in gross revenues for purposes of clause (f)(2) of Section 3.1 (but none of such gross revenues shall be included for purposes of calculating gross revenues for purposes of clause (f)(1) of Section 3.1); (14) providing an Integrated Interactive Bill Payment System that involves an interchange system (not created specifically for the aggregation and payment of Household Bills) of any kind to effectuate payment; and (15) providing payment related services in connection with an electronic wallet or password management product or service, including interfaces to any client software. Except as specifically set forth in this clause (h), none of the gross revenues generated from activities described in clauses (1) through (15) above shall be Page 13
14 counted as gross revenues from Restricted Activities for purposes of clause (f) of Section 3.1. (i) Nothing in this Agreement, including without limitation, this Section 3.1, shall be construed to prohibit FDC or any Affiliate of FDC from providing any FDC Business Services, including through Interactive Service, and none of the FDC Business Services shall be construed to constitute Restricted Activities. "FDC Business Services" means providing any of the following services (including any services supportive or ancillary to Restricted Activities): (1) issuing or processing of debit card, credit card, bank card, payment card, electronic benefit payment card, smart card, stored value card or other similar card (including an electronic equivalent) ("Transaction Cards") transactions and related products, services and systems, loan processing services and line-of-credit services; (2) issuing, origination, reconciliation, payment, processing, clearing, verification, guarantee, scoring or collection of any check (including electronic versions thereof), credit, debit and draft transactions, ATM transactions, Automated Clearinghouse transactions, electronic funds transfer transactions, Transaction Card transactions and recurring payment transactions, including any payment transaction branded by VISA, MasterCard, Discover, NOVUS, American Express or regional EFT network; (3) providing processing and other services in connection with electronic and/or paper bill, invoice, statement or notice presentment and payment services; (4) official checks and money orders services; (5) money transfer services as presently constituted (including Western Union and Orlandi Valuta); (6) remittance processing, tax payment, payment instrument services and cash management services; (7) in store and other off-site retail location facility installments and related consulting services; (8) list services (including sale, licensing and list rental), database marketing services (including housing, storing, sorting, maintaining, enhancing and updating data), data processing services (including provision of merge/purge, address hygiene and data append services) and database information services (including provision of market segmentation, consumer profiling, modeling and demographic information services); Page 14
15 (9) preparation and mailing (or other form of delivery, including electronic delivery) of bills, invoices, statements or notices; (10) messaging services, including the preparation, printing, facsimile or electronic transmission and/or mailing of letters or other communications and the preparation and telephonic delivery of pre-recorded voice messages; (11) automated voice response and call center services; (12) telephone check drafting, Automated Clearinghouse origination or electronic funds transfer services whether originated or authorized over or through a telephone, the Internet or web-based connection (including through a virtual POS or other payment authorization interface) and the enrollment, authorization and confirmation services provided in connection therewith; (13) provision (whether by batch or transactional) of credit and collection services, analytic modeling and metric products or services (including various "scoring" products and services) relating to payment transactions (including by check and Transaction Card), credit worthiness, householding, profitability, customer services, collection effectiveness, retention, fraud, bankruptcy, settlement, payment and related services, transaction, account or performance and the provision of credit reports and other credit bureau services, account screening services and other credit reporting applications and check and Transaction Card acceptance, guarantee, scoring and collection services; (14) any activities seeking collection of amounts owed by a debtor, including telephone calls and written and other communications to a debtor; (15) processing of debit or credit transactions for deposit accounts; (16) employment screening, customer acquisition and address management services; and (17) Merchant Acquiring Services and services offered to merchants, including in connection with the establishment of Internet-based commerce. (j) Nothing in this Section 3.1 shall prohibit the incidental or occasional use of any product or service offered or sold by FDC or any of its Affiliates for use in a Restricted Activity provided such product or service has not been designed or marketed for the purpose of engaging in a Restricted Activity. Page 15
16 3.2 Minimum Revenues. (a) If the fees (excluding installation fees) paid to Chopper and its Affiliates by FDC and its Affiliates (the "Fees") and Expense Savings during the first full twelve (12) calendar months after the Effective Date is less than $6,000,000 (the "First Year Minimum"), then within thirty (30) days after the end of such twelve (12) calendar month period, FDC shall pay to Chopper the difference between the First Year Minimum and the total of the Fees and Expense Savings during such twelve (12) calendar month period. (b) If the Fees and Expense Savings during any of the twelve (12) full calendar months after the first anniversary of the Effective Date is less than $750,000 (the "Second Year Monthly Minimum"), then within thirty (30) days after the end of any month in which there is a Revenue Shortage, FDC shall pay to Chopper the difference between the Second Year Monthly Minimum and the total of the Fees and Expense Savings during such month. (c) If the Fees and Expense Savings during any of the twelve (12) full calendar months after the second anniversary of the Effective Date is less than $1,000,000 (the "Third Year Monthly Minimum"), then within thirty (30) days after the end of any month in which there is a Revenue Shortage, FDC shall pay to Chopper the difference between the Third Year Monthly Minimum and the total of the Fees and Expense Savings during such month. (d) If the Fees and Expense Savings during any of the twelve (12) full calendar months after the third anniversary of the Effective Date is less than $1,250,000 (the "Fourth Year Monthly Minimum"), then within thirty (30) days after the end of any month in which there is a Revenue Shortage, FDC shall pay to Chopper the difference between the Fourth Year Monthly Minimum and the total of the Fees and Expense Savings during such month. (e) If the Fees and Expense Savings during any of the twelve (12) full calendar months after the fourth anniversary of the Effective Date is less than $1,500,000 (the "Fifth Year Monthly Minimum"), then within thirty (30) days after the end of any month in which there is a Revenue Shortage, FDC shall pay to Chopper the difference between the Fifth Year Monthly Minimum and the total of the Fees and Expense Savings during such month. (f) Any fees (excluding installation fees) paid to Chopper or any of its Affiliates received from billers (other than Top Billers) (i) that FDC or any of its Affiliates resells any services or products of Chopper or its Affiliates to, (ii) that FDC or any of its Affiliates has referred or introduced to Chopper or any of its Affiliates or (iii) that FDC or its Affiliates actively market Chopper's services or products to, shall be counted as "Fees" for purposes of this Section 3.2. In addition, any fees (excluding installation fees) received, directly or indirectly, by Chopper or its Page 16
17 Affiliates from consumer transactions occurring on any Internet site owned, maintained or hosted by FDC or any of its Affiliates shall be counted as "Fees" for purposes of this Section 3.2. Chopper shall promptly (but in any event no longer than fifteen (15) days after each month end) provide FDC with any such information reasonably necessary for FDC to calculate the Fee's generated by Persons that are not Affiliates of FDC. 3.3 Notwithstanding Section 3.2, FDC shall be under no obligation to meet any monthly minimum identified in Section 3.2 to the extent and only to the extent that: (a) Chopper or any of its Affiliates fails to make available any Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing service; (b) the means by which Chopper or any of its Affiliates makes available any Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing service are unavailable due to technical failure or otherwise; (c) Chopper changes the nature of its business in a material way so as to have a material adverse effect on FDC's and its Affiliates' ability to meet the monthly payment minimums set forth in Section 3.2; or (d) Chopper or any of its Affiliates takes any action that materially interferes with FDC or its Affiliates ability to commercially exploit any Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing service of Chopper and its Affiliates. 3.4 Pay Anyone. When commercially reasonable, and if FDC or any of its Affiliates chooses to offer a Pay Anyone Service of such kind, FDC and its Affiliates shall use Chopper's Pay Anyone Service, subject to such terms and conditions as the parties may agree. For purposes of this Section 3.5, it shall be deemed commercially reasonable for FDC and its Affiliates to use Chopper's Pay Anyone Service when, in the reasonable business judgment of FDC, services of equal or superior quality as compared to a third Person may thereby be obtained at an equal or lesser overall economic cost from Chopper then from such third Person. 3.5 CSP. Nothing herein shall restrict FDC or its Affiliates from hosting a site providing or offering Pay Anyone and/or Bill Presentment and Payment Services of a third party via distribution or transmission of computer software and/or informational content of such third party, where such hosting activities are generally conducted for other parties and the fee or consideration arrangements therefore are arms' length transactions of the type generally made; provided, however, that if the site is hosted by and for FDC or any of its Affiliates, FDC and its Affiliates will be required to comply with the other provisions of this Agreement; provided, further, that FDC or its Affiliates will not host a site for a third Person offering an FDC branded Pay Anyone or Bill Presentment and Payment product or service which would otherwise violate the terms of this Agreement. As used herein, "hosting" means the transmission or publication of another's products or services, which Page 17
18 may be accomplished through use of the hosting party's equipment and facilities, where the hosting party does not create or control the hosted products or services, but rather is acting as a transmitter or publisher of such products or services. 3.6 Bill Service Provider. If FDC or any of its Affiliates acts as a bill service provider for a specific Payee, FDC and its Affiliates will use its reasonable commercial efforts, determined in the sole judgment of FDC, to encourage such Payee to make available its Household Bills through the Bill Presentment and Payment System operated by Chopper and any of its Affiliates, provided that (1) such Payee has entered into a contract with Chopper or a reseller (including FDC) agreeing to make available Household Bills on the Bill Presentment and Payment System operated by Chopper and any of its Affiliates and (2) such Payee or Chopper agrees to pay all costs and expenses (including installation fees) associated with the presentment of any Household Bills on the Bill Presentment and Payment System operated by Chopper or its Affiliates. 4. Chopper and FDC Joint Obligations. 4.1 Development. Whenever commercially reasonable, Chopper and FDC shall cooperate with each other in developing electronic invoicing and payment services and products for clients and prospective clients of FDC and its Affiliates. Any such joint development shall only be undertaken after execution of a written joint development agreement. The parties must agree in writing prior to commencing any joint development work. All such cooperation is on a non-exclusive basis for both parties, unless otherwise agreed upon in writing for a particular project. 4.2 Expense Savings. Within sixty (60) days after the Effective Date, Chopper and FDC shall determine an appropriate mechanism to calculate the Expense Savings. Notwithstanding the foregoing sentence, commencing on the first full calendar month after the Effective Date and ending sixty full calendar months later, Chopper shall deliver to FDC, not less than fifteen (15) days after the end of each calendar month, a detailed statement calculating the Fees and Expense Savings for the most recently completed calendar month. 4.3 Reseller Agreement. (a) Contemporaneously with the execution of this Agreement, the parties shall enter into a non-exclusive reseller agreement substantially in the form attached hereto as Schedule 4.3(a) relating to the resale by FDC and its Affiliates of the Bill Presentment and Payment Service, Pay Anyone Service and Payment Processing Service of Chopper and its Affiliates to Clients. (b) Pricing. The initial pricing structure for the Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing Service of Chopper and its Affiliates to be resold by FDC and its Affiliates are set forth in Schedule 4.3(b). At least sixty (60) days prior to the commencement of any renewal of this Agreement, the parties shall in good faith renegotiate the pricing structure, and Page 18
19 such structure shall replace the structure then set forth on any Schedule 4.3(b). Chopper represents and warrants that the pricing for the Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing Service to be resold by FDC are at least as favorable as the terms granted by Chopper or any of its Affiliates to any other Person. If Chopper or any of its Affiliates enters into any subsequent or renewal agreement with any other Person during the Term that provides for pricing more favorable than the pricing provided to FDC, FDC shall be deemed to receive the more favorable terms. Chopper shall notify FDC promptly of the existence of such more favorable pricing or benefits and FDC shall have the right to receive the same immediately. [note: the pricing schedule may be folded into the reseller agreement to be executed by the parties.] (c) Consumer Pricing. If FDC or any of its Affiliates offers any of the Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing Service provided by Chopper or its Affiliates to consumers, Chopper shall offer to provide FDC and its Affiliates such Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing Service on at least as favorable terms as those provided by Chopper or any its Affiliates to any Person reselling or receiving a comparable service. In determining the price, level of service and other terms of the Bill Presentment and Payment Service, Pay Anyone Service or Payment Processing Service to be provided to FDC and its Affiliates, Chopper shall take into account (i) the anticipated volumes, (ii) the service support levels to be provided, (iii) the marketing commitments involved and (iv) any exclusivity arrangements and minimum revenue commitments either of the parties or their respective Affiliates are bound by. 5. Term. This Agreement shall be effective on the Effective Date and shall continue for a period of five (5) years (the "Term"), unless earlier terminated as set forth herein or otherwise extended by agreement of the parties. 6. Termination. 6.1 Change of Control. FDC may immediately terminate this Agreement if Chopper or any of its Affiliates enters into a transaction with a Specified Processor or any of its Affiliates which results in the Specified Processor or any of its Affiliates acquiring Chopper in connection with a Change of Control (a "Chopper Acquisition"); provided, however, that in the event FDC elects to terminate this Agreement pursuant to this Section 6.1, then FDC shall be required to pay promptly 50% of the sum of all future Minimums payable pursuant to Section 3.2. Notwithstanding the foregoing, in the event of a Chopper Acquisition, Section 3.1 shall immediately terminate. 6.2 Acquisition. FDC may terminate this Agreement if Chopper or any of its Affiliates enters into a transaction with a Specified Processor or any of its Affiliates that results in Chopper or any of its Affiliates owning fifty percent (50%) or more of the Voting Stock of the Specified Processor or fifty percent (50%) or more of the consolidated assets of the Specified Processor (any such transactions being a "Specified Processor Acquisition"); Page 19
20 provided, however, that in the event FDC elects to terminate this Agreement pursuant to this Section 6.2, then FDC shall be required to pay promptly 50% of the sum of all future Minimums payable pursuant to Section 3.1. Notwithstanding the foregoing, in the event of a Specified Processor Acquisition, Section 3.1 shall immediately terminate. 6.3 Consequences. The following provisions shall survive the termination of this Agreement: Sections 7, 8, 9, 10, 11, and 13, and any payment obligations set forth in Section 3.2 arising prior to the effective date of any such termination. 7. Confidentiality. 7.1 Definition of Confidential Information. "Confidential Information" shall mean any information or materials that could reasonably be considered confidential and disclosed by either party in any form or medium and whether or not designated either orally, visually or in writing as confidential (or like designation) at the time of disclosure, including any data or information that is competitively sensitive material, and not generally known to the public, including products, planning information, marketing strategies, plans, finance, operations, customer relationships, customer profiles, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of a party, their respective Affiliates and the customers, clients and suppliers of any of the foregoing, and the nature and terms of this Agreement. 7.2 Non-Disclosure Obligation. Each party to this Agreement shall: (a) safeguard the confidentiality of the disclosing party's Confidential Information, exercising at least the same degree of care as it would with its own Confidential Information of a similar nature, but never less than reasonable care; (b) hold in confidence, and not disclose or reveal to any Person, any Confidential Information disclosed under this Agreement without the clear and express prior written consent of a duly authorized representative of the disclosing party; and (c) not use or disclose any of the Confidential Information for any purpose at any time, other than for the limited purpose of performance under this Agreement; and (d) upon the expiration or termination of this Agreement for any reason, promptly return to the disclosing party all Confidential Information (and any copies thereof) in its possession. 7.3 Exclusions. Notwithstanding the foregoing Section 7.2, the parties' obligations respecting confidentiality shall not apply to any particular information of a party that the other party can demonstrate: (a) was, at the time of disclosure to it, in the public domain; (b) after disclosure to it, is published or otherwise becomes part of the public domain through no fault of the receiving party and no known fault of the third party; Page 20
21 (c) was in the possession of the receiving party at the time of disclosure to it without being subject to another confidentiality agreement; (d) was received after disclosure to it from a third party who had a lawful right to disclose such information to it; (e) was independently developed by the receiving party without reference to Confidential Information of the furnishing party; (f) was required to be disclosed to any regulatory body having jurisdiction over FDC or Chopper or any of their respective clients; or (g) that disclosure is necessary by reason of legal, accounting or regulatory requirements beyond the reasonable control of the receiving party. 7.4 In the case of any disclosure pursuant to Section 7.3(f) or 7.3(g), to the extent practicable, the disclosing party shall give prior notice to the other party of the required disclosure and shall use commercially reasonable efforts to obtain a protective order or an appropriate confidentiality agreement covering such disclosure. If such a protective order is obtained, such information shall continue to be deemed to be Confidential Information. 7.5 Irreparable Harm. Each party acknowledges that if it breaches (or threatens to breach) its obligations under this Section 7, the other party will suffer immediate and irreparable harm, it being acknowledged that legal remedies are inadequate. Accordingly, if a court of competent jurisdiction should find that a party has breached (or threatened to breach) any such obligations, such party shall not oppose the entry of an appropriate order compelling performance by such party and restraining it from any further breaches (or threatened breaches). 8. Representations, Warranties and Covenants. 8.1 By Chopper. Chopper represents, warrants and covenants to FDC as follows: (a) Chopper is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) Chopper has full power and authority to execute, deliver and perform this Agreement; (c) this Agreement has been duly authorized, executed and delivered by Chopper and is the legal, valid and binding obligation of Chopper in accordance with its terms; and (d) Chopper shall perform all of its obligations set forth herein in a professional and workmanlike manner in accordance with the highest applicable industry standards. Page 21
22 8.2 By FDC. FDC represents, warrants and covenants to Chopper as follows: (a) FDC is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) FDC has full power and authority to execute, deliver and perform this Agreement; (c) this Agreement has been duly authorized, executed and delivered by FDC and is the legal, valid and binding obligation of FDC in accordance with its terms; and (d) FDC shall perform all of its obligations set forth herein in a professional and workmanlike manner in accordance with the highest applicable industry standards. 9. Indemnification. 9.1 By Chopper. Chopper shall indemnify, defend and hold FDC, its Affiliates and their respective directors, officers, employees and agents (collectively, the "FDC Indemnified Persons") harmless from and against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties, court costs and attorneys' fees (collectively, "Losses"), that any FDC Indemnified Person shall incur or suffer, that arise, result from, or relate to: (a) any infringement, misappropriation or violation of any issued United States patent or any copyright, trade secret or other intellectual property rights (collectively, "Infringement Claims") asserted by any third Person against any FDC Indemnified Person relating to the services or products provided by Chopper or its Affiliates pursuant to this Agreement; and (b) any claim by any third Person relating to the services or products provided by Chopper or its Affiliates pursuant to this Agreement, unless, and to the extent that, such claim arises, or is attributable to, the negligence, breach of contract, or unlawful act of FDC or its Affiliates. 9.2 By FDC. FDC shall indemnify, defend and hold Chopper, its Affiliates and their respective directors, officers, employees and agents (collectively, the "Chopper Indemnified Persons") harmless from and against and in respect of any and all Losses that any of Chopper Indemnified Persons shall incur or suffer, that arise, result from, or relate to: (a) any Infringement Claim asserted by any third Person against any Chopper Indemnified Person relating to the services or products provided by FDC to Chopper or its Affiliates pursuant to this Agreement; and (b) any claim by any third Person relating to the services or products provided by FDC and its Affiliates pursuant to this Agreement, unless, and to the extent that, Page 22
23 such claim arises, or is attributable to, the negligence, breach of contract, or unlawful act of Chopper or its Affiliates. 9.3 Third Party. If any indemnifiable claim by a third Person is made against any indemnified Person, such indemnified Person shall promptly provide written notice, as applicable, to Chopper or FDC of such claim; provided that the failure to give such notice shall not affect any rights of such indemnified Person hereunder except to the extent Chopper or FDC, as applicable, is materially prejudiced by such failure to give notice. By delivering written notice to such indemnified Person within 15 days after receipt of such indemnified Person's notice, Chopper, or FDC may, as applicable, or upon written request of such indemnified Person shall, assume the defense and/or settlement of such claim at its sole expense through counsel reasonably satisfactory to such indemnified Person, provided that: (a) Chopper or FDC, as applicable, shall not permit any lien, encumbrance or other adverse charge upon any asset of such indemnified Person; (b) Chopper or FDC, as applicable, shall permit such indemnified Person to participate in such settlement or defense through counsel selected by such indemnified Person at such indemnified Person's expense; and (c) Chopper or FDC, as applicable, shall agree to promptly reimburse such indemnified Person for the full amount of its liability after final determination to the claimant provided such liability is indemnifiable under Section 9. (d) If Chopper or FDC, as applicable, shall not have employed counsel to defend such claim or if such indemnified Person shall have reasonably concluded (with the written advice of counsel) that the position of such indemnified Person and Chopper or FDC, as applicable, may be in conflict, Chopper or FDC, as applicable, shall not have the right to direct the defense of any such claim on behalf of such indemnified Person and the reasonable legal and other expenses incurred by such indemnified Person shall be borne by Chopper or FDC, as applicable. No settlement of a claim that involves a remedy other than the payment of money by Chopper or FDC, as applicable, shall be entered into by Chopper or FDC, as applicable, without the prior written consent of the indemnified Party, which consent shall not be unreasonably withheld or delayed. 10. Limitation of Liability. 10.1 A party's liability to the other party or any other Person for damages, injuries, losses, costs or expenses of any kind, however caused, based on or arising from or in connection with this Agreement, any termination hereof, the subject matter hereof, the performance (or non-performance) of any service or obligation hereunder, whether arising in contract or tort (including as a result of negligence or strict liability), and whether or not such party shall have been informed, or might have anticipated the possibility of any such damage, loss, cost or expense (collectively, "Losses and Expenses"), shall be limited to the direct Page 23
24 damages actually incurred by such party or Person and consequential damages and lost profits incurred by either party to the extent provided for pursuant to Section 11; provided that the aggregate amount required to be paid by a party hereto for all such Losses and Expenses shall not exceed $100,000,000. The foregoing limitations shall not apply to: (a) payment obligations of the parties; or (b) a breach of Section 7. 10.2 Mitigation. Each party shall use reasonable efforts to mitigate damages for which the other party is responsible. 10.3 Limitation of Actions . Neither party may assert any cause of action against the other party (other than third party claims) under this Agreement that accrued more than one (1) year prior to: (a) the filing of a suit (unless arbitration proceedings based on the same factual allegation of facts were commenced within one year of the accrual of such cause of action); or (b) the commencement of arbitration proceedings alleging such cause of action. 10.4 Express Allocation of Risks. The parties expressly acknowledge that the limitations contained in this Agreement represent the express agreement of the parties with respect to the allocation of risks between the parties. The parties acknowledge that but for the limitations contained in this Agreement, the parties would not have entered into this Agreement. 11. Exclusion of Damages. NOTWITHSTANDING ANY OTHER PROVISION TO THE CONTRARY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY, ANY OF THEIR AFFILIATES OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS BE LIABLE UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY LOST PROFITS, EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF WHETHER OR NOT EITHER PARTY OR ANY OTHER SUCH ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, RECOVERY MAY BE MADE OF: (I) LOST PROFIT AND CONSEQUENTIAL DAMAGES INCURRED BY EITHER PARTY AS A RESULT OF A BREACH OF SECTION 7; AND (II) LOST PROFITS ONLY FOR BREACHES OF SECTIONS 2.1 AND 3.1. 12. Compliance with Laws. Each party shall comply with all applicable laws and regulations in its performance under this Agreement and have obtained all permits or licenses or registrations required to perform hereunder. Page 24
25 13. Miscellaneous Terms. 13.1 Further Assurances. Each party hereto agrees to cooperate with the other party, at such other party's request and at such other party's expense, to execute any and all documents or instruments, or to obtain any consents, in order to assign, transfer, perfect, record, maintain, enforce or otherwise carry out the intent of the terms of this Agreement. 13.2 Delays and Omissions. Except with respect to Section 10.2, no delay or omission to exercise any right, power or remedy accruing to a party upon any breach or default of a party under this Agreement shall impair any such right, power or remedy of any such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any such holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, under this Agreement shall be cumulative and not alternative. 13.3 Amendments. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended only by a writing signed by the parties hereto. 13.4 Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto, whether so expressed or not. 13.5 Final Agreement. This Agreement, together with those documents which are schedules and exhibits hereto, constitute the final agreement of the parties concerning the matters referred to herein and therein, and supersedes all prior and contemporaneous agreements and understandings concerning the matters referred to herein and therein. 13.6 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 13.7 Descriptive Heading. The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement. 13.8 Notices. Any notices required, desired or permitted to be given hereunder, shall be delivered personally or sent by overnight courier to the following addresses (or to such other address as each party may specify in a notice given hereunder) or transmitted by facsimile transmission (with such transmission promptly confirmed by writing delivered personally or by overnight courier) and shall be deemed to have been received on the day Page 25
26 of personal delivery, one business day after delivery to the overnight courier service or, in the case of facsimile transmission, when confirmation of such facsimile is received other than by automatic means: If to FDC: First Data Corporation 5660 New Northside Drive Suite 1400 Atlanta, GA 30328 Attention: Chairman Facsimile: (770) 857-0405 with a copy to: First Data Corporation 5660 New Northside Drive Suite 1400 Atlanta, GA 30328 Attention: General Counsel Facsimile: (770) 857-0405 with an additional copy to: Sidley & Austin Bank One Plaza Chicago, Illinois 60603 Attention: Frederick C. Lowinger Michael A. Gordon Facsimile: (312) 853-7036 Page 26
27 If to Chopper: Chopper Corporation 4411 E. Jones Bridge Road Norcross, GA 30092 Attention: Peter J. Kight Phone: (678) 375-1600 Facsimile: (678) 375-3010 Email: pkight@checkfree.com with a copy to: Chopper Corporation 4411 E. Jones Bridge Road Norcross, GA 30092 Attention: Allen L. Shulman Phone: (678) 375-3632 Facsimile: (678) 375-3633 Email: ashulman@checkfree.com with an additional copy to: Simpson Thacher & Bartlett 3373 Hillview Ave. Suite 250 Palo Alto, CA 94304 Attention: Daniel Clivner Richard Capelouto Facsimile: (650) 251-5002 13.9 Dispute Resolution. (a) In the event of a Dispute, the parties shall resolve the same in accordance with the terms set forth in Exhibit 13.9(a). (b) Notwithstanding anything to the contrary set forth herein, neither party shall be required to submit any dispute or disagreement regarding the interpretation of any provision of this Agreement, the performance by either party of such party's obligations under this Agreement or a default hereunder to the mechanisms set forth in Section 13.9(a), if such submission would solely be seeking equitable relief. Any such judicial proceeding seeking equitable relief shall be brought only in a federal or state court located in Delaware. (c) Except as necessary in a court proceeding to enforce the arbitration provision in Section 13.9(a) or to confirm, vacate, modify or correct an award rendered Page 27
28 thereunder, neither a party nor an arbitrator may disclose the existence, content, or results of any arbitration held pursuant to Section 13.9(a) without the prior written consent of all parties to this Agreement. In any judicial proceeding brought pursuant to Section 13.9(a) or 13.9(b), each party shall seek orders from the court that would seal or otherwise protect the confidentiality of the judicial and arbitration proceedings to the maximum extent possible. 13.10 Governing Law. THE VALIDITY, MEANING AND EFFECT OF THIS AGREEMENT SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. 13.11 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. 13.12 Assignment and Change of Control. This Agreement may not be assigned or transferred by either party without the other party's prior written consent, which consent shall not be unreasonably withheld or delayed, except that, subject to Sections 6.1 and 6.2, this Agreement may be assigned by operation of law pursuant to a merger or consolidation. 13.13 Independent Contractor. The relationship of the parties shall be solely that of independent contractor and not that of a joint venture, partnership, or any other joint relationship. 13.14 Press Release; Public Announcements. Neither party or their respective Affiliates shall make any reference to the other party or its Affiliates directly or indirectly in any press release or public announcement without such other party's prior written consent, which consent shall not be unreasonably withheld or delayed. 13.15 Audits. (a) Audits of FDC. Chopper may cause an audit to be made, at Chopper's expense, of FDC's applicable records in order to verify the performance of any provision contained herein. Any such audit shall be conducted only by a third party independent certified public accountant (other than on a contingency fee basis) after prior written notice to FDC, and shall be conducted during regular business hours at FDC's offices and in such a manner as not to interfere with FDC's normal business activities. In no event shall an audit be made hereunder more frequently than once annually. The results of any such audit shall be subject to the nondisclosure obligations set forth in this Agreement. In the event that Chopper makes any claim against FDC with respect to such audit, Chopper hereby agrees to make available to FDC, upon request, the detailed results of the audit as prepared for Chopper by its accountant. (b) Audits of Chopper. FDC may cause an audit to be made, at FDC's expense, of Chopper's applicable records in order to verify the performance of any provision contained herein. Any such audit shall be conducted only by a third party independent certified public accountant (other than on a contingency fee basis) after prior written Page 28
29 notice to Chopper, and shall be conducted during regular business hours at Chopper's offices and in such a manner as not to interfere with Chopper's normal business activities. In no event shall the audits be made hereunder more frequently than once annually. The results of any such audit shall be subject to the nondisclosure obligations set forth in this Agreement. In the event that FDC makes any claim against Chopper with respect to such audit, FDC hereby agrees to make available to Chopper, upon request, the detailed results of the audit as prepared for FDC by its accountant. [REMAINDER LEFT INTENTIONALLY BLANK] Page 29
30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. CHOPPER CORPORATION By: ---------------------------------------------- Name: Title: FIRST DATA CORPORATION By: ---------------------------------------------- Name: Title: Page 30
31 EXHIBIT 13.9(a) --------------- DISPUTE RESOLUTION PROCEDURES Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, except claims for equitable relief, shall be settled by arbitration in the State of Delaware The arbitration shall be administered by the American Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules, and shall be heard by a panel of three (3) arbitrators selected in accordance with these Rules. After a demand for arbitration is made, each party may conduct two (2) party and two (2) non-party depositions and may further request discovery through up to thirty (30) document requests, twenty (20) written interrogatories, and ten (10) requests for admission, and/or such other further discovery as permitted by the arbitration panel upon request and for good cause shown. The arbitrators may awarded damages, except the arbitrators will have no authority to award punitive or other damages not measured by the prevailing party's actual damages unless required by statute. Each party shall be responsible for its own costs and expenses, except that the arbitrators' compensation shall be taxed against the losing party. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Any judicial proceeding to enforce these Dispute Resolution Procedures or to confirm, vacate, modify or correct an award rendered hereunder, shall be brought in a federal or state court located in the State of Delaware. Page 31
1 Exhibit 23(b) INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 Registration Statement No. 333-32644 of CheckFree Holdings Corporation on Form S-4 of our report dated August 9, 1999, appearing in the Information Statement/Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Information Statement/Prospectus. /s/ Deloitte & Touche LLP Atlanta, Georgia April 17, 2000
1 Exhibit 23(c) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 1 to Registration Statement No. 333-32644 of CheckFree Holdings Corporation on Form S-4 of our report dated October 22, 1999, (February 15, 2000 as to Note 4), on the consolidated financial statements of MSFDC, L.L.C. and subsidiaries, a development stage company, as of July 2, 1999, and July 3, 1998, and the related consolidated statements of operations, members' capital deficiency and cash flows for the year ended July 2, 1999, and the periods from June 18, 1997 (inception) to July 3, 1998, and from June 18, 1997 (inception) to July 2, 1999, appearing in the Information Statement/Prospectus, and to the reference to us under the heading "Experts" in the Information Statement/Prospectus, which is part of the Registration Statement. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Seattle, Washington April 17, 2000
1 Exhibit 23(d) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this Registration Statement of CheckFree Holdings Corporation of our report dated February 28, 2000, covering the financial statements of BlueGill Technologies, Inc., appearing in this Information Statement/Prospectus, which is a part of the Registration Statement and to all references to our Firm included in the Registration Statement. /s/ Arthur Andersen LLP - -------------------------------- Ann Arbor, Michigan April 17, 2000