1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From January 1, 1996 To June 30, 1996
Commission File Number: 0-26802
CHECKFREE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1013521
(State or other jurisdiction of (I.R.S. Employer incorporation or organization)
Identification No.)
8275 NORTH HIGH STREET
COLUMBUS, OHIO 43235
(Address of principal executive offices,
including zip code)
(614) 825-3000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $533,246,523 on September
16, 1996.
There were 41,696,870 shares of the Registrant's Common Stock
outstanding on September 16, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
ITEM 1. BUSINESS.
GENERAL
As used in this report, "Checkfree" is generally used to indicate Checkfree
Corporation prior to its acquisition of Servantis Systems Holdings, Inc. on
February 21, 1996 (the "Servantis Acquisition") and prior to its acquisition of
Security APL, Inc. on May 9, 1996 (the "Security APL Acquisition") (the
Servantis Acquisition and the Security APL Acquisition are collectively
referred to as the "Acquisitions"). "Servantis" is generally used to indicate
Servantis Systems Holdings, Inc. prior to its acquisition by Checkfree,
"Security APL" is generally used to indicate Security APL, Inc. prior to its
acquisition by Checkfree, and the term the "Company" is used to indicate the
combined company following the Acquisitions. This report contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Business -- Business Risks."
Checkfree Corporation (the "Company") is a leading provider of electronic
commerce services, financial application software and related products for
financial institutions and businesses and their customers. The Company services
over 700,000 consumers, 1,000 businesses and approximately 850 financial
institutions (including the 500 largest banks in the United States). The Company
has also signed agreements with over 140 banks to provide electronic home
banking services for the customers of those banks. To maximize the efficiency
and effectiveness of its product development and distribution strategies, the
Company has established several strategic alliances with companies such as
Automatic Data Processing, Inc. ("ADP"), AT&T Corporation ("AT&T"), Alltell
Information Services, Inc. ("Alltell"), Block Financial Corporation ("Block
Financial"), Computer Services, Inc., CyberCash, Inc. ("CyberCash"), Money
Access Service, Inc. a wholly owned subsidiary of Electronic Payment Services,
Inc. ("EPS/MAC"), Electronic Data Systems Corporation ("EDS"), First Commerce
Technologies, Inc. ("First Commerce Technologies"), Fiserv, Inc. ("Fiserv"),
FiTech, Inc. ("FiTech"), Five Paces, Inc. ("Five Paces"), Florida
Informanagement Services, Inc. ("Florida Informanagement Services"), Home
Financial Network, Internet Browser Software Companies, Premiere Communications,
Inc. ("Premiere"), Spyglass, Inc. ("Spyglass"), and SPRY, Inc. ("Spry") (an
affiliate of CompuServe, Incorporated ("CompuServe")).
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience as a provider of electronic commerce and financial
applications software and services to financial institutions substantially
enhances the Company's presence in the financial institutions market of the
electronic commerce segment. Security APL's experience as a vendor of portfolio
management and software services to institutional investment managers and
investment services to consumers enhances the Company's presence in the
consumer and financial institutions market of the electronic commerce industry.
The integration of Checkfree's electronic transaction processing and remote
delivery technology with Servantis' software products and market presence and
Security APL's portfolio management and software services has created a single
vendor of electronic commerce services and related products to an expanded
customer base of financial institutions and businesses and their customers.
Prior to the Servantis Acquisition, the Company operated its business in
one business segment, the electronic commerce segment. With the Servantis
Acquisition, the Company added financial application software as a second
business segment. The electronic commerce segment includes electronic home
banking, electronic bill payment, automatic accounts receivable collection,
electronic accounts payable processing, investment portfolio management
services and investment trading and reporting services. These services are
primarily directed to financial institutions and businesses and their
customers. The financial application software segment includes end-to-end
software products for Automated Clearing House ("ACH") processing, account
reconciliation, wire transfer, mortgage loan origination and servicing, lease
accounting and debt recovery. These products and services are primarily
directed to financial institutions and large corporations.
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has ten direct and indirect wholly owned
subsidiaries: Servantis Systems Holdings, Inc., a Delaware corporation;
Servantis Systems, Inc., a Georgia corporation; Servantis Services, Inc., a
Georgia corporation; Checkfree Software Solutions, Inc., a Delaware
corporation; Security APL, Inc., an Illinois corporation; Bow Tie Systems,
Inc., an Illinois corporation; Checkfree Acquisition Corporation II, a Delaware
corporation; Interactive Solutions Corporation, an Oregon corporation;
Checkfree Investment Corporation, a Delaware corporation; and RCM Systems,
Inc., a Wisconsin corporation. The Company's principal executive offices are
located at 8275 North High Street, Columbus, Ohio 43235 and its telephone
number is (614) 825-3000. The Company's Internet address is
http://www.checkfree.com.
-2-
3
THE SERVANTIS ACQUISITION AND SERVANTIS
On February 21, 1996, Checkfree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of the
Company's Common Stock valued at $20.00 per share and $42.5 million in cash to
repay Servantis' long-term debt, in addition to the assumption of $38.3 million
of liabilities. Founded in 1971, Servantis is a leading provider of electronic
commerce and financial applications software and services for businesses and
financial institutions (including the 500 largest banks and over 350 mortgage
institutions in the United States). Servantis designs, markets, licenses and
supports software products for electronic corporate banking, home banking,
financial lending, regulatory compliance and document imaging. In addition,
Servantis offers software consulting and remote processing services.
THE SECURITY APL ACQUISITION AND SECURITY APL
On May 9, 1996, Checkfree acquired Security APL for approximately $53.3
million, consisting of the issuance of 2.8 million shares of the Company's
Common Stock valued at $18.50 per share, and the assumption of $5.5 million of
liabilities. Security APL is a leading vendor of portfolio management and
software services for institutional investment managers. Security APL has been
developing and providing advanced investment analysis systems since it was
founded in 1978. Security APL believes that it is the only full-service
provider of fully-integrated portfolio management, performance measurement,
trading and reporting systems for the investment manager. Security APL's
clients include money management firms, bank trust departments, insurance
companies and brokerage houses. Security APL added an additional investment
information service by establishing its Portfolio Accounting World Wide
("PAWWS") division in August 1994. The PAWWS world-wide web site offers
individuals some of the same tools professional money managers have to gather
the information they need to make their investment decisions to enter trades
and to monitor the status of their investments. Some of the services available
through PAWWS include portfolio accounting and allocation, research information
provided by various data suppliers, free stock quotes, stock host lists and
brokerage services. Currently, Security APL monitors more than 300,000
portfolios for approximately 1,500 portfolio managers at over 150 firms.
POST-ACQUISITIONS STRATEGY
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions, businesses and their customers. The
integration of Checkfree's electronic transaction processing and remote
delivery technology with Servantis' software products and market presence and
Security APL's portfolio management, investment, and software services has
created a single vendor of electronic commerce services and related products to
an expanded customer base of financial institutions and businesses and their
customers. The components of the Company's strategy are to:
Offer an Expanding Range of Convenient, Easily Accessible, Secure and
Cost-Effective Services Through Multiple Delivery Channels. By integrating
Checkfree's ability to pay any bill from any checking account at any financial
institution in the United States with Servantis' capability as an electronic
commerce software provider and bank service organization, the Company intends
to enhance and expand its range of financial institutions and business
electronic commerce services. These services enable customers to execute
electronic commerce transactions through multiple delivery channels including
personal computers, telephones and the Internet.
Pursue Additional Strategic Alliances to Leverage Partners' Capabilities.
Continuing Checkfree's strategy, the Company will pursue strategic alliances
with companies that have maximum penetration and leading reputations for
quality with the Company's target customers. Through these alliances, the
Company expects to integrate its own expertise with its partners' capabilities.
Expand Sales Efforts Through Multiple Distribution Channels. The Company
intends to maximize its distribution efforts through strategic alliances with
market-leading companies through the Company's direct sales force,
-3-
4
and to a lessor extent through direct marketing campaigns. In addition, the
Company is utilizing the Internet as a distribution channel by making certain
of its services and related products available for downloading from the
Company's and third-party web sites.
Leverage Customers and Alliances Across Markets. The Company's efforts in
each target market are designed to increase its successor opportunities in its
other markets. The products and customer base of Servantis substantially
increase the Company's offerings to financial institutions, which the Company
expects will enhance its opportunity to expand its electronic commerce services
to businesses and ultimately to the end, customer users.
Expand Customer Care and Technical Support. The Company supports and
services its customers through numerous activities, including annual user group
meetings and customer satisfaction surveys, technical and non-technical support
(provided by help desk, e-mail, facsimile and bulletin board), service
implementation and training. The Company believes that providing superior
quality and accessible and reliable customer care is essential to establishing
and maintaining successful relationships with its customers.
ELECTRONIC COMMERCE MARKET OPPORTUNITY
INTRODUCTION
Over the last decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards, automated teller
machines ("ATMs"), electronic funds transfer and direct payroll deposit have
automated, simplified and reduced the costs of financial transactions for
financial institutions and businesses and their customers.
CONTINUED USE OF PAPER CHECKS
Despite these benefits, a substantial portion of financial transactions in
the U.S. are still executed by check. In 1995, approximately 57% of the total
dollar volume of consumer payments was made using checks (30.0 billion
transactions with a dollar volume of $2.1 trillion). Approximately 20% of the
total consumer payment dollar volume was made electronically, with credit card
transactions accounting for substantially all of these payments. According to
the Federal Reserve Bank of Boston, the printing, mailing and delivery of more
than 64 billion checks each year costs the equivalent of approximately 0.5% of
the U.S. Gross Domestic Product. Checks impose significant costs on financial
institutions and businesses and their customers. Time costs include the
writing, mailing, recording and processing of checks. Financial costs include
postage, processing costs and costs associated with the "float" created between
the time checks are written and cleared. Due to the limited penetration of
electronic commerce to date, many financial institutions and businesses and
their customers currently engage in a combination of electronically executed
and check-based financial transactions. This combination has increased the
difficulty, particularly for individual consumers, of tracking payments,
withdrawals and deposits, and of managing their financial affairs. As an
indicator, industry sources estimate that approximately 75% of checking account
holders in the U.S. do not balance their checkbook registers on a regular
basis.
GROWTH TRENDS IN ELECTRONIC COMMERCE
Notwithstanding the current predominant usage of checks, there are a
number of current trends that are driving increasing acceptance of electronic
commerce in the U.S.:
o Increase in Electronic Financial Transactions. Over the last
decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards,
ATMs, electronic funds transfer and direct payroll deposit
have automated, simplified and reduced the costs of
financial transactions for consumers, businesses and
financial institutions. In 1994, it is estimated that 20
billion electronic transactions were processed in the U.S.
and it is estimated that electronic transactions will grow
at a rate of 19% each year to 58 billion by the year 2000.
Industry estimates suggest that consumer retail on-line
purchases will grow significantly for the rest of the
decade, from $240 million in 1994 to an estimated $6.9
billion in the year 2000.
-4-
5
o Continuing Penetration of Personal Computers and Modems into
U.S. Households. As of December 31, 1995, an estimated 37.4
million U.S. households, or 39% of U.S. households overall,
had personal computers and approximately 21.1 million of
these computers were equipped with a modem. The number of
modem-equipped personal computers is expected to grow at a
compound annual rate of approximately 26% to 33.6 million by
the end of 1997.
o Rapid Growth in On-line Interactive Services, Particularly
in the Internet. As of December 31, 1995, an estimated 6.2
million households in the U.S. subscribed to on-line
interactive services such as CompuServe, Prodigy and America
Online. This number is expected to increase to 8 million by
year-end 1996. In addition, AT&T and Microsoft Corporation
("Microsoft") have announced that they will enter the
on-line service market. The number of households subscribing
to commercial on-line services is expected to grow at a
compound annual rate of approximately 36% to 17.7 million
from 1994 through 1998. Additionally, there are currently
over 30 million users of the Internet. Industry analysts
expect this figure to grow to 120 million by the end of
1998.
o Growth in Small Business Use of Personal Computers.
According to a 1990 U.S. Commerce Department Report, there
are over 6.8 million businesses with fewer than 10 employees
in the United States. An increasing proportion of small
businesses are using personal computers as part of their
operations. According to a U.S. Census Bureau survey,
personal computer penetration in the small business market
has risen from 40% in 1989 to 64% in 1994.
o Continuing Automation of Financial Institutions' Operations.
Financial institutions are facing increasing competition as
a result of banking deregulation and technological
innovation. The competition is not only from within the
financial institution industry, but also from new
competitors in related industries, such as insurance
companies and mutual funds. The Company believes that in an
increasingly competitive environment, financial institutions
will seek opportunities to automate their operations by
providing electronic banking, electronic bill payment and
automated portfolio services to their customers. These
services, the Company believes, will enable financial
institutions to reduce costs, generate fee-based income and
strengthen their customer relationships.
CONCLUSION
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions and businesses and
their customers. Paper transactions impose significant costs that can be
reduced through electronic execution. The continuing penetration of personal
computers and modems into U.S. households, along with the rapid growth in
on-line interactive services, are providing the technical infrastructure
required to accelerate the acceptance of electronic commerce. In addition, the
Company believes the key requirements that must be addressed to increase
acceptance of electronic commerce applications include: (i) maintenance of
industry-wide quality levels for security, accuracy, reliability and
convenience; (ii) reduction in transaction processing costs; (iii) application
of easy-to-use interfaces; and (iv) development of seamless integration with
the existing financial infrastructure and existing relationships among all
parties to a financial transaction. As a result, the Company believes that the
opportunity exists to provide an integrated set of electronic services that
further automate financial transactions for financial institutions and
businesses and their customers.
-5-
6
PRODUCTS, SERVICES AND COMPETITION
ELECTRONIC COMMERCE SEGMENT
The Company's electronic commerce services and related products are
targeted to financial institutions, businesses and their customers. To ensure
the security of all the electronic commerce transactions that the Company
processes, the Company utilizes a combination of measures, including various
proprietary security technologies and existing industry security standards such
as RSA encryption and multiple authorization and authentication technologies.
The Company is currently developing new electronic commerce services and
enhancing its existing services for each of its target markets.
Retail Services. The Company designs and develops private label payment
and home banking services and related products for financial institutions,
which in turn offer electronic payment and home banking services to their
customers. These services, now marketed under the brand name "Bank Street,"
are tailored to each financial institution's specifications and can include a
variety of services and related products including: customer delivery systems
(including personal computer desktop software, the Internet or telephone based
voice recognition units ("VRU") systems); electronic transaction processing;
ATM-like banking transactions such as balance inquiries and fund transfers;
customer service; customer billing and marketing. The Company believes that its
services offer significant benefits to financial institutions, including lower
transactions processing costs, additional fee income, potential new customers,
and attractive additional services to offer existing customers.
Revenues are generated through contracts that the Company signs with
individual financial institutions. The Company typically negotiates with the
institution an implementation fee, a base fee per customer account on the
service provided by the Company plus a variable per transaction fee which
decreases based on the volume of transactions. Contracts typically have three
year terms and generally provide for minimum fees if certain transaction
volumes are not met. The Company utilizes direct sales and strategic alliances
to market to financial institutions and has the ability to customize services
for each institution.
The Company has contracts with more than 140 financial institutions
through which electronic payment and home banking services designed by the
Company are provided to customers of the financial institutions. Some of the
financial institutions served by the Company include: Bank One, Crestar,
Chemical Bank, Merrill Lynch, Signet Bank, Wells Fargo, and USAA Federal
Savings Bank.
The Company's bill payment services are also included in certain personal
financial software products, such as Managing Your Money, Money and Quicken.
The Company pays a royalty or acquisition fee to these distribution partners.
The Company's bill payment services enable financial institution customers
and direct consumer subscribers to pay bills electronically using a variety of
devices such as personal computers and touch-tone telephones. Bills paid by
consumers using the Company's bill payment services typically include payments
such as credit card statements, monthly mortgage payments and utility bills.
Consumers can use the Company to make any payments from any checking account at
any financial institution in the United States. Recurring bills such as
mortgages can be paid automatically and scheduled in advance for an indefinite
period of time, as specified by the user. As of June 30, 1996, the Company had
approximately 729,000 consumers using bill payment and/or home banking
services.
The Company continually expands its services to accommodate consumer
demand. As an introduction to the benefits of electronic financial
transactions, the Company has developed services and related products for
consumers who want a simple, easy-to-use electronic bill payment service with
limited record keeping capability. For consumers with advanced service
requirements, the Company is developing services which provide more extensive
financial management capabilities.
Through 1995, Quicken had been the largest source of new consumer
customers for the Company. Users of Quicken accounted for approximately 11% of
the Company's revenues for transition fiscal 1996. In the latter months of
1995, Intuit, Inc. ("Intuit") began to offer on-line home banking and financial
services through Intuit Services Corporation ("ISC"), a direct competitor of
the Company. This offering began with the October 1995 release of Quicken
-6-
7
for Windows 5.0 and was the first time that Quicken users were offered these
services through ISC. Currently, the Company is not mentioned as a provider of
bill payment services in the manual or on-screen version of the latest Quicken
release, for Windows, however, the Company's bill payment service may be
accessed as a bill payment option if the user requests such services from the
Company or Intuit. The Company remains the primary bill payment option for the
current Macintosh and all earlier Windows versions of Quicken. In September
1996, the Company and Intuit signed a definitive agreement whereby the Company
would acquire ISC. Under the ISC merger agreement, the Company will be the
exclusive provider of bill payment and home-banking services for Quicken
through October 1997. After October 1997, the Company will compete with other
bill payment and home banking service providers under Intuit's open protocols.
PAWWS, founded as a division of Security APL in August of 1994, provides
customized solutions for financial service providers to offer to their
customers through the Internet fully integrated, on-line trading, portfolio
accounting, quotes, news services, research and fundamental data. The Company
believes the PAWWS service offers significant benefits to financial
institutions, including lower costs by using the Internet, additional fee
income, potential new customers and attractive additional services to offer to
existing customers.
PAWWS, located at http://pawws.com, consists of a cost basis tax lot
accounting tool that allows financial institution customers to keep track of
the investments they own, and provides the customers with enough information to
make informed decisions about generating gains or losses from their portfolios
when required. PAWWS also provides a seamless connection to electronic
brokerage via various order entry screens. The PAWWS system also allows for the
integration of the third party information (e.g,. research reports, financial
news, fundamental data, etc). The Company intends to private label PAWWS as a
part of Web sites for financial institutions.
Business Services. The Company provides businesses with a variety of
services including automatic accounts receivable collection, electronic
accounts payable processing, credit risk management, database management and
fraud protection services.
The Company provides automatic accounts receivable collections for
businesses in the on-line interactive services, Internet access, health and
fitness and various other industries, enabling these businesses to collect
monthly membership or access fees through links to the customer's credit card
or bank account. Services are typically provided under exclusive contracts for
three years with automatic renewals. For providing collection services,
businesses pay the Company implementation fees, transaction fees and credit
card discount fees.
The Company is the leading provider of automatic accounts receivable
collections for on-line interactive services and Internet access providers.
Some of the Company's clients include: AT&T Interchange, CompuServe, NETCOM
On-Line Communication Services, Inc., Optigon Interactive of Planet Optigon,
Inc., The Pipeline Network, Inc., Prodigy Services Company and Spry. In
servicing these business customers, the Company processes electronic
transactions for approximately four million of their on-line consumer
subscribers. The Company also collects monthly membership fees for over 725
health and fitness centers in the United States, including Town Sports
International. The Company provides automatic accounts receivable collections
for Cellular Atlantic, Cellular One Ohio-Michigan, Century Cellular,
MobileMedia Communications, Sky-Tel and Bell South Mobility in the wireless
communications industry and for several utilities.
The Company has an agreement with CompuServe to collect monthly
subscription fees from CompuServe's on-line interactive subscribers. The
agreement renews automatically for three-year terms unless either party gives
notice of intent not to renew at least 60 days before the end of the term. The
Company and CompuServe renewed a three year agreement in June 1995. The June
1995 renewal permits CompuServe to enter into an agreement with another payment
processor during the three year renewal term, provided that CompuServe has
given the Company reasonable opportunity to bid on retaining CompuServe's
payment collection business and pays the Company a termination fee if the
Company's services are not retained. In June 1995, the Company substantially
reduced its prices to CompuServe based on an increased volume of transactions
attributable to its business. During fiscal 1993, 1994, and 1995, the Company
derived approximately 10%, 11%, and 13%, respectively, of its revenues from
CompuServe. During the six months ended June 30, 1996, CompuServe accounted
for less than 10% of the Company's revenues. Although the Company believes its
relationship with CompuServe is positive, there can be no assurance that
CompuServe will continue its business relationship with the Company upon
expiration or early termination of the agreement, that CompuServe will maintain
-7-
8
its number of subscribers at historical levels, or that the Company will
realize revenues from CompuServe at the levels it has in the past. Loss of the
relationship with CompuServe or a reduction of revenues from CompuServe will
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Dependence on
CompuServe)" and Note 16 to Consolidated Financial Statements.
Portfolio Services. Through the Company's PORTVUE product, the Company
offers portfolio accounting and performance measurement to investment advisors,
brokerage firms, banks and insurance companies. Through PORTVUE, clients are
able to leverage their systems and streamline their operations. The Company
designs custom solutions with clients, allowing investment managers the kind of
functionality that dramatically increases productivity. PORTVUE offers a
full-range of Portfolio Management System solutions, including data conversion,
personnel training, trading system, graphical client reporting, performance
measurement, technical network support, interface setup and DTC processing.
Competition. Portions of the electronic commerce market are becoming
increasingly competitive. The Company faces significant competition in all of
its customer markets. In the financial institutions market, the Company's
competitors include Visa Interactive and ISC. A number of banks have developed,
and others may in the future develop, home banking services in-house.
Additionally, Microsoft has announced its own alliances with financial
institutions to offer on-line home banking and financial services to consumers.
Competition for PAWWS includes clearing firms, such as the Pershing Division of
Donaldson, Lufkin and Jenrette, which have announced that they will be offering
Internet solutions to their correspondents. Also, some firms have decided to
build their own transaction-based Web site instead of outsourcing to a third
party. Currently, the Company is not aware of other outsourcing solutions for an
Internet brokerage and portfolio accounting solution. In the business market,
the Company competes with credit card and ACH processors. The Federal Reserve's
ACH is the national payment clearance system through which any bank can effect
debit transactions to any authorized consumer checking account. There are
numerous competitors in the business market for credit card processing,
including First USA, Inc., NaBanco and Card Establishment Services (divisions of
First Data Corporation), and National Processing Company (a division of National
City Bank). The Company also faces competition in ACH processing from numerous
banks. Competition for Portfolio services includes two main segments. First are
the providers of portfolio accounting software, including Advent Software,
PORTIA, a division of Thomson Financial and Shaw Data, a SunGard Company. The
primary service bureau competitor is Shaw Data, a SunGard Company.
FINANCIAL APPLICATION SOFTWARE SEGMENT
The Company is a leading provider of electronic commerce and financial
applications software and services for businesses and financial institutions.
The Company designs, markets, licenses and supports software products for
electronic corporate banking, financial lending, regulatory compliance and
document imaging. In addition, the Company offers software consulting and
remote processing services.
The Company's financial application software revenues are derived
primarily from the sale of software licenses and software maintenance fees.
Software is sold under perpetual licenses, and maintenance fees are received
through renewable agreements. The Company also derives revenues from project
consulting services and from remote transaction processing fees.
Software products licensed by the Company provide systems that range from
back office operations to front-end interface with the clients of the Company's
customers. Applications include electronic funds transfer, electronic wholesale
banking, reconciliation, mortgage loan automation, and imaging technologies,
among others.
-8-
9
The Company's software products are sold under individual brand names. Its
most significant products include:
BRAND NAME FUNCTION CUSTOMERS
PEP+ Automated Clearing House processing Businesses and financial institutions
LSAMS Mortgage setup and file maintenance Mortgage lenders
ACCESS/INFOVUE Corporate remote banking software Businesses and financial institutions
LANPATH Document management system Businesses and financial institutions
SBA Safe box accounting Financial businesses
ARP/QMS Bank controlled account reconciliation Businesses and financial institutions
RECON+ Corporate account reconciliation Businesses and financial institutions
Electronic Funds Transfer. The ACH network was developed in the 1970s to
permit the electronic transfer of funds and thus curtail the growth in the
number of paper checks in circulation. The ACH network acts as the clearing
facility for routing electronic funds transfer entries between financial
institutions. All ACH transfers are handled in a standard format established
through the National Automated Clearing House Association ("NACHA"). More than
15,000 financial institutions participate in the ACH system. There are 31
ACH's, which geographically coincide with the 12 Federal Reserve Banks, their
branches and processing centers. The Company's electronic funds transfer
products are inter-related and may be used by either businesses or financial
institutions depending on the services they offer their customers and
employees.
The Company developed the most widely used, comprehensive ACH processing
system in the United States, the Paperless Entry Processing System Plus
("PEP+"). PEP+ is an on-line, real-time system providing an operational
interface for originating and receiving electronic payments through the ACH.
The Company continues to support the Paperless Entry Processing System ("PEP"),
which was the predecessor to PEP+.
The Company offers a number of products which support the PEP+ and PEP
systems. The Corporate Automated Payment System ("CAPS"), which is licensed to
corporations, serves as an electronic bridge between corporations' in-house
accounting systems software and the ACH Network. CAPS handles both debit and
credit transactions for automated collection or disbursement applications.
Another product of the Company, the MicroACH System, allows financial
institutions to provide their corporate customers more direct access to the ACH
network. The Company licenses MicroACH to financial institutions who then
distribute MicroACH to their corporate customers. The corporation's component,
MicroACH, automatically initiates and electronically sends ACH transactions,
allowing corporations greater flexibility in cash flow management and funds
transfer. The bank's component, MicroACH File Receiver, collects transactions
from MicroACH and then uploads these transactions to a host ACH system, such as
PEP or PEP+. MicroACH operates on a PC platform and has approximately 100 bank
users.
The Company also offers Financial Electronic Data Interchange ("FEDI") in
response to the growing need for banks and corporations to be able to handle
electronic data interchange ("EDI") data for financial transactions. The
purpose of FEDI is to allow corporations and banks already using EDI
translators to electronically process business documents and make payment
transfers electronically. The FEDI system can run as a stand-alone product as
well as in conjunction with the Company's PEP+ and CAPS systems.
The Company entered the wire transfer business in 1990 with WireNet, a
PC/LAN-based wire transfer system. The Company is currently developing
WireNext, a wire transfer system built to take advantage of client-server
architecture.
Electronic Wholesale Banking. The Company's wholesale banking software
systems electronically link banks and their corporate customers, permitting
banks to reduce transaction costs. The centerpiece of this product line is the
Company's ACCESS and InfoVue products, which provide an electronic link and
graphical user interface through which a bank's
-9-
10
corporate customers can receive bank account information and can initiate
banking transactions. ACCESS operates on the bank's system while InfoVue is a
Microsoft Windows-based system located at the offices of the bank's corporate
customers and is used by its customers to interface with the ACCESS system.
Banks can also use the systems as a global gateway linking their branches and
providing international cash management services to their customers worldwide.
Through the Company's electronic banking systems, corporate customers can
obtain previous and intraday account information; initiate stop payments,
account transfers and wire transfers; create payroll and tax payments; receive
lockbox, controlled disbursements and statement reports; and communicate with
the bank via E-mail messages.
Reconciliation. The Company's reconciliation products provide U.S. banks,
international banks and corporate treasury operations with automated check and
non-check reconciliations in high volume, multi-location environments. These
systems are often tailored so that banks and multi-bank holding companies may
deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. Some of the services the Company's reconciliation
products provide are automated deposit verification, consolidated bank account
reconciliations and cash mobilization, immediate and accurate funds
availability data and improved cash control.
The Company's Account Reconciliation Package ("ARP"), is one of the most
widely used account reconciliation systems in the U.S. banking industry. The
ARP/Service Management System ("ARP/SMS"), developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that immediately processes a bank's adjustment, addition, balancing and
control requests. It can provide a bank with electronic detail of all finance
transactions, account history and specific ongoing credit risk information with
respect to its customers. ARP/SMS also groups accounts across banks within bank
holding companies and allows banks to streamline their operations by
reconciling their intra-bank transactions. ARP/Quality Management System
("ARP/QMS"), a companion system to ARP/SMS, helps banks control account
reconciliation operations. ARP/PC is a PC-based checking account reconciliation
program designed for banks and corporations performing lower-volume account
reconciliations.
In 1995, the Company introduced RECON-Plus for Windows a client/server
based "horizontal" reconciliation system. RECON-Plus for Windows is most
frequently used for internal reconciliation by large businesses, financial
service firms and utilities, including the reconciliation of debit and credit
card transactions, checks, ATM transactions, ACH transfers and securities
transactions.
Mortgage Loan Automation. The Company offers a number of products for
originators and servicers of mortgage loans, as well as products designed to
help secondary-market investors manage mortgage loan portfolios. In 1987, the
Company entered the mortgage industry as a software and services provider with
a loan origination product acquired from Software Concepts, Inc. The Company
built upon those products through the acquisition of a group of mortgage
origination and mortgage portfolio management products from Fannie Mae Software
Systems, a division of the Federal National Mortgage Corporation, in 1989.
Subsequent acquisitions of Traeger and Associates, and MLN Enterprises, as well
as the mortgage software division of Dyatron, Inc., have continued to provide
additional products for the Company in this area.
The Company's primary product for mortgage loan originators is The
Mortgage Originator, which provides mortgage lenders and originators
pre-qualification information, access to the most recent product pricing,
immediate interest rate lock-ins, imaging capabilities, laser printing and
comprehensive reporting at every phase of the loan origination process. The
Mortgage Originator runs on mainframe, mid-range and PC platforms.
The Company offers mortgage originators and lenders FORUM, to manage
portfolios of originated loans for secondary market sales. This
client/server-based system is designed to either stand alone or to complement
The Mortgage Originator, and helps manage mortgage loan pipelines and
commitments to buy and sell loans.
The Company also offers a range of products designed for efficient
servicing of mortgage loans. The Loan Servicing, Accounting and Management
System ("LSAMS") offer loan setups and file maintenance, complete payment
processing capabilities, escrow disbursement and management features,
delinquency management, escrow analysis and customer service for mid-range and
mainframe platforms. The Problem Loan Series, a series of four software systems
designed to run on PCs, is designed to automate all functions and
responsibilities associated with bankruptcy and
-10-
11
foreclosure proceedings. The Problem Loan Series interfaces with the other
servicing products offered by the Company as well as other industry products.
In addition, the Company offers mortgage lenders The Construction Lender,
a project management software application which provides complete loan
portfolio control and offers capabilities particular to construction loans that
standard loan systems do not offer. The Construction Lender runs on a PC
platform. The system was recently enhanced to provide project inspectors with
the capability of reporting their inspections through a portable hand-held
unit. The inspection information is then electronically transmitted into the
base system, allowing the lender faster turnaround and greatly reducing the
chance of error.
Imaging Technologies. The Company offers products and services in two
areas of document management: Computer Output to Laser Disk (COLD) and source
document processing.
LANPATH Report Manager automates report data downloaded from a mainframe
or any other computer. The software processes and indexes the reports, then
compresses and stores them permanently on optical disks. Optional modules are
available to automatically transfer report data to other PC programs, publish
reports on CD-ROMs or access reports through other networks. The Company is an
integrator of several document imaging systems and provides systems that
control the scanning, indexing and storage of source document images on optical
disk.
Lease Accounting. The Company offers two lease accounting products that
are designed to provide accounting systems for vehicle and equipment lessors.
The Automated Lease Accounting System ("ALAS") is a comprehensive, IBM
mainframe, real-time, on-line lease accounting system for larger, multiple
lessors such as the vehicle and equipment leasing departments of banks,
independent leasing companies, and corporations with captive leasing
subsidiaries. LeasTrac 2000 is a comprehensive lease accounting system for
equipment and vehicle lessors based on a client/server architecture designed to
provide quicker access and more customized functionality to manage databases.
LeasTrac 2000 uses a Microsoft Windows client with a choice of Windows/NT or
UNIX Server.
Check Processing. The Company markets and supports a line of software
products used by banks to sort and process checks. This software is designed to
work in conjunction with IBM 389X Check Sorters in the IBM CPCS and DOSCHECK
mainframe environment. The Company also provides EPOCH (Electronic Presentment
of Checks) which speeds up check settlements by allowing the electronic
presentment of checks in advance of the paper exchange. Servantis cooperates
closely with IBM in the development, servicing and marketing of each company's
check processing products and services. In addition to its software products,
the Company also offers consulting, modifications and training services to
financial institutions.
Safe Box Accounting. The Company's primary safe box accounting product,
Safe Box Accounting ("SBA") allows financial institutions to maximize fee
income in safe deposit box operations through recordkeeping and invoice
automation. License fees and maintenance fees are based on the number of safe
deposit boxes a bank has. As a dominant player in this saturated market (over
130 financial institutions use SBA), the Company hopes to expand the market
through its 1995 introduction of Vault. The Company markets Vault, a
client/server product, to smaller institutions who do not have access to
mainframe computers as well as large institutions who use client/server
technology.
Securities Recordkeeping. The Company offers software and services to
corporations for tracking their stockholders and bond holders and to banks that
offer security holder, transfer agent and paying agent services. The
Comprehensive Securities System ("CSSII") is a shareholder information and
accounting system designed to meet the recordkeeping, securities transfer and
related requirements of publicly-held corporations and utilities. While CSSII
is designed for use on IBM mainframe systems, Fastock PC, a software product
offering, is the first comprehensive shareholder information and account system
for personal computers. In August 1996, the Company announced that it had
entered into an agreement for the sale of certain CSSII assets to Shareholder
Systems Acquisition Inc., a wholly owned subsidiary of SunGard Data Systems,
Inc.
Regulatory Compliance. The Company's regulatory compliance products assist
banks and corporations to comply with a number of federal and state statutes
and regulations by tracking regulatory changes and by enabling them to report
to federal and state agencies through magnetic and electronic media. The
Information Reporting System
-11-
12
("IRS") gives organizations complete, centralized, and automated control over
all of their Form 1099 reporting requirements. The Large Cash Reporting System
("LCR") automates financial institutions' ongoing compliance with the Bank
Secrecy Act and the Anti-Drug Abuse Act of 1988 and the regulations promulgated
thereunder. The Retirement Reporting System ("RRS") processes customer
retirement plans, as well as corporate pension and profit sharing plans. The
Abandoned Property and Escheatment Compliance System ("APECS") maintains
compliance and automates the management, tracking, and reporting of unclaimed
property to the appropriate governmental agencies.
Recovery Management. The Recovery Management System ("RMS") automates the
processes required to legally recover debts that have been written off.
Although credit card issuers have been the traditional clients for RMS,
utilities, leasing companies, and lawyers involved in the debt recovery process
are target markets for RMS sales. The product is also available for use on an
IBM Mainframe, IBM AS/400 as well as UNIX platforms.
Licenses. The Company generally grants non-exclusive, non-transferable
perpetual licenses to use its application software at a single site. The
Company's standard license agreements contain provisions designed to prevent
disclosure and unauthorized use of its software. License fees vary according to
a number of factors, including the services to be provided by the Company.
Multiple site licenses are available for an additional fee. In its license
agreements, the Company generally warrants that its products will function in
accordance with the specifications set forth in its product documentation. A
significant portion of the license fee payable under the Company's standard
license agreement is payable upon the delivery of the product documentation and
software to the customer, with the balance of the license fee due upon
installation. The standard license fee for most products covers the
installation of the Company's software and maintenance for the first three to
twelve months.
Installation, Maintenance, and Support. Maintenance includes certain
enhancements to the software. Customers who obtain maintenance generally retain
maintenance service from year to year. To complement customer support, the
Company and many of its customers frequently participate in user groups. These
groups exchange ideas and techniques for using the Company's products and
provide a forum for customers to make suggestions for product acquisition,
development and enhancement.
Competition. The computer application software industry is highly
competitive. In the financial applications software market, the Company
competes directly or indirectly with a number of firms, including large
diversified computer software service companies and independent suppliers of
software products. Management believes there is at least one direct competitor
for most of its software products. However, no competitor of the Company
competes with it in all software product areas.
The Company's product lines also face competition from one or more
competitors which include Fiserv, FiTech, EDS, Alltel Financial Information
Services, Inc. ("Alltel"), Computer Power, Inc. ("CPI"), Associated Software
Consultants, Inc. ("ASC") and Gallagher Financial Systems, Inc. ("GFS") in
products offered to the mortgage services industry; the Company's Imaging/COLD
product lines compete with the products of several companies, including IBM,
Optika, IIC and Computron. The Company competes in the recovery and collection
business with First Data Corporation, Rothenberg and Computer Associates among
others. Finally, the Company's products face competition in the securities
software and service sector principally from SunGard Data Systems, Inc.
("SunGard"), National Computer Systems, Inc. ("NCS"), Integrated Software
Solutions ("ISS") and numerous in-house bank and transfer agency service
centers.
Management believes that the major factors affecting customer decisions in
its market, in addition to price, are product availability, flexibility, the
comprehensiveness of offered products, and the availability and quality of
product maintenance, customer support and training. The Company's ability to
compete successfully also requires that it continue to develop and maintain
software products and respond to regulatory change and technological advances.
Management believes that it currently competes favorably in the marketplace
with respect to these criteria. See "Business -- Risk Factors (Intense
Competition)."
STRATEGIC ALLIANCES
A principal element of the Company's strategy is the creation and
maintenance of strategic alliances that maximize access to potential customers
for the Company's electronic commerce services and related products. The
-12-
13
Company believes that these partnerships enable the Company to offer its
services and related products to a larger customer base than can be reached
through stand-alone marketing efforts. The Company seeks strategic alliance
partners which have maximum penetration and leading reputations for quality
with the Company's target customers. To date, the Company has entered into or
is negotiating strategic alliances with several companies, including those
listed below:
o ADP. In August 1995, the Company entered into a strategic
alliance agreement with ADP that will provide a new full
electronic commerce offering of ADP's Business Express cash
management software and the Company's Electronic Cash
Disbursement ("ECD") services on an exclusive basis to
businesses. The Company's ECD services, introduced in August
1996, feature expanded payment and information capabilities
targeted to businesses, including invoice numbers, multiple
disbursement accounts, discount and adjustment data, and
full descriptive information common to accounts payable
disbursement. Business customers will pay a monthly
subscription fee plus a per transaction fee for access to
their bank accounts and for electronic payment processing.
ADP is expected to market the system directly through banks
with the support of its 1,500 person sales force to its over
200,000 business customers. Pursuant to their agreement, the
Company and ADP will jointly share in all revenues and
expenses, including royalties paid to commercial accounting
software publishers, related to the full electronic commerce
offering. The term of the strategic alliance with ADP is
five years, except that either ADP or the Company may
terminate the alliance if the other party is acquired by a
direct competitor of the terminating party, and either ADP
or the Company may terminate the agreement upon six months'
notice, in which event the non-terminating party is granted
a perpetual, non-exclusive license to the terminating
party's software technology and retains exclusive rights to
distribution and customer agreements entered into under the
strategic alliance.
o AT&T. In April 1995, the Company entered into a strategic
alliance with AT&T through which AT&T will offer the
Company's consumer electronic payment services to targeted
segments of its consumer franchise under the AT&T CheckFree
Service brand name. Under the agreement, AT&T has agreed to
use commercially reasonable efforts to market the service to
potential customers. The AT&T CheckFree Service is currently
available through personal computers. AT&T receives a
royalty based on the recurring subscription fees paid by
consumers who sign up for the AT&T CheckFree Service. The
term of the alliance is three years with provisions for at
least three annual renewals, except that AT&T may terminate
the agreement if certain telecommunication companies acquire
a significant ownership in the Company, as defined in the
agreement.
o Alltel. Under an amended product Marketing and Licensing
Agreement, originally dated November 1995, Alltel may offer
the home banking and bill payment services of the Company to
client organizations for which it provides remote core
application processing services or for which it provides
data processing facilities management services.
o Block Financial. In October 1995, the Company entered into a
three-year agreement with Block Financial whereby the
Company granted a non-exclusive license of its CheckFree
electronic payment software to Block Financial. Block
Financial will offer the Company's consumer electronic
payment services to CompuServe/Internet subscribers.
Subscribers will be able to access these services through
Block Financial's new Conductor Online Financial Services
Network during the fourth quarter of 1996. The CheckFree
electronic payment software will provide online users with
inexpensive, easy-to-use, time saving bill payment
capabilities. Block Financial will receive a fee for each
transaction processed by the Company. The three-year
initial term of the agreement renews for one additional
two-year term and is renewable thereafter annually unless
either party gives advance notice of termination.
o Computer Services Inc. In August 1996, the Company entered
into a three year agreement under which Computer Services
Inc. will establish an on-line technical connection to the
Company, and will market the home banking and bill payment
services of the Company to its client base of approximately
two hundred financial institutions in the Midwest, USA for
which it provides core data processing
-13-
14
services. Computer Services Inc. is compensated for its
marketing services based on the volume of accounts and
transactions it generates.
o CyberCash. In February 1996, the Company signed an agreement
with CyberCash that enables the Company to provide secure
Internet transaction processing technology to consumers and
businesses. The parties will integrate the RSA encryption
technology licensed to CyberCash with the Company's
transaction processing and customer care infrastructure so
that the Company's existing service offerings will be
expanded for use over the Internet. CyberCash will receive a
fee for each transaction processed by the Company using the
CheckFree Wallet. The three-year initial term of the
agreement renews for additional one-year terms unless either
party gives notice of termination at least 90 days prior to
the expiration of the term.
o EPS/MAC. In August 1996, the Company entered into a five
year agreement with EPS/MAC, which by many measures is the
largest electronic funds transfer network in the USA,
whereby EPS/MAC and the Company will establish an on-line
technical connection between them for use in delivering the
Company's home banking and bill payment service to the more
than 1,800 financial institutions for which EPS/MAC provides
EFT transaction switching and related processing services.
Under the agreement, EPS/MAC will market the Company's
services to its financial institution clients, provide them
with training regarding the Company's products and services,
provide ongoing account management services to them, and
will provide consumer customer services to their clients'
customers. Under the agreement, EPS/MAC is compensated for
its marketing services by the Company based on the account
and transaction volume it generates from its client base.
o EDS. In December 1995, the Company signed a five-year
agreement with EDS whereby the Company and EDS will jointly
market the Company's services and related products to banks,
savings banks, thrifts, credit unions, brokerage firms,
mortgage companies and other financial institutions
utilizing EDS' front-end software system. Under the terms of
the agreement, EDS received a license fee as well as the
right to elect to receive either $3 million or 118,226
shares of the Company's Common Stock. In addition, if
certain minimum performance standards are not achieved
within the term of the agreement, EDS must refund a pro rata
portion of the $3 million payment. EDS and the Company are
discussing the feasibility of future strategic alliances.
Accordingly, EDS and the Company have verbally agreed to
extend the Company's payment of $3 million or 118,226 shares
of common stock until such future alliances, if any, become
effective.
o First Commerce Technologies. In July 1996, the Company
entered into a three year agreement under which First
Commerce Technology will establish an on-line technical
connection to the Company, and will market the home banking
and bill payment services of the Company to its client base
of approximately two hundred financial institutions in the
Midwest for which it provides core data processing services.
First Commerce Technology is compensated for its marketing
services based on the volume of accounts and transactions it
generates.
o Fiserv. In November 1995, the Company entered into a
five-year agreement with Fiserv whereby the Company and
Fiserv will jointly market the Company's services and
related products to Fiserv's more than 3,000 client banks,
credit unions, and savings institutions utilizing Fiserv's
outsourced processing services and software systems for
in-house processing for financial institutions. Under the
terms of the agreement, Fiserv receives a fee based on
account and transaction volume as well as the option to
purchase up to 650,000 shares of the Company's Common Stock
at $20.00 per share if certain performance measures are
achieved within the term of the agreement. The five-year
initial term of the agreement renews for additional one-year
terms unless either party gives notice of termination at
least 90 days prior to expiration of the term.
o FiTech. In March 1995, the Company signed an agreement with
FiTech, a marketing and consulting firm for community banks,
pursuant to which its CheckFree electronic payment software
has been integrated with Goldleaf Technologies' CustomerLink
home banking software to create a new product called
CustomerLink Interactive Bill Payer ("IBP"). CustomerLink
IBP is being marketed by FiTech
-14-
15
to financial institutions wanting to provide home banking
services to their customers. Under the agreement, FiTech is
compensated for its marketing services by the Company based
on account and transaction volume generated. The term of the
strategic alliance with FiTech is three years with
provisions for annual renewals.
o Five Paces. In August 1996, the Company entered into two
agreements with Five Paces; a Bill Payment Reseller
Agreement and a Service Bureau Licensing Agreement. Under
the terms of the Bill Payment Reseller Agreement, the
parties agreed to develop and maintain an integrated
connection between the Internet-based banking system
developed by Five Paces and the Company's bill payment
processing system, and Five Paces is authorized to make the
bill payment processing services of the Company available on
favorable terms to licensed users of its Internet-based
banking system. Under the terms of the Service Bureau
Licensing Agreement, the Company may, on favorable terms,
utilize the Internet-based banking system integrated with
its bill payment processing system in a service bureau
environment to provide integrated Internet-based banking and
bill payment services to client institutions.
o Florida Informanagement Services. In February 1996, the
Company entered into a three year agreement with Florida
Informanagement Services whereby Florida Informanagement
Services will establish an on-line connection to the Company
and will market and facilitate the delivery of the Company's
home banking and bill payment services to its financial
institution clients. Florida Informanagement Services
provides core data processing and EFT processing services to
approximately one hundred financial institutions in the
southeast. Under the agreement, Florida Informanagement is
compensated for its marketing services by the Company based
on the account and transaction volume it generates from its
client base.
o Home Financial Network. In July 1996, the Company entered
into a five year agreement pursuant to which HFN and the
Company will interface certain software products developed
by HFN such that they will function in concert with the home
banking and bill payment services of the Company. HFN and
the Company will each market the availability of the
integrated products and services of the Company to financial
institutions nationwide. Under the terms of the agreement,
HFN is paid a one-time, per-user licensing fee and a monthly
usage fee for each month a product is in use by a consumer.
o Internet Browser Software Companies. In order to facilitate
widespread distribution of its CheckFree Wallet, the Company
has entered into distribution agreements with Internet
browser software companies including Spyglass and Spry. Under
the agreements, Spyglass and Spry will offer the CheckFree
Wallet as part of their browser software. The agreement with
Spry is for a one-year term and is renewable annually unless
either party gives advance notice of termination. The
agreement with Spyglass can be terminated by either party on
90 days advance notice.
o Premiere. In December 1995, the Company entered into a
five-year agreement with Premiere whereby the Company granted
a non-exclusive license of its CheckFree electronic payment
software to Premiere. Premiere will offer the Company's
consumer electronic payment services to Premiere's 4.5
million cardholders through its Premiere WORLDLINK
Communications Card. Premiere will receive a fee for each
transaction processed by the Company. The five-year initial
term of the agreement renews for additional one-year terms
unless either party gives notice of termination at least 30
days prior to expiration of the term.
o Small Business Accounting Software Companies. To integrate
ECD with businesses' existing accounts payable processes and
increase distribution, the Company has entered into
agreements with numerous providers of commercial accounting
software on a royalty basis. The Company has signed
agreements with accounting software companies, including
Champion Business Systems, Inc., CYMA Systems, Inc.,
DacEasy, Inc., Data Pro Accounting Software, Inc., Macola
Incorporated, New England Business Service, Inc., Peachtree
Software, Inc., Platinum Software Corporation, and Safeguard
Business Systems, Inc. to make ECD available as a feature of
the next versions of their commercial accounting software.
The Company estimates that over one million businesses
utilize the accounting software
-15-
16
programs offered by the Company's partners listed above. The
Company believes that the rollout of its ECD service in
these accounting packages will begin in the second half of
1996 and that the majority of these companies will release
ECD-enabled versions of their software by year-end 1996.
RESEARCH AND DEVELOPMENT
The Company maintains a business development group which engages in
research and development activities with a long-term perspective of planning
and developing new services and related products for the electronic commerce
and financial application software markets. The Company has established the
following guidelines for pursuing the development of new services:
o Distinctive benefits to customers
o Ability to establish a leadership position in the market served
o Sustainable technological advantages
o First to market
The Company believes that in the emerging electronic commerce market it
will be critical to rapidly develop, test and offer new services and
enhancements. To that end, the Company's goal for the time period from
conceptualization to commercial availability of new services is less than one
year. As of June 30, 1996, the research and development group consisted of 199
employees. Of these, 157 employees were software development personnel and 42
employees were business development personnel. Additionally, the Company uses
independent third party software development contractors as needed. During
fiscal 1993, 1994, 1995, and transition fiscal 1996, the Company spent 11.9%,
12.3%, 14.2%, and 19.9% of revenues, respectively, on research and development.
The Company anticipates that it will continue to commit substantial resources
to research and development activities for the foreseeable future.
TECHNOLOGY
The Company's historical approach to technology has been to utilize a
combination of hardware, networks, proprietary software and databases to solve
customer needs and to meet the varying requirements of the electronic commerce
market.
Electronic Commerce. The Company's original core technology capabilities
were developed to handle settlement services, merchant database services, and
on-line inquiry services on a traditional mainframe system with direct
bi-synchronous communications to businesses. As business telecommunication
requirements increased, the Company utilized links to an X.25 Value-Added
Network.
Today, the Company has implemented a logical, nationwide client-server
system. Consumer, business and financial institution customers all act as
clients communicating across dial-up telephone lines, private leased lines, a
private X.25 network, or the Internet to the Company's computing complex.
Within this complex, there is a wide variety of application servers seamlessly
connected via TCP/IP across switched Ethernet. The Company currently is able to
support virtually any communication method required in a secure manner.
Proprietary applications have been developed for the client-server system
on a variety of platforms with each platform selected and optimized for
specific electronic commerce needs. Applications to effect settlement services,
merchant database services, financial institution database services and
heuristic risk management services have been implemented on an IBM mainframe,
optimized for high volume batch processing. Applications to confirm payment
instructions, enhance data integrity and security, and reduce fraud have been
implemented on Digital Equipment Alpha servers, optimized for high volume,
device independent, real time data communication. To handle Internet financial
transactions, applications have been implemented on Sun Microsystems servers
designed for premium data security and integrity. Applications to effect credit
card authorizations and electronic bill delivery have been implemented on
Hewlett-Packard Unix servers, designed for efficient real-time processing and
data integrity and applications to effect
-16-
17
real-time connections to banks, ATM networks, and credit card networks are
being implemented on a Tandem Himalaya server. Other special purpose
application servers are deployed to handle unique electronic commerce
requirements such as electronic payments direct to merchant institutions, VRUs
to telephone customers, and electronic mail with customers and will soon be
deployed to handle real-time connections to ATM networks.
The Company has developed proprietary databases within the client-server
system, including a financial institution file that allows accurate editing and
origination of ACH and paper transactions to financial institutions. The
Company has also developed a merchant information file consisting of over one
million companies that allows accurate editing and initiation of payments to
merchants. These databases have been constructed over the past 15 years as a
result of the Company's transaction processing experience.
Security APL employs advanced technology for its two portfolio management
services PORTVUE and PAWWS. Security APL is an IBM business partner and
utilizes its IBM RS/6000's to process the portfolio management software.
PORTVUE is primarily a service bureau offering with the data center
residing at the Company's Chicago office. This data center functions seven days
a week, twenty-four hours a day. Clients access PORTVUE by a private TCP/IP
Wide Area Network (WAN) either via dedicated circuit or via dial-up
methodologies. The Chicago data center is the communication center for more
than 70 dedicated links together with 4 concentration hub sites located in New
Jersey, New York, Boston, and San Diego. Each of these hub sites support the
concentration of local dedicated links plus dial-up access. In addition to the
dedicated private network, clients use frame relay services from LDDS, MFS,
MCI, and AT&T to access PORTVUE services. These services are also available
through AT&T Fram Relay national network with local numbers in major cities
across the U.S.
The system has been exclusively UNIX since 1991 and consists of 21 IBM
RS/6000 running AIX. In addition, there are another 8 IBM RS/6000 machines in
various client sites. The Company's investment advisory clients receive
hardcopy reporting for either internal usage or for quarterly reports.
Hardcopy, either ASCII or graphical PostScript, is produced on four Xerox
DocuPrints 90 page per minute duplexed laser printers.
The PAWWS service is distributed via the Internet. HTTP servers run on
8-way SMP IBM RS/6000 with another 8 systems dedicated to private labeled PAWWS
services or direct support functions. Data delivery is handled via HTTP servers
provided by Netscape Communications Corporation. These servers are optimized
through site specific configuration files that provide excellent performance.
Secure connections are supported via Netscape's SSL protocol on a dedicated
server. Data is processed and stored on both private Security APL database
functions together with Sybase SQL functions depending upon application needs.
Financial Application Software. Financial application suite of software
products offers a wide range of software addressing both end user access and
back room operational systems located in the customer data centers. Every
effort is taken to insure that each system is correctly platformed to optimize
the characteristics of available technology with the business requirements of
each application. This strategy utilizes large IBM mainframes as the platform
for high volume batch oriented systems, IBM's RS/6000 UNIX Servers for high
volume OLTP systems, Microsoft Windows NT for medium volume OLTP systems and
Windows for client connectivity.
The Company has implemented appropriate backup and recovery procedures to
ensure against any loss of data on any platform. Archival storage is kept on
site as well as off site in fireproof facilities. To maximize availability, the
Company has redundant computer systems to ensure that financial transaction
requests can always be honored. A diesel generator provides power to the
computing facility in the event of a power disruption.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunications failure or similar event. Although the Company is
considering moving some of its computer processing equipment to another site,
this measure will not eliminate the significant risk to the Company's
operations from a natural disaster or system failure at one of these two sites.
Any damage or failure that causes interruptions in the Company's operations
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's property and business
interruption insurance may not be
-17-
18
adequate to compensate the Company for all losses that may occur. See
"Business -- Business Risks (Risk of System Failure)."
With the tremendous growth anticipated for electronic commerce, the
Company's architecture has been designed to address incremental capacity
requirements as needed. The entire infrastructure and set of product
technologies allow the Company to efficiently service and support its three
customer markets.
Although the Company's principal business is to provide electronic
commerce services rather than sell or license software products, the consumer
financial software products offered by the Company to access such services
could contain errors or "bugs" that could adversely affect the performance of
the service or damage a user's data. In addition, as the Company increases its
share of the electronic commerce services market, software reliability and
security demands will increase. As of the date hereof, the Company has not
experienced or been made aware of any errors or "bugs" in its software that
adversely affected the performance of the service or damaged a user's data.
Additionally, the Company attempts to limit its potential liability for
warranty claims through disclaimers in its software documentation and
limitation-of-liability provisions in its shrink-wrap license and customer
agreements. There can be no assurance that the measures taken by the Company
will prove effective in limiting the Company's exposure to warranty claims.
Additionally, despite the existence of various security precautions, the
Company's computer infrastructure may be also vulnerable to viruses or similar
disruptive problems caused by its customers or third parties gaining access to
the Company's processing system. See "Business -- Business Risks (Risk of
Product Defects)."
SALES, MARKETING AND DISTRIBUTION
The Company's sales, marketing and distribution efforts are designed to
maximize access to potential customers. The Company markets its services both
directly and indirectly through a direct sales and technical sales support
force of 108 employees and through select strategic alliances with companies
who are involved in the Company's target customer markets. In addition to its
direct sales force, the Company has 26 employees in marketing.
In the electronic commerce segment, the Company offers its services and
related products to financial institutions directly through its sales force and
through its strategic alliances with companies such as EDS, Fiserv, and FiTech.
The Company offers its services and related products to its customers through a
variety of distribution channels such as direct access via an 800 phone number,
the Company's World Wide Web site on the Internet, integration into certain
leading personal finance software (such as Meca's Managing Your Money, Computer
Associates' Simply Money and Intuit's Quicken), integration into Internet
access providers such as Spyglass and Spry, and through distribution alliances
with companies such as AT&T. Also, the Company currently is developing an
on-line version of its electronic payment services for indirect distribution
through commercial on-line service providers and others (such as CompuServe and
Premiere). The Company offers its services and related products to the business
market directly through its sales force, through its strategic alliance with
ADP and through the integration of the Company's services and related products
into major commercial accounting software programs. The Company presently
offers substantially all of its services and related products to the domestic
marketplace.
The Company markets its financial application software products through
the direct sales force based in Norcross, Georgia and indirect sales through
Alltel banking services. Salespersons have specific product responsibility and
receive support from technical personnel as needed. The Company generates new
customers through direct solicitations, user groups, responses to
advertisements, direct mail campaigns and strategic alliances. The Company also
participates in trade shows and sponsors industry technology seminars for
prospective customers. Existing customers are often candidates for sales of
additional products or for enhancements to products they have already
purchased.
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of the Company's strategy in each of its
customer markets. As of June 30, 1996, the Company had 745 employees dedicated
to customer care, technical support and operations.
-18-
19
To meet the needs of the Company's customers most efficiently, the
customer care staff is organized into vertical teams that support each customer
market. However, these teams share common resources, training and orientation
to ensure cost efficiency and consistency of quality standards and measures.
From an accessibility standpoint, all customer care teams provide service by
phone, e-mail and facsimile.
The level and types of services provided vary by customer market. The
customer care group supports payment inquiry, customer service and technical
support and interfaces with the merchant systems group to improve posting
efficiencies. Representatives in the business customer care group are
individually assigned to business customers in order to provide high level
customer service and technical support. The retail services customer care group
provides various levels of support that depend upon the individual
institution's requirements. This includes providing direct customer care on a
private label basis as well as research and support.
To maintain its customer care standards, the Company employs extensive
internal monitoring systems and conducts ongoing customer surveys. The feedback
from these sources is used to identify areas of strength and opportunities for
improvement in customer care.
GOVERNMENT REGULATION
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. The Company, however, is
periodically audited by the Office of Thrift Supervision since it is a supplier
of products and services to financial institutions. There can be no assurance
that a federal or another state agency will not attempt to regulate providers
of electronic commerce services such as the Company which could impede the
Company's ability to do business in the regulator's jurisdiction. In addition,
through its processing agreements, the Company agrees to comply with the data,
recordkeeping, processing and other requirements of applicable federal and
state laws and regulations, Federal Reserve Bank operating letters, and the
National Automated Clearing House Association Operating Rules imposed on the
Company's processing banks. The Company may be subject to audit or examination
under any of these requirements. Violations by the Company of these
requirements could limit or further restrict the Company's access to the
payment clearance systems or the Company's ability to obtain access to such
systems from banks. Further, the Federal Reserve rules provide that the Company
can only access the Federal Reserve's ACH through a bank. If the Federal
Reserve rules were to change to further restrict access to the ACH or limit the
Company's ability to provide ACH transaction processing services, the Company's
business could be materially adversely affected. See "Business -- Business
Risks (ACH Access; Termination of MasterCard and Visa Registration)" and "--
Payment Clearance Systems."
In conducting various aspects of its business, the Company is subject to
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code, and is also subject to the electronic funds transfer
rules embodied in Regulation E, promulgated by the Federal Reserve Board. The
Federal Reserve's Regulation E implements the Electronic Fund Transfer Act,
which was enacted in 1978. Regulation E protects consumers engaging in
electronic transfers, and sets forth basic rights, liabilities and
responsibilities of consumers who use electronic money transfer services and of
financial institutions that offer these services. For the Company, Regulation E
sets forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. Such
limitations on the consumer's liability may result in liability to the Company.
Given the expansion of the electronic commerce market, it is possible that
the Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
it is possible that Congress or individual states could enact laws regulating
the electronic commerce market. If enacted, such laws, rules and regulations
could be imposed on the Company's business and industry and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Government Regulation)."
-19-
20
PAYMENT CLEARANCE SYSTEMS
Payment Systems. Across the Company's various electronic commerce service
offerings, the Company utilizes all three principal payment clearance systems:
(i) the Federal Reserve's ACH for electronic funds transfers; (ii) the national
credit card systems for electronic credit card settlements; and (iii) the
conventional paper check clearing systems for settlement of payments by check
or draft. Like other users of these payment clearance systems, the Company
accesses these systems through contractual arrangements with processing banks
participating in the ACH for electronic funds transfers and with member banks
of MasterCard and Visa for credit card transactions. For access to conventional
paper check clearing systems, the Company does not need a special contractual
relationship, except for its contractual relationships with its processing bank
and its customers. Such users are subject to applicable federal and state laws
and regulations, Federal Reserve Bank operating letters, the National Automated
Clearing House Association Operating Rules and MasterCard and Visa operating
rules and regulations. There are certain risks typically faced by companies
utilizing each of these payment clearance systems, and the Company has its own
set of operating procedures and proprietary risk management systems and
practices to mitigate credit-related risks. See "Business -- Business Risks
(Risk of Loss from Returned Transactions, Merchant Fraud or Erroneous
Transmissions)," " -- Business Risks (ACH Access; Termination of MasterCard and
Visa Registration)," and " -- Business Risks (Government Regulation)."
ACH. The ACH is used by banks, corporations and governmental entities for
electronic settlement of transactions, direct deposits of payroll and
government benefits and payment of bills such as mortgages, utility payments
and loans. The Company uses the ACH to execute certain of its customers'
payment instructions. Like other users of the ACH, the Company bears credit
risk resulting from returned transactions caused by insufficient funds, stop
payment orders, closed accounts, frozen accounts, unauthorized use, disputes,
theft or fraud.
Credit Cards. To process credit card transactions, the Company has
registered with MasterCard and Visa under the same association operating rules
and regulations as other credit card processors like First USA, Inc., NaBanco,
Card Establishment Services and National Processing Company. Like all credit
card processors, the Company must bear the inherent credit risks of chargebacks
and merchant fraud. Merchant fraud includes such actions as inputting false
sales transactions or false credits. The Company monitors merchant charge
volume, average charge amount and number of transactions, as well as reviews
for unusual patterns in the transactions and chargebacks processed. To minimize
the risk of fraud, the Company tailors its credit analysis according to the
risk level associated with the industry in which the prospective merchant
client operates. The Company also bears the credit risk of a merchant becoming
insolvent when a credit card transaction has been processed by the merchant and
is subsequently returned.
Paper Drafts. The Company uses conventional check clearance methods for
paper drafts to execute certain of its customers' payment instructions using
its bank and its customers' banks. The Company bears no credit risk with paper
drafts written on a customer's checking account returned for insufficient
funds, stop payment orders, closed accounts or frozen accounts. However, the
Company may bear other risks for theft or fraud associated with paper drafts
due to unauthorized use of the Company's services. When a customer instructs
the Company to pay a bill, the Company has the ability to process the payment
either by electronic funds transfer or by paper draft, drawn on the customer's
checking account, on which the customer's pre-authorized signature is laser
imprinted. The Company manages the risk it assumes by adjusting the mix of
electronic and paper draft transactions in individual cases and overall. The
Company tends to process small dollar transactions electronically and large
dollar transactions by paper draft. Moreover, the Company is increasingly
shifting its risks associated with electronic funds transfers to merchants
through contractual arrangements. Regardless whether the Company uses paper
drafts or electronic funds transfers, the Company retains all risks associated
with transmission errors when it is unable to have erroneously transmitted
funds returned by an unintended recipient.
Other Clearance Systems. While the Company presently utilizes the three
principal payment clearance systems, the Company intends to use other clearance
systems such as ATM networks to provide balance inquiry and fund transfers
functions, and such other clearance systems that may develop in the future.
Risk Mitigation. The Company's patented bill payment processing system
determines the preferred method of payment to balance processing costs,
operational efficiencies and risk of loss. The Company manages its risks
associated with its use of the various payment clearance systems through its
risk management systems, internal controls and system security. The Company
also maintains a reserve for such risks, which reserve was $542,000 as of June
30, 1996,
-20-
21
and the Company has not incurred losses in excess of its reserve or greater
than 0.76% of its revenues in any of the past five years. As further protection
against losses due to transmission errors, the Company maintains errors and
omissions insurance. See "Business -- Risk Factors (Risk of Loss from Returned
Transactions, Merchant Fraud or Erroneous Transactions)."
PROPOSED MERGER WITH ISC
On September 15, 1996, the Company entered into a definitive agreement to
purchase ISC from Intuit in exchange for approximately 12.6 million shares of
the Company's common stock. The agreement contains certain provisions that
limit the purchase of additional common shares and the disposition of the
common shares to be obtained by Intuit. The acquisition will be accounted for
under the purchase method of accounting and is expected to include a charge in
an amount not yet determined for in-process research and development. ISC
provides transaction processing and electronic funds transfer services.
The Company will enter into a service and license agreement with Intuit,
contingent on the consummation of the acquisition of ISC, whereby the Company
will obtain a license to connect to and use certain software technology of
Intuit for a payment of $10 million on closing of the ISC acquisition and an
additional $10 million on October 1, 1997.
PROPRIETARY RIGHTS
The Company owns the following federally registered trademarks and service
marks: CHECKFREE(R), CHECKFREE and Design(R), CHECKFREE (Stylized Letters)(R),
CHECKFREE EXTRA(R), MOBILEPAY(R), ACCESS BANKING(R), ALAS(R), BFCS(R), CLAS(R),
CSS(R), CSSII(R), DASH(R), DECISION MANAGER(R), DISC and Design(R), DISC
CHECKBOOK PLUS(R), ECP(R), EPOCH(R), FASTOCK PC(R), LANPATH(R), LEASTRAC2000(R),
MICROACH(R), NETWORK BANKER(R), PEP+(R), PTT(R), RS/REACT(R), SBA(R), SUPRRB(R),
TCM THE CONTROL MACHINE(R), and WIRENET(R). Additionally, the Company has
applied to federally register the following service marks: WE PAY MORE THAN
BILLS--WE PAY ATTENTION(sm), CHECKFREE BILLFREE(sm), CHECKFREE WALLET(sm),
2001...THE NEXT GENERATION(sm), CHECKFREE CONNECT(sm), CHECKFREE E-BILL(sm),
CHECKFREE ELECTRIC MONEY(sm), CHECKFREE EASY(sm), CHECKFREE ELECTRONIC EXCHANGE
NETWORK(sm), CHECKFREE MANAGER(sm), RCM...THE NEXT GENERATION(sm),
BANKATHOME(TM), BANK STREET(TM), BPS(TM), CAPS CORPORATE AUTOMATED PAYMENTS
SYSTEM(TM), CLRS(TM), CLUB HOOCH(sm), CPIM(TM), FMS(TM), ICE HOUSE(sm),
INTEGRATED DECISION MGR.(TM), LSAMS(TM), MAX(TM), OMNI(TM), ORBS(TM), PEP
PAPERLESS ENTRY PROCESSING(TM), PAWWS(TM), PAWTRACKS(TM), PODIUM(TM),
QUICKKILL(TM), SERVANTIS RECON-PLUS(TM), SERVANTIS SYSTEMS(TM), SERVANTIS
SYSTEMS(TM), SERVANTIS SYSTEMS(sm), SERVANTIS EXPRESS(TM), SERVANTIS
INFOVUE(TM), SERVANTIS WORLD$NET(TM), SOLUTIONS YOU CAN BANK ON(TM), SSI
LOGO(TM), SSI(TM), TMS-THE MORTGAGE SERVICER(TM), TST(TM), VAULT(TM),
WIRENEXT(TM), THE SECONDARY MARKETER(TM). THE WAY MONEY MOVES(SM), and CHECKFREE
CHARITY NET(SM). The Company is awaiting further information to file
applications for the following marks: ALLIANCE, APECS, APECS PC, ARP, ARP - PC,
ARP/QMS, ARP/SMS, BANKVUE, CHECKBOOK PLUS, CPCS, EASY ACCESS TO TOTAL ELECTRONIC
BANKING, SERVANTIS IRS, IRS/SRS, LCR, RECON-PLUS FOR WINDOWS, RECON-PLUS/PC,
RPS, RPS-PC, RPS/400, RRS, RS/REACT, SERVANTIS, SERVANTIS with Design, SERVANTIS
SYSTEMS, INC., SERVANTIS FORUM, SERVANTIS QUIK, SIG FILER, SMS and SERVANTIS
WORLD$NET.
The Company regards its financial transaction services and related
products such as its software as proprietary and relies on a combination of
patent, copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements, and other intellectual property protection methods to
protect its services and related products. Although the Company believes its
consumer financial software to be proprietary, it does not depend on its
software to compete, but rather on its services to which the software provides
access. The Company's consumer financial software does not generate significant
revenues because the Company makes such software available to consumers at no
cost or for a nominal charge with the intention of selling related services to
such consumers.
The Company also copyrights certain of its programs and software
documentation and trademarks certain product names. Management believes that
these actions provide appropriate legal protection for the Company's
intellectual property rights in its software products. Furthermore, management
believes that the competitive position for some of the Company's products
depends primarily on the technical competence and creative ability of its
personnel
-21-
22
and that its business is not materially dependent on copyright protection or
trademarks. See "Business -- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
The Company's United States Letters Patent No. 5,383,113, issued on
January 17, 1995, relates to its system and method for electronically providing
services including payment of bills and financial analysis. Using the system
described in the patent, the Company can pay any bill from any checking account
at any financial institution in the United States on the consumer's behalf by
selecting a preferred means of payment from various options such as a paper
draft drawn on the consumer's account, electronic funds transfer from the
consumer's account, or checks drawn on a trust account maintained for the
benefit of the Company's customers. While the Company believes that the
ownership of the patent is a significant factor in its business, its success
does not depend only on the ownership of the patent or future patents, but also
on the innovative skills, technical competence, quality of service and
marketing abilities of its personnel. The Company believes its patent provides
a measure of security against competition, and the Company intends to enforce
its patent against infringement by third parties. If the Company's patent is
found to be invalid, to the extent it has or would in the future serve as a
barrier to entry in this marketplace, there may be increased competition in the
market. See "Business -- Competition," "-- Business Risks (Intense
Competition)" and "-- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
Existing intellectual property laws afford only limited protection, and it
may be possible for unauthorized third parties to copy the Company's services
and related products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can be no assurance that the
Company's competitors will not independently develop services and related
products that are substantially equivalent or superior to those of the Company.
EMPLOYEES
As of June 30, 1996, the Company employed 1,200 full-time employees,
including 199 in research and development (including software development), 745
in customer care, technical support and operations, 134 in sales, marketing and
sales support, and 122 in administration, financial control, corporate services
and human resources. The Company is not a party to any collective bargaining
agreement and is not aware of any efforts to unionize its employees. The
Company believes its relations with its employees are good. The Company
believes its future success and growth will depend in large measure upon its
ability to attract and retain qualified technical, management, marketing,
business development and sales personnel.
BUSINESS RISKS
The Company desires to take advantage of the new "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Reform Act only became law in late December 1995 and, except for the Conference
Report, no official interpretations of the Reform Act's provisions have been
published. Many of the following important factors discussed below have been
discussed in the Company's prior filings with the Securities and Exchange
Commission.
In addition to the other information in this report, readers should
carefully consider that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
for the transition year ended June 30, 1996, and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf
of, the Company.
Emerging Electronic Commerce Market; Security and Privacy Concerns. The
electronic commerce market is a relatively new and growing service industry. If
the electronic commerce market fails to grow or grows more slowly than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and ATM
industries, the Company and other organizations serving the electronic commerce
market need to educate users that
-22-
23
electronic transactions use encryption technology and other electronic security
measures that make electronic transactions more secure than paper-based
transactions. While the Company believes that it is utilizing proven
applications designed for premium data security and integrity to process
electronic transactions, there can be no assurance that the Company's use of
such applications will be sufficient to address the changing market conditions
or the security and privacy concerns of existing and potential customers. See
"Business -- General" and "-- Services and Related Products."
Additionally, the Company's growth and acceptance in the electronic
commerce market is dependent on its continued growth in its target markets. See
"Business -- Services and Related Products." Although demand for the Company's
services and related products continues to grow, there can be no assurance that
the Company will be successful in each of its target markets. Accordingly, the
Company's inability to grow in any one of these markets could have a material
adverse effect on the Company's business, operating results and financial
condition.
Integration of Servantis and Security APL. On February 21, 1996, the
Company acquired Servantis for approximately $165.1 million, consisting of the
issuance of 5.7 million shares of the Company's Common Stock valued at $20.00
per share (approximately 16% of the Company's total shares outstanding
following the Servantis Acquisition) and $42.5 million in cash to repay
Servantis' long-term debt, in addition to the assumption of $38.3 million in
liabilities. In addition, on May 9, 1996, the Company acquired Security APL
for approximately $53.3 million, consisting of the issuance of 2.8 million
shares of the Company's Common Stock valued at $18.50 per share (approximately
7% of the Company's total shares outstanding following the Security APL
Acquisition), and the assumption of $5.5 million of liabilities. The successful
and timely integration of Checkfree, Servantis, and Security APL is critical to
the future financial performance of the Company. The Company currently
estimates that the complete integration of the three companies could take
several quarters to accomplish. The combination of the three companies will
require, among other things, integration of the companies' respective service
and product offerings and coordination of their sales and marketing and
research and development efforts. While Checkfree, Servantis, and Security APL
have focused on markets which utilize financial transaction processing,
record-keeping and information delivery, Checkfree has to date acted
principally as a provider of services, whereas Servantis and Security APL have
focused on the development and support of software systems and services used by
financial institutions. In addition, Servantis had greater revenues than
Checkfree for the twelve months ended December 31, 1995, and the absorption of
a larger company may present a more substantial integration challenge than the
acquisition of a smaller company. There can be no assurance that present and
potential customers of the Company will continue their recent buying patterns
without regard to the Acquisitions, and any significant delay or reduction in
orders could have an adverse effect on the Company's near-term business and
results of operations. The diversion of the attention of management created by,
and any difficulties encountered in, the integration process could have an
adverse impact on the revenues and operating results of the Company. In
addition, the process of combining the three organizations could have an
adverse effect on any or all of the companies' businesses. The difficulty of
combining the three companies may be increased by the need to integrate the
personnel of and the geographic distance between the three companies. Changes
brought about by the Acquisitions may result in the loss of key employees of
any or all companies. There can be no assurance that the Company will retain
the employees it wants to retain or that the Company will realize any of the
other anticipated benefits of the Acquisitions.
In addition, for transition fiscal 1996, the Company wrote-off $119.4
million of the purchase price for Servantis and Security APL as in process
research and development. In addition, as part of the allocation of the
purchase price, the Company reduced the deferred revenues on the balance sheets
of Servantis at the date of the Servantis Acquisition due to the fact that the
anticipated profits included in deferred revenues are reflected in the purchase
price of the Servantis Acquisition. As a result, the Company did not recognize
revenues or profits of approximately $12.7 million with respect to such
reduction in deferred revenues in transition fiscal 1996. The write-off of
in-process research and development costs, and the nonrecognition of revenues
or profits on certain deferred revenues had a material adverse impact on the
Company's financial results in 1996. In addition, with the proposed acquisition
of ISC the Company expects a substantial in process research and development
write off in fiscal 1997.
Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. In the financial institutions market, the
Company's competitors include Visa Interactive and ISC. A number of banks have
developed, and others in the future may develop, home banking services
in-house. Additionally, Intuit and Microsoft have each individually announced
their own alliances with financial institutions to offer on-line home banking
and financial services to consumers. In the
-23-
24
business market, the Company competes with other credit card and ACH
processors. The Federal Reserve's ACH is the national payment clearance system
through which any bank can effect debit or credit transactions to any
authorized consumer checking account. There are numerous competitors in the
business market for credit card processing, including First USA, Inc., NaBanco
and Card Establishment Services (divisions of First Data Corporation), and
National Processing Company (a division of National City Bank). The Company
also faces competition in ACH processing from numerous banks. The financial
application software segment also faces significant competition. Portfolio
accounting software providers include Advent software, PORTIA a division of
Thomson Financial and Shew Data a Sun Guard Company. The primary portfolio
competition is Shaw Data. In products offered to the mortgage services
industry, the Company competes with Fiserv, FiTech, EDS, Alltel, CPI, ASC and
GFS. The Company's Imaging/COLD product lines compete with the products of
several companies, including International Business Machines Corporation
("IBM"), Optika ("Optika"), Image Integration Corporation ("IIC") and Computron
Software, Inc. ("Computron"). The Company competes in the recovery and
collection business with First Data Corporation, Rothenberg Systems
International ("Rothenberg") and Computer Associates International, Inc.
("Computer Associates") among others. Finally, the Company's products face
competition in the securities software and service sector principally from
SunGard, NCS, ISS and numerous in-house bank and transfer agency service
centers.
The Company expects competition to increase from both established and
emerging companies and that such increased competition will result in price
reductions and may result in a reduction of the Company's market share, either
or both of which could materially adversely affect the Company's business,
operating results and financial condition. The Company announced a new series
of services and pricing options in September 1995 in an attempt to appeal to
various segments of the Company's markets. One such option is to offer a bill
payment service at a lower cost in order to target new users and users who are
only interested in the electronic bill payment aspect of the Company's
services. Moreover, the Company's current and potential competitors, many of
whom have significantly greater financial, technical, marketing and other
resources than the Company, may respond more quickly than the Company to new or
emerging technologies or could expand to compete directly against the Company
in any or all of its target markets. Accordingly, it is possible that current
or potential competitors could rapidly acquire significant market share.
Acquisitions and consolidations are taking place in the transaction processing
industry such as the merger between First Data Corp. and First Financial
Management Corp. and the acquisition of Litle and Company by First USA, Inc.
While the Company believes competition will increase as a result of these
mergers and acquisitions, the Company also believes it is well positioned to
meet such competition. There can be no assurance, however, that the Company
will be able to compete against current or future competitors successfully or
that competitive pressures faced by the Company will not have a material
adverse effect on its business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- General," and "-- Competition."
Today, the Company is the leading provider of electronic payment services
to users of personal finance software. The Company believes that as
consumer-based on-line interactive and telecommunications services continue to
grow, retail-marketed personal financial software will become a less important
channel for the Company in acquiring new customers. The Company's strategy is
to focus increasingly on its own distribution alliances and direct marketing,
including key strategic alliances in the on-line interactive and
telecommunications industries. There can be no assurance that the Company's
strategy will be successful.
Management of Growth. The Company is currently experiencing a period of
rapid growth which has placed, and could continue to place, a significant
strain on its resources. This strain is increased by the Acquisitions. The
Company's key employees have not had experience in managing companies larger
than the Company. The Company's ability to manage growth successfully will
require the Company to continue to improve its operational, management and
financial systems and controls as well as expand its work force. A significant
increase in the Company's customer base would necessitate the hiring of a
significant number of additional customer care and technical support personnel
as well as computer software developers and technicians, qualified candidates
for which, at the present time, are in short supply. In addition, the expansion
and adaptation of the Company's computer infrastructure will require
substantial operational, management and financial resources. Although the
Company believes that its current computer infrastructure is adequate to meet
the needs of its customers in the foreseeable future, there can be no assurance
that the Company will be able to expand and adapt its computer infrastructure
to meet additional demand on a timely basis, at a commercially reasonable cost,
or at all. If the Company's management is unable to manage growth effectively,
hire needed personnel, expand and adapt its computer infrastructure or improve
its operational, management and financial
-24-
25
systems and controls, the Company's business, operating results and financial
condition could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Acquisition-Related Risks. In September 1996, the Company signed a
definitive agreement to acquire ISC for 12.6 million shares of common stock.
The acquisition is expected to close in December 1996 and will be accounted for
as a purchase. While the appraisal for ISC is not yet complete, the Company
expects a substantial in process research and development write-off at the
acquisition date. In addition, ISC had been incurring operating losses and
operating losses are anticipated in 1997. The Company expects it will take 12
to 18 months to integrate ISC's bill payment and home banking operations into
the Company's operations. There can be no assurance the Company's integration
plan will be completed in the expected time frame or that the Company will
realize the operational efficiencies projected as a result of the acquisition.
In the future, the Company may pursue additional acquisitions of
complementary service or product lines, technologies or businesses. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, operating
results and financial condition. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. There can be no
assurance that some or all of these risks will not apply to the Acquisitions.
From time to time, the Company evaluates potential acquisitions of businesses,
services, products or technologies. Other than the ISC acquisition, the Company
has no present commitments or agreements with respect to any material
acquisition of other businesses, services, products or technologies. In the
event that such an acquisition were to occur, however, there can be no
assurance that the Company's business, operating results and financial
condition would not be materially adversely affected.
Dependence on Strategic Alliances. A principal element of the Company's
strategy is the creation and maintenance of strategic alliances that maximize
access to potential customers for the Company's electronic commerce services
and related products. The Company believes that these alliances enable the
Company to offer its services and related products to a larger customer base
than could be reached through stand-alone marketing efforts. As of the date of
this report, the Company has entered into strategic alliances with several
companies, including AT&T, ADP, Block Financial, CyberCash, EDS, Fiserv,
FiTech, Premiere, Spyglass and Spry. While the Company believes it has
established strong strategic alliances with these partners, the Company's
success depends both on the ultimate success of these partners, as well as on
the ability of its partners to successfully market the Company's services and
related products. Failure of one or more of the Company's key strategic
partners to successfully develop and sustain a market for the Company's
services and related products could have a material adverse effect on the
Company's overall performance. Additionally, failure of the Company's
strategic partners to generate new customers would likely lead to increased and
more costly direct marketing expenditures by the Company as well as a need to
develop new strategic alliances with other parties. Moreover, the Company has
traditionally relied on its strategic partners as the cornerstone of its
marketing efforts to consumers and financial institutions and, consequently,
the Company has only limited experience in the direct marketing of its services
in two of its existing markets. See "Business -- Strategic Alliances."
Although the Company views its alliances as a key factor in its overall
business strategy and in the development and commercialization of its services,
software and related products, there can be no assurance that its strategic
partners view their alliances with the Company as significant for their own
businesses or that they will not reassess their commitment to the Company at
any time in the future. The Company's strategic alliance agreements generally
do not establish minimum performance requirements for the strategic partners
but instead rely on the voluntary efforts of the partners in pursuing joint
goals. The ability of the Company's strategic partners to incorporate the
Company's services and related products into successful commercial ventures
will depend, in part, on the Company's ability to continue to successfully
enhance its existing services and products and develop new services and
products. The Company's inability to meet such requirements would delay the
ongoing development of services and products and could result in its strategic
partners seeking alternative providers of financial transaction services,
software and related products, which would have a material adverse impact on
the Company. See "Business -- Strategic Alliances."
-25-
26
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly results of operations may fluctuate significantly as a result of a
number of factors, including changes in the Company's pricing policies or those
of its competitors, relative rates of acquisition of new customers, delays in
the introduction of new or enhanced services, software, and related products by
the Company or by its competitors or market acceptance of such services and
products, other changes in operating expenses, personnel changes and general
economic conditions. In addition, the Company's growth in new consumer
customers is impacted by certain seasonal factors such as holiday-based
personal computer sales. These seasonal factors may impact operating results by
concentrating customer acquisition and set-up costs, which may not be
immediately offset by revenue increases primarily due to introductory service
price discounts. Additionally, on-line interactive service customers generally
tend to be more active users during the non-summer seasons, potentially causing
revenue fluctuations during the summer months. Servantis' quarterly operating
results have historically been highly seasonal, with sales and earnings
generally stronger in the quarters ended December 31 and June 30 of each year
and generally weaker in the quarters ended September 30 and March 31 of each
year. The seasonality is due, in part, to calendar year-end buying patterns of
Servantis' financial institution customers and Servantis' sales compensation
structure, which is based on fiscal year (June 30) sales performance. Servantis
has historically operated with little or no backlog and has no long-term
contracts, and, at present, approximately half of its revenues in each quarter
result from software licenses issued in that quarter. Moreover, the Company's
intention to aggressively promote the acceptance of its electronic commerce
services and rapidly expand its customer base may adversely impact the
Company's short-term profitability. These seasonal factors will impact the
Company's operating results. Fluctuations in operating results could result in
volatility in the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risk of Product Defects. The software products offered by the Company
could contain errors or "bugs" that could adversely affect the performance of
the Company's software or services or damage a user's data. In addition, as the
Company increases its share of the electronic commerce services market,
software reliability and security demands will increase. Additionally, the
Company attempts to limit its potential liability for warranty claims through
disclaimers in its software documentation and limitation-of-liability
provisions in its license and customer agreements. There can be no assurance
that the measures taken by the Company will prove effective in limiting the
Company's exposure to warranty claims. Additionally, despite the existence of
various security precautions, the Company's computer infrastructure may be also
vulnerable to viruses or similar disruptive problems caused by its customers or
third parties gaining access to the Company's processing system. See "Business
- -- Technology."
Rapid Technological Change; Risk of Delays. The Company's success is
highly dependent on its ability to develop new and enhanced software, services
and related products that meet changing customer requirements. The market for
the Company's software, services and related products is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services and
products. There can be no assurance that the Company can successfully identify
new service opportunities and develop and bring new and enhanced software,
services and related products to market in a timely manner, that such software,
services, products or technologies will develop or will be commercially
successful, that the Company will benefit from such developments or that
services, products or technologies developed by others will not render the
Company's software, services and related products noncompetitive or obsolete.
If the Company is unable, for technological or other reasons, to develop and
introduce new services and products in a timely manner in response to changing
market conditions or customer requirements, or if new or enhanced software,
services and related products do not achieve a significant degree of market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business -- General," "-- Services
and Related Products," and "-- Research and Development."
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes all three principal financial payment
clearance systems: the Federal Reserve's ACH for electronic fund transfers; the
national credit card systems (e.g., American Express, Discover, MasterCard and
Visa) for electronic credit card settlements; and conventional paper check and
draft clearing systems for settlement of payments by check or drafts. In its
use of these established payment clearance systems, the Company generally bears
the same credit risks normally
-26-
27
assumed by other users of these systems arising from returned transactions
caused by insufficient funds, stop payment orders, closed accounts, frozen
accounts, unauthorized use, disputes, theft or fraud. In addition, the Company
also assumes the risk of merchant fraud and transmission errors when it is
unable to have erroneously transmitted funds returned by an unintended
recipient. Merchant fraud includes such actions as inputting false sales
transactions or false credits. The Company manages all of these risks through
its risk management systems, internal controls and system security. The Company
also maintains a reserve for such credit risks and has not historically
incurred losses in excess of its reserve nor greater than 0.76% of its revenues
in any of the past five years. Past reserving experience cannot predict the
adequacy of reserves in the future. The Company believes that its risk
management and reserving practices are adequate. However, there can be no
assurance that the Company's risk management practices or reserves will be
sufficient to protect the Company from returned transactions, merchant fraud or
erroneous transmissions which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Payment Clearance Systems."
Risk of System Failure. The Company's operations are dependent on its
ability to protect its computer equipment against damage from fire, earthquake,
power loss, telecommunications failure or similar event. All of the Company's
computer equipment, including its processing operations, is located at its
facilities in Columbus, Ohio, Norcross, Georgia, Chicago, Illinois and Austin,
Texas. A disproportionate amount of the Company's computer equipment, including
its primary processing operations, is located at its headquarters facility in
Columbus, Ohio. Although the Company is considering moving some of its computer
processing equipment to another site, this measure will not eliminate the
significant risk to the Company's operations from a natural disaster or system
failure at one of these two sites. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business --
Technology."
Limited Protection of Proprietary Technology; Risk of Third Party
Infringement Claims. The Company regards its financial transaction services and
related products such as its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party nondisclosure agreements, and other intellectual property
protection methods to protect its services and related products.
The Company has been granted a patent for certain features of its
electronic bill payment processing system. See "Business -- Proprietary
Rights." While the Company believes that the ownership of the patent is a
significant factor in its business, its success does not depend only on the
ownership of the patent or future patents, but also on the innovative skills,
technical competence, quality of service and marketing abilities of its
personnel. The Company believes its patent provides a measure of security
against competition, and the Company intends to enforce its patent against
infringement by third parties. If the Company's patent is found to be invalid,
to the extent it has or would in the future serve as a barrier to entry in this
marketplace, there may be increased competition in the market. See "Business --
Competition" and "-- Business Risks (Intense Competition)."
Existing intellectual property laws afford only limited protection, and it
may be possible for unauthorized third parties to copy the Company's services
and related products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can be no assurance that the
Company's competitors will not independently develop services and related
products that are substantially equivalent or superior to those of the Company.
Dependence on Key Personnel; Lack of Employment Agreements. The Company's
success depends to a significant degree upon the continued contributions of its
key management, marketing, service and related product development and
operational personnel, including its Chairman, President, and Chief Executive
Officer, Peter J. Kight, and its President of Business Services, Mark A.
Johnson. The Company's operations could be affected adversely if, for any
reason, either Mr. Kight or Mr. Johnson ceased to be active in the Company's
management. The Company maintains proprietary nondisclosure and noncompete
agreements with all of its key employees. The Company does not have employment
agreements with several of its executive officers, including Mr. Kight and Mr.
Johnson. The Company maintains key person life insurance policies on Mr. Kight.
The success of the Company depends to a large extent upon its ability to retain
and continue to attract highly skilled personnel. Competition for employees in
the electronic commerce industry is intense, and there can be no assurance that
the Company will be able to attract and retain enough qualified employees. If
the business of the Company grows, it may become increasingly difficult to
hire,
-27-
28
train and assimilate the new employees needed. The Company's inability to
retain and attract key employees could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Employees."
ACH Access; Termination of MasterCard and Visa Registration. The Federal
Reserve rules provide that the Company can only access the Federal Reserve's
ACH through a bank. If the Federal Reserve rules were to change to further
restrict access to the ACH or limit the Company's ability to provide ACH
transaction processing services, the Company's business could be materially
adversely affected. To process credit card transactions for merchants and
businesses, the Company must register with MasterCard and Visa as an
independent service organization through processing banks. MasterCard and Visa
permit the Company, as a registered service provider, to provide MasterCard and
Visa transaction processing services through processing banks that are members
of MasterCard or Visa. The Company's registrations with MasterCard and Visa are
renewed annually. There can be no assurance that the Company's registrations
with MasterCard and Visa will be renewed or that the current rules of
MasterCard and Visa permitting independent service providers to market
transaction processing services will remain in effect or that the terms thereof
will not be modified in the future. The non-renewal of either registration or
any changes in MasterCard or Visa rules that would prevent the registration of
the Company or limit its ability to provide MasterCard and Visa transaction
processing services would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Government Regulation" and "-- Payment Clearance Systems."
Customer Attrition. In the consumer market, the Company had an average
annual customer attrition rate of 19% for the twelve months ended June 30,
1996. Such attrition rate is approximately 20% higher than the Company's
historical customer attrition experiences. The higher attrition rate is due
primarily to the competition from ISC for bill payment processing for Quicken.
Most of the customer attrition occurs within the first few months of a new
customer's commencement of use of the services while longer-term customers have
significantly lower attrition rates. Nonetheless, there can be no assurance
that the Company will not experience higher customer attrition rates in the
future. Increased levels of attrition could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Services and Related Products."
Limited Prior Market; Volatility of Stock Price. Prior to September 28,
1995, there was no public market for the Company's Common Stock. Although the
Company is listed on the Nasdaq National Market, there can be no assurance that
an active or liquid trading market in the Company's Common Stock will continue.
The market price of the Company's Common Stock is subject to significant
fluctuations in response to variations in quarterly operating results, the
failure of the Company to achieve operating results consistent with securities
analysts' projections of the Company's performance, and other factors. The
stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental stage companies. Such fluctuations and
volatility have often been unrelated or disproportionate to the operating
performance of such companies. Factors such as announcements of the
introduction of new or enhanced services or related products by the Company or
its competitors, announcements of joint development efforts or corporate
partnerships in the electronic commerce market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to the Company or its competitors may have a significant impact
on the market price of the Company's Common Stock.
Control by Principal Stockholders. At June 30, 1996, the directors,
executive officers and principal stockholders of the Company and their
affiliates collectively owned approximately 40% of the outstanding the
Company's Common Stock. As a result, these stockholders will be able to
exercise significant influence over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying
or preventing a change in control of the Company.
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price.
At June 30, 1996, the Company had 41,517,264 shares of the Company's Common
Stock outstanding. Of these shares, 13,968,960 shares are held by nonaffiliates
of the Company and are freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The holders of the remaining 27,598,304 shares are entitled to resell
them only pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder such as an exemption provided
by Rule 144, Rule 145, or Rule 701 under the Securities Act. Additionally, as
of June 30, 1996, the Company had outstanding options to purchase 2,908,218
shares of the Company's Common
-28-
29
Stock at a weighted average exercise price of $4.58, of which options for
1,433,781 shares of the Company's Common Stock were exercisable as of June 30,
1996 at a weighted average exercise price of $1.16.
Additionally, the 5,692,734 shares of the Company's Common Stock issued by
the Company to the shareholders of Servantis on February 21, 1996 in connection
with the Servantis Acquisition are available for resale, subject in certain
cases to the quarterly volume limitations of Rules 144 and 145 under the
Securities Act.
Further, the 2,805,652 shares of the Company's Common Stock issued by the
Company to the shareholders of Security APL on May 9, 1996 in connection with
the Security APL Acquisition will be available for resale, subject in certain
cases to the quarterly volume limitations of Rules 144 and 145 under the
Securities Act. In connection with the Security APL Acquisition, the
shareholders of Security APL entered into a Registration Rights Agreement with
the Company. The Registration Rights Agreement provides that shareholders of
Security APL will receive three demand registration rights, the first being
exercisable after September 1, 1996. The subsequent demand registration rights
will be available no earlier than 180 days after the effectiveness of a
previous registration period. The shares of the Company's Common Stock received
in the Security APL Acquisition will no longer be registrable after May 9,
1998. During each registration period, the Security APL shareholders who hold
in the aggregate more than 50% of the then registrable shares will be able to
demand registration of up to 25% of the original number of shares received in
the Security APL Acquisition as long as the aggregate price to the public, net
any underwriting discounts and commissions, of the registered shares will
exceed $5,000,000. In addition to demand registration rights, if at any time or
from time to time on or before January 9, 1998, the Company shall determine to
register any of its shares, Security APL shareholders will have the opportunity
to include their shares in such registration and in any underwriting involved
with the registration. These "piggy-back" registration rights are subject to
certain limitations, including the right of the Company to exclude shares from
an underwritten offering if the managing underwriter determines that market
conditions require such limitation.
Sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could adversely affect the market price of
the Company's Common Stock.
Anti-Takeover Provisions; Certain Provisions of Delaware Law; Certificate
of Incorporation and By-Laws. Certain provisions of Delaware law the Company's
Certificate of Incorporation and By-Laws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. The Company's Certificate
of Incorporation provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. Such classification of
the Board of Directors expands the time required to change the composition of a
majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. Certain provisions of Delaware law and the
Company's Certificate of Incorporation allow the Company to issue preferred
stock with rights senior to those of the Company's Common Stock without any
further vote or action by the stockholders. The issuance of the Company's
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of the Company's Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Company's Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Company's Common Stock.
Government Regulation. Management believes that the Company is not
required to be licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services.
There can be no assurance that a federal or state agency will not attempt to
regulate providers of electronic commerce services such as the Company which
could impede the Company's ability to do business in the regulator's
jurisdiction. In addition, through its processing agreements, the Company
agrees to comply with the data, recordkeeping, processing and other
requirements of applicable federal and state laws and regulations, Federal
Reserve Bank operating letters and the National Automated Clearing House
Association Operating Rules imposed on the Company's processing banks. In
conducting various aspects of its business, the Company is subject to various
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code, and is also subject to the electronic funds transfer
rules embodied in Regulation E, promulgated by the Federal Reserve Board. Given
the expansion of the electronic commerce market, it is possible that the
Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
it is possible that Congress or individual
-29-
30
states could enact laws regulating the electronic commerce market. If
enacted, such laws, rules and regulations could be imposed on the Company's
business and industry and could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Government Regulation."
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and funds from
operations will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements both for the short-term and through at
least December 31, 1997. The Company may need to raise additional funds through
public or private debt or equity financings in order to take advantage of
unanticipated opportunities, including more rapid expansion or acquisitions of
complementary businesses or technologies, or to develop new or enhanced
services and related products or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new or enhanced services and
related products or otherwise respond to unanticipated competitive pressures
and the Company's business, operating results and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on CompuServe. The Company has an agreement with CompuServe to
collect monthly subscription fees from CompuServe's approximately four million
on-line interactive subscribers. The agreement renews automatically for three
year terms unless either party gives notice of intent not to renew at least 60
days before the end of the term. The Company and CompuServe renewed a three
year agreement in June 1995. The June 1995 renewal permits CompuServe to enter
into an agreement with another payment processor during the three year renewal
term, provided that CompuServe has given the Company reasonable opportunity to
bid on retaining CompuServe's payment collection business and pays the Company
a termination fee if the Company's services are not retained. Recently, the
Company substantially reduced its prices to CompuServe based on an increased
volume of transactions attributable to its business. During fiscal 1993, 1994
and 1995, the Company derived approximately 10%, 11% and 13%, respectively, of
its revenues from CompuServe. Such CompuServe revenues were less than 10% of
total revenues for transition fiscal 1996. Although the Company believes its
relationship with CompuServe is positive, there can be no assurance that
CompuServe will continue its business relationship with the Company upon
expiration or early termination of the agreement, that CompuServe will maintain
its number of subscribers at historical levels, or that the Company will
realize revenues from CompuServe at the levels it has in the past. Loss of the
relationship with CompuServe or a reduction of revenues from CompuServe will
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Services and Related Products" and Note
16 to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company leases approximately 107,000 square feet of office space and
12,500 square feet of warehouse space in Columbus, Ohio. The Company owns
approximately eight acres of real property adjacent to the Company's
headquarters. The Company owns a 51,000 square foot conference center in
Norcross, Georgia which includes lodging, training and fitness facilities for
the Company's customers and employees. Although the Company owns the building,
it is on land which is leased through 2003. The Company also leases office
facilities in Norcross, Georgia, Owings Mills, Maryland, Austin, Texas, Jersey
City, New Jersey, Chicago, Illinois, San Diego, California and Boston,
Massachusetts with square footage of approximately 229,000, 30,000, 32,000,
17,100, 10,000, 3,000 and 2,000 respectively. The Company believes that its
facilities are adequate for current and near-term growth and that additional
space is available to provide for anticipated growth.
The Company leases its corporate offices from the Director of Development,
State of Ohio, pursuant to the terms of a capitalized lease entered into as
part of the issuance by the State of Ohio of State Economic Development Revenue
Bonds (the "Bonds") in the aggregate principal amount of $7.5 million. Pursuant
to the terms of the lease, the Company pays monthly lease payments equal to the
amount of the debt service on the Bonds. Upon full payment of the amount due on
the Bonds, the Company has a right to purchase the real property from the
Director of Development, State of Ohio, for the sum of one dollar. Under the
terms of the lease, the Company has the right to prepay all amounts owed
thereunder without any prepayment penalty. See "Item 13. Certain Relationships
and Related Transactions."
-30-
31
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 20, 1996 for
the purpose of electing a Class I Director of the Company, to serve until the
1999 Annual Meeting of Stockholders or until his successor is elected and
qualified.
Management's nominee for Class I director as listed in the proxy statement
was elected with the following vote:
NUMBER OF SHARES VOTED
----------------------------------------------------------------
FOR AGAINST ABSTAIN
------------------- ------------------ -----------------
George R. Manser 31,639,967 9,282 0
-31-
32
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "CKFR." The following table sets forth,
for the periods indicated, the high and low sales prices for the Company's
Common Stock, as reported on the Nasdaq National Market. Information with
respect to the Company commences on September 28, 1995, when the Company's
Common Stock was first offered to the public.
COMPANY COMMON STOCK
---------------------------------------------
CALENDAR PERIOD HIGH LOW
- ---------------------------------------------------- ------------------- --------------------
Fiscal 1995:
Third Quarter (September 28 to September 30) $22.875 $19.75
Fourth Quarter $29.375 $16.00
Transitional Fiscal 1996:
First Quarter $26.375 $16.50
Second Quarter $23.50 $16.875
Fiscal 1997:
First Quarter (through September 16, 1996) $21.625 $10.75
The number of record holders of the Company's Common Stock as of September
16, 1996, was 501. The closing sales price of the common stock on September 16,
1996, was $21.25.
The Company has paid no cash dividends since 1986. The Company presently
anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on
the Company's Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data for the six months ended June 30,
1996 and each of the years in the three year period ended December 31, 1995 and
as of June 30, 1996 and as of December 31, 1994 and 1995 have been derived from
the Company's financial statements included elsewhere in this Form 10-K which
have been audited by Deloitte & Touche LLP, independent certified public
accountants, whose report thereon is also included elsewhere in this Form 10-K.
The selected consolidated financial data for the years ended December 31, 1991
and 1992 and as of December 31, 1991, 1992, and 1993 have been derived from
audited financial statements of the Company which are not included in this Form
10-K. The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
-32-
33
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- ----------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and
merchant discount $16,322 $22,201 $28,986 $38,282 $49,330 $ 33,305
License fees -- -- -- -- -- 10,970
Maintenance fees -- -- -- -- -- 1,978
Other 9,334 -- 1,906 984 -- 4,787
------- ------- ------- ------- ------ ---------
Total revenues 25,656 22,201 30,892 39,266 49,330 51,040
Expenses:
Cost of processing, servicing and support 14,800 14,772 19,516 25,787 32,293 40,352
Research and development 2,960 2,418 3,678 4,826 7,009 10,177
Sales and marketing 3,566 3,466 3,730 4,553 7,405 17,513
General and administrative 1,697 1,725 2,466 2,717 4,288 8,806
In process research and development -- -- -- -- -- 122,358
------- ------- ------- ------- ------ ---------
Total expenses 23,023 22,381 29,390 37,883 50,995 199,206
------- ------- ------- ------- ------ ---------
Income (loss) from operations 2,633 (180) 1,502 1,383 (1,665) (148,166)
Interest:
Income 493 171 165 298 2,135 1,659
Expense (331) (230) (279) (795) (645) (325)
------- ------- ------- ------- ------ ---------
Income (loss) before income taxes 2,795 (239) 1,388 886 (175) (146,832)
Income tax expense (benefit) 1,407 (159) 368 400 40 (8,629)
------- ------- ------- ------- ------ ---------
Income (loss) before extraordinary item 1,388 (80) 1,020 486 (215) (138,203)
Extraordinary item 1,094 -- -- -- -- (364)
------- ------- ------- ------- ------ ---------
Net income (loss) $ 2,482 $ (80) $ 1,020 $ 486 $ (215) $(138,567)
------- ------- ------- ------- ------ ---------
Income (loss) per common and equivalent
share before extraordinary item $ 0.05 -- $ 0.04 $ 0.02 $(0.01) $ (3.69)
Net income (loss) per common and equivalent
share $ 0.09 -- $ 0.04 $ 0.02 $(0.01) $ (3.70)
Weighted-average common and equivalent
shares outstanding 27,153 27,127 26,886 27,103 28,219 37,420
BALANCE SHEET DATA:
Working capital $ 2,884 $ 304 $ 623 $11,399 $81,792 $ 45,496
Total assets 9,820 8,059 17,669 30,512 115,642 196,230
Long-term obligations, less current portion 1,900 1,275 8,968 8,213 7,282 8,324
Total Stockholders' equity 2,985 1,915 2,985 16,372 99,325 137,675
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company was founded in 1981 to provide electronic collection services
to businesses. This expertise was expanded in the late 1980s through the
introduction of electronic bill payment services for consumers. As a result of
two significant acquisitions in 1996, the company now operates in two business
segments -- Electronic Commerce and Financial Application Software. The
Company's electronic transaction processing services, software and related
products are targeted to financial institutions and businesses and their
customers.
Electronic Commerce. Electronic Commerce services offered to financial
institutions include electronic bill payment, electronic home banking,
investment portfolio management services and investment trading and reporting
services. The Company generates revenues based on the number of customers using
the services, transaction fees and
-33-
34
implementation fees. Services are provided under contracts with the financial
institutions, which typically have three to five year terms and generally
provide for minimum fees if certain transaction volumes are not met.
On May 9, 1996, the Company acquired, Security APL, Inc. ("Security APL")
for $53 million plus the assumption of approximately $5.5 million of
liabilities through the issuance of 2.8 million shares of common stock.
Security APL is a full-service provider of fully integrated, customized
portfolio software services, including performance measurement and trade and
reporting systems for institutional money managers. Security APL's operations
are included in the consolidated results of operations from the date of the
acquisition.
For businesses, the Company provides automatic payment collection services
to companies in the online interactive services, Internet access, cellular,
paging, direct marketing, health and fitness and various other service
industries. The Company generates revenues from transaction fees, credit card
discount fees and implementation fees. The related credit card interchange
costs are included in processing and servicing expenses. Services are provided
under contracts typically of three year terms and generally provide for minimum
fees if certain transaction volumes are not met.
The Company also offers its bill payment and portfolio management services
directly to consumers. Generally, these services are offered through strategic
partner alliances, whereby the Company pays customer acquisition fees or
royalties for new customers generated by partners.
Processing and servicing revenues include revenue from transaction
processing, electronic funds transfer and monthly service fees. The Company
derives merchant discount revenue from businesses, who pay a negotiated
discount rate to the Company for credit card transactions. The merchant
discount rate for businesses is established when the Company initiates the
processing relationship with the merchant and negotiates a discount rate which
is set at a percentage of the dollar amount of each credit card transaction.
The Company collects the majority of its monthly processing and servicing
fees and merchant discount revenues from customers electronically by deducting
such fees from their accounts. The capacity to collect service and other
revenues electronically enhances the Company's cash flow compared to other
service companies, which typically experience longer payouts on their accounts
receivables. Generally, the Company realizes greater operational efficiencies
and margins as electronic payments to merchants increase, displacing
paper-based transactions. In June 1996, the Company processed 37% of all
payments to merchants electronically, a 4% increase over June 1995.
The Company intends to aggressively promote the acceptance of its
electronic commerce services and rapidly expand its customer base. To achieve
these objectives, the Company intends to accelerate investment in new services
and related products, pursue aggressive pricing policies, including offering a
new lower cost standard bill payment service for users who are interested only
in bill payments, and increase marketing expenses. Specifically, the Company
announced a new series of services and pricing options in September 1995 in an
attempt to appeal to various segments of the Company's markets. One such option
is to offer a bill payment service at a lower cost in order to target new users
and users who are interested only in the electronic bill payment aspect of the
Company's services. Although these initiatives may adversely impact the
Company's short-term profitability, the Company expects that these initiatives
will allow it to maintain and enhance its leading position in the rapidly
growing electronic commerce market.
Financial Application Software. Financial Application Software includes
end-to-end software products for Automated Clearing House ("ACH") processing,
account reconciliation, wire transfers, mortgage loan origination and
servicing, lease accounting and debt recovery. The Company generates revenues
by granting software licenses, through on-going maintenance contracts and
through consulting fees.
The Company started operating in the financial application software
business segment with the acquisition of Servantis Systems Holdings, Inc.
("Servantis") on February 21, 1996. Servantis was acquired for $165.1 million
plus the assumption of liabilities of approximately $38.3 million through the
issuance of 5.7 million of shares of common stock valued at $20.00 per share,
$42.5 million paid to retire Servantis debt and the assumption of stock
options.
Financial application software products are generally granted as perpetual
licenses. Revenue from software license agreements is recognized upon delivery
of the software if there are no significant post-delivery obligations. The
-34-
35
revenue related to significant post-delivery obligations is deferred and
recognized using the percentage-of-completion method. Maintenance fee revenue
is recognized ratably over the term of the related contractual support period,
generally 12 months.
RESULTS OF OPERATIONS
On April 19, 1996, the Company elected to change its fiscal year end from
December 31 to June 30. To assist in the analysis of the results of operations
for the six months ended June 30, 1996, results from the unaudited period for
the six months ended June 30, 1995 are also provided.
The following table sets forth percentages of revenue represented by
certain consolidated statements of operations data:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Expenses:
Cost of processing, servicing and support 63.2 65.7 65.5 65.5 79.1
Research and development 11.9 12.3 14.2 13.1 19.9
Sales and marketing 12.1 11.6 15.0 13.4 34.3
General and administrative 8.0 6.9 8.7 8.3 17.3
In process research and development 0.0 0.0 0.0 0.0 239.7
------ ------ ------ ------ ------
Total expenses 95.2 96.5 103.4 100.3 390.3
------ ------ ------ ------ ------
Income (loss) from operations 4.8 3.5 (3.4) (0.3) (290.3)
Interest:
Income 0.5 0.8 4.3 2.3 3.3
Expense (0.8) (2.0) (1.3) (1.4) (0.6)
------ ------ ------ ------ ------
Income (loss) before income taxes 4.5 2.3 (0.4) 0.6 (287.7)
Income tax expense (benefit) 1.2 1.1 0.1 0.3 (16.9)
------ ------ ------ ------ ------
Income (loss) before extraordinary item 3.3% 1.2% (0.4)% 0.3% (270.8)%
====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues. Processing servicing and merchant discount revenues increased by
41.2% from $23.6 million for the six months ended June 30, 1995 to $33.3
million for the six months ended June 30, 1996. The increase was due primarily
to $5.7 million of processing and servicing revenues recognized from the
acquisitions of Servantis, Security APL and Interactive Solutions Corporation,
a 20% increase in the number of bill payment and home banking consumers (prior
to consumers acquired from Servantis) and a 17% increase in the number of
transactions processed. In June 1995, the Company reduced its per transaction
prices to a major business customer based on an increased volume of
transactions attributable to such customer as part of the Company's on-going
monitoring of its pricing structure in each of the markets in which it
competes. In addition, license fees, maintenance fees, and other revenue all
increased as a result of the business acquisitions.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses consist primarily of data processing costs, customer care and
technical support, and third party transaction fees, which consist principally
of credit card interchange fees, ACH transaction fees and the amortization of
software costs. Processing, servicing and support expenses, as a percentage of
revenues, were 65.5%, and 79.1% for the six months ended June 30, 1995 and 1996
respectively. Processing, servicing and support costs increased as a percentage
of revenue primarily due to a purchased profits adjustment related to the
Servantis acquisition. The estimated profits from deferred revenue at the
Servantis acquisition date are charged against the revenue when earned. This
charge to revenue was approximately $12.7 million for the six months ended June
30, 1996. Without this purchased profit charge, processing, servicing and
-35-
36
support costs would have been 63.3% of revenue for the six months ended June
30, 1996. The Company anticipates additional purchased profit charges of
approximately $8.0 million in the year ending June 30, 1997.
Research and Development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel. Research and development expenses were $3.1
million and $10.2 million, or 13.1% and 19.9% of revenue during the six months
ended June 30, 1995 and June 30, 1996, respectively. The increase was due to
$2.7 million of research and development incurred by the acquired companies,
plus development efforts on new and existing services and related products,
including Electronic Cash Disbursement for businesses, expanded home banking
offerings, greater capability payment processing systems and bill presentment.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales employees, public relations and advertising
costs, customer acquisition fees and royalties paid to distribution partners.
Sales and marketing costs were $3.2 million and $17.5 million, or 13.4% and
34.3% of revenue for the six months ended June 30, 1995 and 1996, respectively.
The significant increase as a percentage of revenue is due to $6.5 million for
a direct consumer marketing campaign, which has been discontinued, and $7.7
million of increased sales and marketing expenses incurred by the acquired
companies.
General and Administrative. General and administrative expenses consist
primarily of salaries for administrative, executive, financial control and
human resource employees. General and administrative expenses were $2.0 million
and $8.8 million, or 8.3% and 17.3% of revenue for the six months ended June
30, 1995 and 1996, respectively. The increase was due to $3.9 million of
increased general and administrative expenses related to the acquired
companies, increased expenses related to being a public company (such as legal
fees and investor relations) and additional management, financial control and
human resources employees.
In Process Research and Development. The Company incurred $122.4 million
of in-process research and development costs for the six months ended June 30,
1996, in conjunction with the acquisitions of Servantis, Security APL and ISC.
The amounts to be allocated to in-process research and development for each of
the acquisitions were based on independent appraisals.
Interest. Interest income increased from $535,000 for the six months ended
June 30, 1995 to $1.7 million for the six months ended June 30, 1996. The
increase was due to the income from the investment of proceeds of the initial
public offering in September 1995.
Interest expense of $330,000 for the six months ended June 30, 1995 was
comparable to the interest expense of $324,00 for the six months ended June 30,
1996.
Income Taxes. The effective income tax rate (credit) was 45.1% and (5.9%)
for the six months ended June 30, 1995 and 1996, respectively. For the six
months ended June 30, 1995, the effective tax rate was more than the statutory
rate of 34% due to state and local taxes and non-deductible intangible asset
amortization. For the six months ended June 30, 1996, the effective tax benefit
was less than the statutory rate due primarily to non-deductible in-process
research and development and intangible asset amortization.
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
Revenues. Processing, servicing and merchant discount revenues increased
32.1% from $29.0 million in 1993 to $38.3 million in 1994, and 28.9% to $49.3
million in 1995. The increase was primarily attributable to 71% and 20%
increases in the number of consumers in 1994 and 1995 which resulted in
increased revenues of $3.3 million and $6.6 million, respectively, and 27.2%,
or $1.5 million, and 36.3%, or $2.6 million, increases in revenues from
merchant discounts in 1994 and 1995, respectively, as well as a significant
increase in the use of on-line services for which the Company collects user
subscription fees. The number of transactions processed for financial
institutions and businesses and their customers increased from 38.4 million in
1993, to 51.8 million in 1994, to 63.6 million in 1995. In June 1995, the
Company reduced its per transaction prices to a major business customer based
on an increased volume of transactions attributable to such customer as part of
the Company's on-going monitoring of its pricing structure in each of the
markets in which it competes.
-36-
37
Other revenues include reimbursement of services and related product
development expenses from strategic alliance partners. Other revenues decreased
48.4% from $1.9 million in 1993 to $1.0 million in 1994 due to the termination
of a joint development project with a strategic partner. There were no revenues
in this category in 1995.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses, as a percentage of revenues, were 63.2%, 65.7%, and 65.5% in
1993, 1994 and 1995, respectively. Excluding other revenues, processing,
servicing and support costs were 67.3%, 67.4% and 65.5% of revenues in 1993,
1994 and 1995, respectively. From 1993 to 1994, processing, servicing and
support costs increased as a percentage of revenue due to the mix of credit
card versus ACH transactions and the depreciation related to an enhancement of
the Company's data processing capabilities. The decrease in processing,
servicing and support costs as a percentage of revenue from 1994 to 1995 was
due primarily to more efficient customer care operations, resulting in slower
growth in the number of customer care employees compared to growth in revenue,
and the increase in electronic payments to merchants.
Research and Development. Research and development expenses were $3.7
million, $4.8 million and $7.0 million, or 11.9%, 12.3% and 14.2% of revenue
during 1993, 1994 and 1995, respectively. The increases in 1994 and 1995 were
due to continued development efforts on new and existing services and related
products, including Electronic Cash Disbursement, expanded home banking
offerings, greater capability payment processing systems and an Electronic
Exchange Network.
Sales and Marketing. Sales and marketing costs were $3.7 million, $4.6
million and $7.4 million, or 12.1%, 11.6% and 15.0% of revenue in 1993, 1994
and 1995, respectively. As a percentage of revenue, sales and marketing
expenses decreased in 1994 due to increased leverage from distribution
partners. In 1995, sales and marketing expenses increased as a percentage of
revenue due to increases in the sales staff in anticipation of new services and
opportunities in addition to increased public relations activities related to
new services and related products.
General and Administrative. General and administrative expenses were $2.5
million, $2.7 million and $4.3 million, or 8.0%, 6.9% and 8.7% of revenue in
1993, 1994 and 1995, respectively. In 1994, general and administrative costs
increased $251,000, but decreased significantly as a percentage of revenue due
to the significant increase in revenues. In addition, the Company had
previously leased land and a building for its former corporate offices. In June
1994, the lessor sold the building and relieved the Company of all its
liabilities related to the lease. This resulted in a gain of approximately
$223,000 for previously accrued lease liabilities. In 1995, general and
administrative expenses increased as a percentage of revenue due to the hiring
of additional operating, administrative and financial control employees to
manage current and expected future growth.
Interest. Interest income increased from $165,000 in 1993, to $298,000 in
1994 due to higher average cash balances and the income received from the
proceeds of the private placement of the Company's common stock in December
1994. Interest income increased to $2.1 million in 1995 due to the income from
the private placement in December 1994 and due to the income from the proceeds
of the initial public offering in September 1995.
Interest expense increased from $279,000 in 1993 to $795,000 in 1994 due
to the impact of a full year's financing costs incurred for the new corporate
offices compared to only three months in 1993, offset by the impact of the
redemption and conversion of $1.0 million of convertible subordinated
debentures outstanding in September 1994. Interest decreased to $645,000 in
1995 due to the redemption and conversion of the subordinated debentures in
1994, offset by increased interest related to new capital lease obligations in
1994 and 1995.
Income taxes. The effective income tax rate was 26.5% and 45.1% in
1993 and 1994, respectively. The 1993 effective tax rate was less than the
statutory federal rate of 34%, due to the benefit of reducing the valuation
allowance for deferred tax assets. In 1994, the effective tax rate was more
than the statutory federal tax rate of 34% due primarily to state and local
taxes and non-deductible intangible asset amortization. In 1995, the Company
recognized a $40,000 tax expense, while incurring a pre-tax loss of $175,000,
primarily due to state and local taxes and non-deductible intangible asset
amortization.
-37-
38
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through cash flows
generated from operations, the sale of equity and debt securities, and capital
lease financing. The Company's operating activities provided cash of $2.7
million and $2.4 million for the years ended December 31, 1994 and 1995,
respectively, and used cash of $6.6 million for the six months ended June 30,
1996.
The Company invested in property additions, primarily computer related
equipment, of $1.0 million, $3.4 million and $7.1 million for the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively. In addition, the Company invested $54.1 million in investments
in 1995, offset by maturities of $37.7 million, with the proceeds from a
private placement of the Company's common stock in December 1994, and the
proceeds from the initial public offering in September 1995. For the six months
ended June 30, 1996, the Company invested $39.4 million, net of cash acquired,
for the acquisition of Servantis and Security APL. These investments were
partially funded through $10.6 million of maturities and sales of investments.
In 1994, the Company repaid $500,000 of convertible subordinated
debentures and notes payable. The Company paid capital lease obligations of
$711,000 in 1994 and $1.0 million in 1995. In addition, in September 1995, the
Company issued 4,975,310 shares of the Company's common stock in the initial
public offering for an aggregate $82.7 million. For the six months ended June
30, 1996, the Company borrowed $1.1 million under an unsecured loan, received
$871,000 from the exercise of stock options and paid principal obligations
under capital leases of $571,000.
The Company's cash and cash equivalents and short term investments were
$39.1 million at June 30, 1996, a decrease of $45.8 million from December 31,
1995. As of June 30, 1996 and 1995, the Company's ratio of current assets to
current liabilities was 2.0 to 1.0 and 10.4 to 1.0, respectively, and working
capital was $45.5 million and $81.8 million, respectively. The significant
decrease in the current ratio and working capital was due to the acquisition of
Servantis and Security APL.
In August 1996, the Company signed a definitive agreement to sell certain
software for $20 million. The sale is expected to close in September. In
September 1996, the Company signed a definitive agreement to purchase Intuit
Services Corporation for 12.6 million shares of Company common stock. The
Company also signed a Service and License Agreement with Intuit that requires a
$10 million payment upon the closing of the ISC acquisition, and an additional
payout of $10 million on October 1, 1997. The Company expects to incur a
yet-to-be-determined in-process research and development charge in the quarter
the ISC acquisition closes. Certain stockholders have an option to sell up to
280,565 shares of common stock to the Company at $19 per share. Such option
expires no later than September 30, 1996.
The Company believes that the cash equivalents and investments will be
sufficient to meet the Company's presently anticipated working capital and
capital expenditure requirements through at least December 31, 1997. To the
extent that the Company needs additional capital resources, the Company
believes that it will have access to both bank financing and capital leasing
for additional facilities and equipment.
INFLATION.
The Company believes the effects of inflation have not had a significant
impact on the Company's results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, services and related products, prices, and other factors discussed in
the Company's prior filings with the Securities and Exchange Commission.
-38-
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, together with
reports thereon from Deloitte & Touche LLP are set forth on pages F-1 through
F-20 hereof (see Item 14 of this Annual Report for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and corporate officers of the Company
are as follows:
NAME AGE POSITION
Peter J. Kight 40 President, Chief Executive Officer and Chairman of the Board
Mark A. Johnson 43 President of Business Services, and Director
Howard S. Baulch 43 Executive Vice President, Systems, Support and Development
Mark D. Phelan 42 Executive Vice President, Corporate Services
James S. Douglass 34 Executive Vice President, Finance and Chief Financial Officer
Kenneth J. Benvenuto 37 Executive Vice President, Retail Services
James M. Garrett(3) 38 Executive Vice President, Sales and Marketing
Lynn D. Busing 44 Executive Vice President, Corporate Banking
Claude A. Thomas 54 Executive Vice President, Business Development
Jay N. Whipple, III 39 Executive Vice President, Portfolio Services
Geoffrey D. Gill 30 Vice President, Finance
John M. Stanton 36 Vice President, Treasurer and Assistant Secretary
Curtis A. Loveland 49 Secretary
William P. Boardman 55 Director
George R. Manser(1)(2) 65 Director
Eugene F. Quinn(1)(2) 42 Director
Jeffrey M. Wilkins(1) 52 Director
____________
(1) Member of the Audit Committee.
(2) Member of Stock Option and Compensation Committee.
(3) Resigned in July 1996.
Directors of the Company are elected at the annual stockholder's meeting
for staggered three-year terms and serve until their successors are duly
elected and qualified. Executive officers of the Company are elected annually
by the Board of Directors and serve until their successors are duly elected and
qualified. There are no family relationships among directors and executive
officers of the Company.
Peter J. Kight is the founder of the Company and has served as Chairman,
President, and Chief Executive Officer since 1981. He has also served as
president of Servantis Systems Holdings, Inc. ("Servantis") since February
1996. Mr. Kight is a Director of Metatec Corporation, a publicly-held company
which distributes information utilizing CD ROM technology.
-39-
40
Mark A. Johnson has served as the President of Business Services of the
Company since 1996. He has been a Director of the Company since 1983. Mr.
Johnson served as Treasurer from 1993 to 1996, as Executive Vice President of
the Company from 1993 to 1996, as Senior Vice President of the Company from
1991 to 1993, and as a Vice President from 1982 to 1991.
Howard S. Baulch has served as Executive Vice President of Systems,
Support and Development from 1994 to present. From 1992 to July 1994, Mr.
Baulch served as Director of Systems Architecture for Mead Data Central. He
also served as Director of Quality Assurance for Mead Data Central from 1990 to
1992.
Mark D. Phelan has served as Executive Vice President of the Company in
various capacities from 1992 to present. From 1982 to 1992, Mr. Phelan served as
a Sales Vice President of AT&T Corporation, a worldwide telecommunications
company.
James S. Douglass has served as Executive Vice President of Finance and
Chief Financial Officer of the Company since September 1996. From 1994 to 1996,
Mr. Douglass was Vice President-Corporate Controller and Chief Accounting
Officer for Medaphis Corporation. From 1988 to 1994, Mr. Douglass served in
various capacities with KPMG Peat Marwick LLP, most recently as senior manager.
Kenneth J. Benvenuto has served as Executive Vice President of the Company
since March 1996. From 1994 to 1996, he was employed by Servantis as the
Treasury Products Division President. From 1993 to 1994, Mr. Benvenuto served as
Vice President of Best Programs, Inc., an accounting software firm. From 1986 to
1993, he was an Executive Vice President of Mitchell Humphrey & Company, a
client/server-based financial management software firm.
James M. Garrett has served as Executive Vice President of Sales and
Marketing of the Company since March 1996. From 1995 to 1996, he was employed
by Servantis, most recently as Executive Vice President of Marketing and
Business Development. From 1991 to 1995, Mr. Garrett served as President of
Group Eagle Consulting. While President of Group Eagle Consulting, Mr. Garrett
also served as Senior Vice President, Marketing and Sales for Cadtel Systems,
Inc. from 1991 to 1992, and as Director of Sales for Scientific Atlanta Inc.
from 1992 to 1994. Mr. Garrett resigned from the Company in July 1996.
Lynn D. Busing has served as Executive Vice President of Corporate Banking
of the Company since March 1996. From 1994 to 1996, he was employed by
Servantis most recently as Senior Vice President of the Corporate Banking
Group. From 1987 to 1993, Mr. Busing served as Vice President, U.S. Software
and Services of Digital Equipment Corporation.
Claude A. Thomas has served as Executive Vice President of Business
Development of the Company since March 1996. From 1993 to 1995, Mr. Thomas
served as Senior Vice President, Division Chief Executive Officer and Chief
Operating Officer of First Financial Management Corporation. From 1986 to 1993,
he served as Vice President, Financial Industry of Digital Equipment
Corporation.
Jay N. Whipple, III has served as Executive Vice President of Portfolio
Services of the Company since May 1996. Mr. Whipple was founder of Security
APL, Inc. and served as it's President, Chief Executive officer and Chairman of
the Board from 1978 to 1996.
Geoffrey D. Gill has served as Vice President of Finance of the Company
since April 1996. From 1994 to 1996, he was employed by Servantis as Vice
President of Finance. From 1988 to 1994, Mr. Gill served in various capacities
with Coopers & Lybrand L.L.P., most recently as audit manager.
John M. Stanton has served as Vice President and Treasurer of the Company
since March 1996. He served as Corporate Controller of the Company from 1994 to
1996, and as Chief Accounting Officer from 1995 to 1996. From 1982 to 1994, Mr.
Stanton served in various capacities with KPMG Peat Marwick LLP, most recently
as a Senior Manager.
-40-
41
Curtis A. Loveland has served as Secretary of the Company since 1983. Mr.
Loveland has been associated with the law firm of Porter, Wright, Morris &
Arthur since 1973 and a partner since 1979.
William P. Boardman has served as a Director of the Company since July
1996. Mr. Boardman has been a Senior Executive Vice President with Bank One
Corp. since 1984.
George R. Manser has served as a Director of the Company since 1983. Since
July 1994, Mr. Manser has served as Chairman of Uniglobe Travel (Capital
Cities) Inc., which franchises travel agencies in certain areas of the U.S.
From 1985 to 1994, he served as Chairman of North American National
Corporation, a life insurance holding company. Mr. Manser is a Director of
Cardinal Health Inc., a publicly-held wholesale drug distributor, State Auto
Financial Corporation, a publicly-held insurance company, AmeriLink
Corporation, a publicly-held cabling services company, and Hallmark Financial
Services, Inc., a publicly-held insurance services company. He is also an
Advisory Director to the Corporate Finance Department of J.C. Bradford & Co., a
NASD broker-dealer.
Eugene F. Quinn has served as a Director of the Company since 1994. Since
October 1994, Mr. Quinn has served as General Manager, Tribune Interactive
Services of Tribune Company, a publicly-held diversified media company. From
August 1991 to October 1994, he served as General Manager, Chicago Online of
Chicago Tribune Company. Mr. Quinn served as Associate Managing Editor of
Chicago Tribune Company from January 1984 to August 1991. Mr. Quinn is a
director of Open Market, Inc., a publicly held Internet software solutions
company.
Jeffrey M. Wilkins has served as a Director of the Company since 1990.
Since August 1989, Mr. Wilkins has served as Chairman and Chief Executive
Officer of Metatec Corporation, a publicly-held company which distributes
information utilizing CD ROM technology.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: a Stock Option and
Compensation Committee and an Audit Committee. The Stock Option and
Compensation Committee has the authority to (i) administer the Company's stock
option plans, including the selection of optionees and the timing of option
grants; and (ii) review and monitor key employee compensation policies and
administer the Company's management compensation plans. The members of the
Stock Option and Compensation Committee are Messrs. Manser and Quinn.
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and
non-audit assignments and related fees, the accounting principles used by the
Company in financial reporting, internal financial auditing procedures and the
adequacy of the Company's internal control procedures. Messrs. Manser, Quinn,
and Wilkins serve as members of the Audit Committee.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will receive a $500
retainer for each fiscal quarter, $500 for each Board meeting attended and $250
for each committee meeting attended, plus out-of-pocket expenses incurred in
connection with attendance at such meetings. Additionally, in the past,
non-employee directors also received stock options granted under the existing
stock option plans upon their election to the Board of Directors. Such options
have ranged from the right to acquire from 15,000 to 26,307 shares of the
Company's Common Stock. The exercise price for such options ranges from $0.57
to $14.25 per share. Such options vest 20% a year over a five year period and
terminate 10 years after grant.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who are beneficial owners of more
than ten percent of the Company's Common Stock ("reporting persons") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Reporting persons are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
-41-
42
forms filed by them. Based on its review of the copies of Section 16(a) forms
received by it, the Company believes that all filing requirements applicable to
its reporting persons were complied with during Transitional Fiscal 1996.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during the period from July 1, 1995 through June 30, 1996 to the Company's
Chief Executive Officer and each of the Company's other executive officers
whose annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- --------------
AWARDS
--------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) (#) ($)(2)
- -------------------------------------- --------- --------------- -------------- -------------- ---------------
PETER J. KIGHT 1996 250,000 33,000 1,000 0
President, Chief Executive Officer, 1995 248,173 33,000 0 0
and Chairman of the Board 1994 154,615 79,333 0 0
MARK A. JOHNSON 1996 161,538 13,500 1,000 1,820
President of Business Services 1995 154,711 38,000 0 1,698
1994 138,077 20,000 0 1,365
MARK D. PHELAN 1996 155,000 23,300 0 899
Executive Vice President of 1995 154,904 47,800 0 1,763
Corporate Services 1994 149,615 29,800 0 1,831
HOWARD S. BAULCH(3) 1996 129,904 11,813 0 2,781
Executive Vice President of Systems, 1995 124,904 35,000 0 2,541
Support and Development 1994 51,231 12,500 263,070 0
JAMES M. GARRETT(4) 1996 51,162 108,750 25,000 0
Executive Vice President of
Sales and Marketing
- ----------------------
(1) Reference to 1996 is for the period from July 1, 1995 to June, 30,
1996, while reference to 1995 and 1994 is for the period from January
1 to December 31 for those respective years.
(2) Includes matching contribution to the Company's 401(k) Plan.
(3) Mr. Baulch was employed by the Company effective July 28, 1994.
(4) Mr. Garrett was employed by the Company effective February 21, 1996
and resigned in July 1996.
-42-
43
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to the Named Executive Officers under the Company's 1995 Stock
Option Plan:
Individual Grants (1)
- -------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (D) (e)
% of Total Options
Number of Securities Granted to
Underlying Options Employees in Fiscal Exercise Price
NAME GRANTED (#) YEAR ($/SH) EXPIRATION DATE
---- ----------- ---- ------ ---------------
Peter J. Kight 1,000 0.2% 19.38 04/19/06
Mark A. Johnson 1,000 0.2% 19.38 04/19/06
Mark D. Phelan 0 - - -
Howard S. Baulch 0 - - -
James M. Garrett 25,000 5.0% 21.88 02/21/06
(1) This table covers the period from July 1, 1995 to June 30, 1996.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain information regarding the number and
value of stock options held by the Company's Named Executive Officers at June
30, 1996.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(1)
------------------------------ -------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ------------ ------------ -------------- ------------ ---------------
Peter J. Kight -0- -0- 315,684 211,456 5,986,947 3,991,298
Mark A. Johnson -0- -0- 72,812 49,542 1,386,705 924,482
Mark D. Phelan 105,355 1,960,393 300,089 -0- 5,715,195 -0-
Howard S. Baulch -0- -0- -0- 210,456 -0- 4,008,135
James M. Garrett -0- -0- 1,974 26,316 36,233 24,155
______________
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year
end (19.875 on June 28, 1996). An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price of the
option.
-43-
44
The following Compensation Committee Report and Performance Graph shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any of the Company's filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Stock Option and Compensation Committee has the authority and
responsibility to determine and administer the Company's officer compensation
policies and to establish the salaries of executive officers, the formula for
bonus awards to executive officers, and the grant of stock options to executive
officers and other key employees under the Company's 1995 Stock Option Plan.
The Stock Option and Compensation Committee consists solely of independent
directors of the Company who are not eligible to receive any stock options
under the 1995 Stock Option Plan, except pursuant to any formulas provided in
the plans. In general, the philosophy of the Stock Option and Compensation
Committee is to attract and retain qualified executives, reward current and
past individual performance, provide short-term and long-term incentives for
superior future performance, and relate total compensation to individual
performance and performance of the Company.
The determination of executive officer base salaries for Transition Fiscal
1996, including increases to base salaries, was based primarily on subjective
factors, such as the Stock Option and Compensation Committee's perception of
individual performance and the executive officer's contribution to the overall
performance of the Company, and not on specific criteria. No specific weight
was given to any of these factors because each of these factors was considered
significant and the relevance of each varies depending upon an officer's
responsibilities. These factors were also taken into account when the Stock
Option and Compensation Committee established Peter J. Kight's salary at
$250,000 for transition fiscal 1996.
The purposes of the Company's 1995 Stock Option Plan is to provide
long-term incentives to key employees and motivate key employees to improve the
performance of the Company's Common Stock. Stock option awards are considered
annually by the Stock Option and Compensation Committee. The value of the stock
options awarded is entirely dependent upon the Company's stock performance over
a period of time.
The number of shares of the Company's Common Stock subject to the options
granted during transition fiscal 1996 was determined based on a subjective
evaluation of the past performance of the individual, the total compensation
being paid to the individual, the individual's scope of responsibility, and the
anticipated value of the individual's contribution to the Company's future
performance. No specific weight was given to any of these factors. Although
information as to the options awarded to each executive officer during previous
years was reviewed by the Stock Option and Compensation Committee, the Stock
Option and Compensation Committee did not consider the total amount of options
held by an officer in determining the size of an option awarded for transition
fiscal 1996.
Each stock option awarded during transition fiscal 1996 had an exercise
price equal to the fair market value of the underlying Common Stock of the
Company on the date of the grant. The options granted during transition fiscal
1996 vest and become exercisable at the rate of 20% per year if the option
holder remains employed at the time of vesting and terminate ten (10) years
from the date of grant. All options granted during transition fiscal 1996 to
employees are subject to certain forfeiture restrictions.
The Budget Reconciliation Act of 1993 amended the Code to add Section
162(m) which bars a deduction to any publicly held corporation for compensation
paid to a "covered employee" in excess of $1,000,000 per year. The Compensation
Committee does not believe that this law will impact the Company in the near
term because the current level of compensation for each of the Company's
executive officers is well below the $1,000,000 salary limitation.
STOCK OPTION AND COMPENSATION COMMITTEE
George R. Manser
Eugene F. Quinn
(For transition fiscal 1996)
-44-
45
PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE NASDAQ STOCK MARKET - US INDEX
AND THE S&P COMPUTER SOFTWARE & SERVICES INDEX
The following Performance Graph compares the performance of the Company
with that of the Nasdaq Stock Market - US Index and the S&P Computer Software &
Services Index, which is a published industry index. The comparison of the
cumulative total return to stockholders for each of the periods assumes that
$100 was invested on September 27, 1995 (the effective date the Company's
Common Stock was registered under the Securities Exchange Act of 1934, as
amended), in the Common Stock of the Company, and in the Nasdaq Stock Market -
US Index and the S&P Computer Software & Services Index and that all dividends
were reinvested.
CheckFree Corporation S&P NASDAQ
--------------------- --- ------
9/95 100 100 100
12/95 107.5 103.7257 100.9016
6/96 99.375 132.0183 113.65
-45-
46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information as of September 16, 1996
regarding beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to own beneficially 5% or more of the Company's
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
the Named Executive Officers, excluding Mr. Garrett who resigned in July 1996;
(iv) all current directors and executive officers as a group:
SHARES BENEFICIALLY OWNED (1)(2)
------------------------------------------------------
STOCKHOLDER NUMBER PERCENT
- ------------------------------------------------------------ ----------------------- -------------------------
Peter J. Kight (3) 6,620,607 15.7%
Mark A. Johnson 1,573,802 3.8%
Mark D. Phelan 474,140 1.1%
Howard S. Baulch 107,228 *
William P. Boardman - *
George R. Manser 26,307 *
Eugene F. Quinn 5,261 *
Jeffrey M. Wilkins 52,614 *
All directors and executive officers as a group 11,164,935 26.2%
(15 persons)(3)
Nationwide Mutual Life 3,705,341 8.9%
Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Tribune Company 2,686,155 6.5%
435 North Michigan Avenue
Chicago, Illinois 60611
- ----------------------
* Represents beneficial ownership of less than 1% of the Company's
outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those shares.
(2) Includes shares purchasable within 60 days after September 16, 1996
pursuant to the exercise of options covering 420,912 shares for Mr.
Kight, 72,812 shares for Mr. Johnson, 300,089 shares for Mr. Phelan,
52,614 shares for Mr. Baulch, 0 shares for Mr. Boardman, 26,307 shares
for Mr. Manser, 5,261 shares for Mr. Quinn, 52,614 shares for Mr.
Wilkins, and 961,488 shares for all directors and executive officers as
a group.
(3) Includes 1,800 shares held by the Peter J. Kight and Teresa J. Kight
1995 Children's Trust. Mr. Kight disclaims ownership of such shares in
which he has no pecuniary interest.
-46-
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Manser and Quinn, neither of whom are employees of the
Company, are members of the Stock Option and Compensation Committee. Since
1994, Mr. Kight has served as a member of Metatec Corporation's Board of
Directors, of which Mr. Wilkins is Chairman and Chief Executive Officer.
TRANSACTIONS BETWEEN EXECUTIVE OFFICERS AND THE COMPANY
On December 16, 1992, Mark A. Johnson, President of Business Services of
the Company, and Mark D. Phelan, Executive Vice President of the Company, along
with certain other non-executive officers of the Company, purchased shares of
Common Stock from two stockholders of the Company. In order to pay for those
shares, Mr. Johnson, Mr. Phelan and certain other non-executive officers of the
Company entered into agreements with the Company pursuant to which the Company
loaned an aggregate of $501,447 to such officers of which none remains
outstanding as of June 30, 1996. Mr. Johnson and Mr. Phelan borrowed $100,272
and $100,293, respectively, and Mr. Johnson and Mr. Phelan pledged to the
Company the Common Stock acquired with the proceeds of the loans. These loans
were evidenced by promissory notes due December 31, 1997, bearing interest at a
rate of 6.15% per annum, payable annually. In addition to the restrictions
imposed by the pledge, the transfer of the shares by each of these officers is
also restricted by agreements which give the Company an option to purchase such
officer's shares if that officer's employment with the Company is terminated.
The entire principal amount of each note is due on December 31, 1997, except
that, if the officer's employment with the Company is terminated, the entire
unpaid principal and unpaid accrued interest becomes due and payable within 60
days after such termination. In December 1995, Mr. Johnson repaid all
obligations under his promissory note. In June 1996, the Company agreed to
forgive all principal and interest payable under Mr. Phelan's promissory note.
Jay N. Whipple III, the Company's Executive Vice President of Portfolio
Services is a minority owner and Vice President of Jay N. Whipple Inc., a
consulting firm that provides services to the Company. Under the current
arrangement with Jay N. Whipple Inc., the Company pays Jay N. Whipple, Inc.
$8,500 per month for consulting services.
VOTING AGREEMENTS
Mr. Kight, Mr. Johnson, Greylock Limited Partnership ("Greylock"),
Highland Capital Partners Limited Partnership ("Highland"), and Tribune Company
("Tribune") entered into a voting agreement, dated December 2, 1994, pursuant
to which Mr. Kight, Mr. Johnson, Greylock and Highland agreed to vote all of
their shares of the Company's Common Stock in favor of the election to the
Company's Board of Directors of Eugene F. Quinn or such other nominee of
Tribune who is reasonably acceptable to Mr. Kight, Mr. Johnson, Greylock and
Highland. Additionally, Mr. Kight and Mr. Johnson agreed to vote, and Greylock
and Highland agreed to cause their nominees to the Company's Board of Directors
to vote, in their capacity as directors, in favor of the election of Tribune's
nominee to the Audit Committee of the Company's Board of Directors.
Additionally, Tribune agreed to vote all of its shares of the Company's Common
Stock in favor of the election to the Company's Board of Directors of (i) Mr.
Kight, (ii) Mr. Johnson, (iii) Mr. William S. Kaiser or such other nominee of
Greylock as shall be reasonably acceptable to Tribune, and (iv) Mr. Paul A.
Maeder or such other nominee of Highland as shall be reasonably acceptable to
Tribune. Mr. Kaiser, Class III Director, resigned from the Board of Directors
effective March 21, 1996. Mr. Maeder, Class I Director, resigned from the Board
of Directors effective April 17, 1996. Messrs. Kaiser and Maeder are general
partners of venture capital investment partnerships that purchased shares of
the Company in 1992 and either have distributed their shares to their
respective limited partners. This voting agreement was terminated on April 19,
1996.
In addition, Mr. Kight, Mr. Johnson and Tribune entered into a voting
agreement, dated April 19, 1996, pursuant to which Mr. Kight and Mr. Johnson
agreed to vote all of their shares of the Company's Common Stock in favor of
the election to the Company's Board of Directors of Mr. Quinn or such other
nominee of Tribune who is reasonably acceptable to Mr. Kight and Mr. Johnson.
Additionally, Mr. Kight and Mr. Johnson agreed to vote, in their capacity as
directors, in favor of the election of Tribune's nominee to the Audit Committee
of the Company's Board of Directors. Under this agreement, Mr. Quinn currently
represents Tribune on the Company's Board of Directors and on
-47-
48
the Audit Committee. Additionally, Tribune agreed to vote all of its shares of
the Company's Common Stock in favor of the election to the Company's Board of
Directors of Mr. Kight and Mr. Johnson. This voting agreement terminates on the
earlier of the date Tribune holds less than 50% of the shares of the Company's
Common Stock acquired from the Company in December 1994 pursuant to the terms
of a certain stock purchase agreement, dated as of December 2, 1994, between
Tribune and the Company (the "Tribune Agreement"), and from Mr. Kight in
January 1995 and any shares subsequently acquired by Tribune pursuant to the
exercise of the anti-dilution rights granted in the Tribune Agreement and
September 28, 2000.
MR. KIGHT'S GUARANTY
In 1993, the State of Ohio issued State Economic Development Revenue Bonds
in the aggregate principal amount of $7,515,000 pursuant to a certain trust
agreement between the Treasurer of Ohio and The Provident Bank, as trustee
("Provident"). The proceeds of the bonds were applied to the purchase of real
property which is now currently being leased by the Company from the Director
of Development, State of Ohio for its corporate offices in Columbus, Ohio. Mr.
Kight guaranteed the obligations evidenced by the bonds in order to induce
their issuance by the State of Ohio pursuant to a guaranty agreement, dated
August 1, 1993, made with Provident (the "Guaranty Agreement"). Under the
Guaranty Agreement, Mr. Kight's liability is limited to an amount equal to the
product of his percentage beneficial ownership of the Company multiplied by the
outstanding principal of the bonds; provided, however, that Mr. Kight's
liability may not exceed $2,200,000. The Company has agreed to indemnify and
reimburse Mr. Kight for any amount paid by him under the Guaranty Agreement.
Additionally, under the Guaranty Agreement, with certain limited exceptions,
the Director of Development's consent is required for Mr. Kight to sell or
otherwise dispose of his equity interest in the Company.
MISCELLANEOUS
Curtis A. Loveland, the Company's Secretary, is a partner in the law firm
of Porter, Wright, Morris & Arthur, which firm serves as general counsel to the
Company.
Tribune owns a 13% interest in Peapod, L.P. ("Peapod"). Peapod is a
business customer of the Company, which generated revenue of $56,953 in
transition fiscal 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements are included in
this Annual Report on Form 10-K:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1996 and as of
December 31, 1994 and 1995.
Consolidated Statements of Operations for the six months
ended June 30, 1996 and for each of the three years in the
period ended December 31, 1995.
Consolidated Statements of Stockholders' Equity for the six
months ended June 30, 1996 and for each of the three years in
the period ended December 31, 1995.
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and for the each of the three years in
the period ended December 31, 1995.
Notes to the Consolidated Financial Statements.
-48-
49
(2) The following financial statement schedule is included in this Annual
Report on Form 10-K and should be read in conjunction with the Consolidated
Financial Statements contained in the Annual Report.
Schedule II -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included
in the financial statements or the notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
2(a) Agreement and Plan of Merger, dated as of January
15, 1996, among the Company, Checkfree Acquisition
Corporation, and Servantis Systems Holdings, Inc.
(Reference is made to Exhibit 2 to the Current
Report on Form 8-K, dated January 15, 1996, filed
with the Securities and Exchange Commission on
January 16, 1996, and incorporated herein by
reference.)
2(b) Agreement and Plan of Merger, dated as of March 21,
1996, among the Company, ISC Acquisition
Corporation, and Security APL, Inc. (Reference is
made to Exhibit 2 to the Current Report on Form
8-K, dated March 21, 1996, as amended, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(c) Amendment to Agreement and Plan of Merger, dated as
of April 30, 1996, among the Company, ISC
Acquisition Corporation, and Security APL, Inc.
(Reference is made to Exhibit 2(c) to the Form 10-Q
for the quarter ended March 31, 1996, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(d) Agreement and Plan of Merger, dated as of September
15, 1996, among the Company, Checkfree Acquisition
Corporation II, Intuit Inc. and Intuit Services
Corporation. (Reference is made to Exhibit 2 to the
Current Report on Form 8-K, dated September 15,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the
Company. (Reference is made to Exhibit 3(a) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
3(b) Amended and Restated By-Laws of the Company.
(Reference is made to Exhibit 3(b) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII
-49-
50
of the Company's Amended and Restated By-Laws
(contained in the Company's Amended and Restated
By-Laws filed as Exhibit 3(b) hereto).
10(a) Checkfree Corporation 1995 Stock Option Plan.
(Reference is made to Exhibit 10(a) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(b) Checkfree Corporation Amended and Restated 1993
Stock Option Plan. (Reference is made to Exhibit
10(b) to Registration Statement on Form S-1, as
amended (Registration No. 33- 95738), filed with
the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(c) Checkfree Corporation Second Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 10(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(d) Checkfree Corporation Second Amended and Restated
1983 Incentive Stock Option Plan. (Reference is
made to Exhibit 10(d) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(e) Form of Indemnification Agreement. (Reference is
made to Exhibit 10(a) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(f) Schedule identifying material details of
Indemnification Agreements substantially identical
to Exhibit 10(e). (Reference is made to Exhibit
10(f) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(g) Voting Agreement, dated November 30, 1994, among
Peter J. Kight, Greylock Limited Partnership, and
Highland Capital Partners Limited Partnership.
(Reference is made to Exhibit 10(g) to Registration
Statement on Form S-1, as amended (Registration No.
33- 95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(h) Voting Agreement, dated December 2, 1994, among
Peter J. Kight, Mark A. Johnson, Greylock Limited
Partnership, Highland Capital Partners Limited
Partnership and Tribune Company. (Reference is made
to Exhibit 10(h) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(i) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Peter J.
Kight and the Company. (Reference is made to
Exhibit 10(i) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(j) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Mark A.
Johnson and the Company. (Reference is made to
Exhibit 10(j) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
-50-
51
10(k) Stock Purchase Agreement, dated December 2, 1994,
between the Company and Tribune Company. (Reference
is made to Exhibit 10(k) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(l) Stock Transfer Restriction Agreement, dated
December 2, 1994, among Peter J. Kight, Mark A.
Johnson, and Tribune Company. (Reference is made to
Exhibit 10(l) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(m) Investment Agreement, dated November 9, 1983, among
the Company (formerly, Aegis Systems, Inc.), The
Midland Mutual Life Insurance Company, The Columbus
Mutual Life Insurance Company, Grange Mutual
Casualty Company, and North American National Corp.
(Reference is made to Exhibit 10(m) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(n) Stock Purchase Agreement, dated March 17, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(n) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(o) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and The
Midland Mutual Life Insurance Company. (Reference
is made to Exhibit 10(o) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(p) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Columbus
Mutual Life Insurance Company. (Reference is made
to Exhibit 10(p) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(q) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Grange
Mutual Casualty Company. (Reference is made to
Exhibit 10(q) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(s) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Pan
Western Life Insurance Company. (Reference is made
to Exhibit 10(s) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(t) Subscription Agreement, dated December 31, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(t) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(u) Investment Agreement, dated September 20, 1989,
among the Company, Columbus Life Insurance Company,
Grange Mutual Casualty Company, and North American
National Corporation. (Reference is made to Exhibit
10(u) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-51-
52
10(v) Amending Agreement, dated November 30, 1994, and
letter agreement, dated September 24, 1992, between
the Company and Mark D. Phelan. (Reference is made
to Exhibit 10(v) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(w) Joint Development and Marketing Agreement, dated
August 2, 1995, between the Company and ADP, Inc.
(Reference is made to Exhibit 10(w) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(x) Bill Payment and Remote Banking Services Agreement,
dated March 25, 1993, between the Company and
MasterCard International Incorporated. (Reference
is made to Exhibit 10(x) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(y) Amendment to Bill Payment and Remote Banking
Services Agreement, dated December 1, 1994, between
the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(y)
to Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(z) Agreement and Release, dated October 16, 1995,
between the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(z)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.)**
10(aa) Electronic Bill Payment Services Marketing
Agreement, dated April 26, 1995, between the
Company and AT&T Corporation. (Reference is made to
Exhibit 10(z) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(bb) Amendment One to Electronic Bill Payment Services
Marketing Agreement, dated November 1, 1995,
between the Company and AT&T Corporation.
(Reference is made to Exhibit 10(bb) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(cc) Marketing and License Agreement, dated August 14,
1995, among the Company, Virtual Open Network
Environment, and Spyglass, Inc. (Reference is made
to Exhibit 10(aa) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(dd) Automatic Payment Collection Agreement, dated July
28, 1993, between the Company and CompuServe,
Incorporated (with addenda). (Reference is made to
Exhibit 10(bb) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(ee) Automatic Payment Collection Agreement, dated
August 22, 1994, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(cc) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-52-
53
10(ff) Data Capture Credit Card Terminal Processing
Agreement, dated August 22, 1994, between the
Company and Spry, Inc. (Reference is made to
Exhibit 10(dd) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(gg) Reproduction and Distribution Agreement, dated July
27, 1995, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(ee) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(hh) Letter of Intent, dated July 10, 1995, between the
Company and CyberCash, Inc. (Reference is made to
Exhibit 10(ff) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(ii) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech,
Inc. (Reference is made to Exhibit 10(gg) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(jj) Amendment to Bill Payment and Remote Banking
Services Agreement, dated July 1, 1995, between the
Company and FiTech, Inc. (Reference is made to
Exhibit 10(hh) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(kk) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ll) Merchant Processing Agreement, dated March 13,
1995, between the Company and Society National
Bank. (Reference is made to Exhibit 10(jj) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(mm) Cooperative Marketing Agreement, dated March 14,
1991, between the Company and Intuit Corporation
(including addendum and notice). (Reference is made
to Exhibit 10(kk) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(nn) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark D.
Phelan. (Reference is made to Exhibit 10(ll) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(oo) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark D. Phelan.
(Reference is made to Exhibit 10(mm) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
-53-
54
10(pp) Promissory Note, dated December 16, 1992, of Mark
D. Phelan. (Reference is made to Exhibit 10(nn) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(qq) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark A.
Johnson. (Reference is made to Exhibit 10(oo) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(rr) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark A. Johnson.
(Reference is made to Exhibit 10(pp) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ss) Promissory Note, dated December 16, 1992, of Mark
A. Johnson. (Reference is made to Exhibit 10(qq)
to Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(tt) Lease, dated August 1, 1993, between the Company
and The Director of Development of the State of
Ohio. (Reference is made to Exhibit 10(rr) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(uu) Guaranty Agreement, dated August 1, 1993, between
the Company and The Provident Bank. (Reference is
made to Exhibit 10(ss) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(vv) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33- 95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ww) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(xx) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company
as mortgagor and Society National Bank as
mortgagee. (Reference is made to Exhibit 10(vv) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(yy) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(zz) Commercial Note Variable Rate, dated January 3,
1995, of the Company. (Reference is made to Exhibit
10(xx) to Registration Statement on Form S-1, as
amended (Registration
-54-
55
No. 33-95738), filed with the Securities and
Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(aaa) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference
is made to Exhibit 10(yy) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(bbb) Agreement, dated August 29, 1995, between the
Company and Nationwide Mutual Insurance Company.
(Reference is made to Exhibit 10(zz) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ccc) Agreement, dated September 8, 1995, among the
Company, The Midland Life Insurance Company, The
Columbus Life Insurance Company, Grange Mutual
Casualty Company, and Pan Western Life Insurance
Company. (Reference is made to Exhibit 10(aaa) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ddd) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(eee) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by
reference.)**
10(fff) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by
reference.)**
10(ggg) License Agreement, December 29, 1995, between the
Company and Premiere Communications, Inc.
(Reference is made to Exhibit 10(ggg) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(hhh) Payment Services, Software Development and
Marketing Agreement, dated as of February 27, 1996,
between the Company and CyberCash. (Reference is
made to Exhibit 10(a) to the Form 10-Q for the
quarter ended March 31, 1996, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.) **
10(iii) Termination of Voting Agreement, dated as of April
19, 1996, among Peter J. Kight, Mark A. Johnson,
Greylock Limited Partnership, Highland Capital
Partners Limited Partnership and Tribune Company.
(Reference is made to Exhibit 10(b) to the Form
10-Q for the quarter ended March 31, 1996, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(jjj) Voting Agreement, dated as of April 19, 1996, among
Peter J. Kight, Mark A. Johnson, and Tribune
Company. (Reference is made to Exhibit 10(c) to the
Form 10-Q for the quarter ended March 31, 1996,
filed with the Securities and Exchange Commission,
and incorporated herein by reference.)
-55-
56
10(kkk) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(lll) Executive Employment Agreement between the Company
and Robert E. Bowers. (Reference is made to Exhibit
10(e) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(mmm) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(nnn) Executive Employment Agreement between the Company
and James M. Garrett. (Reference is made to Exhibit
10(g) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ooo) Executive Employment Agreement between the Company
and James Robert Lewis, III. (Reference is made to
Exhibit 10(h) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(ppp) Executive Employment Agreement between the Company
and Jay N. Whipple, III. (Reference is made to
Exhibit 10(i) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(qqq) * Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Powers of Attorney.
27 * Financial Data Schedule.
- -----------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K
since March 31, 1996:
Current Report on Form 8-K, dated April 19, 1996,
filed with the Securities and Exchange Commission on
April 23, 1996 (Item 8).
Current Report on Form 8-K, dated May 9, 1996, filed
with the Securities and Exchange Commission on May
20, 1996 (Items 2 and 7).
Current Report on Form 8-K/A No. 1, dated May 9,
1996, filed with the Securities and Exchange
Commission on July 22, 1996 (Items 2 and 7).
Current Report on Form 8-K dated July 2, 1996, filed
with the Securities and Exchange Commission on July
8, 1996 (Items 5).
-56-
57
(C) EXHIBITS
The exhibits to this report begin on page __.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent
auditors' report thereon are set forth on pages F-21 through F-22 hereof.
-57-
58
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND INDEPENDENT AUDITORS' REPORT
59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Checkfree Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Checkfree
Corporation and its subsidiaries as of December 31, 1994 and 1995 and June 30,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 and for the six months ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Checkfree Corporation and its
subsidiaries at December 31, 1994 and 1995 and June 30, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 in conformity
with generally accepted accounting principles.
Columbus, Ohio
August 22, 1996, except for Note 17 as to which
the date is September 15, 1996
DELOITTE & TOUCHE LLP
F - 1
60
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
ASSETS 1994 1995 1996
CURRENT ASSETS:
Cash and cash equivalents $ 2,208,725 $ 63,839,854 $ 20,987,355
Investments 11,819,937 21,012,141 18,089,029
Accounts receivable 1,862,496 3,389,084 29,516,548
Assets held for sale 20,000,000
Prepaid expenses and other 1,079,612 1,915,969 2,205,800
Refundable income taxes 144,119
Deferred income taxes 112,123 165,543
--------------- --------------- ---------------
Total current assets 17,082,893 90,466,710 90,798,732
PROPERTY AND EQUIPMENT - Net 12,156,280 13,559,180 36,567,141
OTHER ASSETS:
Capitalized software, net 493,054 285,554 34,407,680
Intangible assets, net 27,507,677
Investments 7,498,835 2,898,065
Other noncurrent assets 779,833 3,831,649 4,050,249
--------------- --------------- ---------------
Total other assets 1,272,887 11,616,038 68,863,671
--------------- --------------- ---------------
TOTAL $ 30,512,060 $ 115,641,928 $ 196,229,544
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 483,052 $ 706,459 $ 5,434,468
Accrued liabilities 2,994,545 5,632,852 14,876,861
Customer deposits 217,951 192,456 575,595
Current portion of long-term obligations 1,081,611 1,161,192 1,112,184
Deferred revenue 754,154 982,171 15,438,798
Income taxes payable 153,032 45,608
Deferred income taxes 7,819,505
-------------- --------------- ---------------
Total current liabilities 5,684,345 8,675,130 45,303,019
ACCRUED RENT AND OTHER 65,637 50,755 195,169
DEFERRED INCOME TAXES 176,663 308,711 4,732,324
LONG-TERM OBLIGATIONS - Less current portion:
Obligations under capital leases 8,007,079 7,157,465 7,136,817
Stockholder's note 50,000 50,000 50,000
Notes payable to banks 156,250 75,000 1,137,500
--------------- --------------- ---------------
Total long-term obligations 8,213,329 7,282,465 8,324,317
COMMITMENTS (Notes 11, 12 and 13)
STOCKHOLDERS' EQUITY:
Preferred stock - 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding - -
Common stock - 150,000,000 authorized shares, $.01 par value;
issued 27,619,193 shares, 32,864,765 shares and 42,274,800 shares 276,192 328,648 422,748
Additional paid-in capital 17,210,032 100,133,800 276,823,109
Less:
Treasury stock - at cost, 757,536 shares (629,481) (629,481) (629,481)
Stockholders' notes receivable (325,932) (133,793)
accumulated deficit (158,725) (374,307) (138,941,661)
-------------- --------------- ---------------
Total stockholders' equity 16,372,086 99,324,867 137,674,715
-------------- ---------------- ---------------
TOTAL $ 30,512,060 $ 115,641,928 $ 196,229,544
============== =============== ===============
See notes to consolidated financial statements.
F-2
61
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
1993 1994 1995
REVENUES:
Processing and servicing $ 23,337,061 $ 31,097,631 $ 39,535,737 $ 27,141,624
Merchant discount 5,648,539 7,184,729 9,794,280 6,162,914
License fees -- -- -- 10,970,034
Maintenance fees -- -- -- 1,978,287
Other 1,906,675 984,275 -- 4,787,003
------------- ------------- ------------- --------------
Total revenues 30,892,275 39,266,635 49,330,017 51,039,862
------------- ------------- -------------- -------------
EXPENSES:
Cost of processing, servicing and support 19,516,041 25,787,164 32,292,787 40,351,784
Research and development 3,677,898 4,825,910 7,008,625 10,177,164
Sales and marketing 3,730,311 4,553,073 7,405,341 17,512,910
General and administrative 2,466,395 2,717,175 4,288,696 8,805,891
In process research and development -- -- -- 122,357,586
------------- ----------- ------------ -------------
Total expenses 29,390,645 37,883,322 50,995,449 199,205,335
------------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS 1,501,630 1,383,313 (1,665,432) (148,165,473)
OTHER:
Interest income 165,235 298,186 2,135,085 1,658,749
Interest expense (278,835) (795,204) (644,837) (324,726)
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,388,030 886,295 (175,184) (146,831,450)
INCOME TAX EXPENSE (BENEFIT) 368,000 400,000 40,000 (8,628,615)
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,020,030 486,295 (215,184) (138,202,835)
EXTRAORDINARY ITEM, EXTINGUISHMENT
OF DEBT, NET OF TAX -- -- -- (364,374)
------------- ------------- ------------- ------------
NET INCOME (LOSS) $ 1,020,030 $ 486,295 $ (215,184) $(138,567,209)
============= ============= ============== =============
PER SHARE AMOUNTS:
Income (loss) before extraordinary item $ 0.04 $ 0.02 $ (0.01) $ (3.69)
Extraordinary item (0.01)
------------- ------------- ------------- -------------
Net income (loss) $ 0.04 $ 0.02 $ (0.01) $ (3.70)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 26,886,254 27,103,287 28,218,521 37,419,580
============= ============= ============= =============
See notes to consolidated financial statements.
F - 3
62
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF COMMON ADDITIONAL NUMBER OF TREASURY STOCKHOLDERS'
SHARES OF STOCK AT PAID-IN SHARES OF STOCK AT NOTES
COMMON STOCK PAR CAPITAL TREASURY STOCK COST RECEIVABLE
BALANCE, DECEMBER 31, 1992 24,021,579 $240,216 $ 4,344,979 (606,666) $(504,113) $(501,447)
Net income -- -- -- -- -- --
Treasury stock acquired -- -- -- (60,348) (50,147) 50,147
Repayment of loans to stockholders -- -- -- -- -- 50,147
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1993 24,021,579 240,216 4,344,979 (667,014) (554,260) (401,153)
Net income -- -- -- -- -- --
Stock options exercised 52,614 526 29,474 -- -- --
Treasury stock acquired -- -- -- (90,522) (75,221) 75,221
Conversion of subordinated debentures 1,127,439 11,274 738,726 -- -- --
Sale of common stock 2,417,561 24,176 12,096,853 -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1994 27,619,193 276,192 17,210,032 (757,536) (629,481) (325,932)
Net loss -- -- -- -- -- --
Stock options exercised 270,262 2,703 172,082 -- -- --
Tax benefit associated with exercise of stock
options -- -- 57,586 -- -- --
Sale of common stock, net of expenses related
to public offering 4,975,310 49,753 82,694,100 -- -- --
Repayment of loans to stockholders -- -- -- -- -- 192,139
Cash payments in lieu of fractional shares -- -- -- -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, DECEMBER 31, 1995 32,864,765 328,648 100,133,800 (757,536) (629,481) (133,793)
Net loss -- -- -- -- -- --
Stock options exercised 874,195 8,742 862,088 -- -- --
Tax benefit associated with exercise of stock
options -- -- 1,100,141 -- -- --
Issuance of common stock and stock options 8,535,840 85,358 174,727,080 -- -- --
pursuant to acquisitions
Repayment of loans to stockholders -- -- -- -- -- 133,793
Cash payments in lieu of fractional shares -- -- -- -- -- --
---------- -------- ------------ -------- --------- ---------
BALANCE, JUNE 30, 1996 42,274,800 $422,748 $276,823,109 (757,536) $(629,481) $ --
========== ======== ============ ======== ========= =========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
BALANCE, DECEMBER 31, 1992 $ (1,665,050) $ 1,914,585
Net income 1,020,030 1,020,030
Treasury stock acquired -- --
Repayment of loans to stockholders -- 50,147
------------- -------------
BALANCE, DECEMBER 31, 1993 (645,020) 2,984,762
Net income 486,295 486,295
Stock options exercised -- 30,000
Treasury stock acquired -- --
Conversion of subordinated debentures -- 750,000
Sale of common stock -- 12,121,029
------------- -------------
BALANCE, DECEMBER 31, 1994 (158,725) 16,372,086
Net loss (215,184) (215,184)
Stock options exercised -- 174,785
Tax benefit associated with exercise of stock
options -- 57,586
Sale of common stock, net of expenses related
to public offering -- 82,743,853
Repayment of loans to stockholders -- 192,139
Cash payments in lieu of fractional shares (398) (398)
------------- -------------
BALANCE, DECEMBER 31, 1995 (374,307) 99,324,867
Net loss (138,567,209) (138,567,209)
Stock options exercised -- 870,830
Tax benefit associated with exercise of stock
options -- 1,100,141
Issuance of common stock and stock options -- 174,812,438
pursuant to acquisitions
Repayment of loans to stockholders -- 133,793
Cash payments in lieu of fractional shares (145) (145)
------------- -------------
BALANCE, JUNE 30, 1996 $(138,941,661) $ 137,674,715
============= =============
See notes to consolidated financial statements.
F-4
63
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------ 1996
1993 1994 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,020,030 $ 486,295 $ (215,184) $(138,567,209)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item, extinguishment of debt, net of tax -- -- -- 364,374
Write-off of in process research and development -- -- -- 122,357,586
Depreciation and amortization 1,376,533 1,921,665 2,484,677 6,997,102
Deferred income taxes -- 64,540 78,628 (8,653,323)
Loss on disposal of property and equipment -- 33,996 12,650 99,819
Accretion of investment discount - net -- -- (337,221) --
Change in certain assets and liabilities:
Accounts receivable (2,364,264) 543,052 (1,499,502) (1,109,875)
Prepaid expenses and other (443,183) (269,276) (915,259) 820,701
Refundable income taxes 159,473 -- (144,119) --
Accounts payable 141,325 723 223,407 2,605,707
Accrued liabilities 562,810 (87,607) 2,623,425 3,428,406
Customer deposits 82,430 (113,237) (25,495) 272,647
Deferred revenue 493,354 153,093 228,017 4,585,841
Income taxes payable 232,441 (79,409) (153,032) 152,903
----------- ------------ ------------ -------------
Net cash provided by (used in) operating activities 1,260,949 2,653,835 2,360,992 (6,645,321)
----------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,351,254) (1,042,892) (3,431,016) (7,089,391)
Proceeds from the sale of property and equipment 19,719 23,548 270 29,016
Capitalization of software development costs -- -- -- (1,312,327)
Purchase of businesses, net of cash acquired -- -- -- (39,404,209)
Purchase of investments -- (11,819,937) (54,078,818) --
Proceeds from maturities and sales of investments -- -- 37,725,000 10,644,945
Purchase of trademark license -- -- (3,000,000) --
----------- ------------ ------------ -------------
Net cash used in investing activities (1,331,535) (12,839,281) (22,784,564) (37,131,966)
----------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock -- 12,121,029 82,743,853 --
Redemption of subordinated debentures (400,000) (250,000) -- --
Repayment of notes payable and other debt extinguishment (458,340) (250,000) (75,000) (608,874)
Proceeds from notes payable -- -- 225,000 1,100,000
Repayment of stockholders' notes -- -- (225,000) --
Principal payments under capital lease obligations (176,412) (711,435) (1,038,264) (570,816)
Proceeds from stock options exercised including related income
tax benefits -- 30,000 232,371 870,830
Cash payments in lieu of fractional shares -- -- (398) (145)
Payments received on stockholder notes receivables 50,147 -- 192,139 133,793
----------- ------------ ------------ -------------
Net cash provided by (used in) financing activities (984,605) 10,939,594 82,054,701 924,788
----------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,055,191) 754,148 61,631,129 (42,852,499)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,509,768 1,454,577 2,208,725 63,839,854
----------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,454,577 $ 2,208,725 $ 63,839,854 $ 20,987,355
=========== ============ ============ =============
See notes to consolidated financial statements.
F-5
64
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Checkfree Corporation (the Company) was organized in 1981
and is a leading provider of transaction processing services, software and
related products to financial institutions and businesses and their
customers throughout the United States. See Note 16 for a description of
the Company's business segments.
PRINCIPLES OF CONSOLIDATION AND CHANGE IN FISCAL YEAR - The accompanying
consolidated financial statements include the results of operations of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Effective January 1, 1996, the Company changed its fiscal year-end from
December 31 to June 30. The following presents unaudited summarized
consolidated financial information for the six months ended June 30, 1995:
Total revenues $ 23,581,343
Loss from operations (67,792)
Income taxes 61,592
Net income 75,288
Net income per share Nil
PROCESSING AGREEMENTS - The Company has agreements with transaction
processors to provide origination and settlement services for the Company.
Under the agreements, the Company must fund service fees and returned
transactions when presented. These agreements expire at various times
through June 1999.
TRANSACTION PROCESSING - In connection with the timing of the Company's
financial transactions processing, the Company is exposed to credit risk
in the event of nonperformance by other parties, such as returns and
chargebacks. The Company utilizes credit analysis and other controls to
manage its credit risk exposure. The Company also maintains a reserve for
future returns and chargebacks.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments (primarily United States government agency obligations and
commercial paper) purchased with maturities of one month or less to be
cash equivalents. Substantially all cash and cash equivalents are on
deposit with seven financial institutions.
INVESTMENTS - The Company's investments consist primarily of United States
government or government agency obligations and certificates of deposit.
The Company classifies these investments as
F-6
65
available-for-sale securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Such investments are carried at amortized cost,
which approximates market value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line and
accelerated methods over the estimated useful lives as follows: land
improvements, building and building improvements, 15 to 30 years; computer
equipment, software, and furniture, 3 to 5 years. Equipment under capital
leases is amortized using the straight-line method over the terms of the
leases. Leasehold improvements are amortized over the lesser of the
estimated useful lives or remaining lease terms.
CAPITALIZED SOFTWARE COSTS - Software development costs incurred prior to
the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the technological feasibility of
the subject software product has been established are capitalized in
accordance with Statement of Financial Accounting Standards No. 86.
Capital software development costs are amortized on a product-by-product
basis using either the straight-line method over the estimated economic
life of the product or the ratio of current year gross product revenue to
current and anticipated future gross product revenue, whichever is
greater. Unamortized software development costs in excess of estimated
future net revenues from a particular product are written down to
estimated net realizable value.
Amortization of software costs totaled $265,763, $267,624, $207,500 and
$2,520,802 for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996, respectively.
INTANGIBLE ASSETS - The cost of identified intangible assets are generally
amortized on a straight-line basis over periods from 6-15 years. Goodwill
is amortized on a straight-line basis over 10 years. At each balance sheet
date, a determination is made by management to ascertain whether the
intangible assets have been impaired based on several criteria, including,
but not limited to, sales trends, undiscounted operating cash flows, and
other operating factors.
CAPITAL STOCK - On April 21, 1995, the Company's stockholders increased
the authorized number of shares of $.01 par value Common Stock to
25,000,000 and on August 8, 1995 increased the number of authorized shares
of $.01 par value Common Stock to 150,000,000. In addition, on August 8,
1995, the Company's stockholders authorized the Board of Directors to
issue up to 15,000,000 shares of $.01 par value preferred stock in one or
more series and to establish such relative voting, dividend, redemption,
liquidation, conversion and other powers, preferences, rights,
qualifications, limitations and restrictions as the Board may determine
without further stockholder approval. No preferred shares have been
issued.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expenses were $494,110, $613,158, $1,757,601 and $7,159,234
for the years ended December 31, 1993, 1994 and 1995, and the six months
ended June 30, 1996, respectively.
NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE - Net income (loss) per
common and equivalent share is based on the weighted average number of
shares and dilutive common stock equivalents (stock options) outstanding
during the periods presented. All share and per share information has been
retroactively adjusted for the five-for-one stock split on May 1, 1995 and
the 5.2614-for-one split on the effective date of the initial public
offering (September 28, 1995). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common shares and stock
options issued during the twelve months immediately preceding the initial
public offering were treated as if they had been
F-7
66
outstanding for all periods, using the treasury stock method. The assumed
conversion of the convertible debentures had an insignificant impact on
net income (loss) per common and equivalent share.
RECLASSIFICATIONS - Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1996 presentation.
REVENUE RECOGNITION:
PROCESSING AND SERVICING - Processing and servicing revenues include
revenues from transaction processing, electronic funds transfer and
monthly service fees on consumer funds transfer services. The Company
recognizes revenue when the services are performed.
As part of processing certain types of transactions, the Company earns
revenue from the time money is collected from its customers until the time
payment is made to the applicable merchants. These revenues are included
in processing and servicing and totalled $130,300, $740,290, $1,622,963
and $1,019,288 for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996, respectively.
MERCHANT DISCOUNT - Merchant discount revenues are recognized when the
services are performed. Interchange fees incurred in the settlement of
merchant credit card transactions are included in processing and servicing
expenses.
LICENSE FEES - Revenue from software license agreements is recognized upon
delivery of the software if there are no significant postdelivery
obligations. The revenue related to significant postdelivery obligations
is deferred and recognized using the percentage-of-completion method.
MAINTENANCE FEES - Maintenance fee revenue is recognized ratably over the
term of the related contractual support period, generally 12 months.
EXPENSE CLASSIFICATION:
PROCESSING, SERVICING AND SUPPORT- Processing, servicing and support costs
consist primarily of data processing costs, customer care and technical
support, and third party transaction fees, which consist primarily of
credit card interchange fees, ACH transaction fees and the amortization of
software costs.
RESEARCH AND DEVELOPMENT - Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel.
SALES AND MARKETING - Sales and marketing expenses consist primarily of
salaries and commissions of sales employees, public relations and
advertising costs, customer acquisition fees and royalties paid to
distribution partners.
GENERAL AND ADMINISTRATIVE - General and administrative expenses consist
primarily of salaries for administrative, executive, financial control,
and human resource employees.
F-8
67
2. ACQUISITIONS
On February 21, 1996, the Company acquired Servantis Systems Holdings,
Inc. (Servantis) for $165.1 million, including 5.7 million shares of
common stock, valued at $20.00 per share, the issuance of stock options
valued at $8.2 million and the retirement of certain debt of $42.5
million, and the assumption of liabilities of approximately $38.3 million.
The acquisition was treated as a purchase for accounting purposes, and,
accordingly, the assets and liabilities were recorded based on their fair
values at the date of the acquisition. Of the total purchase price, $90.6
million was allocated to in-process research and development, which was
charged to operations at the time of the acquisition. Servantis'
operations are included in the consolidated results of operations from the
date of the acquisition.
On May 9, 1996, the Company acquired Security APL, Inc. (Security APL) for
$53 million, including 2.8 million shares of common stock, valued at
$18.50 per share, and the assumption of liabilities of approximately $5.5
million. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based
on their fair values at the date of the acquisition. Of the total purchase
price, $28.8 million was allocated to in-process research and development,
which was charged to operations at the time of the acquisition. Security
APL's operations are included in the consolidated results of operations
from the date of the acquisition.
In March 1996, the Company acquired Interactive Solutions Corp. ("IS")
for $3.0 million, including 85,000 shares of common stock valued at $21.25
per share. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based
on their fair values at the date of the acquisition. Of the total purchase
price, $3.0 million was allocated to in-process research and development,
which was charged to operations at the time of the acquisition. IS's
operations are included in the consolidated results of operations from the
date of acquisition.
Consistent with the Company's policy for internally developed software,
the Company determined the amounts to be allocated to in-process research
and development based on whether technological feasibility had been
achieved and whether there was any alternative future use for the
technology. As of the date of the acquisitions, the Company concluded that
the in-process research and development had no alternative future use
after taking into consideration the potential for usage of the software in
different products, resale of the software and internal usage.
The unaudited pro forma results of operations of the Company for the year
ended December 31, 1995 and the six months ended June 30, 1996, assuming
all of the above acquisitions occurred at the beginning of each period are
as follows:
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
(In thousands, except per share data)
Total revenues $ 110,974 $ 59,384
Loss before extraordinary item (16,333) (25,564)
Net loss (16,698) (25,929)
Net loss per share (0.45) (0.63)
This information is presented to facilitate meaningful comparisons to
on-going operations and to other companies. The unaudited pro forma
amounts above do not include a charge for in-process research and
development of $122.4 million arising from the acquisitions. The unaudited
pro forma information is not necessarily indicative of the actual results
of operations had the transactions occurred at the beginning of
F-9
68
the periods presented, nor should it be used to project the Company's
results of operations for any future periods.
3. INVESTMENTS
The carrying amounts, which approximate market value, of investments in
debt securities are as follows:
December 31, June 30,
1994 1995 1996
U.S. Government and
Government Agency
Obligations $ 11,819,937 $ 28,510,976 $ 20,762,950
Certificates of Deposit - - 224,144
------------ -------------- --------------
Total $ 11,819,937 $ 28,510,976 $ 20,987,094
============ ============== ==============
Gross unrealized gains and losses at each date were insignificant. In
addition, sales of securities and related realized gains/losses, based on
the specific identification cost method, were insignificant for each of
the periods.
Contractual maturities of debt securities at June 30, 1996 are shown
below. Expected maturities will differ from contractual maturities because
debt issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Due in one year or less $ 18,089,029
Due after one year through five years 2,898,065
--------------
Total $ 20,987,094
==============
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31, June 30,
1994 1995 1996
Trade accounts receivable $ 1,703,912 $ 2,684,989 $14,858,364
Unbilled trade accounts receivable -- -- 16,203,055
Other receivables 185,319 736,756 734,851
----------- ----------- -----------
Total 1,889,231 3,421,745 31,796,270
Less allowance for doubtful accounts 26,735 32,661 2,279,722
----------- ----------- -----------
Total $ 1,862,496 $ 3,389,084 $29,516,548
=========== =========== ===========
5. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes," which requires an asset and liability approach
F-10
69
to financial accounting and reporting for income taxes. In accordance with
SFAS No. 109, deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Income tax expense (benefit) is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
Income tax expense (benefit) consists of the following:
Six Months
Year Ended December 31, Ended June 30,
1993 1994 1995 1996
Current:
Federal $ 305,800 $ 250,929 $ (123,406) $ --
State and local 62,200 84,531 84,778 24,708
----------- ----------- ------------ ------------
Total current 368,000 335,460 (38,628) 24,708
Deferred Federal and state taxes -- 64,540 78,628 (8,653,323)
----------- ----------- ------------ ------------
Total income tax expense (benefit) $ 368,000 $ 400,000 $ 40,000 $(8,628,615)
=========== =========== =========== ===========
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 34 percent to income before income
taxes as a result of the following:
Six Months
Year Ended December 31, Ended June 30,
1993 1994 1995 1996
Computed "expected" tax
expense (benefit) $ 471,930 $ 301,340 $ (59,563) $(49,922,693)
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets (256,000) -- -- --
Non-deductible in-process
research and development of
acquired businesses -- -- -- 41,601,579
Nondeductible intangible
amortization 64,767 64,767 64,767 218,918
State and local taxes, net of
Federal income tax benefit 41,052 55,790 55,953 (626,334)
Other accruals 36,636 (36,636)
Other - net 9,615 14,739 (21,157) 99,915
------------ ------------ ------------ ------------
Total income tax expense (benefit) $ 368,000 $ 400,000 $ 40,000 $ (8,628,615)
============ ============ ============ ============
F-11
70
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994, 1995 and June 30, 1996 are:
December 31, June 30,
1994 1995 1996
Deferred tax assets:
Net operating loss carryforwards $ 9,295,934
Allowance for bad debts and returns $ 120,553 $ 178,215 1,254,497
Accrued compensation and related items 91,186 113,180 1,001,332
State income tax accrued 20,264 15,132 89,328
Deferred revenue 120,000
Valuation allowance -- -- (6,000,000)
------------ ------------ -----------
Total deferred tax assets 232,003 426,527 5,641,091
------------ ------------ -----------
Deferred tax liabilities:
Assets held for sale -- -- (8,000,000)
Property and equipment (169,935) (308,711) (1,434,982)
Capitalized software (6,726) (5,953,098)
Intangible assets -- -- (640,176)
Deferred revenue -- -- (1,936,171)
Prepaid expenses (119,882) (260,984) (169,711)
Other, net -- -- (58,782)
------------ ------------ -----------
Total deferred tax liabilities (296,543) (569,695) (18,192,920)
------------ ------------ -----------
Net deferred tax liability $ (64,540) $ (143,168) $(12,551,829)
============ ============ ============
At June 30, 1996, the Company has approximately $25,000,000 of net
operating loss carryforwards available, expiring in 2009 to 2011,
including approximately $16,000,000 related to a purchased subsidiary
which can only be used to offset income earned by the subsidiary up to
specified annual amounts. The valuation allowance reduces deferred tax
assets to the amount the Company believes more likely than not will be
realized. Any future realization of tax benefits for which the valuation
allowance has been recorded would result in a reduction of intangible
assets, based on unamortized recorded balances as of June 30, 1996.
6. INTANGIBLE ASSETS
The components of intangible assets at June 30, 1996 are as follows:
Workforce $ 7,195,200
Tradenames 4,164,444
Customer base 3,459,111
Goodwill 13,647,058
---------------
Total 28,465,813
Less accumulated amortization 958,136
---------------
Intangible assets, net $ 27,507,677
==============
F-12
71
7. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
December 31, June 30,
1994 1995 1996
Land and land improvements $ 3,145,746 $ 3,145,746 $ 3,145,746
Building and building improvements 4,391,824 4,626,902 13,531,873
Computer equipment and software
licenses 7,389,731 9,915,370 22,655,049
Furniture and equipment 1,780,963 2,350,893 7,055,892
--------- --------- ---------
Total 16,708,264 20,038,911 46,388,560
Less accumulated depreciation and
amortization 4,551,984 6,479,731 9,821,419
--------- --------- ---------
Property - net $12,156,280 $13,559,180 $36,567,141
=========== =========== ===========
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, June 30,
1994 1995 1996
Processing fees $ 818,547 $ 2,061,753 $ 3,662,257
Salaries and related costs 630,466 903,946 5,467,592
Acquisition fees 515,528 463,162 388,861
Property tax 287,854 304,509 545,535
Reserve for returns and chargebacks 274,649 390,163 542,387
Other 467,501 1,509,319 4,270,229
------- --------- ---------
Total $ 2,994,545 $ 5,632,852 $14,876,861
=========== =========== ===========
9. LONG-TERM DEBT AND NOTES PAYABLE
CONVERTIBLE SUBORDINATED DEBENTURES - In September 1989, the Company
issued $1,000,000 of convertible subordinated debentures bearing interest
at 10% payable quarterly. The debentures were convertible at the option of
the holders at any time, subject to prior redemption provisions, into
1,503,235 shares of common stock at $.67 per share. In 1994, the Company
called the debentures which resulted in $750,000 of debentures being
converted into 1,127,439 common shares. The remaining $250,000 of
debentures were redeemed and the Company paid a premium of $75,000 which
was expensed.
STOCKHOLDERS' AND BANK NOTES PAYABLE - The Company has unsecured loans
payable to certain stockholders totalling $275,000, $50,000 and $50,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively, of which
$50,000 is due in December 1998. These loans bear interest based on the
prime rate as defined in the notes (total of 9.5% at December 31, 1994 and
1995 and 9.25% at June 30, 1996). Interest expense on the notes was
$19,517, $20,334, $5,379 and $1,938 for the years ended December 31, 1993,
1994 and 1995 and for the six months ended June 30, 1996, respectively. In
January 1995, $225,000 was refinanced with a bank into a 36 month
unsecured term loan payable in monthly installments of $6,250 at the prime
rate, due in February 1998.
F-13
72
In March 1996, the Company executed an unsecured note payable with a bank
for $1.1 million. The principal amount is due in March 1998, with interest
payable quarterly based on the LIBOR rate (total of 6.2% at June 30,
1996).
The estimated fair value of the Company's notes payable approximates their
carrying amounts based on currently available debt with similar interest
rates and remaining maturities.
During the six months ended June 30, 1996, the Company retired certain
debt in connection with a business acquisition, resulting in an
extraordinary loss of $364,374, net of income taxes of $204,961.
10. OBLIGATIONS UNDER CAPITAL LEASES
During 1993, the Company entered into a 20 year lease with the Department
of Development of the State of Ohio for land and an office building located
in Columbus, Ohio. The Company has the option to purchase the land and
building for $1 at the termination of the lease and thus, the Company has
recorded the transaction as a capital lease. The lease payments are secured
by a $751,500 standby letter of credit agreement with a bank and are
partially guaranteed by an officer and principal stockholder of the
Company. The standby letter of credit is collateralized by a savings
account totalling $463,871 at June 30, 1996 and certain real estate
adjacent to the leased property. The lease contains certain covenants, the
most restrictive of which require the Company to maintain certain debt to
equity ratios and tangible net worth and working capital levels.
The Company also leases certain computer equipment, furniture and
telephone equipment under capital leases. The Company is required to pay
certain taxes, insurance and other expenses related to the leased
property.
The following is a summary of property under capital leases included in
the accompanying balance sheets:
December 31, June 30,
1994 1995 1996
Land $ 3,145,746 $ 3,145,746 $ 3,145,746
Building 4,369,254 4,369,254 4,369,254
Computer equipment 2,441,327 2,703,308 3,204,468
--------- --------- ---------
Total 9,956,327 10,218,308 10,719,468
Less accumulated amortization 832,194 1,901,055 2,425,823
--------- --------- ---------
Property held under capital leases $ 9,124,133 $ 8,317,253 $ 8,293,645
=========== =========== ===========
F-14
73
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows:
Fiscal year ending June 30:
1997 $ 1,591,446
1998 1,192,198
1999 1,046,396
2000 973,167
2001 837,645
Thereafter 7,055,149
---------
Total future minimum lease payments 12,696,001
Less amount representing interest 4,522,000
---------
Net future minimum lease payments $ 8,174,001
===============
11. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that
the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the
leases. Total expense under all operating lease agreements for the years
ended December 31, 1993, 1994 and 1995 and for the six months ended June
30, 1996 was $1,030,330, $671,528, $664,948 and $1,935,880, respectively.
Minimum future rental payments under these leases are as follows:
Fiscal year ending June 30:
1997 $ 5,374,511
1998 4,614,244
1999 4,129,695
2000 3,315,176
2001 2,937,793
Thereafter 11,704,720
----------
Total $ 32,076,139
===============
12. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS - The Company has three defined contribution 401(k)
retirement plans covering substantially all of its employees. Under the
plans, eligible employees may contribute a portion of their salary until
retirement and the Company, at its discretion, may match a portion of the
employee's contribution. Total expense under these plans amounted to,
$58,013, $70,880, $96,913 and $366,670 for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1996,
respectively.
GROUP MEDICAL PLAN - The Company has a group medical self-insurance plan
covering certain of its employees. The Company has employed an
administrator to manage this plan. Under terms of this plan, both the
Company and eligible employees are required to make contributions to this
plan. The administrator reviews all claims filed and authorizes the
payment of benefits. The Company has stop-loss insurance coverage on all
individual claims exceeding $35,000. Total expense under this plan
amounted to $290,000, $397,000, $626,000 and $369,000 for the years ended
December 31, 1993, 1994 and 1995
F-15
74
and for the six months ended June 30, 1996, respectively. The Company
expenses amounts as claims are incurred and recognizes a liability for
incurred but not reported claims. At December 31, 1994 and 1995 and June
30, 1996, the Company has accrued $100,000, $120,000 and $120,000,
respectively, as a liability for costs incurred under this plan.
13. COMMON STOCK
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan
(the "1993 Plan"). The options granted under the 1995 and 1993 Plans may
be either incentive stock options or non-statutory stock options. The
terms of the options granted under the 1995 and 1993 Plans are at the sole
discretion of a committee of members of the Company's Board of Directors,
not to exceed ten years. Generally, options vest at 20% per year from the
date of grant. The 1995 Plan provides that the Company may grant options
for not more than 2,630,700 shares of common stock to certain key
employees, officers and directors. Options granted under the 1995 and 1993
Plans are exercisable according to the terms of each option, however, in
the event of a change in control or merger as defined, the options shall
become immediately exercisable. At June 30, 1996, 1,691,171 additional
shares are available for grant in the aggregate for all Plans.
Previously, the Company had adopted the 1983 Incentive Stock Option Plan
and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983
Plans"), which provided that the Board of Directors may grant options for
shares of common stock to certain employees and directors. Under the terms
of the 1983 Plans, options are exercisable over a period up to ten years
from the grant date. In the event the Company is sold, options outstanding
under the 1983 Plans must be repurchased at a price calculated as if the
options had been fully exercised.
All options granted under the 1983 Plans, the 1993 Plan and the 1995 Plan
were granted at exercise prices not less than the fair market value of the
underlying common stock at the date of grant. In the event that shares
purchased through the exercise of incentive stock options are sold within
one year of exercise, the Company is entitled to a tax deduction. The tax
benefit of the deduction is not reflected in the consolidated statements
of operations but is reflected as an increase in additional paid-in
capital.
The following summarizes the stock option activity from January 1, 1993 to
June 30, 1996:
Number
of Shares Price
Balance at December 31, 1992 1,939,773 $.57 - $.83
Granted 1,249,793 $.83 - $.91
Cancelled (341,360) $.57 - .83
---------
Balance at December 31, 1993 2,848,206 $.57 - $.91
Granted 927,322 $.83 - $3.04
Exercised (52,614) $.57
Cancelled (648,178) $.57 - $.91
---------
Balance at December 31, 1994 3,074,736 $.57 - $3.04
=========
F-16
75
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
------------------------------- ---------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of period 3,074,736 $ 0.82 2,901,782 $ 1.19
Granted 160,746 7.12 459,289 21.79
Exercised (270,262) 0.65 (874,195) 0.99
Cancelled (63,438) 0.73 (22,020) 1.06
Issued in conjunction with
Servantis Acquisition 443,362 1.52
--------- ---------
Outstanding at end of period 2,901,782 $ 1.19 2,908,218 $ 4.58
========= =========
Weighted average fair value of options
granted during the year $ 2.92 $ 8.45
======== ========
The following table summarizes information about options outstanding at
June 30, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
$0.57 - $1.00 2,066,754 4.9 $ 0.84 1,273,146 $ 0.83
$1.00 - $4.00 341,652 8.4 2.14 144,846 1.76
$18.00 - $22.00 239,023 9.6 20.64 -- --
$22.00 - $25.00 260,789 9.8 22.77 15,789 22.63
--------- --------
2,908,218 $ 4.58 1,433,781 $ 1.16
========= =========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended December
31, 1995 and the six months ended June 30, 1996, respectively: dividend
yield of 0%; expected volatility of 40 percent; risk-free interest rates
of 5.25% to 6.68%; and expected lives of 3-5 years.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of FASB Statement No. 123, the Company's net loss and loss per
share, net of related income tax effects, would have been as follows:
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
Net loss $ 244,759 $ 138,797,202
Net loss per share $ 0.01 $ 3.71
The pro forma amounts are not representative of the effects on reported
net income (loss) for future years.
F-17
76
In accordance with the terms of a joint marketing agreement, a strategic
partner has warrants to purchase up to 650,000 shares of common stock at
$20 per share should the partner attain certain customer acquisition
targets.
Under the terms of a joint marketing and trademark licensing agreement, a
strategic partner was paid $3,000,000 which has been capitalized and will
be amortized over the life of the agreement. Additionally, the strategic
partner has the option on August 31, 1996 to accept 118,226 shares of
common stock in lieu of a $3,000,000 cash payment then due. In addition,
if certain minimum performance standards are not achieved within the term
of the agreement, the strategic partner must refund a pro rata portion of
the August 31, 1996 payment.
Certain stockholders have an option to sell up to 280,565 shares of common
stock to the Company at $19 per share. Such option expires no later than
September 30, 1996.
14. STOCKHOLDERS' NOTES RECEIVABLE
In late December 1992, the Company agreed to loan $501,447 to certain
officers of the Company for the purchase of 603,456 shares of common stock
of the Company from certain stockholders of the Company under a loan and
stock restriction agreement. The stock was pledged as security for the
notes which bore interest at 6.15% payable annually. The notes have been
recorded as contra-equity in the consolidated balance sheets.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months
Year Ended December 31, Ended June 30,
--------------------------------------- --------------
1993 1994 1995 1996
Interest paid $ 274,718 $838,153 $645,443 $ 321,477
========== ======== ======== ==========
Income taxes paid $ 25,200 $414,869 $211,150 $ 468,077
========== ======== ======== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $7,823,539 $1,594,492 $261,981 $ 501,160
========== ========== ======== ==========
Loans to stockholders repaid with
common stock $ 50,147 $75,221
========== =======
Conversion of subordinated debentures $ 750,000
==========
Computer equipment received
in exchange for accounts receivable $ 395,000
==========
Tax benefit associated with the
exercise of stock options $1,100,141
==========
Purchase price of business acquisitions $265,238,845
Less: Issuance of common stock and
stock options pursuant to
acquisitions (174,812,438)
Liabilities assumed (44,064,523)
Cash acquired in acquisitions (6,957,675)
-------------
Net cash paid $39,404,209
=============
F-18
77
16. BUSINESS SEGMENTS
Prior to 1996, the Company operated in one segment - Electronic Commerce.
With the acquisition of Servantis in February 1996, the Company now also
operates in the Financial Application Software Segment. The net revenues
of each segment are principally domestic, and no single customer accounted
for 10% or more of consolidated revenues for the six months ended June 30,
1996. Approximately 10%, 11% and 13% of the Company's revenues for the
years ended December 31, 1993, 1994 and 1995, respectively, were from a
single customer. Approximately 11% and 25% of the Company's current
receivables - trade and other at December 31, 1994 and 1995, respectively,
were from a single customer.
A further description of each business segment follows:
ELECTRONIC COMMERCE - Electronic commerce includes electronic home
banking, electronic bill payment, automatic accounts receivable
collection, electronic accounts payable processing, investment portfolio
management services and investment trading and reporting services. These
services are primarily directed to financial institutions and businesses
and their customers.
FINANCIAL APPLICATION SOFTWARE - Financial application software includes
end-to-end software products for ACH processing, account reconciliation,
wire transfer, mortgage loan origination and servicing, lease accounting
and debt recovery. These products and services are primarily directed to
financial institutions and large corporations.
The following sets forth certain financial information attributable to the
Company's business segments for the six months ended June 30, 1996:
Revenues:
Electronic commerce $ 32,768,717
Financial application software 18,271,145
----------
Total $ 51,039,862
===============
Operating income (loss):
Electronic commerce, net of charge for acquired
in-process research and development of $106,049,586 $ (120,788,727)
Financial application software, net of charge for acquired
in-process research and development of $16,308,000 (24,940,486)
Corporate (24,674,777)
----------
Total $ (148,165,473)
================
Identifiable assets:
Electronic commerce $ 54,523,799
Financial application software 96,843,884
Corporate 46,990,119
----------
Total $ 198,357,802
================
F-19
78
Capital expenditures:
Electronic commerce $ 5,688,439
Financial application software 1,087,303
Corporate 664,809
------------------
Total $ 7,440,551
==================
Depreciation and amortization:
Electronic commerce $ 2,330,064
Financial application software 4,345,200
Corporate 321,838
------------------
Total $ 6,997,102
==================
17. SUBSEQUENT EVENTS
In August 1996, the Company signed a definitive agreement to sell certain
software for $20,000,000. The sale is expected to close in September 1996.
No gain or loss will be recognized on the sale.
On September 15, 1996, the Company entered into a definitive agreement to
purchase Intuit Services Corporation (ISC), a wholly-owned subsidiary of
Intuit, Inc., in exchange for approximately 12.6 million shares of the
Company's common stock. The agreement contains certain provisions that
limit the purchase of additional common shares and the disposition of the
common shares to be obtained by Intuit, Inc. The acquisition will be
accounted for under the purchase method of accounting and is expected to
include a charge in an amount not yet determined for in-process research
and development. ISC provides transaction processing and electronic funds
transfer services.
The Company also intends to enter into a service and license agreement
with Intuit, Inc., contingent on the consummation of the acquisition of
ISC, whereby the Company will obtain a license to connect to and use
certain software technology of Intuit Inc. for a payment of $10 million
on closing of the ISC acquisition and an additional $10 million on
October 1, 1997.
* * * * * *
F-20
79
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Checkfree Corporation and Subsidiaries:
We have audited the consolidated financial statements of Checkfree Corporation
and subsidiaries as of December 31, 1995 and 1994 and June 30, 1996, and for
each of the three years in the period ended December 31, 1995 and for the six
months ended June 30, 1996, and have issued our report thereon dated August 22,
1996, except for Note 17 as to which the date is September 15, 1996; such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Checkfree Corporation
and subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 22, 1996
F-21
80
SCHEDULE II
CHECKFREE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE
SIX MONTHS ENDED JUNE 30, 1996
BALANCE AS OF AMOUNT ASSUMED CHARGES TO CHARGES TO BALANCE
BEGINNING IN BUSINESS COSTS AND OTHER AS OF END
OF PERIOD COMBINATION EXPENSES DEDUCTIONS DEDUCTIONS OF PERIOD
------------- -------------- ---------- ---------- ---------- ---------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
1993 $ 35,919 $ -- $ 13,320 $-- $ 3,708 $ 45,531
1994 45,531 -- 11,769 -- 30,565 26,735
1995 26,735 -- 18,068 -- 12,142 32,661
1996 32,661 1,861,039 915,472 -- 529,450 2,279,722
RESERVE FOR RETURNS
AND CHARGEBACKS
1993 $134,507 $ -- $ 84,110 $-- $118,617 $ 100,000
1994 100,000 -- 299,389 -- 124,740 274,649
1995 274,649 -- 370,229 -- 254,715 390,163
1996 390,163 -- 250,655 -- 98,431 542,387
F-22
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHECKFREE CORPORATION
Date: September 26, 1996 By: /s/ MARK A. JOHNSON
---------------------------
Mark A. Johnson, President
of Corporate Services
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on the 26th day of September, 1996.
Signature Title
*PETER J. KIGHT Chairman of the Board, President, and Chief Executive Officer
- ------------------------------- (Principal Executive Officer)
Peter J. Kight
/s/ Mark A. Johnson President of Corporate Services and Director
- -------------------------------
Mark A. Johnson
*John M. Stanton Vice President and Treasurer
- ------------------------------- (Principal Accounting Officer)
John M. Stanton
*James S. Douglass Vice President - Finance and Chief Financial Officer
- ------------------------------- (Principal Financial Officer)
James S. Douglass
*William P. Boardman Director
- -------------------------------
William P. Boardman
*George R. Manser Director
- -------------------------------
George R. Manser
*Eugene F. Quinn Director
- -------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- -------------------------------
Jeffrey M. Wilkins
*By: /s/ CURTIS A. LOVELAND
-------------------------------
Curtis A. Loveland, Attorney-in-Fact
-58-
82
CHECKFREE CORPORATION
FORM 10-K FOR THE
TRANSITIONAL YEAR ENDED
JUNE 30, 1996
EXHIBIT INDEX
83
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
2(a) Agreement and Plan of Merger, dated as of January
15, 1996, among the Company, Checkfree Acquisition
Corporation, and Servantis Systems Holdings, Inc.
(Reference is made to Exhibit 2 to the Current
Report on Form 8-K, dated January 15, 1996, filed
with the Securities and Exchange Commission on
January 16, 1996, and incorporated herein by
reference.)
2(b) Agreement and Plan of Merger, dated as of March 21,
1996, among the Company, ISC Acquisition
Corporation, and Security APL, Inc. (Reference is
made to Exhibit 2 to the Current Report on Form
8-K, dated March 21, 1996, as amended, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(c) Amendment to Agreement and Plan of Merger, dated as
of April 30, 1996, among the Company, ISC
Acquisition Corporation, and Security APL, Inc.
(Reference is made to Exhibit 2(c) to the Form 10-Q
for the quarter ended March 31, 1996, filed with
the Securities and Exchange Commission, and
incorporated herein by reference.)
2(d) Agreement and Plan of Merger, dated as of September
15, 1996, among the Company Checkfree Acquisition
Corporation II, Intuit Inc. and Intuit Services
Corporation. (Reference is made to Exhibit 2 to the
Current Report on Form 8-K, dated September 15,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the
Company. (Reference is made to Exhibit 3(a) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
3(b) Amended and Restated By-Laws of the Company.
(Reference is made to Exhibit 3(b) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of
the Company's Amended and Restated By-Laws
(contained in the Company's Amended and Restated
By-Laws filed as Exhibit 3(b) hereto).
84
10(a) Checkfree Corporation 1995 Stock Option Plan.
(Reference is made to Exhibit 10(a) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(b) Checkfree Corporation Amended and Restated 1993
Stock Option Plan. (Reference is made to Exhibit
10(b) to Registration Statement on Form S-1, as
amended (Registration No. 33- 95738), filed with
the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(c) Checkfree Corporation Second Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 10(c) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(d) Checkfree Corporation Second Amended and Restated
1983 Incentive Stock Option Plan. (Reference is
made to Exhibit 10(d) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(e) Form of Indemnification Agreement. (Reference is
made to Exhibit 10(a) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(f) Schedule identifying material details of
Indemnification Agreements substantially identical
to Exhibit 10(e). (Reference is made to Exhibit
10(f) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(g) Voting Agreement, dated November 30, 1994, among
Peter J. Kight, Greylock Limited Partnership, and
Highland Capital Partners Limited Partnership.
(Reference is made to Exhibit 10(g) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(h) Voting Agreement, dated December 2, 1994, among
Peter J. Kight, Mark A. Johnson, Greylock Limited
Partnership, Highland Capital Partners Limited
Partnership and Tribune Company. (Reference is made
to Exhibit 10(h) to Registration Statement on Form
S-1, as amended (Registration No. 33- 95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(i) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Peter J.
Kight and the Company.
85
(Reference is made to Exhibit 10(i) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(j) Noncompete, Nondisclosure, and Assignment
Agreement, dated February 1, 1990, between Mark A.
Johnson and the Company. (Reference is made to
Exhibit 10(j) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(k) Stock Purchase Agreement, dated December 2, 1994,
between the Company and Tribune Company. (Reference
is made to Exhibit 10(k) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(l) Stock Transfer Restriction Agreement, dated
December 2, 1994, among Peter J. Kight, Mark A.
Johnson, and Tribune Company. (Reference is made to
Exhibit 10(l) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(m) Investment Agreement, dated November 9, 1983, among
the Company (formerly, Aegis Systems, Inc.), The
Midland Mutual Life Insurance Company, The Columbus
Mutual Life Insurance Company, Grange Mutual
Casualty Company, and North American National Corp.
(Reference is made to Exhibit 10(m) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(n) Stock Purchase Agreement, dated March 17, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(n) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(o) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and The
Midland Mutual Life Insurance Company. (Reference
is made to Exhibit 10(o) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(p) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Columbus
Mutual Life Insurance Company. (Reference is made
to Exhibit 10(p) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
86
reference.)
10(q) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Grange
Mutual Casualty Company. (Reference is made to
Exhibit 10(q) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(s) Subscription and Redemption Agreement, dated
December 31, 1988, between the Company and Pan
Western Life Insurance Company. (Reference is made
to Exhibit 10(s) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(t) Subscription Agreement, dated December 31, 1988,
between the Company and Nationwide Mutual Insurance
Company. (Reference is made to Exhibit 10(t) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(u) Investment Agreement, dated September 20, 1989,
among the Company, Columbus Life Insurance Company,
Grange Mutual Casualty Company, and North American
National Corporation. (Reference is made to Exhibit
10(u) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(v) Amending Agreement, dated November 30, 1994, and
letter agreement, dated September 24, 1992, between
the Company and Mark D. Phelan. (Reference is made
to Exhibit 10(v) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(w) Joint Development and Marketing Agreement, dated
August 2, 1995, between the Company and ADP, Inc.
(Reference is made to Exhibit 10(w) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(x) Bill Payment and Remote Banking Services Agreement,
dated March 25, 1993, between the Company and
MasterCard International Incorporated. (Reference
is made to Exhibit 10(x) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(y) Amendment to Bill Payment and Remote Banking
Services Agreement, dated December 1, 1994, between
the Company and MasterCard International
Incorporated. (Reference is made to
87
Exhibit 10(y) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(z) Agreement and Release, dated October 16, 1995,
between the Company and MasterCard International
Incorporated. (Reference is made to Exhibit 10(z)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.)**
10(aa) Electronic Bill Payment Services Marketing
Agreement, dated April 26, 1995, between the
Company and AT&T Corporation. (Reference is made to
Exhibit 10(z) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(bb) Amendment One to Electronic Bill Payment Services
Marketing Agreement, dated November 1, 1995,
between the Company and AT&T Corporation.
(Reference is made to Exhibit 10(bb) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(cc) Marketing and License Agreement, dated August 14,
1995, among the Company, Virtual Open Network
Environment, and Spyglass, Inc. (Reference is made
to Exhibit 10(aa) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(dd) Automatic Payment Collection Agreement, dated July
28, 1993, between the Company and CompuServe,
Incorporated (with addenda). (Reference is made to
Exhibit 10(bb) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(ee) Automatic Payment Collection Agreement, dated
August 22, 1994, between the Company and Spry, Inc.
(Reference is made to Exhibit 10(cc) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ff) Data Capture Credit Card Terminal Processing
Agreement, dated August 22, 1994, between the
Company and Spry, Inc. (Reference is made to
Exhibit 10(dd) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(gg) Reproduction and Distribution Agreement, dated July
27, 1995, between the Company and Spry, Inc.
(Reference is made to
88
Exhibit 10(ee) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(hh) Letter of Intent, dated July 10, 1995, between the
Company and CyberCash, Inc. (Reference is made to
Exhibit 10(ff) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(ii) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech,
Inc. (Reference is made to Exhibit 10(gg) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(jj) Amendment to Bill Payment and Remote Banking
Services Agreement, dated July 1, 1995, between the
Company and FiTech, Inc. (Reference is made to
Exhibit 10(hh) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)**
10(kk) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ll) Merchant Processing Agreement, dated March 13,
1995, between the Company and Society National
Bank. (Reference is made to Exhibit 10(jj) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(mm) Cooperative Marketing Agreement, dated March 14,
1991, between the Company and Intuit Corporation
(including addendum and notice). (Reference is made
to Exhibit 10(kk) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(nn) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark D.
Phelan. (Reference is made to Exhibit 10(ll) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
89
10(oo) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark D. Phelan.
(Reference is made to Exhibit 10(mm) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(pp) Promissory Note, dated December 16, 1992, of Mark
D. Phelan. (Reference is made to Exhibit 10(nn) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(qq) Loan and Stock Restriction Agreement, dated
December 16, 1992, between the Company and Mark A.
Johnson. (Reference is made to Exhibit 10(oo) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(rr) Stock Pledge and Security Agreement, dated December
16, 1992, between the Company and Mark A. Johnson.
(Reference is made to Exhibit 10(pp) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ss) Promissory Note, dated December 16, 1992, of Mark
A. Johnson. (Reference is made to Exhibit 10(qq)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(tt) Lease, dated August 1, 1993, between the Company
and The Director of Development of the State of
Ohio. (Reference is made to Exhibit 10(rr) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(uu) Guaranty Agreement, dated August 1, 1993, between
the Company and The Provident Bank. (Reference is
made to Exhibit 10(ss) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(vv) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ww) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission
on August 14, 1995, and incorporated herein by
reference.)
10(xx) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company
as mortgagor and Society National Bank as
mortgagee. (Reference is made to Exhibit 10(vv) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(yy) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(zz) Commercial Note Variable Rate, dated January 3,
1995, of the Company. (Reference is made to Exhibit
10(xx) to Registration Statement on Form S-1, as
amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(aaa) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference
is made to Exhibit 10(yy) to Registration Statement
on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(bbb) Agreement, dated August 29, 1995, between the
Company and Nationwide Mutual Insurance Company.
(Reference is made to Exhibit 10(zz) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ccc) Agreement, dated September 8, 1995, among the
Company, The Midland Life Insurance Company, The
Columbus Life Insurance Company, Grange Mutual
Casualty Company, and Pan Western Life Insurance
Company. (Reference is made to Exhibit 10(aaa) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(ddd) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(eee) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to
90
the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.)**
10(fff) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by
reference.)**
10(ggg) License Agreement, December 29, 1995, between the
Company and Premiere Communications, Inc.
(Reference is made to Exhibit 10(ggg) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(hhh) Payment Services, Software Development and
Marketing Agreement, dated as of February 27, 1996,
between the Company and CyberCash. (Reference is
made to Exhibit 10(a) to the Form 10-Q for the
quarter ended March 31, 1996, filed with the
Securities and Exchange Commission, and
incorporated herein by reference.) **
10(iii) Termination of Voting Agreement, dated as of April
19, 1996, among Peter J. Kight, Mark A. Johnson,
Greylock Limited Partnership, Highland Capital
Partners Limited Partnership and Tribune Company.
(Reference is made to Exhibit 10(b) to the Form
10-Q for the quarter ended March 31, 1996, filed
with the Securities and Exchange Commission, and
incorporated herein by reference.)
10(jjj) Voting Agreement, dated as of April 19, 1996, among
Peter J. Kight, Mark A. Johnson, and Tribune
Company. (Reference is made to Exhibit 10(c) to the
Form 10-Q for the quarter ended March 31, 1996,
filed with the Securities and Exchange Commission,
and incorporated herein by reference.)
10(kkk) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(lll) Executive Employment Agreement between the Company
and Robert E. Bowers. (Reference is made to Exhibit
10(e) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(mmm) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
91
10(nnn) Executive Employment Agreement between the Company
and James M. Garrett. (Reference is made to Exhibit
10(g) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(ooo) Executive Employment Agreement between the Company
and James Robert Lewis, III. (Reference is made to
Exhibit 10(h) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(ppp) Executive Employment Agreement between the Company
and Jay N. Whipple, III. (Reference is made to
Exhibit 10(i) to the Form 10-Q for the quarter
ended March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(qqq) * Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Powers of Attorney.
27 * Financial Data Schedule.
- -----------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
1
Exhibit 10(qqq)
AGREEMENT FOR ACH SERVICES
--------------------------
AGREEMENT, dated as of July 1, 1996, between CHECKFREE
CORPORATION, having its principal place of business at 8275 North High Street,
Columbus, Ohio 43235 (the "Company") and THE CHASE MANHATTAN BANK, N.A., having
its principal place of business at 1 Chase Manhattan Plaza, New York, NY 10061
("Chase"). Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings provided in the Operating Rules (the "Rules")
of the National Automated Clearing House Association and the Chase Automated
Clearing House, Inc.
RECITALS
--------
A. The Company provides electronic payment processing services to
individuals and businesses who have contracted with the Company for such
services (collectively the "Clients"). Pursuant to its contracts with its
Clients, the Company acts as either a payment agent or collection agent for the
payment or collection of monthly or other periodic charges (the "Periodic
Payments") through an electronic payment processing service. The Company has
advised Chase that in the course of performing these services, the Company is
from time to time in possession of its Clients' funds.
B. The Company wishes (i) to initiate Debit Entries and Credit Entries
through the automated clearing house ("ACH") system in order to collect funds
from the depository financial institution accounts of the Clients and pay funds
to the entities specified by the Clients (the "Payees") and (ii) to transmit
Files of such Entries directly to the New York Automated Clearing House
("NYACH") using a routing number that identifies Chase as the Originating
Depository Financial Institution, and Chase is willing to allow the Company to
use such routing number.
C. In some instances, the Company must hold the Periodic Payments in
clearing accounts at Chase until the funds clear through the ACH system, at
which time the Company makes payments with checks or electronic transfers drawn
on the Company's account.
D. The Company wishes to establish one or more demand deposit accounts
to hold the Periodic Payments while in transit end desires that Chase
acknowledge the Company's representation regarding the ownership of these funds
by the Clients and waive its set-off rights with respect to the funds in such
account(s). The Company further desires that a procedure be put into place to
notify the Company in the event of third party claims that such funds constitute
property of the Company and permit the Company the opportunity to contest such
claims. Chase wishes to assist the Company in establishing such demand deposit
accounts and to provide the services necessary to accomplish the foregoing.
NOW, THEREFORE, in consideration of the agreements of the parties set
forth below, the Company and Chase hereby agree as follows:
1. ESTABLISHMENT OF CHECKFREE CLIENT ACCOUNTS. The Company shall open
one or more demand deposit accounts at Chase in which the Company will collect,
hold and pay out funds for the benefit of the Company's Clients. The title of
each such account shall be "Checkfree Corporation Collections Held in Trust for
the Benefit of Clients Account" (collectively, the "Checkfree Client Accounts").
The Checkfree Client Accounts shall be credited with the funds payable under the
Debit Entries originated by the Company and shall be charged in the amount of
2
the Credit Entries originated by the Company. The Checkfree Client Accounts are
described by account number and other appropriate identifying information as set
forth on Exhibit A attached hereto and incorporated herein by this reference.
The information contained on Exhibit A shall be updated from time to time by the
parties, as appropriate, to reflect current information concerning the Checkfree
Client Accounts. The Company hereby reserves the right to receive interest
payable by Chase under any arrangement whereby funds are swept out of the
Checkfree Client Accounts and placed overnight (or longer) in one or more
interest bearing accounts, and Chase agrees to pay such interest earned into a
separate Company account and to not commingle the interest with the funds in the
Checkfree Client Accounts.
The Checkfree Client Accounts, Return Item Accounts (as such term is
hereafter defined) and any other accounts maintained by the Company at Chase
shall also be governed by the terms of Chase's account conditions, as amended
from time to time, except that in the event of any conflict between said account
conditions and this Agreement, this Agreement shall control. Nothing in said
account conditions shall alter the Company's right to categorize the funds held
in the Checkfree Client Accounts as funds held in trust by the Company for the
benefit of the Company's Clients.
Notwithstanding the foregoing, the Company understands and agrees that
Chase's obligations set forth in this Agreement (and otherwise with respect to
the Checkfree Client Accounts) run solely to the Company and that Chase has no
relationship with, and has assumed no obligations to, the Company's Clients.
Without limitation of the foregoing, Chase shall not be deemed to have any
fiduciary obligation towards or relationship of agency with or for the Clients
or the Company in performing its duties under this Agreement. Chase's duties
with respect to the Checkfree Client Accounts shall continue to be that of a
debtor/creditor as in any other depository account relationship (except as
otherwise set forth in this Agreement). Chase shall have no duty whatsoever to
monitor the deposits or withdrawals from the Checkfree Client Accounts (whether
made by means of the Debits and Credits or otherwise).
2. AUTHORIZATION. Prior to the initiation of the first Debit Entry to a
Client's account, the Company shall obtain an authorization from such Client
which permits the initiation from time to time of Debit Entries to such Client's
account. Each authorization shall be in a form which complies with the Rules.
3. TRANSMISSION OF FILES TO NYACH. The Company shall, at such times as
shall be mutually agreed upon by the parties, create Files of Debit Entries or
Credit Entries, using an origin number identifying the Company as Originator and
using a routing number identifying Chase as the Originating Depository Financial
Institution. Chase shall specify which Chase routing number(s) (the "Chase
Routing Number") may be used by the Company and the Company will not use any
other Chase routing numbers on its Files. The Company shall not make any use of
the Chase Routing Number except as specifically permitted under this Agreement.
The Company shall transmit the Files directly to NYACH by means of
authenticated mainframe computer transmission in accordance with and subject to,
the security procedures set forth in Section 4 hereof. The Company shall ensure
that all Files are transmitted in the appropriate NACHA format for the
transactions contained in such Files.
Concurrently with the transmission of a File to NYACH, the Company will
transmit a duplicate of such File to Chase, or advise Chase of the transmission
of such file to NYACH in such other manner as shall be mutually agreed upon by
the parties.
2
3
Chase shall establish a maximum aggregate dollar limit for Credit
Entries originated by the Company having the same settlement date (the "Exposure
Limit"), which Chase shall communicate to NYACH. The Company understands and
agrees that Chase has instructed NYACH to suspend any File or Files containing
Credit Entries which exceed the Exposure Limit and not to process such Files
unless and until Chase's approval is received, which approval may be granted or
withheld by Chase in its sole discretion. The Exposure Limit shall be subject to
revision or cancellation by Chase at any time without prior notice, although
Chase will endeavor to notify the Company prior to any such revision or
cancellation.
Chase shall also have the right to monitor the aggregate dollar amount
of Debit Entries transmitted to NYACH under this Agreement. If at any time Chase
determines that the aggregate dollar amount of Debit Entries or Credit Entries
originated by the Company is excessive in relation to the Company's financial
condition, or if in the opinion of Chase the Company's financial condition has
become materially impaired, Chase shall have the right at any time to (a)
require the Company to deposit good and collected funds with respect to each
Credit Entry at such time prior to the settlement date therefor as Chase shall
specify, and/or (b) require the Company to maintain collateral or an imprest
balance with Chase in an amount specified by Chase. Further, in the event the
Company at any time fails to cover an overdraft upon demand as required under
Sections 6 and 8(a), Chase shall have the right to immediately notify NYACH to
suspend processing for the Company until such time as such overdraft is funded.
Chase's rights set forth in this paragraph are in addition to any termination
rights Chase may have under Section 14.
4. AUTHENTICATION OF FILES. The Company agrees to obtain any necessary
equipment (including hardware and software) to implement authentication between
itself and NYACH and to authenticate each File transmitted to NYACH under this
Agreement. As between Chase and the Company, any unauthorized Debit Entry or
Credit Entry shall be solely the responsibility of the Company.
In connection with the authentication link between the Company and
NYACH, it is understood and agreed that Chase will be furnishing to NYACH, at
NYACH's request and in a form provided by NYACH, (i) an ACH Authentication
Contact Letter (the "Contact Letter") setting forth the names of individuals at
the Company who will serve as ACH Security Officer (one person) and Personal
Computer Authentication Contacts (three people) and (ii) an Authentication
Equipment Agreement (the "NYACH Authentication Agreement") acknowledging receipt
of authentication equipment which NYACH will furnish to the Company. The Company
shall designate an ACH Security Officer and three Computer Authentication
Contacts, as required by the Contact Letter, and furnish their names, titles,
addresses and telephone numbers to Chase so that Chase may complete the Contact
Letter. In connection with the Contact Letter and NYACH Authentication
Agreement, the Company hereby agrees as follows:
(a) The Company hereby represents, warrants and covenants that each ACH
Security Officer and Computer Authentication Contact designated at any time by
the Company pursuant to this Agreement has been duly authorized by the Board of
Directors of the Company (or designated by an individual who has been duly
authorized by such Board of Directors to make such designation) to order the
issuance of Debit Entries and Credit Entries and to otherwise perform their
functions as described in the Contact Letter and Authentication Agreement.
(b) Without limitation of anything contained in clause (a) above, the
Company further represents, warrants and covenants that the Company shall take
all actions necessary to ensure that each ACH Security Officer and Computer
Authentication Contact is informed of his or her responsibilities under the
Contact Letter and Authentication Agreement, fully understands such
3
4
responsibilities and is capable of fulfilling such responsibilities. Such
responsibilities include the following:
ACH SECURITY OFFICER - Must understand the authentication process
and be able to authorize bypass when necessary. Must be able to
serve as the primary participant contact for any ACH security
related issue, provide for the security of the authentication device
and key, and insure (through Telecommunications/Operations
personnel) that the device is functioning and in the data path when
communicating with NYACH.
AUTHENTICATION CONTACTS - Must be authorized to instruct NYACH by
telephone that the Company will operate In bypass authentication
mode. Must confirm such instruction upon receipt of telephone call
from NYACH. Must be able to serve as back-up ACH Security Officer in
the named ACH Security Officer's absence.
(c) The Company shall notify Chase (or, at Chase's request, NYACH) in
writing within seven (7) calendar days should any ACH Security Officer or
Authentication Contact, for whatever reason, cease employment with the Company
or be re-assigned and shall notify Chase (or, at Chase's request, NYACH) of any
replacement for such person.
(d) The Company represents and warrants that it has established and
will follow appropriate security procedures in notifying NYACH that the Company
will operate in bypass authentication mode.
(e) The Company hereby acknowledges that it has received from NYACH the
authentication unit[s], switching device[s], and cables ("Authentication
Equipment") listed on the ACH Authentication Equipment Inventory attached hereto
as Exhibit B to be installed at the Company's processing facility by the Company
for use in connection with a security procedure established by NYACH for the
purposes of (i) verifying that an ACH entry or a communication amending or
cancelling an ACH entry has been sent to NYACH by the Company or sent to the
Company by NYACH and (ii) detecting error in the transmission of an ACH entry or
a communication amending or cancelling an ACH entry. The Company acknowledges
that the authentication equipment listed on the attached ACH Authentication
Equipment Inventory, and any subsequent ACH Authentication Equipment Inventory
adding to, deleting from, or modifying the list of authentication equipment in
the Company's possession, is the sole property of The New York Clearing House
Association ("NYCHA") and that the Company shall have no right, title, or
interest in any of the authentication equipment. The Company further agrees to
return the Authentication Equipment to NYCHA or NYACH upon NYACH's or NYCHA's
demand or if the Company ceases to originate Entries under this Agreement.
(f) The Company understands that upon receiving an instruction from an
ACH Security Officer or Personal Computer Authentication Contact to operate in
bypass authentication mode. NYACH will immediately confirm such instruction by
callback or other procedures that NYACH may establish from time to time. The
Company further understands that bypass authentication mode will not be put into
operation until NYACH has confirmed, using callback or other procedures, such
instruction.
(g) The Company agrees that in authorizing bypass authentication mode,
the Company will have refused the use of a security procedures that requires the
use of the Authentication Equipment and will have chosen to rely solely on the
use of a telephone voice response system. passwords, or other security
procedures that NYACH will have adopted. The Company
4
5
understands that these security procedures may be deemed commercially reasonable
within the meaning of section 4-A-202(3) of the New York Uniform Commercial
Code. The Company further agrees that whenever an ACH Security Officer or
Personal Computer Authentication Contact has authorized NYACH to process in
bypass authentication mode, the Company will be bound by any Debit Entry or
Credit Entry, whether or not authorized, issued in the Company's name and
processed by NYACH in compliance with the security procedure NYACH has
established.
(h) The Company hereby agrees to indemnify Chase against and hold Chase
harmless from any and all claims, liabilities, losses, damages, and expenses
(including, but not limited to, attorneys' fees and expenses of litigation)
arising out of or in connection with the Company's use of the Authentication
Equipment or operating the Authentication Equipment in the bypass authentication
mode.
5. SETTLEMENT OF DEBIT ENTRIES AND CREDIT ENTRIES. Chase will receive
from NYACH on each banking day a transmittal (the "NYACH Transmittal") showing
all Debit Entries and Credit Entries originated by the Company. Using the
information contained in the NYACH Transmittal, Chase shall handle the funding
and payment of all such Credit Entries and Debit Entries in accordance with
Sections 6 and 7 of this Agreement and the Company hereby authorizes Chase to
debit and credit the Checkfree Client Accounts in accordance with Sections 6 and
7 based solely upon the information contained in the NYACH Transmittal.
6. FUNDING FOR CREDIT ENTRIES. Chase shall effect the payment of each
Credit Entry listed on the NYACH Transmittal by debiting a designated Checkfree
Client Account in the amount of such Credit Entry on the settlement date for
such Credit Entry specified in the NYACH Transmittal. The Company shall ensure
that the requisite amount of good and collected funds with respect to each
Credit Entry is on deposit in the designated Checkfree Client Account at the
time Chase effects such debit. If any overdraft results from any debit to a
Checkfree Client Account made pursuant to this section, the Company shall repay
the amount of such overdraft upon demand in immediately available funds plus
interest on such overdraft at such rates as Chase shall establish and advise the
Company of from time to time.
7. PAYMENT OF DEBIT ENTRIES. Chase will credit the funds payable under
each Debit Entry listed on the NYACH Transmittal to the Checkfree Client Account
designated by the Company. Such credits with respect to any Debit Entry will be
made on the date the NYACH Transmittal listing such Debit Entry is received by
Chase.
8. RETURNS AND REVERSALS.
(A) RETURNED OR REVERSED DEBIT ENTRIES. The amount of all returned or
reversed Debit Entries listed on each NYACH Transmittal will be charged against
a demand deposit account established and maintained at Chase by the Company in
its own right, title and interest (and not as agent for the benefit of the
Company's Clients) (the "Return Item Account"), which shall be separate and
distinct from the Checkfree Client Accounts. In addition, if final payment for
any Debit Entry is not received by Chase for any reason, including without
limitation, for reason of the failure, suspension or inability to settle of any
Participating Depository Financial Institution, the amount of such Debit Entry
will be charged against a designated Return Item Account. All charges effected
by Chase pursuant to this Section 8 shall be made on the day Chase receives
notice of the return, reversal or failure to make final payment. The Company
shall ensure that good and collected funds are on deposit at all times in the
Return Item Accounts in an amount sufficient to cover any such returns or
reversals. If any such charge causes an overdraft in a Return Item Account, the
Company shall repay the amount of such overdraft upon demand in immediately
5
6
available funds plus interest on such overdraft at such rates as Chase shall
establish and advise the Company of from time to time.
(b) RETURNED CREDITS. For each returned Credit Entry listed on a NYACH
Transmittal, Chase shall (if it has previously received payment from the Company
in accordance with Section 6 and if Chase has obtained payment for the returned
Credit Entry from the Receiving Depository Financial Institution) credit the
amount of such returned Credit Entry to a designated Return Item Account or make
the amount of such Credit Entry available to the Company through such other
means as may be agreed upon by the Company and Chase. Any such credit shall be
made on the day Chase receives notice of the returned Credit Entry.
9. ADDITIONAL PROVISIONS REGARDING FUNDS IN THE CHECKFREE CLIENT
ACCOUNTS. (a) In the event that Chase receives any notices of garnishment,
attachment, levy, or any other such legal process with respect to funds in the
Checkfree Client Accounts, Chase covenants that it will promptly advise the
Company of such receipt and will cooperate with the Company in connection with
such notice. Chase acknowledges the Company's representation that the funds in
the Checkfree Client Accounts are being held in trust by the Company for the
benefit of the Clients and Chase agrees that any response made by Chase with
respect to any such attempted garnishment, attachment, levy or other such legal
process will reflect the accurate title of the Checkfree Client Accounts.
(b) Chase covenants and agrees not to apply or set off the funds in the
Checkfree Client Accounts against any indebtedness or other obligations
whatsoever of the Company to Chase, except only such application as is required
to fund the Credit Entries as provided in Section 6 of this Agreement, whether
such set-off rights are granted by (i) common law, (ii) any state or federal
statute or regulation, (iii) express contractual agreements between the Company
and Chase concerning any depository accounts the Company has with Chase, (iv)
Chase's policies and rules concerning depository accounts, or (V) by virtue of
any security Interest or other lien granted to Chase by law or by agreement,
including, but not limited to, any security interest or lien claimed pursuant to
any cross default or cross collateral provisions in any loan document or other
contract between the Company and Chase.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Company hereby
represents, warrants and covenants that: (a) The execution, delivery and
performance by the Company of this Agreement on the terms set forth herein have
been duly authorized by all necessary corporate action and do not and will not
violate any provision of law or the Company's charter or by-laws or result in
the breach of or constitute a default under or require any consent under any
other agreement or instrument to which the Company is a party or by which the
Company may be bound or affected; (b) the Company hereby makes the same
representations and warranties to Chase as Chase (as the "Originating Depository
Financial Institution" under the Rules) is deemed to make under Section 2.2 of
the Rules; (c) all requirements of the Rules binding on or applicable to the
Company as the "Originator" under the Rules have been satisfied and shall
continue to be complied with and the Company shall be bound by and comply with
the Rules as in effect from time to time, including without limitation, the
provision thereof making payment of a Credit Entry by the Receiving Depository
Financial Institution to the Payee provisional until receipt by the Receiving
Depository Financial Institution of final settlement for such Credit Entry, and
the Company acknowledges that it has received notice of such rule and of the
fact that if such settlement is not received, the Receiving Depository Financial
Institution shall be entitled to a refund from the Payee of the amount credited
and the Company shall not be deemed to have paid the Payee the amount of such
Credit Entry; and (d) the Company has been duly authorized by each Client to act
as such Client's agent with respect to any funds of such Client at any time on
deposit in the Checkfree Client Accounts and the Company is holding such funds
in trust for the benefit of the Clients.
6
7
Chase hereby represents, warrants and covenants that the execution,
delivery and performance by Chase of this Agreement have been duly authorized by
all necessary corporate action and do not and will not violate any provision of
law or Chase's charter or by-laws or result in the breach of or constitute a
default under or require any consent under any other agreement or instrument to
which Chase is a party or by which Chase may be bound or affected.
11. INDEMNITIES AND RELEASES. Subject to the limitations of the
Company's liability set forth below in this Section 11, the Company agrees to
indemnify and hold Chase harmless from and against any and all actions, claims,
demands, loss, liability or expenses whatsoever (collectively, "Losses"),
resulting (a) from the Company's violation of any of its agreements or breach of
any of its representations or warranties hereunder, (b) from the maintenance and
operation of the Checkfree Client Accounts in accordance with this Agreement,
including without limitation the investment by the Company for its own benefit
of the funds being held therein and the payment of interest earned on such
investments to the Company pursuant to Section 1 hereof, (c) from any Debit
Entry or Credit Entry, whether or not authorized, originated in the name of
Company under this Agreement, and (d) from any claims by Clients relating to the
use or disposition of funds in the ACH Accounts; provided, however, that these
indemnities shall not apply to any Losses caused directly or indirectly by
Chase's negligence or willful misconduct. These indemnities shall survive the
termination of this Agreement.
Subject to the limitations of Chase's liability set forth below in this
Section 11, Chase agrees to indemnify and hold the Company harmless from and
against any and all Losses resulting from Chase's violation of any of its
agreements or breach of any of its representations or warranties hereunder;
provided, however, that these indemnities shall not apply to any Losses caused
directly or indirectly by the Company's negligence or willful misconduct. These
indemnities shall survive the termination of this Agreement.
Neither party shall have any responsibility nor shall incur any
liability for any failure to carry out, or any delay in carrying out, any of its
obligations hereunder if such failure or delay results from such party's acting
in accordance with applicable laws, regulations or rules or interpretations
thereof, or from acts of God, labor difficulty, war, terrorist acts, power
failure, interruption of transmission or communication facilities, or any other
cause beyond such party's control. In addition, Chase shall have no
responsibility and shall incur no liability for any act or failure to act by, or
for the solvency of or notice to the Company of the solvency of, NACHA or any
member thereof, NYACH, NYCHA, any Participating Depository Financial
Institution, Federal Reserve Bank or any other third party, or for any error,
omission or inaccuracy in the information contained, in any NYACH Transmittal.
In no event shall either party be liable for any indirect, consequential or
special damages, regardless of the form of action and even if such party has
been advised of the possibility of such damages.
12. NO USE OF NAME. Neither party shall use the name or logo of the
other party, or the name or logo of any affiliate of the other party, in any
advertising, promotional or other written or tangible material, without the
prior written consent of the other party.
13. COMPENSATION. For the services provided hereunder the Company shall
pay to Chase monthly fees calculated in accordance with the fee schedule annexed
hereto as Exhibit C. Such fees shall remain in effect until the end of the
Initial Term (as defined in Section 14) (except for pass-through charges from
the Federal Reserve, an automated clearing house or other processor, which may
be increased or decreased by Chase as the amounts charged to Chase are increased
or decreased). The fees after the Initial Term shall be mutually agreed upon by
the parties. Chase shall either, as the Company and Chase shall mutually agree,
(a) each month send the Company a bill for the fee earned in the prior month,
and the Company shall make payment of the same within
7
8
fifteen days following receipt, or (b) each month debit an account of the
Company in the amount of the fee earned by Chase in the prior month. In lieu of
such fee, Chase may permit the Company to maintain deposits with Chase in an
amount which, in the reasonable determination of Chase, provides Chase with
compensation equivalent to such fee.
14. TERM; TERMINATION. (a) This Agreement shall become effective as of
the date hereof and, except as provided in Section 14(b), shall continue in
effect for a period of three years from the date hereof (the "Initial Term").
This Agreement shall automatically renew and continue upon the expiration of the
Initial Term unless terminated by either party upon not less than ninety days
prior written notice to the other party at the end of, or at any time after, the
Initial Term.
(b) Notwithstanding the foregoing, this Agreement may be terminated as
follows:
(i) Either party may terminate this Agreement effective upon written
notice to the other party in the event of (A) the other party's breach of a
material obligation or duty under this Agreement which breach is incapable of
cure or which, being capable of cure, has not been cured within 15 days
following receipt of notice of such breach from the terminating party, or (B)
the other party's insolvency, receivership or voluntary or involuntary
bankruptcy, or the institution of any proceeding therefor, or any assignment for
the benefit of such party's creditors, or if in the opinion of the terminating
party the financial condition of the other party has become impaired.
(ii) Chase may at any time terminate this Agreement upon not less than
90 days prior written notice to the Company in the event Chase determines, in
its sole discretion, to cease providing to its customers generally the ACH
processing services covered by this Agreement. In any event, Chase will use all
reasonable efforts to notify the Company promptly after any decision is made
that would trigger Chase's termination rights under this section.
(iii) Either party may at any time terminate this Agreement upon not
less than 90 days prior written notice to the other party in the event of a
transfer of control of the other party or any entity which directly or
indirectly controls the other party, whether by stock purchase, merger,
consolidation, sale of assets, operation of law or otherwise.
Notwithstanding any such termination, this Agreement shall continue in
full force and effect as to all Entries whose processing has been commenced by
Chase prior to such termination.
15. NOTICES. Any notices required or permitted hereunder shall be in
writing and shall be deemed to have been duly given when delivered to the
parties at the following respective address (or at such other address as shall
be specified by like notice) by any method that includes an acknowledgment or
other written evidence of receipt:
To the Company:
Checkfree Corporation
8275 North High Street
Columbus, Ohio 43235
Attention: General Counsel
8
9
To Chase:
The Chase Manhattan Bank, N.A.
4 Chase Metrotech Center, 20th Floor
Brooklyn, New York 11245
Attention: Global Payments and Treasury Services Division,
EFT Product Manager
16. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to its
choice of law principles.
17. ASSIGNABILITY. This Agreement is not assignable by either party
without the prior written consent of the other party, which consent shall not be
unreasonably withheld.
18. MISCELLANEOUS. Either party's waiver of any provision of this
Agreement shall not constitute a waiver of such party's rights under that
provision in the future or of any other right. This Agreement supersedes and
replaces any proposals, representations or warranties, either oral or in
writing, previously made by either or both of the parties with respect to the
services described herein. In the event that any one or more of the provisions
of this Agreement shall be held to be invalid, illegal, or unenforceable, the
remaining provisions of this Agreement shell not be affected or impaired
thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first set forth above.
CHECKFREE CORPORATION
By: /s/ Mark A. Johnson
----------------------------------
Authorized Signature
Executive Vice President
----------------------------------
Title
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Steve Bernstein
----------------------------------
Authorized Signature
Vice President
----------------------------------
Title
9
1
EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
Servantis Systems Holdings, Inc., a Delaware corporation;
Servantis Systems, Inc., a Georgia corporation;
Servantis Services, Inc., a Georgia corporation;
Checkfree Software Solutions, Inc., a Delaware corporation;
Security APL, Inc., an Illinois corporation;
Bow Tie Systems, Inc., an Illinois corporation;
Checkfree Acquisition Corporation II, a Delaware corporation;
Interactive Solutions Corporation, an Oregon corporation;
Checkfree Investment Corporation, a Delaware corporation; and
RCM Systems, Inc., a Wisconsin corporation.
1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-98440, 33-98444, 33-98442 and 33-98446 of Checkfree Corporation on Form S-8
of our reports dated August 22, 1996, except for Note 17 as to which the date
is September 15, 1996, appearing in this Transition Report on Form 10-K of
Checkfree Corporation for the six months ended June 30, 1996.
DELOITTE & TOUCHE LLP
Columbus, Ohio
September 23, 1996
1
EXHIBIT 24
POWER OF ATTORNEY
Each director and/or officer of Checkfree Corporation (the "Corporation")
whose signature appears below hereby appoints Peter J. Kight, Mark A. Johnson,
and Curtis A. Loveland as the undersigned's attorneys or any of them
individually as the undersigned's attorney, to sign, in the undersigned's name
and behalf and in any and all capacities stated below, and to cause to be filed
with the Securities and Exchange Commission (the "Commission"), the
Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year
ended June 30, 1996, and likewise to sign and file with the Commission any and
all amendments to the Form 10-K, and the Corporation hereby also appoints such
persons as its attorneys-in-fact and each of them as its attorney-in-fact with
like authority to sign and file the Form 10-K and any amendments thereto
granting to each such attorney-in-fact full power of substitution and
revocation, and hereby ratifying all that any such attorney-in-fact or the
undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 23rd day of
September, 1996.
Signature Title
/s/ PETER J. KIGHT Chairman of the Board of Directors, President,
- ---------------------------- and Chief Executive Officer
Peter J. Kight
/s/ MARK A. JOHNSON Director and President - Business
- ---------------------------- Services
Mark A. Johnson
/s/ JAMES S. DOUGLASS Executive Vice President - Finance and
- ---------------------------- Chief Financial Officer
James S. Douglass
/s/ JOHN M. STANTON Vice President and Treasurer
- ----------------------------
John M. Stanton
/s/ WILLIAM P. BOARDMAN Director
- ----------------------------
William P. Boardman
/s/ GEORGE R. MANSER Director
- ----------------------------
George R. Manser
/s/ EUGENE F. QUINN Director
- ----------------------------
Eugene F. Quinn
/s/ JEFFREY M. WILKINS Director
- ----------------------------
Jeffrey M. Wilkins
5
1
U.S. DOLLARS
YEAR
JUN-30-1996
JAN-01-1996
JUN-30-1996
1
20,987,355
18,089,029
31,796,270
2,279,722
0
90,798,732
46,388,560
9,821,419
196,229,544
45,303,019
8,274,317
0
0
422,748
137,251,967
196,229,544
0
51,039,862
0
50,528,948
122,357,586
0
324,726
(146,831,450)
(8,628,615)
(138,202,835)
0
(364,374)
0
(138,567,209)
(3.70)
(3.70)
