Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 0-25346

 

 

ACI WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-0772104

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3520 Kraft Rd, Suite 300

Naples, FL 34105

  (239) 403-4600
(Address of principal executive offices, including zip code)  

(Registrant’s telephone number, including area code)

 

 

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 such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 6, 2019, there were 110,563,189 shares of the registrant’s common stock outstanding.

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.005 par value   ACIW   Nasdaq Global Select Market

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets as of March  31, 2019, and December 31, 2018

     3  
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

     4  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018

     5  
 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

     6  
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

     7  
 

Notes to Condensed Consolidated Financial Statements

     8  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     33  

Item 4.

 

Controls and Procedures

     34  
PART II – OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

     34  

Item 1A.

 

Risk Factors

     34  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     35  

Item 3.

 

Defaults Upon Senior Securities

     35  

Item 4.

 

Mine Safety Disclosures

     35  

Item 5.

 

Other Information

     35  

Item 6.

 

Exhibits

     36  

Signature

     37  

 

2


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands, except share and per share amounts)

 

     March 31,     December 31,  
     2019     2018  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 176,173     $ 148,502  

Receivables, net of allowances of $3,663 and $3,912, respectively

     265,750       348,182  

Prepaid expenses

     31,464       23,277  

Other current assets

     40,830       46,516  
  

 

 

   

 

 

 

Total current assets

     514,217       566,477  
  

 

 

   

 

 

 

Noncurrent assets

    

Accrued receivables, net

     177,407       189,010  

Property and equipment, net

     70,909       72,729  

Operating lease right-of-use assets

     60,978       —    

Software, net

     130,812       137,228  

Goodwill

     909,691       909,691  

Intangible assets, net

     162,845       168,127  

Deferred income taxes, net

     38,408       27,048  

Other noncurrent assets

     48,875       52,145  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,114,142     $ 2,122,455  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 28,046     $ 39,602  

Employee compensation

     29,570       38,115  

Current portion of long-term debt

     20,788       20,767  

Deferred revenue

     91,369       104,843  

Other current liabilities

     90,604       93,293  
  

 

 

   

 

 

 

Total current liabilities

     260,377       296,620  
  

 

 

   

 

 

 

Noncurrent liabilities

    

Deferred revenue

     60,853       51,292  

Long-term debt

     645,784       650,989  

Deferred income taxes, net

     24,705       31,715  

Operating lease liabilities

     50,636       —    

Other noncurrent liabilities

     39,203       43,608  
  

 

 

   

 

 

 

Total liabilities

     1,081,558       1,074,224  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock; $0.01 par value; 5,000,000 shares authorized; no shares issued at March 31, 2019, and December 31, 2018

     —         —    

Common stock; $0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at March 31, 2019, and December 31, 2018

     702       702  

Additional paid-in capital

     636,960       632,235  

Retained earnings

     837,805       863,768  

Treasury stock, at cost, 23,994,620 and 24,401,694 shares at March 31, 2019, and December 31, 2018, respectively

     (351,587     (355,857

Accumulated other comprehensive loss

     (91,296     (92,617
  

 

 

   

 

 

 

Total stockholders’ equity

     1,032,584       1,048,231  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,114,142     $ 2,122,455  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2019     2018  

Revenues

    

Software as a service and platform as a service

   $ 108,557     $ 104,280  

License

     21,078       28,046  

Maintenance

     55,111       56,659  

Services

     21,109       20,325  
  

 

 

   

 

 

 

Total revenues

     205,855       209,310  
  

 

 

   

 

 

 

Operating expenses

    

Cost of revenue (1)

     114,941       107,336  

Research and development

     36,194       36,791  

Selling and marketing

     29,430       31,893  

General and administrative

     31,517       28,649  

Depreciation and amortization

     21,866       21,345  
  

 

 

   

 

 

 

Total operating expenses

     233,948       226,014  
  

 

 

   

 

 

 

Operating loss

     (28,093     (16,704
  

 

 

   

 

 

 

Other income (expense)

    

Interest expense

     (11,614     (9,365

Interest income

     3,033       2,744  

Other, net

     (1,912     (55
  

 

 

   

 

 

 

Total other income (expense)

     (10,493     (6,676
  

 

 

   

 

 

 

Loss before income taxes

     (38,586     (23,380

Income tax benefit

     (12,623     (3,952
  

 

 

   

 

 

 

Net loss

   $ (25,963   $ (19,428
  

 

 

   

 

 

 

Loss per common share

    

Basic

   $ (0.22   $ (0.17

Diluted

   $ (0.22   $ (0.17

Weighted average common shares outstanding

    

Basic

     116,090       115,642  

Diluted

     116,090       115,642  

 

(1)

The cost of revenue excludes charges for depreciation but includes amortization of purchased and developed software for resale.

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Net loss

   $ (25,963   $ (19,428

Other comprehensive income:

    

Foreign currency translation adjustments

     1,321       5,659  
  

 

 

   

 

 

 

Total other comprehensive income

     1,321       5,659  
  

 

 

   

 

 

 

Comprehensive loss

   $ (24,642   $ (13,769
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited and in thousands, except share amounts)

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance as of December 31, 2017

   $ 702      $ 610,345     $ 550,866     $ (319,960   $ (77,356   $ 764,597  

Net loss

     —          —         (19,428     —         —         (19,428

Other comprehensive income

     —          —         —         —         5,659       5,659  

Stock-based compensation

     —          6,362       —         —         —         6,362  

Shares issued and forfeited, net, under stock plans including income tax benefits

     —          206       —         9,671       —         9,877  

Repurchase of 1,346,427 shares of common stock

     —          —         —         (31,113     —         (31,113

Repurchase of restricted share awards for tax
withholdings

     —          —         —         (914     —         (914

Cumulative effect of accounting change, ASC 606

     —          —         243,981       —         —         243,981  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2018

   $ 702      $ 616,913     $ 775,419     $ (342,316   $ (71,697   $ 979,021  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2018

   $ 702      $ 632,235     $ 863,768     $ (355,857   $ (92,617   $ 1,048,231  

Net loss

     —          —         (25,963     —         —         (25,963

Other comprehensive income

     —          —         —         —         1,321       1,321  

Stock-based compensation

     —          6,585       —         —         —         6,585  

Shares issued and forfeited, net, under stock plans including income tax benefits

     —          (1,860     —         7,525       —         5,665  

Repurchase of 23,802 shares of common stock

     —          —         —         (631     —         (631

Repurchase of restricted share awards and restricted share
units for tax withholdings

     —          —         —         (2,624     —         (2,624
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2019

   $ 702      $ 636,960     $ 837,805     $ (351,587   $ (91,296   $ 1,032,584  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows from operating activities:

    

Net loss

   $ (25,963   $ (19,428

Adjustments to reconcile net loss to net cash flows from operating activities:

    

Depreciation

     5,901       5,926  

Amortization

     18,951       19,067  

Amortization of operating lease right-of-use assets

     3,383       —    

Amortization of deferred debt issuance costs

     753       699  

Deferred income taxes

     (17,414     (4,827

Stock-based compensation expense

     6,585       6,362  

Other

     574       (663

Changes in operating assets and liabilities

    

Receivables

     94,549       68,741  

Accounts payable

     (10,297     (2,611

Accrued employee compensation

     (8,598     (14,743

Current income taxes

     (1,041     (3,569

Deferred revenue

     (4,127     11,326  

Other current and noncurrent assets and liabilities

     (20,829     (21,144
  

 

 

   

 

 

 

Net cash flows from operating activities

     42,427       45,136  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (5,250     (5,937

Purchases of software and distribution rights

     (4,578     (6,652
  

 

 

   

 

 

 

Net cash flows from investing activities

     (9,828     (12,589
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     831       753  

Proceeds from exercises of stock options

     4,857       9,118  

Repurchase of restricted share awards and restricted share units for tax withholdings

     (2,624     (914

Repurchases of common stock

     (631     (31,113

Proceeds from revolving credit facility

     —         48,000  

Repayment of revolving credit facility

     —         (50,000

Repayment of term portion of credit agreement

     (5,937     (5,187

Payments on other debt

     (1,857     (352
  

 

 

   

 

 

 

Net cash flows from financing activities

     (5,361     (29,695
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

     433       1,719  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     27,671       4,571  

Cash and cash equivalents, beginning of period

     148,502       69,710  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 176,173     $ 74,281  
  

 

 

   

 

 

 

Supplemental cash flow information

    

Income taxes paid

   $ 5,949     $ 8,263  

Interest paid

   $ 14,388     $ 13,127  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

7


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements include the accounts of ACI Worldwide, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements as of March 31, 2019, and for the three months ended March 31, 2019 and 2018, are unaudited and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results for the interim periods. The condensed consolidated balance sheet as of December 31, 2018, is derived from the audited financial statements.

The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018, filed on March 1, 2019. Results for the three months ended March 31, 2019, are not necessarily indicative of results that may be attained in the future.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Other Current Assets and Other Current Liabilities

 

(in thousands)

   March 31,
2019
     December 31,
2018
 

Settlement receivables

   $ 13,842      $ 8,605  

Settlement deposits

     10,549        23,651  

Other

     16,439        14,260  
  

 

 

    

 

 

 

Total other current assets

   $ 40,830      $ 46,516  
  

 

 

    

 

 

 

(in thousands)

   March 31,
2019
     December 31,
2018
 

Settlement payables

   $ 23,552      $ 31,605  

Operating lease liabilities

     14,334        —    

Royalties payable

     14,751        11,318  

Vendor financed licenses

     4,152        3,551  

Accrued interest

     4,848        8,407  

Other

     28,967        38,412  
  

 

 

    

 

 

 

Total other current liabilities

   $ 90,604      $ 93,293  
  

 

 

    

 

 

 

Individuals and businesses settle their obligations to the Company’s various clients, primarily utility and other public-sector clients, using credit or debit cards or via automated clearing house (“ACH”) payments. The Company creates a receivable for the amount due from the credit or debit card company and an offsetting payable to the client. Upon confirmation that the funds have been received, the Company settles the obligation to the client. Due to timing, in some instances, the Company may receive the funds into bank accounts controlled by and in the Company’s name that are not disbursed to its clients by the end of the day, resulting in a settlement deposit on the Company’s books.

Off Balance Sheet Settlement Accounts

The Company also enters into agreements with certain clients to process payment funds on their behalf. When an ACH or automated teller machine network payment transaction is processed, a transaction is initiated to withdraw funds from the designated source account and deposit them into a settlement account, which is a trust account maintained for the benefit of the Company’s clients. A simultaneous transaction is initiated to transfer funds from the settlement account to the intended destination account. These “back to back” transactions are designed to settle at the same time, usually overnight, such that the Company receives the funds from the source at the same time as it sends the funds to their destination. However, due to the transactions being with various financial institutions there may be timing differences that result in float balances. These funds are maintained in accounts for the benefit of the client, which is separate from the Company’s corporate assets. As the Company does not take ownership of the funds, the settlement accounts are not included in the Company’s balance sheet. The Company is entitled to interest earned on the fund balances. The collection of interest on these settlement accounts is considered in the Company’s determination of its fee structure for clients and represents a portion of the payment for services performed by the Company. The amount of settlement funds as of March 31, 2019, and December 31, 2018, was $199.6 million and $256.5 million, respectively.

 

8


Table of Contents

Fair Value

The fair value of the Company’s Credit Agreement approximates the carrying value due to the floating interest rate (Level 2 of the fair value hierarchy). The Company measures the fair value of its Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities. The fair value of the Company’s 5.750% Senior Notes due 2026 (“2026 Notes”) as of March 31, 2019, and December 31, 2018, was $409.5 million and $395.0 million respectively.

The fair values of cash and cash equivalents approximate the carrying values due to the short period of time to maturity (Level 2 of the fair value hierarchy).

Goodwill

In accordance with the Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, the Company assesses goodwill for impairment annually during the fourth quarter of its fiscal year using October 1 balances or when there is evidence that events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company evaluates goodwill at the reporting unit level and has identified its operating segments, ACI On Demand and ACI On Premise, as its reporting units. As of March 31, 2019, the Company’s goodwill of $909.7 million was allocated to its two reporting units, with $725.9 million allocated to ACI On Premise and $183.8 million allocated to ACI On Demand.

Recoverability of goodwill is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved. Use of a discounted cash flow model is common practice in impairment testing in the absence of available transactional market evidence to determine the fair value. The calculated fair value was substantially in excess of the current carrying value for all reporting units based upon the October 1, 2018, annual impairment test and there have been no indications of impairment in the subsequent periods.

New Accounting Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (codified as “ASC 842”). ASC 842 requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases unless, as a policy election, a lessee elects not to apply ASC 842 to short-term leases. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. The Company adopted ASC 842 on January 1, 2019 (the effective date), using the optional transition method to not apply the new lease standard in the comparative periods presented and elected the “practical expedient package”, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. ASC 842 also provides practical expedients for the Company’s ongoing accounting including the combination of lease and non-lease components into a single lease component which the Company has elected to apply to its facilities leases. As of January 1, 2019, the Company recognized ROU assets and operating lease liabilities of $63.3 million and $68.6 million, respectively. Refer to Note 13, Leases, for further details.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the 2017 U.S. Tax Cuts and Jobs Act (or portion thereof) is recorded. This ASU requires disclosure of a description of the accounting policy for releasing income tax effects from AOCI; whether election is made to reclassify the stranded income tax effects from the 2017 U.S. Tax Cuts and Jobs Act; and information about the income tax effects that are reclassified. The Company adopted ASU 2018-02 as of January 1, 2019. The adoption of ASU 2018-02 did not have an impact on the condensed consolidated balance sheet, results of operations, and statement of cash flows.

Recently Issued Accounting Standards Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables and other financial instruments. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact the adoption of ASU 2016-13 will have on its condensed consolidated balance sheet, results of operations, and cash flow.

 

9


Table of Contents

2. Revenue

In accordance with ASC 606, Revenue From Contracts With Customers, revenue is recognized upon transfer of control of promised products and/or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. Refer to Note 11, Segment Information, for further details, including disaggregation of revenue based on primary solution category and geographic location.

Total receivables represent amounts billed and amounts earned that are to be billed in the future (i.e., accrued receivables). Included in accrued receivables are services and SaaS and PaaS revenues earned in the current period but billed in the following period and amounts due under multi-year software license arrangements with extended payment terms for which the Company has an unconditional right to invoice and receive payment subsequent to invoicing.

 

     March 31,      December 31,  

(in thousands)

   2019      2018  

Billed receivables

   $ 158,807      $ 239,275  

Allowance for doubtful accounts

     (3,663      (3,912
  

 

 

    

 

 

 

Billed receivables, net

   $ 155,144      $ 235,363  
  

 

 

    

 

 

 

Accrued receivables

     320,575        336,858  

Significant financing component

     (32,562      (35,029
  

 

 

    

 

 

 

Total accrued receivables, net

     288,013        301,829  

Less: current accrued receivables

     120,569        123,053  

Less: current significant financing component

     (9,963      (10,234
  

 

 

    

 

 

 

Total long-term accrued receivables, net

   $ 177,407      $ 189,010  
  

 

 

    

 

 

 

Total receivables, net

   $ 443,157      $ 537,192  
  

 

 

    

 

 

 

No customer accounted for more than 10% of the Company’s consolidated receivables balance as of March 31, 2019, or December 31, 2018.

Deferred revenue includes amounts due or received from customers for software licenses, maintenance, services, and/or SaaS and PaaS services in advance of recording the related revenue. Changes in deferred revenue were as follows (in thousands):

 

Balance, December 31, 2018

   $ 156,135  

Deferral of revenue

     42,533  

Recognition of deferred revenue

     (46,701

Foreign currency translation

     255  
  

 

 

 

Balance, March 31, 2019

   $ 152,222  
  

 

 

 

Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This does not include:

 

   

Revenue that will be recognized in future periods from capacity overages that are accounted for as a usage-based royalty.

 

   

SaaS and PaaS revenue from variable consideration that will be recognized in accordance with the ‘right to invoice’ practical expedient.

 

   

SaaS and PaaS revenue from variable consideration that will be recognized in accordance with the direct allocation method.

Revenue allocated to remaining performance obligations was $628.3 million as of March 31, 2019, of which the Company expects to recognize approximately 46% over the next 12 months and the remainder thereafter.

During the three months ended March 31, 2019, revenue recognized by the Company from performance obligations satisfied in previous periods was $3.9 million. During the three months ended March 31, 2018, revenue recognized by the Company from performance obligations satisfied in previous periods was not significant.

 

10


Table of Contents

3. Acquisition

Speedpay

On May 9, 2019, the Company acquired Speedpay, the U.S. bill pay business of Western Union Company (“WU”) for $750.0 million in cash, subject to adjustments, pursuant to a Stock Purchase Agreement, among the Company, WU, and ACI Worldwide Corp., a wholly owned subsidiary of the Company. The combination of the Company and Speedpay bill pay solutions will serve more than 4,000 customers across the U.S., bringing expanded reach in existing and complementary market segments such as consumer finance, insurance, healthcare, higher education, utilities, government, and mortgage. The acquisition of Speedpay will increase the scale of the Company’s On Demand platform business and allow the acceleration of platform innovation.

The acquisition of Speedpay will be accounted for using the acquisition method of accounting, where the Company will record all assets acquired and liabilities assumed at their respective acquisition-date fair values. The Company has not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations. In addition to goodwill, the final purchase price allocation may include allocations to intangible assets such as trademarks and tradenames, developed technology, and customer-related assets.

Effective April 5, 2019, the Company entered into an amendment agreement (the “amendment”) with ACI Worldwide Corp., Official Payments Corporation, the lenders, and Bank of America, N.A., as administrative agent for the lenders, to amend and restate the Company’s Credit Agreement, dated February 24, 2017. The amendment permitted the Company to borrow up to $500.0 million in the form of a senior secured term loan; extended the revolver and the term loan maturity date from February 24, 2022, to April 5, 2024; and increased the maximum consolidated senior secured net leverage ratio covenant from 3.50:1.00 to 3.75:1.00; among other things. The Company used the funds from the new term loan, in addition to drawing $250.0 million on the available Revolving Credit Facility, to fund the acquisition.

Through March 31, 2019, the Company expensed approximately $4.7 million of costs related to the acquisition of Speedpay. These costs, which consist primarily of consulting and legal fees, are included in general and administrative expenses in the condensed consolidated statements of operations.

4. Debt

As of March 31, 2019, the Company had $279.0 million and $400.0 million outstanding under its Term Credit Facility and Senior Notes, respectively, with up to $500.0 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended.    

Credit Agreement

On February 24, 2017, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) replacing the existing agreement with a syndicate of financial institutions, as lenders, and Bank of America, N.A., as the administrative agent, providing for revolving loans, swingline loans, letters of credit, and a term loan. The Credit Agreement consists of (a) a five-year $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”), which includes sublimits for (1) the issuance of standby letters of credit and (2) swingline loans, and (b) a five-year $415.0 million senior secured term loan facility (the “Term Credit Facility” and, together with the Revolving Credit Facility, the “Credit Facility”). The Credit Agreement also allows the Company to request optional incremental term loans and increases in the revolving commitment.

At the Company’s option, borrowings under the Credit Facility bear interest at an annual rate equal to, either (a) a base rate determined by reference to the highest of (1) the annual interest rate publicly announced by the administrative agent as its Prime Rate, (2) the federal funds effective rate plus 1/2 of 1%, or (3) a London Interbank Offered Rate (“LIBOR”) rate determined by reference to the costs of funds for U.S. dollar deposits for a one-month interest period, adjusted for certain additional costs, plus 1% or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, plus an applicable margin. Based on the calculation of the applicable consolidated total leverage ratio, the applicable margin for borrowings under the Credit Facility is between 0.25% to 1.25% with respect to base rate borrowings and between 1.25% and 2.25% with respect to LIBOR rate borrowings. Interest is due and payable monthly. The interest rate in effect as of March 31, 2019, for the Credit Facility was 4.25%.

The Company is also required to pay (a) a commitment fee related to the unutilized commitments under the Revolving Credit Facility, payable quarterly in arrears, (b) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOR rate borrowings under the Revolving Credit Facility on an annual basis, payable quarterly in arrears, and (c) customary fronting fees for the issuance of letters of credit fees and agency fees.

The Company’s obligations under the Credit Facility and cash management arrangements entered into with lenders under the Credit Facility (or affiliates thereof) and the obligations of the subsidiary guarantors are secured by first-priority security interests in substantially all assets of the Company and any guarantor, including 100% of the capital stock of ACI Worldwide Corp. and each domestic subsidiary of the Company, each domestic subsidiary of any guarantor, and 65% of the voting capital stock of each foreign subsidiary of the Company that

 

11


Table of Contents

is directly owned by the Company or a guarantor, in each case subject to certain exclusions set forth in the credit documentation governing the Credit Facility. On October 9, 2018, the Company entered into the first amendment to the collateral agreement of the Credit Agreement. This amendment released the lien on certain assets of Official Payments Corporation (“OPAY”), our electronic bill presentment and payment affiliate, to allow OPAY to comply with certain eligible securities and unencumbered asset requirements related to money transmitter or transfer license rules and regulations.

The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict the Company’s ability and, as applicable, the ability of its subsidiaries to: create, incur, assume or suffer to exist any additional indebtedness; create, incur, assume or suffer to exist any liens; enter into agreements and other arrangements that include negative pledge clauses; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; create restrictions on the payment of dividends or other distributions by subsidiaries; make investments, loans, advances and acquisitions; merge, consolidate or enter into any similar combination or sell assets, including equity interests of the subsidiaries; enter into sale and leaseback transactions; directly or indirectly engage in transactions with affiliates; alter in any material respect the character or conduct of the business; enter into amendments of or waivers under subordinated indebtedness, organizational documents and certain other material agreements; and hold certain assets and incur certain liabilities.

Senior Notes

On August 21, 2018, the Company completed a $400.0 million offering of the 2026 Notes at an issue price of 100% of the principal amount, in a private placement for resale to qualified institutional buyers. The 2026 Notes bear interest at an annual rate of 5.750%, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2019. Interest accrued from August 21, 2018. The 2026 Notes will mature on August 15, 2026.

The Company used the net proceeds of the offering described above to redeem in full the Company’s outstanding 6.375% Senior Notes due 2020, including accrued interest, and repaid a portion of the outstanding amount under the Term Credit Facility.

Maturities on long-term debt outstanding as of March 31, 2019, are as follows (in thousands):

 

Fiscal year ending December 31,

      

2019

   $ 17,810  

2020

     23,747  

2021

     31,662  

2022

     205,804  

2023

     —    

Thereafter

     400,000  
  

 

 

 

Total

   $ 679,023  
  

 

 

 

The Credit Agreement and 2026 Notes also contain certain customary mandatory prepayment provisions. As specified in the Credit Agreement and 2026 Notes agreement, if certain events shall occur, the Company may be required to repay all or a portion of the amounts outstanding under the Credit Facility or 2026 Notes.

The Credit Facility will mature on February 24, 2022, and the 2026 Notes will mature on August 15, 2026. The Revolving Credit Facility and 2026 Notes do not amortize. The Term Credit Facility does amortize, with principal payable in consecutive quarterly installments.

The Credit Agreement and 2026 Notes contain certain customary affirmative covenants and negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of subsidiaries, mergers, advances, investments, acquisitions, transactions with affiliates, change in nature of business and the sale of the assets. The Company is also required to maintain a consolidated leverage ratio at or below a specified amount and an interest coverage ratio at or above a specified amount. As specified in the Credit Agreement and 2026 Notes agreement, if an event of default shall occur and be continuing, the Company may be required to repay all amounts outstanding under the Credit Facility and 2026 Notes. As of March 31, 2019, and at all times during the period, the Company was in compliance with its financial debt covenants.

 

12


Table of Contents

Total debt is comprised of the following (in thousands):

 

     March 31,
2019
     December 31,
2018
 

Term credit facility

   $ 279,023      $ 284,959  

5.750% Senior notes, due August 2026

     400,000        400,000  

Debt issuance costs

     (12,451      (13,203
  

 

 

    

 

 

 

Total debt

     666,572        671,756  

Less: current portion of term credit facility

     23,747        23,747  

Less: current portion of debt issuance costs

     (2,959      (2,980
  

 

 

    

 

 

 

Total long-term debt

   $ 645,784      $ 650,989  
  

 

 

    

 

 

 

Other

As of March 31, 2019, $9.4 million is outstanding related to certain multi-year license agreements for internal use software, of which $2.5 million and $6.9 million is included in other current liabilities and other noncurrent liabilities, respectively, in the condensed consolidated balance sheet.

5. Stock-Based Compensation Plans

Employee Stock Purchase Plan

Shares issued under the 2017 Employee Stock Purchase Plan during the three months ended March 31, 2019 and 2018, totaled 32,174 and 38,145, respectively.

Stock Options

A summary of stock option activity is as follows:

 

Stock Options

   Number of
Shares
     Weighted-
Average
Exercise Price
($)
     Weighted-
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value of
In-the-Money
Options ($)
 

Outstanding as of December 31, 2018

     4,864,836      $ 17.76        

Exercised

     (313,282      15.50        

Forfeited

     (3,496      17.89        
  

 

 

    

 

 

       

Outstanding as of March 31, 2019

     4,548,058      $ 17.91        6.02      $ 68,018,687  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of March 31, 2019

     3,946,163      $ 17.58        5.80      $ 60,350,648  
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2018, was $7.03. The total intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018, was $5.3 million and $7.2 million, respectively. There were no stock options granted during the three months ended March 31, 2019.

The fair value of options granted during the three months ended March 31, 2018, were estimated on the date of grant using the Black-Scholes option-pricing model, acceptable under ASC 718, Compensation – Stock Compensation (“ASC 718”), with the following weighted-average assumptions:

 

     Three Months Ended
March 31, 2018
 

Expected life (years)

     5.6  

Risk-free interest rate

     2.7

Expected volatility

     26.4

Expected dividend yield

     —    

Expected volatilities are based on the Company’s historical common stock volatility, derived from historical stock price data for periods commensurate with the options’ expected life. The expected life of the options granted represents the period of time options are expected to be outstanding, based primarily on historical employee option exercise behavior. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon bonds issued with a term equal to the expected life at the date of grant of the options. The expected dividend yield is zero, as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.

 

13


Table of Contents

Long-term Incentive Program Performance Share Awards

A summary of nonvested long-term incentive program performance share awards (“LTIP performance shares”) is as follows:

 

Nonvested LTIP Performance Shares

   Number of
Shares at
Expected
Attainment
     Weighted-
Average Grant
Date Fair
Value
 

Nonvested as of December 31, 2018

     540,697      $ 19.83  

Forfeited

     (1,036      20.12  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     539,661      $ 19.83  
  

 

 

    

 

 

 

Restricted Share Awards

A summary of nonvested restricted share awards (“RSAs”) is as follows:

 

Nonvested Restricted Share Awards

   Number of
Shares
     Weighted-
Average Grant
Date Fair
Value
 

Nonvested as of December 31, 2018

     213,337      $ 20.21  

Vested

     (98,769      20.12  

Forfeited

     (3,975      20.12  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     110,593      $ 20.29  
  

 

 

    

 

 

 

During the three months ended March 31, 2019, a total of 98,769 RSAs vested. The Company withheld 30,878 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.

Total Shareholder Return Awards

A summary of nonvested total shareholder return awards (“TSRs”) is as follows:

 

Nonvested Total Shareholder Return Awards

   Number of
Shares
     Weighted-
Average Grant

Date Fair
Value
 

Nonvested as of December 31, 2018

     718,931      $ 29.25  

Granted

     436,674        47.90  

Forfeited

     (5,457      31.31  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     1,150,148      $ 36.32  
  

 

 

    

 

 

 

The fair value of TSRs granted during the three months ended March 31, 2019 and 2018, were estimated on the date of grant using the Monte Carlo simulation model, acceptable under ASC 718, using the following weighted-average assumptions:

 

     Three Months Ended
March 31,
 
     2019     2018  

Expected life (years)

     2.8       2.9  

Risk-free interest rate

     2.5     2.4

Expected volatility

     29.3     28.0

Expected dividend yield

     —         —    

 

14


Table of Contents

Restricted Share Units

A summary of nonvested restricted share unit awards (“RSUs”) is as follows:

 

Nonvested Restricted Share Units

   Number of
Shares
     Weighted-
Average
Grant Date
Fair Value
 

Nonvested as of December 31, 2018

     651,045      $ 23.82  

Granted

     550,091        33.07  

Vested

     (173,547      23.36  

Forfeited

     (8,346      23.36  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     1,019,243      $ 28.90  
  

 

 

    

 

 

 

During the three months ended March 31, 2019, a total of 173,547 RSUs vested. The Company withheld 53,274 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.

As of March 31, 2019, there were unrecognized compensation costs of $31.6 million related to nonvested TSRs, $26.7 million related to nonvested RSUs, $3.0 million related to nonvested LTIP performance shares, $1.1 million related to nonvested stock options, and $1.9 million related to nonvested RSAs, which the Company expects to recognize over weighted-average periods of 2.3 years, 1.9 years, 1.0 years, 0.9 years, and 0.9 years, respectively.

The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended March 31, 2019 and 2018, of $6.6 million and $6.4 million, respectively, with corresponding tax benefits of $1.2 million and $1.0 million, respectively.

6. Software and Other Intangible Assets

As of March 31, 2019, software net book value totaled $130.8 million, net of $261.1 million of accumulated amortization. Included in this net book value amount is software for resale of $24.8 million and software acquired or developed for internal use of $106.0 million.

As of December 31, 2018, software net book value totaled $137.2 million, net of $252.2 million of accumulated amortization. Included in this net book value amount is software for resale of $27.5 million and software acquired or developed for internal use of $109.7 million.

Amortization of software for resale is computed using the greater of (a) the ratio of current revenues to total current and future revenues expected to be derived from the software or (b) the straight-line method over an estimated useful life of generally three to ten years. Software for resale amortization expense recorded during the three months ended March 31, 2019 and 2018, totaled $3.0 million and $3.6 million, respectively. These software amortization expense amounts are reflected in cost of revenue in the condensed consolidated statements of operations.

Amortization of software for internal use is computed using the straight-line method over an estimated useful life of generally three to ten years. Software for internal use amortization expense recorded during the three months ended March 31, 2019 and 2018, totaled $10.4 million and $10.5 million, respectively. These software amortization expense amounts are reflected in depreciation and amortization in the condensed consolidated statements of operations.

The carrying amount and accumulated amortization of the Company’s other intangible assets subject to amortization at each balance sheet date are as follows (in thousands):

 

     March 31, 2019      December 31, 2018  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Balance
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Balance
 

Customer relationships

   $ 298,459      $ (136,628   $ 161,831      $ 297,991      $ (131,187   $ 166,804  

Trademarks and tradenames

     16,346        (15,332     1,014        16,348        (15,025     1,323  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 314,805      $ (151,960   $ 162,845      $ 314,339      $ (146,212   $ 168,127  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other intangible assets amortization expense during the three months ended March 31, 2019 and 2018, totaled $5.5 million and $4.9 million, respectively.

 

15


Table of Contents

Based on capitalized intangible assets as of March 31, 2019, estimated amortization expense amounts in future fiscal years are as follows (in thousands):

 

Fiscal Year Ending December 31,

   Software
Amortization
     Other
Intangible
Assets
Amortization
 

Remainder of 2019

   $ 37,383      $ 16,340  

2020

     40,353        20,992  

2021

     27,637        20,506  

2022

     13,167        20,359  

2023

     6,633        20,053  

Thereafter

     5,639        64,595  
  

 

 

    

 

 

 

Total

   $ 130,812      $ 162,845  
  

 

 

    

 

 

 

7. Corporate Restructuring and Other Organizational Changes

The components of corporate restructuring and other reorganization from prior acquisitions are included in the following table (in thousands):

 

Balance, December 31, 2018

   $ 4,127  

Amounts paid during the period

     (389

Foreign currency translation adjustments

     42  
  

 

 

 

Balance, March 31, 2019

   $ 3,780  
  

 

 

 

Of the $3.8 million restructuring liability, $1.6 million and $2.2 million are recorded in other current liabilities and operating lease liabilities, respectively, in the condensed consolidated balance sheet as of March 31, 2019.

8. Common Stock and Treasury Stock

In 2005, the board approved a stock repurchase program authorizing the Company, as market and business conditions warrant, to acquire its common stock and periodically authorize additional funds for the program. In February 2018, the board approved the repurchase of up to $200.0 million of the Company’s common stock, in place of the remaining purchase amounts previously authorized.

The Company repurchased 23,802 shares for $0.6 million under the program during the three months ended March 31, 2019. Under the program to date, the Company has repurchased 44,153,195 shares for approximately $548.5 million. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was $176.0 million.

9. Loss Per Share

Basic loss per share is computed in accordance with ASC 260, Earnings per Share, based on weighted average outstanding common shares. Diluted loss per share is computed based on basic weighted average outstanding common shares adjusted for the dilutive effect of stock options and RSUs.

The following table reconciles the weighted average share amounts used to compute both basic and diluted loss per share (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Weighted average shares outstanding:

     

Basic weighted average shares outstanding

     116,090        115,642  

Add: Dilutive effect of stock options and RSUs

     —          —    
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     116,090        115,642  
  

 

 

    

 

 

 

The diluted loss per share computation excludes 7.4 million and 8.6 million options to purchase shares, RSUs, and contingently issuable shares during the three months ended March 31, 2019 and 2018, respectively, as their effect would be anti-dilutive.

Common stock outstanding as of March 31, 2019, and December 31, 2018, was 116,530,435 and 116,123,361, respectively.

 

16


Table of Contents

10. Other, Net

Other, net is comprised of foreign currency transaction losses of $1.9 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.

11. Segment Information

The Company reports financial performance based on its segments, ACI On Premise and ACI On Demand, and analyzes Segment Adjusted EBITDA as a measure of segment profitability.

The Company’s Chief Executive Officer is also the chief operating decision maker (“CODM”). The CODM, together with other senior management personnel, focus their review on consolidated financial information and the allocation of resources based on operating results, including revenues and Segment Adjusted EBITDA, for each segment, separate from Corporate operations.

ACI On Premise serves customers who manage their software on site. These on-premise customers use the Company’s software to develop sophisticated solutions, which are often part of a larger system located and managed at the customer specified site. These customers require a level of control and flexibility that ACI On Premise solutions can offer, and they have the resources and expertise to take a lead role in managing these solutions.

ACI On Demand serves the needs of banks, merchants and corporates who use payments to facilitate their core business. These on-demand solutions are maintained and delivered through the cloud via our global data centers and are available in either a single-tenant environment for SaaS offerings, or in a multi-tenant environment for PaaS offerings.

Revenue is attributed to the reportable segments based upon the product sold and mechanism for delivery to the customer. Expenses are attributed to the reportable segments in one of three methods: (1) direct costs of the segment, (2) labor costs that can be attributed based upon time tracking for individual products, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities as well as information technology and facilities related expense for which multiple segments benefit. The Company also allocates certain depreciation costs to the segments.

Segment Adjusted EBITDA is the measure reported to the CODM for purposes of making decisions on allocating resources and assessing the performance of the Company’s segments, and, therefore, Segment Adjusted EBITDA is presented in conformity with ASC 280, Segment Reporting. Segment Adjusted EBITDA is defined as earnings (loss) from operations before interest, income tax expense (benefit), depreciation and amortization (“EBITDA”) adjusted to exclude stock-based compensation, and net other income (expense).

Corporate and unallocated expenses consists of the corporate overhead costs that are not allocated to reportable segments. These overhead costs relate to human resources, finance, legal, accounting, merger and acquisition activity, and other costs that are not considered when management evaluates segment performance.

 

17


Table of Contents

The following is selected financial data for the Company’s reportable segments (in thousands):

 

     Three Months Ended March 31,  
     2019      2018  

Revenue

     

ACI On Premise

   $ 96,007      $ 105,030  

ACI On Demand

     109,848        104,280  
  

 

 

    

 

 

 

Total revenue

   $ 205,855      $ 209,310  
  

 

 

    

 

 

 

Segment Adjusted EBITDA

     

ACI On Premise

   $ 28,268      $ 38,898  

ACI On Demand

     (262      (4,233

Depreciation and amortization

     (24,852      (24,993

Stock-based compensation expense

     (6,585      (6,362

Corporate and unallocated expenses

     (24,662      (20,014

Interest, net

     (8,581      (6,621

Other, net

     (1,912      (55
  

 

 

    

 

 

 

Loss before income taxes

   $ (38,586    $ (23,380
  

 

 

    

 

 

 

Depreciation and amortization

     

ACI On Premise

   $ 3,030      $ 2,975  

ACI On Demand

     7,562        7,736  

Corporate

     14,260        14,282  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 24,852      $ 24,993  
  

 

 

    

 

 

 

Stock-based compensation expense

     

ACI On Premise

   $ 1,956      $ 1,467  

ACI On Demand

     1,951        1,463  

Corporate

     2,678        3,432  
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 6,585      $ 6,362  
  

 

 

    

 

 

 

Assets are not allocated to segments, and the Company’s CODM does not evaluate operating segments using discrete asset information.

 

18


Table of Contents

The following is revenue by primary geographic market and primary solution category for the Company’s reportable segments (in thousands):

 

     Three Months Ended March 31, 2019      Three Months Ended March 31, 2018  
     ACI
On Premise
     ACI
On Demand
     Total      ACI
On Premise
     ACI
On Demand
     Total  

Primary Geographic Markets

                 

Americas - United States

   $ 26,422      $ 93,036      $ 119,458      $ 30,864      $ 88,946      $ 119,810  

Americas - Other

     10,945        2,743        13,688        16,784        2,319        19,103  

EMEA

     42,451        12,068        54,519        38,686        12,009        50,695  

Asia Pacific

     16,189        2,001        18,190        18,696        1,006        19,702  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,007      $ 109,848      $ 205,855      $ 105,030      $ 104,280      $ 209,310  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Primary Solution Categories

                 

Bill Payments

   $ —        $ 68,967      $ 68,967      $ —        $ 66,168      $ 66,168  

Digital Channels

     8,725        9,788        18,513        11,363        10,644        22,007  

Merchant Payments

     5,022        19,339        24,361        5,010        12,371        17,381  

Payments Intelligence

     7,037        8,981        16,018        10,420        11,798        22,218  

Real-Time Payments

     14,715        618        15,333        13,641        450        14,091  

Retail Payments

     60,508        2,155        62,663        64,596        2,849        67,445  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,007      $ 109,848      $ 205,855      $ 105,030      $ 104,280      $ 209,310  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is the Company’s long-lived assets by geographic location (in thousands):

 

     March 31,      December 31,  
     2019      2018  

Long-lived assets

     

United States

   $ 829,953      $ 811,435  

Other

     731,564        717,495  
  

 

 

    

 

 

 
     $1,561,517      $1,528,930  
  

 

 

    

 

 

 

No single customer accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2019 and 2018. No other country outside the United States accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2019 and 2018.

12. Income Taxes

The effective tax rate for the three months ended March 31, 2019, was 33%. The Company reported an overall tax benefit on a pretax loss for the three months ended March 31, 2019. The losses of the Company’s foreign entities for the three months ended March 31, 2019, were $6.1 million. The effective tax rate for the three months ended March 31, 2019, was positively impacted by equity compensation excess tax benefits and state income tax benefits on domestic loss.

The effective tax rate for the three months ended March 31, 2018, was 17%. The losses of the Company’s foreign entities for the three months ended March 31, 2018, were $1.8 million. The effective tax rate for the three months ended March 31, 2018, was negatively impacted by losses in certain foreign jurisdictions taxed at lower rates and domestic taxes resulting from the current GILTI tax, partially offset by equity compensation tax benefits.

The Company’s effective tax rate could fluctuate on a quarterly basis due to the occurrence of significant and unusual or infrequent items, such as vesting of stock-based compensation or foreign currency gains and losses. The Company’s effective tax rate could also fluctuate due to changes in the valuation of its deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, the Company is occasionally subject to examination of its income tax returns by tax authorities in the jurisdictions it operates. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.

As of March 31, 2019, and December 31, 2018, the amount of unrecognized tax benefits for uncertain tax positions was $28.3 million and $28.4 million, respectively, excluding related liabilities for interest and penalties of $1.2 million as of March 31, 2019 and December 31, 2018.

 

19


Table of Contents

The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $3.9 million, due to the settlement of various audits and the expiration of statutes of limitation.

13. Leases

The Company has operating leases for corporate offices and datacenters. Excluding office leases, leases with an initial term of 12 months or less (that do not include an option to purchase the underlying asset) are not recorded on the condensed consolidated balance sheet, and are expensed on a straight-line basis over the lease term.

The Company’s leases typically include certain renewal options to extend the leases for up to 25 years, some of which include options to terminate the leases within one year. The exercise of lease renewal options is at the Company’s sole discretion. The Company combines lease and non-lease components of its leases and currently has no leases with options to purchase the leased property. The Company accounts for payments of maintenance and property tax costs paid by it as variable lease cost, which are expensed as incurred.

The components of lease cost are as follows (in thousands):

 

     Three Months Ended
March 31, 2019
 

Operating lease cost

   $ 4,036  

Variable lease cost

     986  

Sublease income

     (139
  

 

 

 

Total lease cost

   $ 4,883  
  

 

 

 

Supplemental cash flow information related to leases is as follows (in thousands):

 

    Three Months Ended
March 31, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:

 

Operating cash flows from operating leases

  $ 5,411  

Right-of-use assets obtained in exchange for new lease obligations:

 

Operating leases

    1,218  

Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):

 

     March 31,
2019
 

Assets:

  

Operating lease right-of-use assets

   $ 60,978  
  

 

 

 

Liabilities:

  

Other current liabilities

   $ 14,334  

Operating lease liabilities

     50,636  
  

 

 

 

Total operating lease liabilities

   $ 64,970  
  

 

 

 

Weighted average remaining operating lease term

     7.02  

Weighted average operating lease discount rate

     3.96

 

20


Table of Contents

The Company uses its incremental borrowing rate as the discount rate. As the Company enters into operating leases in multiple jurisdictions and denominated in currencies other than the U.S. dollar, judgment is used to determine the Company’s incremental borrowing rate including (1) conversion of its subordinated borrowing rate (using published yield curves) to an unsubordinated and collateralized rate (2) adjusting the rate to align with the term of each lease and (3) adjusting the rate to incorporate the effects of the currency in which the lease is denominated.

Maturities on lease liabilities as of March 31, 2019, are as follows (in thousands):

 

Fiscal year ending December 31,

      

2019

   $ 12,471  

2020

     14,895  

2021

     10,915  

2022

     8,387  

2023

     6,698  

Thereafter

     21,122  
  

 

 

 

Total lease payments

     74,488  

Less: imputed interest

     9,518  
  

 

 

 

Total lease liability

   $ 64,970  
  

 

 

 

Future payments under operating lease agreements accounted for under ASC 840, Leases, as of December 31, 2018, were as follows (in thousands):

 

Fiscal Year Ending December 31,

      

2019

   $ 16,925  

2020

     14,212  

2021

     10,538  

2022

     8,178  

2023

     6,529  

Thereafter

     21,196  
  

 

 

 

Total minimum lease payments

   $ 77,578  
  

 

 

 

As of March 31, 2019, the Company has additional operating leases for office facilities that have not yet commenced with minimum lease payments of $3.7 million. These operating leases will commence between fiscal year 2019 and 2020 with lease terms of one to seven years.

 

21


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as “believes,” “will,” “expects,” “anticipates,” “intends,” and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.

Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment, key trends, and, in each case, statements related to expected financial and other benefits. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law.

All of the forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission (“SEC”). Such factors include, but are not limited to, risks related to:

 

   

increased competition;

 

   

the performance of our strategic products, Universal Payments solutions;

 

   

demand for our products;

 

   

consolidations and failures in the financial services industry;

 

   

customer reluctance to switch to a new vendor;

 

   

failure to obtain renewals of customer contracts or to obtain such renewals on favorable terms;

 

   

delay or cancellation of customer projects or inaccurate project completion estimates;

 

   

the complexity of our products and services and the risk that they may contain hidden defects;

 

   

compliance of our products with applicable legislation, governmental regulations, and industry standards;

 

   

failing to comply with money transmitter rules and regulations;

 

   

our compliance with privacy regulations;

 

   

being subject to security breaches or viruses;

 

   

our ability to adequately protect our intellectual property;

 

   

increasing intellectual property rights litigation;

 

   

certain payment funding methods expose us to the credit and/or operating risk of our clients;

 

   

business interruptions or failure of our information technology and communication systems;

 

   

our offshore software development activities;

 

   

operating internationally;

 

   

global economic conditions impact on demand for our products and services;

 

   

attracting and retaining employees;

 

   

potential future litigation;

 

   

our sale of Community Financial Services (“CFS”) assets and liabilities to Fiserv, Inc. (“Fiserv”), including potential claims arising under the transaction agreement, the transition services agreement or with respect to retained liabilities;

 

   

future acquisitions, strategic partnerships, and investments;

 

   

impairment of our goodwill or intangible assets;

 

   

restrictions and other financial covenants in our debt;

 

   

difficulty meeting our debt service requirements;

 

   

the accuracy of our backlog estimates;

 

22


Table of Contents
   

exposure to unknown tax liabilities;

 

   

the cyclical nature of our revenue and earnings and the accuracy of forecasts due to the concentration of revenue generating activity during the final weeks of each quarter; and

 

   

volatility in our stock price.

The cautionary statements in this report expressly qualify all of our forward-looking statements.

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements and related notes and Management’s Discussion & Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. Results for the three months ended March 31, 2019, are not necessarily indicative of results that may be attained in the future.

Overview

ACI Worldwide, Inc., the Universal Payments (“UP”) company, powers electronic payments for more than 5,100 organizations around the world. More than 1,000 of the largest financial institutions and intermediaries, as well as thousands of leading global merchants, rely on ACI to execute approximately $14 trillion each day in payments and securities. In addition, thousands of organizations utilize our electronic bill payment and presentment (“EBPP”) services. Through our comprehensive suite of solutions, we deliver real-time, immediate payments capabilities and enable a complete omni-channel payments experience.

Our products are sold and supported through distribution networks covering three geographic regions – the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia/Pacific. Each distribution network has its own globally coordinated sales force and supplements its sales force with independent reseller and/or distributor networks. Our products and solutions are used globally by banks, financial intermediaries, and merchants and corporates, such as third-party electronic payment processors, payment associations, switch interchanges, and a wide range of transaction-generating endpoints, including ATMs, merchant point-of-sale (“POS”) terminals, bank branches, mobile phones, tablets, corporations, and Internet commerce sites. Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of electronic payments, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI Worldwide, ACI Universal Payment, and ACI UP brands.

We derive a majority of our revenues from domestic operations and believe we have large opportunities for growth in international markets as well as continued expansion domestically in the United States. Refining our global infrastructure is a critical component of driving our growth. We have launched a globalization strategy, which includes elements intended to streamline our supply chain and maximize expertise in several geographic locations to support a growing international customer base and competitive needs. We utilize our Irish subsidiaries to manage certain of our intellectual property rights and to oversee and manage certain international product development and commercialization efforts. We increased our SaaS and PaaS capabilities with a data center in Ireland allowing our SaaS and PaaS solutions to be more-broadly offered in the European market. We also continue to grow centers of expertise in Timisoara, Romania and Pune and Bangalore in India, as well as key operational centers such as Cape Town, South Africa and in multiple locations in the United States.

Key trends that currently impact our strategies and operations include:

Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. In their World Payments Report, Capgemini predicts non-cash transaction volumes will grow at an annual rate of 12.7%, or from 482.5 billion in 2016 to 876.4 billion in 2021, with varying growth rates based on the type of payment and part of the world. We leverage the growth in transaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume and through the sale of capacity upgrades to existing customers.

Adoption of real-time payments. Customer expectations, from both consumers and corporate, are driving the payments world to more real-time delivery. In the U.K., payments sent through the traditional ACH multi-day batch service can now be sent through the Faster Payments service giving almost immediate access to the funds, and this is being considered and implemented in several countries including Australia and the United States. In the U.S. market, National Automated Clearinghouse Association (“NACHA”) implemented phase 2 of Same Day ACH in September 2017. Corporate customers expect real-time information on the status of their payments instead of waiting for an end of-day report. Regulators expect banks to be monitoring key measures like liquidity in real time. ACI’s focus has always been on the real-time execution of transactions and delivery of information through real-time tools, such as dashboards, so our experience will be valuable in addressing this trend.

Increasing competition. The electronic payments market is highly competitive and subject to rapid change. Our competition comes from in-house information technology departments, third-party electronic payment processors, and third-party software companies located both within and outside of the United States. Many of these companies are significantly larger than us and have significantly greater financial, technical, and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings or are eliminating banks from the payments service, reducing the need for our solutions. As consolidation in the financial services industry continues, we anticipate that competition for those customers will intensify.

 

23


Table of Contents

Adoption of cloud technology. To leverage lower-cost computing technologies, some banks, financial intermediaries, merchants and corporates are seeking to transition their systems to make use of cloud technology. Our investments provide us the grounding to deliver cloud capabilities in the future. Market sizing data from Ovum indicates that spend on SaaS and PaaS payment systems is growing faster than spend on installed applications.

Electronic payments fraud and compliance. As electronic payment transaction volumes increase, organized criminal organizations continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Banks, financial intermediaries, and merchants and corporates continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions and other attacks such as denial of service attacks. Due to concerns with international terrorism and money laundering, banks and financial intermediaries in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions to help customers manage the growing levels of electronic payments fraud and compliance activity.

Adoption of smartcard technology. In many markets, card issuers are being required to issue new cards with embedded chip technology, with the liability shift having gone into effect in 2015 in the United States. Chip-based cards are more secure, harder to copy, and offer the opportunity for multiple functions on one card (e.g., debit, credit, electronic purse, identification, health records, etc.). This results in greater card-not-present fraud (e.g., fraud at eCommerce sites).

Single Euro Payments Area (SEPA). The SEPA, primarily focused on the European economic community and the U.K., is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. The transition to SEPA payment mechanisms will drive more volume to these systems with the potential to cause banks to review the capabilities of the systems supporting these payments. Our Retail Payments and Real-Time Payments solutions facilitate key functions that help banks and financial intermediaries address these mandated regulations.

European Payment Service Directive (PSD2). PSD2, which was ratified by the European Parliament in 2015, required member states to implement new payments regulations in 2018. The XS2A provision effectively creates a new market opportunity where banks in European Union member countries must provide open API standards to customer data, thus allowing authorized third-party providers to enter the market.

Financial institution consolidation. Consolidation continues on a national and international basis, as financial institutions seek to add market share and increase overall efficiency. Such consolidations have increased, and may continue to increase, in their number, size, and market impact as a result of recent economic conditions affecting the banking and financial industries. There are several potential negative effects of increased consolidation activity. Continuing consolidation of financial institutions may result in a smaller number of existing and potential customers for our products and services. Consolidation of two of our customers could result in reduced revenues if the combined entity were to negotiate greater volume discounts or discontinue use of certain of our products. Additionally, if a non-customer and a customer combine and the combined entity decides to forego future use of our products, our revenue would decline. Conversely, we could benefit from the combination of a non-customer and a customer when the combined entity continues use of our products and, as a larger combined entity, increases its demand for our products and services. We tend to focus on larger financial institutions as customers, often resulting in our solutions being the solutions that survive in the consolidated entity.

Global vendor sourcing. Global and regional banks, financial intermediaries, and merchants and corporates are aiming to reduce the costs in supplier management by picking suppliers who can service them across all their geographies instead of allowing each country operation to choose suppliers independently. Our global footprint from both a customer and a delivery perspective enable us to be successful in this global sourced market. However, projects in these environments tend to be more complex and therefore of higher risk.

Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, banks and financial intermediaries are seeking methods to consolidate their payments processing across the enterprise. We believe that the strategy of using service-oriented architectures to allow for re-use of common electronic payment functions, such as authentication, authorization, routing and settlement, will become more common. Using these techniques, banks and financial intermediaries will be able to reduce costs, increase overall service levels, enable one-to-one marketing in multiple bank channels, leverage volumes for improved pricing and liquidity, and manage enterprise risk. Our product strategy is, in part, focused on this trend, by creating integrated payment functions that can be re-used by multiple bank channels, across both the consumer and wholesale bank. While this trend presents an opportunity for us, it may also expand the competition from third-party electronic payment technology and service providers specializing in other forms of electronic payments. Many of these providers are larger than us and have significantly greater financial, technical and marketing resources.

 

24


Table of Contents

Mobile banking and payments. There is a growing demand for the ability to carry out banking services or make payments using a mobile phone. Recent statistics from Javelin Strategy & Research, a subsidiary of Greenwich Associates, show that 50% of adults in the United States use their phone for mobile banking. The use of phones for mobile banking is expected to grow to 81% in 2020. Our customers have been making use of existing products to deploy mobile banking, mobile payments, and mobile commerce solutions for their customers in many countries. In addition, ACI has invested in mobile products of our own and via partnerships to support mobile functionality in the marketplace.

Electronic bill payment and presentment. EBPP encompasses all facets of bill payment, including biller direct, where customers initiate payments on biller websites, the consolidator model, where customers initiate payments on a financial institution’s website, and walk-in bill payment, as one might find in a convenience store. The EBPP market continues to grow as consumers move away from traditional forms of paper-based payments. Nearly three out of four (73%) online payments are made at the billers’ sites, rather than through banking websites, up 11% since 2010. The biller-direct solutions are seeing strong growth as billers migrate these services to outsourcers, such as ACI, from legacy systems built in house. We believe that EBPP remains ripe for outsourcing, as a significant amount of biller-direct transactions are still processed in house. As billers seek to manage costs and improve efficiency, we believe that they will continue to look to third-party EBPP vendors that can offer a complete solution for their billing needs.

Several other factors related to our business may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as creditworthiness of the customer and timing of transfer of control or acceptance of our products may cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the U.S. dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period.

We continue to seek ways to grow through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions’ breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and accretive to our financial performance.

Acquisition

Speedpay

On May 9, 2019, we acquired Speedpay, the U.S. bill pay business of Western Union Company (“WU”) for $750.0 million in cash, subject to adjustments, pursuant to a Stock Purchase Agreement, among the Company, WU, and ACI Worldwide Corp., our wholly owned subsidiary. The combination of the Company and Speedpay bill pay solutions will serve more than 4,000 customers across the U.S., bringing expanded reach in existing and complementary market segments such as consumer finance, insurance, healthcare, higher education, utilities, government, and mortgage. The acquisition of Speedpay will increase the scale of our On Demand platform business and allow the acceleration of platform innovation.

Effective April 5, 2019, we entered into an amendment agreement (the “amendment”) with ACI Worldwide Corp., Official Payments Corporation, the lenders, and Bank of America, N.A., as administrative agent for the lenders, to amend and restate our Credit Agreement, dated February 24, 2017. The amendment permitted us to borrow up to $500.0 million in the form of a senior secured term loan; extended the revolver and the term loan maturity date from February 24, 2022, to April 5, 2024; and increased the maximum consolidated senior secured net leverage ratio covenant from 3.50:1.00 to 3.75:1.00; among other things. We used the funds from the new term loan, in addition to drawing $250.0 million on the available Revolving Credit Facility, to fund the acquisition.

Backlog

Backlog is comprised of:

 

   

Committed Backlog, which includes (1) contracted revenue that will be recognized in future periods (contracted but not recognized) from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts (including estimates of variable consideration if required under ASC 606) and included in the transaction price for those contracts, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods and (2) estimated future revenues from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts.

 

   

Renewal Backlog, which includes estimated future revenues from assumed contract renewals to the extent we believe recognition of the related revenue will occur within the corresponding backlog period.

 

25


Table of Contents

We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

Our 60-month backlog estimates are derived using the following key assumptions:

 

   

License arrangements are assumed to renew at the end of their committed term or under the renewal option stated in the contract at a rate consistent with historical experience. If the license arrangement includes extended payment terms, the renewal estimate is adjusted for the effects of a significant financing component.

 

   

Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term.

 

   

SaaS and PaaS arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences.

 

   

Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar.

 

   

Our pricing policies and practices are assumed to remain constant over the 60-month backlog period.

In computing our 60-month backlog estimate, the following items are specifically not taken into account:

 

   

Anticipated increases in transaction, account, or processing volumes by our customers.

 

   

Optional annual uplifts or inflationary increases in recurring fees.

 

   

Services engagements, other than SaaS and PaaS arrangements, are not assumed to renew over the 60-month backlog period.

 

   

The potential impact of consolidation activity within our markets and/or customers.

We review our customer renewal experience on an annual basis. The impact of this review and subsequent updates may result in a revision to the renewal assumptions used in computing the 60-month backlog estimates. In the event a significant revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes.

The following table sets forth our 60-month backlog estimate, by reportable segment, as of March 31, 2019, and December 31, 2018 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

 

     March 31,
2019
     December 31,
2018
 

ACI On Premise

   $ 1,861      $ 1,875  

ACI On Demand

     2,290        2,299  
  

 

 

    

 

 

 

Total

   $ 4,151      $ 4,174  
  

 

 

    

 

 

 
     March 31,
2019
     December 31,
2018
 

Committed

   $ 1,734      $ 1,832  

Renewal

     2,417        2,342  
  

 

 

    

 

 

 

Total

   $ 4,151      $ 4,174  
  

 

 

    

 

 

 

Estimates of future financial results require substantial judgment and are based on several assumptions, as described above. These assumptions may turn out to be inaccurate or wrong for reasons outside of management’s control. For example, our customers may attempt to renegotiate or terminate their contracts for many reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer’s industry or geographic location. We may also experience delays in the development or delivery of products or services specified in customer contracts, which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will generate the specified revenues or that the actual revenues will be generated within the corresponding 60-month period. Additionally, because certain components of Committed Backlog and all of Renewal Backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as contracted but not recognized Committed Backlog.

 

26


Table of Contents

RESULTS OF OPERATIONS

The following table presents the condensed consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our condensed consolidated statements of operations (in thousands):

Three Month Period Ended March 31, 2019, Compared to the Three Month Period Ended March 31, 2018

 

     Three Months Ended March 31,  
     2019     2018  
     Amount     % of Total
Revenue
    $ Change vs
2018
    % Change
vs 2018
    Amount     % of Total
Revenue
 

Revenues:

            

Software as a service and platform as a service

   $ 108,557       53   $ 4,277       4   $ 104,280       50

License

     21,078       10     (6,968     -25     28,046       13

Maintenance

     55,111       27     (1,548     -3     56,659       27

Services

     21,109       10     784       4     20,325       10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     205,855       100     (3,455     -2     209,310       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Cost of revenue

     114,941       56     7,605       7     107,336       51

Research and development

     36,194       18     (597     -2     36,791       18

Selling and marketing

     29,430       14     (2,463     -8     31,893       15

General and administrative

     31,517       15     2,868       10     28,649       14

Depreciation and amortization

     21,866       11     521       2     21,345       10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     233,948       114     7,934       4     226,014       108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (28,093     -14     (11,389     68     (16,704     -8

Other income (expense):

            

Interest expense

     (11,614     -6     (2,249     24     (9,365     -4

Interest income

     3,033       1     289       11     2,744       1

Other, net

     (1,912     -1     (1,857     3376     (55     0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (10,493     -5     (3,817     57     (6,676     -3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (38,586     -19     (15,206     65     (23,380     -11

Income tax benefit

     (12,623     -6     (8,671     219     (3,952     -2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (25,963     -13   $ (6,535     34   $ (19,428     -9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Total revenue for the three months ended March 31, 2019, decreased $3.5 million, or 2%, as compared to the same period in 2018.

Total revenue was $3.7 million lower for the three months ended March 31, 2019, compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total revenue for the three months ended March 31, 2019, was flat compared to the same period in 2018.

Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue

The Company’s SaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a single-tenant cloud environment on a subscription basis. The Company’s PaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a multi-tenant cloud environment on a subscription or consumption basis. Included in SaaS and PaaS revenue are fees paid by our customers for use of our Biller solutions. Biller-related fees may be paid by our clients or directly by their customers and may be a percentage of the underlying transaction amount, a fixed fee per executed transaction or a monthly fee for each customer enrolled. SaaS and PaaS costs include payment card interchange fees, the amounts payable to banks and payment card processing fees, which are included in cost of revenue in the condensed consolidated statements of operations. All revenue from SaaS and PaaS arrangements that does not qualify for treatment as a distinct performance obligation, which includes set-up fees, implementation or customization services, and product support services, are included in SaaS and PaaS revenue.

SaaS and PaaS revenue increased $4.3 million, or 4%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total SaaS and PaaS revenue was $0.9 million lower for the three months ended March 31, 2019, compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total SaaS and PaaS revenue for the three months ended March 31, 2019, increased $5.2 million, or 5%, compared to the same period in 2018, which is primarily attributable to new customers adopting our SaaS and PaaS offerings and existing customers adding new functionality or increasing transaction volumes.

 

27


Table of Contents

License Revenue

Customers purchase the right to license ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years. Under these arrangements the software is installed at the customer’s location (i.e. on-premise). Within these agreements are specified capacity limits typically based on customer transaction volume. ACI employs measurement tools that monitor the number of transactions processed by customers and if contractually specified limits are exceeded, additional fees are charged for the overage. Capacity overages may occur at varying times throughout the term of the agreement depending on the product, the size of the customer, and the significance of customer transaction volume growth. Depending on specific circumstances, multiple overages or no overages may occur during the term of the agreement.

Included in license revenue are license and capacity fees that are payable at the inception of the agreement or annually (initial license fees). License revenue also includes license and capacity fees payable quarterly or monthly due to negotiated customer payment terms (monthly license fees). The Company recognizes revenue in advance of billings for software license arrangements with extended payment terms and adjusts for the effects of the financing component, if significant.

Total license revenue decreased $7.0 million, or 25%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total license revenue was $0.7 million lower for the three months ended March 31, 2019, compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total license revenue for the three months ended March 31, 2019, decreased $6.3 million, or 22%, compared to the same period in 2018.                

The decrease in total license revenue was primarily driven by the timing and relative size of license and capacity events during the three months ended March 31, 2019, as compared to the same period in 2018.

Maintenance Revenue

Maintenance revenue includes standard and premium maintenance and any post contract support fees received from customers for the provision of product support services.

Maintenance revenue decreased $1.5 million, or 3%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total maintenance revenue was $1.6 million lower for the three months ended March 31, 2019, as compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total maintenance revenue for the three months ended March 31, 2019, remained flat compared to the same period in 2018.

Services Revenue

Services revenue includes fees earned through implementation services and other professional services. Implementation services include product installations, product configurations, and custom software modifications (“CSMs”). Other professional services include business consultancy, technical consultancy, on-site support services, CSMs, product education, and testing services. These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products.

Services revenue increased $0.8 million, or 4%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total services revenue was $0.5 million lower for the three months ended March 31, 2019, as compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total services revenue for the three months ended March 31, 2019, increased $1.3 million, or 6%, compared to the same period in 2018.

Operating Expenses

Total operating expenses for the three months ended March 31, 2019, increased $7.9 million, or 4%, as compared to the same period in 2018.

Total operating expenses for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the planned acquisition of Speedpay. Total operating expenses for the three months ended March 31, 2018, included $4.3 million of significant integration and divestiture-related expenses. Total operating expenses were $5.3 million lower for the three months ended March 31, 2019, compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the significant acquisition and integration related expenses and the impact of foreign currency, total operating expenses for the three months ended March 31, 2019, increased $12.8 million, or 6%, compared to the same period in 2018, primarily due to higher cost of revenue, general and administrative, and depreciation and amortization expenses, partially offset by lower selling and marketing.

 

28


Table of Contents

Cost of Revenue

Cost of revenue includes costs to provide SaaS and PaaS services, third-party royalties, amortization of purchased and developed software for resale, the costs of maintaining our software products, as well as the costs required to deliver, install, and support software at customer sites. SaaS and PaaS service costs include payment card interchange fees, amounts payable to banks, and payment card processing fees. Maintenance costs include the efforts associated with providing the customer with upgrades, 24-hour help desk, post go-live (remote) support, and production-type support for software that was previously installed at a customer location. Service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support. Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support.

Cost of revenue increased $7.6 million, or 7%, during the three months ended March 31, 2019, compared to the same period in 2018. Cost of revenue was $1.9 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, cost of revenue increased $9.5 million, or 9%, for the three months ended March 31, 2019, as compared to the same period in 2018, primarily due to a $5.1 million increase in payment card interchange and processing fees, a $2.5 million increase in third-party product royalty expenses, and a $1.9 million increase in personnel and related expenses.

Research and Development

Research and development (“R&D”) expenses are primarily human resource costs related to the creation of new products, improvements made to existing products as well as compatibility with new operating system releases and generations of hardware.

R&D expense decreased $0.6 million, or 2%, during the three months ended March 31, 2019, as compared to the same period in 2018. R&D expense was $1.4 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, R&D expense increased $0.8 million, or 2%, for the three months ended March 31, 2019, as compared to the same period in 2018, primarily due to an increase in personnel and related expenses.

Selling and Marketing

Selling and marketing includes both the costs related to selling our products to current and prospective customers as well as the costs related to promoting the Company, its products and the research efforts required to measure customers’ future needs and satisfaction levels. Selling costs are primarily the human resource and travel costs related to the effort expended to license our products and services to current and potential clients within defined territories and/or industries as well as the management of the overall relationship with customer accounts. Selling costs also include the costs associated with assisting distributors in their efforts to sell our products and services in their respective local markets. Marketing costs include costs incurred to promote the Company and its products, perform or acquire market research to help the Company better understand impending changes in customer demand for and of our products, and the costs associated with measuring customers’ opinions toward the Company, our products and personnel.

Selling and marketing expense decreased $2.5 million, or 8%, during the three months ended March 31, 2019, as compared to the same period in 2018. Selling and marketing expense was $1.0 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, selling and marketing expense decreased $1.4 million, or 5%, for the three months ended March 31, 2019, as compared to the same period in 2018, due to a decrease in personnel and related expenses, primarily as the result of a decrease in total bookings.

General and Administrative

General and administrative expenses are primarily human resource costs including executive salaries and benefits, personnel administration costs, and the costs of corporate support functions such as legal, administrative, human resources, and finance and accounting.

General and administrative expense increased $2.9 million, or 10%, during the three months ended March 31, 2019, as compared to the same period in 2018. General and administrative expense for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the planned acquisition of Speedpay. Total operating expenses for the three months ended March 31, 2018, included $4.0 million of significant integration and divestiture-related expenses. General and administrative expense was $0.6 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the significant acquisition and integration expenses and the impact of foreign currency, general and administrative expense increased $2.7 million, or 11%, for the three months ended March 31, 2019, as compared to the same period in 2018, due to an increase in personnel and related expenses.

Depreciation and Amortization

Depreciation and amortization increased $0.5 million, or 2%, during the three months ended March 31, 2019, as compared to the same period in 2018. Depreciation and amortization was $0.4 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, depreciation and amortization increased $0.9 million, or 4%, for the three months ended March 31, 2019, as compared to the same period in 2018.

 

29


Table of Contents

Other Income and Expense

Interest expense for the three months ended March 31, 2019, increased $2.2 million, or 24%, as compared to the same period in 2018, primarily due to $1.8 million of interest expense related to royalty payments. Excluding the impact of interest expense related to royalty payments, interest expense for the three months ended March 31, 2019, increased $0.4 million, or 5%, as compared to the same period in 2018.

Interest income includes the portion of software license fees paid by customers under extended payment terms that is attributed to the significant financing component. Interest income for the three months ended March 31, 2019, increased $0.3 million, as compared to the same period in 2018.

Other, net consists of foreign currency loss and other non-operating items. Foreign currency loss for the three months ended March 31, 2019 and 2018, was $1.9 million and $0.1 million, respectively.

Income Taxes

Refer to Note 12, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Segment Results

We report financial performance based on our segments, ACI On Premise and ACI On Demand, and analyze Segment Adjusted EBITDA as a measure of segment profitability.

Our Chief Executive Officer is also our chief operating decision maker (“CODM”). The CODM, together with other senior management personnel, focus their review on consolidated financial information and the allocation of resources based on operating results, including revenues and Segment Adjusted EBITDA, for each segment, separate from the corporate operations.

ACI On Premise serves customers who manage their software on site. These on-premise customers use the Company’s software to develop sophisticated solutions, which are often part of a larger system located and managed at the customer specified site. These customers require a level of control and flexibility that ACI On Premise solutions can offer, and they have the resources and expertise to take a lead role in managing these solutions.

ACI On Demand serves the needs of banks, merchants and corporates who use payments to facilitate their core business. These on-demand solutions are maintained and delivered through the cloud via our global data centers and are available in either a single-tenant environment for SaaS offerings, or in a multi-tenant environment for PaaS offerings.

Revenue is attributed to the reportable segments based upon the product sold and mechanism for delivery to the customer. Expenses are attributed to the reportable segments in one of three methods, (1) direct costs of the segment, (2) labor costs that can be attributed based upon time tracking for individual products, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities as well as information technology and facilities related expense for which multiple segments benefit. We also allocate certain depreciation costs to the segments.

Segment Adjusted EBITDA is the measure reported to the CODM for purposes of making decisions on allocating resources and assessing the performance of our segments and, therefore, Segment Adjusted EBITDA is presented in conformity with ASC 280, Segment Reporting. Segment Adjusted EBITDA is defined as earnings (loss) from operations before interest, income tax expense (benefit), depreciation and amortization (“EBITDA”) adjusted to exclude stock-based compensation, and net other income (expense).

Corporate and unallocated expenses consists of the corporate overhead costs that are not allocated to reportable segments. These overhead costs relate to human resources, finance, legal, accounting, merger and acquisition activity, and other costs that are not considered when management evaluates segment performance.

 

30


Table of Contents

The following is selected financial data for our reportable segments (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Revenue

     

ACI On Premise

   $ 96,007      $ 105,030  

ACI On Demand

     109,848        104,280  
  

 

 

    

 

 

 

Total revenue

   $ 205,855      $ 209,310  
  

 

 

    

 

 

 

Segment Adjusted EBITDA

     

ACI On Premise

   $ 28,268      $ 38,898  

ACI On Demand

     (262      (4,233

Depreciation and amortization

     (24,852      (24,993

Stock-based compensation expense

     (6,585      (6,362

Corporate and unallocated expenses

     (24,662      (20,014

Interest, net

     (8,581      (6,621

Other, net

     (1,912      (55
  

 

 

    

 

 

 

Loss before income taxes

   $ (38,586    $ (23,380
  

 

 

    

 

 

 

Depreciation and amortization

     

ACI On Premise

   $ 3,030      $ 2,975  

ACI On Demand

     7,562        7,736  

Corporate

     14,260        14,282  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 24,852      $ 24,993  
  

 

 

    

 

 

 

Stock-based compensation expense

     

ACI On Premise

   $ 1,956      $ 1,467  

ACI On Demand

     1,951        1,463  

Corporate

     2,678        3,432  
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 6,585      $ 6,362  
  

 

 

    

 

 

 

ACI On Premise Segment Adjusted EBITDA decreased $10.6 million for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to a $9.0 million decrease in revenue driven by timing and size of certain license and capacity events.

ACI On Demand Segment Adjusted EBITDA increased $4.0 million for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to a $5.6 million increase in revenues, a $2.0 million decrease in selling and marketing expense, partially offset by a $5.1 million increase in payment card interchange and processing fees.

Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund acquisitions, capital expenditures, and lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents, and available borrowings under our revolving credit facility.

Available Liquidity

The following table sets forth our available liquidity for the periods indicated (in thousands):

 

     March 31,
2019
     December 31,
2018
 

Cash and cash equivalents

   $ 176,173      $ 148,502  

Availability under revolving credit facility

     500,000        500,000  
  

 

 

    

 

 

 

Total liquidity

   $ 676,173      $ 648,502  
  

 

 

    

 

 

 

The increase in total liquidity is primarily attributable to positive operating cash flows of $42.4 million, offset by $9.8 million of payments to purchase property and equipment and software and distribution rights.

 

31


Table of Contents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. As of March 31, 2019, we had $176.2 million of cash and cash equivalents, of which $79.7 million was held by our foreign subsidiaries. If these funds were needed for our operations in the U.S., we may potentially be required to accrue and pay foreign and U.S. state income taxes to repatriate these funds. As of March 31, 2019, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested. The earnings of all other foreign entities are no longer indefinitely reinvested. We are also permanently reinvested for outside book/tax basis difference related to foreign subsidiaries. These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of March 31, 2019.

Cash Flows

The following table sets forth summarized cash flow data for the periods indicated (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Net cash provided by (used by):

     

Operating activities

   $ 42,427      $ 45,136  

Investing activities

     (9,828      (12,589

Financing activities

     (5,361      (29,695

Cash Flows from Operating Activities

Net cash flows provided by operating activities during the three months ended March 31, 2019, were $42.4 million as compared to $45.1 million during the same period in 2018. The comparative period decrease was primarily due to a higher net loss for the three months ended March 31, 2019, compared to the same period in 2018, as well as timing of receipts and payments. Our current policy is to use our operating cash flow primarily for funding capital expenditures, lease payments, stock repurchases, and acquisitions.    

Cash Flows from Investing Activities

During the first three months of 2019, we used cash of $9.8 million to purchase software, property and equipment, as compared to $12.6 million during the same period in 2018.

Cash Flows from Financing Activities

Net cash flows used by financing activities for the three months ended March 31, 2019, were $5.4 million as compared to $29.7 million during the same period in 2018. During the first three months of 2019, we repaid $5.9 million on the Term Credit Facility. In addition, we received proceeds of $5.7 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $2.6 million for the repurchase of restricted share awards (“RSAs”) and restricted share units (“RSUs”) for tax withholdings. We also used $0.6 million to repurchase common stock. During the first three months of 2018, we repaid $5.2 million on the Term Credit Facility and repaid a net $2.0 million on the Revolving Credit Facility. In addition, we received proceeds of $9.9 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $0.9 million for the repurchase of RSAs for tax withholdings. We also used $31.1 million to repurchase common stock.

We may decide to use cash to acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies, and personnel, or through investments in other companies.

We believe our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months and foreseeable future.    

Debt

As of March 31, 2019, we had $279.0 million outstanding under our Term Credit Facility, with up to $500.0 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended. The interest rate in effect as of March 31, 2019, was 4.25%. As of March 31, 2019, we also had $400.0 million outstanding of 5.750% Senior Notes due 2026 (the “2026 Notes”). Refer to Note 4, Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Stock Repurchase Program

In 2005, our board of directors (“the board”) approved a stock repurchase program authorizing us, as market and business conditions warrant, to acquire our common stock and periodically authorize additional funds for the program. In February 2018, the board approved the repurchase of up to $200.0 million of our common stock in place of the remaining purchase amounts previously authorized.

 

32


Table of Contents

We repurchased 23,802 shares for $0.6 million under the program during the three months ended March 31, 2019. Under the program to date, we have repurchased 44,153,195 shares for approximately $548.5 million. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $176.0 million.

There is no guarantee as to the exact number of shares we will repurchase. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period of three business days following our quarterly earnings release.

Contractual Obligations and Commercial Commitments

For the three months ended March 31, 2019, there have been no material changes to the contractual obligations and commercial commitments disclosed in Item 7 of our Form 10-K for the fiscal year ended December 31, 2018.

We are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Tax. The liability for unrecognized tax benefits as of March 31, 2019, is $28.3 million.

Critical Accounting Estimates

The preparation of the condensed consolidated financial statements requires we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions we believe to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our condensed consolidated financial statements. Actual results could differ from those estimates.

The accounting policies that reflect our more significant estimates, judgments, and assumptions, and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

 

   

Revenue Recognition

 

   

Business Combinations

 

   

Intangible Assets and Goodwill

 

   

Stock-Based Compensation

 

   

Accounting for Income Taxes

During the three months ended March 31, 2019, there were no significant changes to our critical accounting policies and estimates. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2018, filed on March 1, 2019, for a more complete discussion of our critical accounting policies and estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Excluding the impact of changes in interest rates and the uncertainty in the global financial markets, there have been no material changes to our market risk for the three months ended March 31, 2019. We conduct business in all parts of the world and are thereby exposed to market risks related to fluctuations in foreign currency exchange rates. The U.S. dollar is the single largest currency in which our revenue contracts are denominated. Any decline in the value of local foreign currencies against the U.S. dollar results in our products and services being more expensive to a potential foreign customer. In those instances where our goods and services have already been sold, receivables may be more difficult to collect. Additionally, in jurisdictions where the revenue contracts are denominated in U.S. dollars and operating expenses are incurred in the local currency, any decline in the value of the U.S. dollar will have an unfavorable impact to operating margins. At times, we enter into revenue contracts that are denominated in the country’s local currency, primarily in Australia, Canada, the United Kingdom, and other European countries. This practice serves as a natural hedge to finance the local currency expenses incurred in those locations. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for speculation or arbitrage.

The primary objective of our cash investment policy is to preserve principal without significantly increasing risk. If we maintained similar cash investments for a period of one year based on our cash investments and interest rates on these investments at March 31, 2019, a hypothetical ten percent increase or decrease in effective interest rates would increase or decrease interest income by approximately $0.1 million annually.

 

33


Table of Contents

We had approximately $679.0 million of debt outstanding as of March 31, 2019, with $400.0 million in Senior Notes and $279.0 million outstanding under our Credit Facility. Our 2026 Notes are fixed-rate long-term debt obligations with a 5.750% interest rate. Our Credit Facility has a floating rate, which was 4.25% as of March 31, 2019. A hypothetical ten percent increase or decrease in effective interest rates would increase or decrease interest expense related to the Credit Facility by approximately $1.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures are effective as of March 31, 2019.

Changes in Internal Control over Financial Reporting

We adopted ASC 842, Leases, on January 1, 2019, which required management to make changes to our policies and processes and to implement new or modify existing internal controls over financial reporting during the quarter ended March 31, 2019. This included modifications to our existing controls over the review of supplier contracts and other agreements, the implementation of a new lease accounting system, and new controls related to disclosure requirements.

There were no additional changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various litigation matters arising in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would be likely to have a material effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended December 31, 2018. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

 

34


Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information regarding our repurchases of common stock during the three months ended March 31, 2019:

 

Period

   Total Number of
Shares
Purchased
    Average Price
Paid per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program
     Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Program
 

January 1, 2019 through January 31, 2019

     23,802     $ 26.50        23,802      $ 175,956,000  

February 1, 2019 through February 28, 2019

     84,152  (1)      31.18        —          175,956,000  

March 1, 2019 through March 31, 2019

     —         —          —          175,956,000  
  

 

 

   

 

 

    

 

 

    

Total

     107,954     $ 30.15        23,802     
  

 

 

   

 

 

    

 

 

    

 

  (1)

Pursuant to our 2005 Incentive Plan, we granted RSAs and RSUs. Under each arrangement, shares are issued without direct cost to the employee. During the three months ended March 31, 2019, 272,316 shares of the RSAs and RSUs vested. We withheld 84,152 of those shares to pay the employees’ portion of the applicable payroll taxes.

In fiscal 2005, our board approved a stock repurchase program authorizing us, as market and business conditions warrant, to acquire our common stock and periodically authorize additional funds for the program, with the intention of using existing cash and cash equivalents to fund these repurchases. In February 2018, the board approved the repurchase of up to $200.0 million of our common stock in place of the remaining purchase amounts previously authorized. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $176.0 million.

There is no guarantee as to the exact number of shares we will repurchase. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period of three business days following our quarterly earnings release.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

35


Table of Contents

ITEM 6. EXHIBITS

The following lists exhibits filed as part of this quarterly report on Form 10-Q:

 

Exhibit
No.
 

Description

  2.01   Stock Purchase Agreement, dated February 28, 2019
  3.01    (1)   2013 Amended and Restated Certificate of Incorporation of the Company
  3.02    (2)   Amended and Restated Bylaws of the Company
  4.01    (3)   Form of Common Stock Certificate (P)
10.01    (4)   Form of Restricted Share Unit Award Agreement CEO (RSUs)
10.02    (5)   Form of Performance Share Award Agreement CEO (rTSR Performance Share Awards)
10.03    (6)   Form of Restricted Share Unit Award Agreement (RSUs)
10.04    (7)   Form of Performance Share Award Agreement (rTSR Performance Share Awards)
10.05    (8)   Amendment Agreement to the Amended and Restated Credit Agreement, dated April 5, 2019
31.01   Certification of Principal Executive Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02   Certification of Principal Financial Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002
32.01    *   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    *   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase

 

*

This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

 

(P)

Paper Exhibit

(1)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed August 17, 2017.

(2)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed February 27, 2017.

(3)

Incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement No. 33-88292 on Form S-1.

(4)

Incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed March 8, 2019.

(5)

Incorporated herein by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed March 8, 2019.

(6)

Incorporated herein by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed March 8, 2019.

(7)

Incorporated herein by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed March 8, 2019.

(8)

Incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed April 11, 2019.

 

36


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    

ACI WORLDWIDE, INC.

(Registrant)

Date: May 9, 2019    By:   

/s/ SCOTT W. BEHRENS

      Scott W. Behrens
     

Senior Executive Vice President, Chief Financial Officer and Chief Accounting Officer

(Principal Financial Officer)

 

37

EX-2.1

EXECUTION VERSION

   Exhibit 2.01

STOCK PURCHASE AGREEMENT

AMONG

THE WESTERN UNION COMPANY,

ACI WORLDWIDE CORP.

AND

ACI WORLDWIDE, INC.

Dated February 28, 2019


TABLE OF CONTENTS

 

         Page  

ARTICLE I

 

DEFINITIONS

     1  

Section 1.1.

 

Definitions

     1  

Section 1.2.

 

Interpretation

     23  

ARTICLE II

 

PURCHASE AND SALE

     25  

Section 2.1.

 

Purchase and Sale of the Shares

     25  

ARTICLE III

 

PURCHASE PRICE

     25  

Section 3.1.

 

Purchase Price

     25  

ARTICLE IV

 

CLOSING

     25  

Section 4.1.

 

Closing Date

     25  

Section 4.2.

 

Payment on the Closing Date

     25  

Section 4.3.

 

Buyer and Parent’s Additional Closing Date Deliveries

     26  

Section 4.4.

 

Seller’s Closing Date Deliveries

     26  

Section 4.5.

 

Determination of the Adjustment Amount

     27  

Section 4.6.

 

Target Working Capital Adjustment

     27  

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES OF SELLER

     29  

Section 5.1.

 

Organization of Seller

     29  

Section 5.2.

 

Organization; Capital Structure of the Companies; Power and Authority

     29  

Section 5.3.

 

Authority of Seller; Conflicts

     30  

Section 5.4.

 

Financial Statements

     31  

Section 5.5.

 

Operations Since Interim Financial Statements Date

     31  

Section 5.6.

 

Taxes

     31  

Section 5.7.

 

Governmental Permits

     33  

Section 5.8.

 

Owned Real Property

     33  

Section 5.9.

 

Leased Real Property

     33  

Section 5.10.

 

Intellectual Property

     33  

Section 5.11.

 

Title to Property; Sufficiency of Assets

     35  

Section 5.12.

 

No Violation, Litigation or Regulatory Action; Privacy

     36  

Section 5.13.

 

Contracts

     36  

Section 5.14.

 

Status of Contracts

     37  

Section 5.15.

 

ERISA

     38  

Section 5.16.

 

Environmental Matters

     40  

Section 5.17.

 

Employee Relations and Agreements

     41  

Section 5.18.

 

No Undisclosed Liabilities

     41  

Section 5.19.

 

Insurance

     42  

Section 5.20.

 

Customers and Suppliers

     42  

Section 5.21.

 

Shared Contracts; Joint Service Contracts

     43  

Section 5.22.

 

Affiliate Transactions

     43  

Section 5.23.

 

No Brokers

     43  

Section 5.24.

 

No Other Representations or Warranties

     43  

 

i


TABLE OF CONTENTS

(continued)

 

         Page  

ARTICLE VI

  REPRESENTATIONS AND WARRANTIES OF BUYER      43  

Section 6.1.

 

Organization of Parent and Buyer

     43  

Section 6.2.

 

Authority of Parent and Buyer; Conflicts

     43  

Section 6.3.

 

No Violation, Litigation or Regulatory Action; Required Approvals

     44  

Section 6.4.

 

Financing

     45  

Section 6.5.

 

Solvency

     46  

Section 6.6.

 

Investment Intent

     46  

Section 6.7.

 

No Brokers

     46  

Section 6.8.

 

Investigation

     46  

Section 6.9.

 

No other Representations or Warranties

     47  

ARTICLE VII

  ACTION PRIOR TO THE CLOSING DATE      47  

Section 7.1.

 

Access to Information

     47  

Section 7.2.

 

Notifications

     48  

Section 7.3.

 

Consents of Third Parties; Governmental Approvals; Shared Contracts

     48  

Section 7.4.

 

Operations Prior to the Closing Date

     52  

Section 7.5.

 

Termination of Certain Intercompany Accounts; Intercompany Agreements

     55  

Section 7.6.

 

Efforts to Obtain Funding

     55  

Section 7.7.

 

Financing Status

     58  

Section 7.8.

 

Audited Financial Statements

     58  

Section 7.9.

 

Reorganization

     59  

Section 7.10.

 

Non-Assignable Assets

     60  

Section 7.11.

 

Wrong Pockets

     62  

Section 7.12.

 

R&W Policy

     63  

Section 7.13.

 

Walletron

     63  

ARTICLE VIII

  ADDITIONAL AGREEMENTS      63  

Section 8.1.

 

Use of Names; Intellectual Property

     63  

Section 8.2.

 

Tax Matters

     64  

Section 8.3.

 

Employee Matters

     69  

Section 8.4.

 

Securities Law Legends

     73  

Section 8.5.

 

Insurance; Risk of Loss

     73  

Section 8.6.

 

Substitute Guaranties; Replacement Letters of Credit

     74  

Section 8.7.

 

Assistance with Financial Reporting

     74  

Section 8.8.

 

Non-Competition; Non-Solicitation; No-Hire

     74  

Section 8.9.

 

Certain Actions

     75  

ARTICLE IX

  CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER      76  

Section 9.1.

 

No Misrepresentation or Breach of Covenants and Warranties

     76  

Section 9.2.

 

No Restraints

     76  

Section 9.3.

 

Other Deliveries

     76  

Section 9.4.

 

Material Adverse Effect

     76  

Section 9.5.

 

Frustration of Closing Conditions

     76  

 

ii


TABLE OF CONTENTS

(continued)

 

         Page  

ARTICLE X

  CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER      77  

Section 10.1.

 

No Misrepresentation or Breach of Covenants and Warranties

     77  

Section 10.2.

 

Consents

     77  

Section 10.3.

 

Other Deliveries

     77  

Section 10.4.

 

Frustration of Closing Conditions

     77  

ARTICLE XI

  TERMINATION      77  

Section 11.1.

 

Termination

     77  

Section 11.2.

 

Notice of Termination

     78  

Section 11.3.

 

Buyer Termination Fee

     78  

Section 11.4.

 

Effect of Termination

     79  

ARTICLE XII

  INDEMNIFICATION      79  

Section 12.1.

 

Survival

     79  

Section 12.2.

 

Indemnification by Seller

     79  

Section 12.3.

 

Indemnification by Buyer

     80  

Section 12.4.

 

Termination of Indemnification

     80  

Section 12.5.

 

Procedures Relating to Indemnification

     80  

Section 12.6.

 

Notice and Opportunity To Defend

     81  

Section 12.7.

 

Treatment of Indemnification Payments

     82  

Section 12.8.

 

Additional Matters; Manner of Payment

     82  

Section 12.9.

 

Exclusive Remedy

     83  

ARTICLE XIII

  GENERAL PROVISIONS      84  

Section 13.1.

 

Governing Law

     84  

Section 13.2.

 

No Public Announcement

     84  

Section 13.3.

 

Notices

     84  

Section 13.4.

 

Successors and Assigns

     85  

Section 13.5.

 

Access to Records after Closing

     85  

Section 13.6.

 

Entire Agreement; Amendments

     86  

Section 13.7.

 

Waivers

     86  

Section 13.8.

 

Expenses

     87  

Section 13.9.

 

Partial Invalidity

     87  

Section 13.10.

 

Execution in Counterparts

     87  

Section 13.11.

 

Further Assurances

     87  

Section 13.12.

 

Jurisdiction; Specific Performance

     87  

Section 13.13.

 

Waiver of Jury Trial

     87  

Section 13.14.

 

Confidential Nature of Information

     87  

Section 13.15.

 

Privilege; Waiver of Conflicts

     88  

Section 13.16.

 

Financing Source Related Parties

     88  

Section 13.17.

 

Guaranty

     89  

 

iii


Exhibit

 

Exhibit A    Transition Services Agreement
Exhibit B    Reorganization Certificate
Exhibit C    R&W Policy

 

iv


STOCK PURCHASE AGREEMENT

STOCK PURCHASE AGREEMENT (the “Agreement”), dated February 28, 2019, among The Western Union Company, a Delaware corporation (“Seller), ACI Worldwide Corp., a Nebraska corporation and a wholly owned Subsidiary of Parent (“Buyer”), and ACI Worldwide, Inc., a Delaware corporation (“Parent”).

PRELIMINARY STATEMENT:

WHEREAS, Seller is and as of the Closing shall be the sole owner of all of the outstanding shares of capital stock (the “Shares”) of E Commerce Group Products, Inc., a New York corporation (“ECG”);

WHEREAS, ECG is the owner of all outstanding shares of capital stock of Speedpay, Inc., a New York corporation (“Sprint”, and together with ECG the “Companies”);

WHEREAS, as of the date hereof, Seller and its Affiliates, including the Companies, are engaged in the Business;

WHEREAS, prior to the Closing, Seller shall effect the Reorganization; and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, all of the Shares, all on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, it is hereby agreed between Seller and Buyer as follows:

ARTICLE I

DEFINITIONS

Section 1.1.    Definitions. In this Agreement, the following terms have the meanings specified or referred to in this Section 1.1.

Accounting Firm” has the meaning specified in Section 4.5(b).

Adjustment Amount” means (a) the Closing Date Working Capital minus the Target Working Capital Amount (expressed as a positive or negative number, as applicable), plus (b) the Closing Date Cash, minus (c) the Closing Date Indebtedness, minus (d) the Transaction Expenses.

Adjustment Report” has the meaning specified in Section 4.5(a).

Adjustment Report Finalization Date” means the date which is 30 days after the date on which the Adjustment Report is delivered by Buyer to Seller; provided, however, that if Seller or Seller’s Accountant delivers a notice of exception within such 30-day period, and if any change to the Adjustment Report is agreed to by Buyer and Seller in accordance with Section 4.5, then the date on which Buyer and Seller agree in writing to such change shall be the Adjustment Report Finalization Date; provided, further, that if Seller and Buyer cannot agree upon the Adjustment Amount, then the date on which the Accounting Firm delivers its decision with respect to such dispute in accordance with Section 4.5 shall be the Adjustment Report Finalization Date.


Affected Employee” means (a) each U.S. Business Employee who is employed by one of the Companies immediately prior to the Closing (each, a “U.S. Affected Employee”) and (b) each International Business Employee who accepts an offer of employment with Buyer or one of its Affiliates as contemplated by this Agreement.

Affiliate” means, with respect to any Person, any other Person which directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person. As used herein, “control” means the power to direct the management or affairs of a Person through the ownership of more than 50% of the voting equity securities of such Person.

Affiliated Group” means an “affiliated group” as defined in Section 1504(a) of the Code, and any other group of Persons eligible to file any Tax Return on a combined, consolidated or unitary basis.

Agreed Accounting Principles” means (a) the accounting principles, policies, procedures and methodologies described on Schedule 1.1(a) and (b) to the extent not inconsistent with clause (a), the accounting principles, policies, procedures and methodologies used in the preparation of the Historical Financial Statements.

Agreement” has the meaning specified in the first paragraph of this Agreement.

Alternative Financing” has the meaning specified in Section 7.6(b).

Applicable Consents” has the meaning specified in Section 7.3(d).

Asset Transferor” means each of Seller, Western Union Holdings, Inc., a Georgia corporation, the Seller Licensed Subsidiary and any other Subsidiary of Seller.

Assumed Data Center Liabilities” any Liabilities arising out of the operation of the Business to the extent taking place at or through the the Excluded Data Centers to the extent relating to the Business; provided, however, that Assumed Data Center Liabilities shall not include Post-Closing Data Center Liabilities or any lease or rental obligations in respect of the Excluded Data Centers.

Assumed Liabilities” means all Liabilities of any Asset Transferor to the extent arising from or relating to the Business or the Contributed Assets, whether direct or indirect, known or unknown, fixed or contingent, accrued or unaccrued, matured or unmatured or asserted or unasserted, and irrespective of whether the same shall arise prior to, on or following the Closing Date, including the following Liabilities of the applicable Asset Transferor to the extent arising

 

2


from or related to the Business or the Contributed Assets, excluding, in each case, any such Liabilities to the extent they are Excluded Liabilities:

(i)    all Liabilities (A) arising under any of the Transferred Contracts and any of the Contracts set forth on Schedules 7.3(e) whether arising prior to, on or after the Closing, (B) arising under any Joint Service Contract to the extent (1) arising out of the Business whether arising prior to, on or after the Closing or (2) arising out of the actions or, in respect of the Business, omissions of Buyer or any Buyer Affiliates, or (C) arising under any Shared Vendor Contract to the extent (1) arising out of the Business whether arising prior to, on or after the Closing or (2) arising out of acts or omissions of Buyer or any Buyer Affiliates relating to the Business (“Shared Contract Liabilities”);

(ii)    all Liabilities to the extent they are of the type reflected in the Interim Financial Statements;

(iii)    all Liabilities for Taxes to the extent (A) such Liabilities were taken into account in finally determining Closing Date Working Capital, (B) Buyer is liable for such Taxes pursuant to Section 8.2, or (C) such Liabilities are attributable to Contributed Assets for which the Companies or Buyer bear the economic benefits, burdens and Liabilities pursuant to Sections 7.9(b) or 7.10(b) (collectively, “Assumed Taxes”);

(iv)    all Liabilities arising under the Transferred Permits, whether arising prior to, on or after the Closing Date;

(v)    all Liabilities relating to any claim by a third party to the extent relating to the ownership or operation of the Business, the Contributed Assets or the other Assumed Liabilities;

(vi)    Assumed Data Center Liabilities;

(vii)    all Liabilities of any Asset Transferor to pay or perform any Liability of a type referred to in (i)-(vi) or (viii)-(x) hereof pursuant to any guaranty or obligation or Encumbrance, security interest or other encumbrance on, or in respect of, any collateral of such Asset Transferor to ensure performance given or made by such Asset Transferor (including the Guaranties but excluding any other letter of credit or surety bond);

(viii)    all Liabilities arising from Actions or Proceedings pending or threatened against the Business or the Contributed Assets, including those Proceedings listed on Schedule 5.12, and all performance obligations under any non-financial settlement obligation;

(ix)    all Liabilities to the extent relating to the Affected Employees except as otherwise provided in Section 8.3; and

(x)    all Liabilities arising from or relating to claims asserted by Business Employees for acts or omissions occurring after the Closing.

Post-Closing Data Center Liabilities shall not be considered Assumed Liabilities.

 

3


Assumed Taxes” has the meaning specified under the defined term “Assumed Liabilities.”

Base Purchase Price” means $750,000,000.00.

Biller” means (a) U.S. Governmental Bodies and (b) Utility Service providers, insurance companies and providers of Financial Services, in each case, solely in their capacity as such, that have a regular need to receive periodic U.S. dollar denominated payments from Customers in respect of the operations in the United States. For the avoidance of doubt, Schedule 1.1(b) sets forth a complete list of the Billers of the Business as of the date of this Agreement.

Biller Contract” means, with respect to any Biller, a Contract to which the Biller and one of the Companies and/or another Subsidiary of Seller is a party pursuant to which the Companies and/or the other Subsidiary of Seller provide services of the Business to such Biller.

Business” means the business of providing to Billers a payment acceptance and processing service using the Sprint Platform that permits Billers to receive from Customers automated clearing house, credit card, debit card or PIN-Less (ATM Network) U.S. dollar denominated payments for one or more recurring bills for Covered Services in the United States, which payments are initiated by Customers remotely via a website, telephone (either directly through an interactive voice response system or through a customer service representative or agent located in a call center), mobile site or other payment acceptance methodology (collectively, “Channels”), in each case, which Channel is dedicated solely to (a) the acceptance and processing of payments from Customers for such Biller’s Covered Services and (b) operations of such Biller incident thereto.

Notwithstanding anything in this Agreement to the contrary, “Business” does not include (even, for the avoidance of doubt, if any of the following involve a Biller or a bill payment service): (i) any Seller Service for facilitating bill payments made at a physical location of Seller or one of its Affiliates or one of its or their respective agents (including payments made via an electronic kiosk deployed at any physical location of Seller or one of its Affiliates or one of its or their respective agents), (ii) any Seller Service for facilitating periodic or recurring payments for the purchase of retail or digital goods on a subscription or other recurring basis, (iii) any Seller Service for making payments to or from (including, for clarity, pursuant to the cross border business and operations of Western Union Business Solutions) persons outside of the United States where the primary purpose of the Seller Service is not bill payment services to Billers, (iv) any Seller Service for making payments, whether domestic or cross-border, that is not limited to a single payee or for a single purpose, or is to a payee that acts as intermediary for others, (v) any Seller Service that includes foreign exchange, (vi) any Seller Service for the payment to commissary or equivalent accounts or otherwise for the benefit of incarcerated individuals, (vii) any bill payment services to customers or potential customers via any Channel, including at westernunion.com, that is not dedicated solely to the acceptance and processing of payments for a single Biller for such Biller’s Covered Services and operations of such Biller incident thereto, (viii) the Seller Service provided in connection with its “Equity Accelerator” product, including the processing of payments for mortgagees to mortgage holders, (ix) any Seller Service for the payments to educational institutions, (x) the ownership of or business activities of Walletron, Inc.

 

4


unless the Walletron Shares are transferred to Buyer at Closing in accordance with Section 7.3(d), and (xi) the presentment and delivery of electronic bills or billing data for customers or third parties in connection with any of the items listed in (i) through (x) above.

Business Agreements” has the meaning specified in Section 5.14.

Business Combination” has the meaning specified in Section 8.8(c).

Business Employee” means (a) as of the date of this Agreement, any individual identified in the letter provided by Seller to Buyer simultaneously with the execution and delivery of this Agreement (the “Employee List”) and (b) at any time after the date of this Agreement until the Closing Date, any individual identified on the Employee List who remains employed by a Company or any of their Affiliates and any other individual hired by a Company or any of their Affiliates after the date hereof in accordance with this Agreement (or who is already so employed and whose duties and responsibilities are modified) to fill a vacant position with respect to the Business or to replace any person on the Employee List. For the avoidance of doubt, “Business Employee” shall not include any individual employed in Costa Rica.

Business Non-Assignable Asset” has the meaning specified in Section 7.10(a).

Business Plans” has the meaning specified in Section 8.3(i).

Buyer” has the meaning specified in the first paragraph of this Agreement.

Buyer 401(k) Plan” has the meaning specified in Section 8.3(h).

Buyer Ancillary Agreements” means all agreements, instruments and documents being or to be executed and delivered by Buyer or any of its respective Affiliates (including, following the Closing, the Companies) under this Agreement or in connection herewith.

Buyer Defenses” has the meaning specified in Section 13.17(e).

Buyer Fundamental Representations” means the representations and warranties set forth in Section 6.1, Section 6.2(a), Section 6.3(c) and 6.3(d) of this Agreement.

Buyer Indemnified Persons” has the meaning specified in Section 12.2(a).

Buyer Licensed Subsidiary” means Official Payments Corporation.

Buyer Tax Return” has the meaning specified in Section 8.2(b)(i).

Buyer Termination Fee” has the meaning specified in Section 11.3.

Buyer’s Benefits Programs” has the meaning specified in Section 8.3(c).

Cap” has the meaning specified in Section 12.2(b).

Cash” means, as of the date and time of determination, but giving effect to the Reorganization, the amount equal to the aggregate amount of cash and cash equivalents with a

 

5


maturity of 90 days or less, when purchased, of the Companies, including any cash or other deposits in transit and less the amount of any uncleared outstanding checks, wires or other transfers if the payables of the Companies to the extent relating thereto have been reduced, calculated in accordance with the Agreed Accounting Principles; provided, however, that Cash shall exclude the aggregate amount of any security deposits pledged to a third party and current assets included in Closing Date Working Capital.

Channels” has the meaning specified in the definition of “Business”.

Claim Notice” has the meaning specified in Section 12.5.

Closing” means the closing of the transfer of the Shares from Seller to Buyer.

Closing Date” has the meaning specified in Section 4.1.

Closing Date Cash” means the aggregate amount of all Cash as of 12:01 a.m. on the Closing Date calculated in accordance with the Agreed Accounting Principles.

Closing Date Indebtedness” means the aggregate amount of all Indebtedness of each of the Companies as of immediately prior to the Closing calculated in accordance with the Agreed Accounting Principles.

Closing Date Working Capital” means Working Capital as of 12:01 a.m. on the Closing Date calculated in accordance with the Agreed Accounting Principles.

COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

Code” means the Internal Revenue Code of 1986.

Commitment Letters” has the meaning specified in Section 6.4.

Companies” has the meaning specified in the recitals of this Agreement.

Company IT Systems” means all computer and information technology systems, devices, equipment, platforms and networks owned or licensed by the Companies (after giving effect to the Reorganization).

Confidentiality Agreement” means the confidentiality agreement previously entered into between Seller and Buyer.

Confirmed” means that the Biller has indicated orally or in writing to Seller that the Biller is aware of the Target Conversion Date for such Biller and will attempt to (or expects to attempt to) test the NextGen Platform application on a timeline that would permit conversion of the Biller to the NextGen Platform by the Target Conversion Date.

Consolidated Tax Group” means, as to either of the Companies, any Affiliated Group that, at any time on or before the Closing Date, includes or has included Seller and such

 

6


Company, or any other group of corporations filing Tax Returns on a combined, consolidated or unitary basis that, at any time on or before the Closing Date, includes or has included Seller and such Company (but not, for the avoidance of doubt, any Affiliated Group or other group of corporations consisting only of a Company and any Subsidiary thereof).

Contemplated Transactions” means any and all transactions contemplated by this Agreement, the Seller Ancillary Agreements and/or the Buyer Ancillary Agreements, as the context so requires.

Contract” means each contract or other legally binding commitment whether written or oral.

Contributed Assets” means all right, title and interest of the Asset Transferor to and under the assets, claims, properties and rights of such Asset Transferor which are primarily used in, primarily held for use in, or are otherwise primarily related to the Business, including the following assets, claims, properties and rights of the applicable Asset Transferor primarily used in, primarily held for use in, or otherwise primarily related to the Business as of immediately prior to the Reorganization and Closing, excluding, in each case, any such assets, claims, properties and rights that are Excluded Assets:

(i)    (A) the Biller Contracts to which any Asset Transferor is a party set forth on Schedule 1.1(e)(i) Item 1 (in each case, except as such Contract constitutes a Joint Service Contract), (B) any vendor Contracts to which an Asset Transfer is a party set forth on Schedule 1.1(e)(i) Item 1 (in each case, except as such Contract constitutes a Shared Vendor Contract), and (C) any other Business Agreements of Seller or its Subsidiaries (other than the Companies) (the “Transferred Contracts”);

(ii)    the bank accounts set forth on Schedule 1.1(e)(i) Item 2;

(iii)    all transferable Governmental Permits primarily used in the Business other than any money transfer licenses (the “Transferred Permits”);

(iv)    all accounts, notes and other receivables to the extent arising out of the sale of services or products of the Business to Third Parties under any Biller Contract (other than, for the avoidance of doubt, any accounts, notes or other receivables arising under any Joint Service Contract);

(v)    all Intellectual Property (other than Software) (the “Transferred Intellectual Property”);

(vi)    all Trademarks;

(vii)    all domain names, including the domain names set forth on Schedule 1.1(e)(i) Item 3 (the “Transferred Domain Names”);

(viii)    all intellectual property rights in the Software, including the Software set forth on Schedule 1.1(e)(i) Item 4 (the “Transferred Owned Software”), irrespective of whether such Transferred Owned Software is included within assets located at an Excluded Data Center;

 

7


(ix)    all assets to the extent reflected as assets in the calculation of the Closing Date Working Capital;

(x)    all laptop computers and mobile phones;

(xi)    (A) all personnel and employment records relating to the Affected Employees that are not Excluded Books and Records and (B) all other books and records (including all client files), whether in hard copy or computer format, including marketing, advertising, promotional, and similar materials and customer correspondence, subject to the terms of Section 13.5; provided that, Seller may retain a copy of the databases of contracts and lists of clients, prospective clients, suppliers, subcontractors, and vendors for use in its other businesses, subject to the terms of Section 8.8;

(xii)    all claims, deposits, prepayments, warranties, guarantees, refunds, causes of action, rights of recovery and rights of set-off and defenses relating to (or arising out of) the Contributed Assets or any Assumed Liability; and

(xiii)    all goodwill of the Business.

Copyrights” means all copyrights registered with a Governmental Body and pending applications to register the same that are enforceable in the United States.

Court Order” means any judgment, order, award or decree of any foreign, federal, state, local or other court or tribunal and any award in any arbitration proceeding.

Covered Services” means (a) Utility Services, Financial Services, insurance products, Governmental Matters and (b) any services provided by a Biller whose name is set forth on Schedule 1.1(b).

Customers” means payors, whether or not residing or located in the United States.

Deductible” has the meaning set forth in Section 12.2(b).

Definitive Financing Agreements” has the meaning specified in Section 7.6(a).

DOJ” has the meaning specified in Section 7.3(c).

ECG” has the meaning specified in the recitals of this Agreement.

Eligible Biller” means a Biller which either (a) has consented to the sale of the Companies if required pursuant to the terms of such Biller’s Biller Contract, (b) has consented to the assignment of such Biller’s Biller Contract as contemplated by the Reorganization or Section 7.3 or (c) has no contractual requirement to consent to the sale of the Companies or treatment of such Biller’s Biller Contract as contemplated by the Reorganization or Section 7.3.

 

8


Employee Benefit Plan” has the meaning specified in Section 5.15(a).

Employee List” has the meaning specified in the definition of “Business Employee.”

Encumbrance” means any lien, charge, security interest, encumbrance, deed of trust, right of way, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, transfer restriction or other restrictions of a similar kind.

Environmental Laws” has the meaning specified in Section 5.16(a).

ERISA” means the Employee Retirement Income Security Act of 1974.

ERISA Affiliate” means any trade or business (whether or not incorporated) (a) under common control within the meaning of Section 4001(b)(1) of ERISA with either of the Companies or (b) which together with either of the Companies is treated as a single employer under Section 414(t) of the Code.

Estimated Adjustment Amount” means (a) the Estimated Closing Date Working Capital minus the Target Working Capital Amount (expressed as a positive or negative number, as applicable), plus (b) the Estimated Closing Date Cash, minus (c) the Estimated Closing Date Indebtedness, minus (d) the Estimated Transaction Expenses.

Estimated Closing Date Cash” means Seller’s good faith estimate of the Closing Date Cash as set forth on the statement delivered pursuant to Section 4.2(b).

Estimated Closing Date Indebtedness” means Seller’s good faith estimate of the Closing Date Indebtedness as set forth on the statement delivered pursuant to Section 4.2(b).

Estimated Closing Date Working Capital” means Seller’s good faith estimate of the Closing Date Working Capital as set forth on the statement delivered pursuant to Section 4.2(b).

Estimated Transaction Expenses” means Seller’s good faith estimate of the Transaction Expenses as set forth on the statement delivered pursuant to Section 4.2(b).

Exchange Act” means the Securities Exchange Act of 1934.

Excluded Assets” means the following assets, properties and rights of Seller and its Subsidiaries (other than the Companies), as of immediately prior to the Reorganization and Closing:

(i)    all cash and cash equivalents to the extent not included in Closing Date Cash or pledged to a third party pursuant to a Contract for the benefit of the Business;

(ii)    all right, title and interest in owned and leased real property and other interests in real property, including all such right, title and interest under each real property lease pursuant to which any Person leases, subleases (as sub-landlord or sub-tenant) or otherwise occupies any such leased real property, including all improvements, fixtures and appurtenances thereto and rights in respect thereof;

 

9


(iii)    all rights of Seller or any of its Subsidiaries (other than the Companies) to any Trademark other than the Transferred Trademarks and Transferred Domain Names, including the name “Western Union,” “WU” or any Trademark related thereto or employing or incorporating the words “Western Union” and/or “WU” and with respect to any of the foregoing, either alone, in combination with any other words, any variation or derivative of the foregoing and any Trademark likely to cause confusion with the foregoing, Internet domain name or URL address, together with any Contracts granting rights to use the same and any Intellectual Property to the extent incorporating any of the same and any and all goodwill, registrations and applications relating thereto (collectively, the “Excluded Trademarks”);

(iv)    (A) any Intellectual Property of Seller or any of its Subsidiaries (other than the Companies), other than the Transferred Intellectual Property, Transferred Owned Software, Transferred Trademarks and Transferred Domain Names) and (B) any Contracts granting rights to use the same (collectively, the “Excluded Intellectual Property”);

(v)    other than Transferred Owned Software, any other Software and all intellectual property rights in such other Software, including the Software described on Schedule 1.1(e)(ii) Item 2;

(vi)    all Shared Contracts and all Contracts (and all rights thereunder) that are not Transferred Contracts;

(vii)    all Tax Returns, and all rights to refunds of or credits relating to any Tax with respect to the Contributed Assets (to the extent not included as assets in Closing Date Working Capital, as finally determined) to the extent attributable to Taxes that were paid in respect of events or periods prior to the Closing or Taxes for which Seller is required to indemnify Buyer;

(viii)    all Employee Benefit Plans and each other benefit or compensation plan, program, policy, Contract or arrangement sponsored by Seller or any of its Affiliates (including all assets related thereto) (the “Seller Benefit Plans”);

(ix)    all insurance policies, and all rights under any policies of insurance, and any benefits, proceeds or premium refunds payable or paid thereunder or with respect thereto;

(x)    any Excluded Books and Records;

(xi)    without limiting clause (ii) of this definition of Excluded Assets, any (A) Leased Real Property and data centers of Seller and its Subsidiaries located in Charlotte, North Carolina, Englewood Cliffs, New Jersey and Water Street, New York, (B) any and all servers, hardware and physical information technology infrastructure assets and other physical property located at or used in connection with the locations and

 

10


data centers set forth in clause (A) in each case to the extent used in the Business (such Leased Real Property, data centers and assets in clauses (A) and (B), the “Excluded Data Centers”), and (C) the call center utilized by the Business and located in Costa Rica (collectively, clauses (A) through (C), the “Excluded Perimeter Assets”);

(xii)    any assets included within the definition of “Contributed Assets” that are disposed of prior to the Closing Date as permitted by the terms of this Agreement;

(xiii)    (A) all governmental qualifications, registrations, franchises, licenses, permits, approvals, certifications and authorizations, other than the Transferred Permits and (B) all money transfer licenses or permits, including those listed on Schedule 1.1(e)(ii) Item 3;

(xiv)    all causes of action (including counterclaims) and defenses against Third Parties not primarily arising out of the Business, any of the Contributed Assets or the Assumed Liabilities, except to the extent necessary to defend against any claim asserted by a Third Party for any Excluded Liability;

(xv)    all loans or advances by the Asset Transferors to Seller or any of its Affiliates (other than the Companies);

(xvi)    the assets, rights and properties set forth or described on Schedule 5.11 or any asset used by Seller or its Affiliates to perform services under the Transition Services Agreement;

(xvii)    all rights to receive, and all rights with respect to the delivery of, corporate-level services of the type provided prior to the date hereof to the Business by Seller or any of its Affiliates (other than the Companies), including assets used or held for use by Seller or such Affiliate in connection with such corporate-level services;

(xviii)    other than the outstanding capital stock of the Companies, all shares, shares of capital stock or any other equity interests of any Person (except as provided by Section 7.13); and

(xix)    all right, title and interest of Seller or any of its Subsidiaries (other than the Companies) to any assets, properties, rights, titles, interests, Contracts and claims of any Asset Transferor not primarily used in or not primarily related to the Business, wherever located, whether tangible or intangible, real, personal or mixed.

Excluded Books and Records” means (a) corporate minute books, stock records and other similar corporate records of Seller and its Affiliates (other than the Companies); (b) books and records to the extent relating to the business of Seller and its Affiliates (excluding the Business), the Excluded Assets and Excluded Liabilities (including any books and records and privileged information relating to any cause of action (including counterclaims) and defenses against third parties to the extent relating to any of the businesses of Seller and its Affiliates (other than the Business), the Excluded Assets or the Excluded Liabilities); (c) books and records (including personnel and employment records) that Seller or any of its Affiliates is required by

 

11


Law to retain or prohibited by Law from delivering to Buyer (copies of which will be made available to Buyer at no cost to Buyer (other than for reasonable out-of-pocket expenses) upon Buyer’s reasonable request to the extent permitted by Law and solely in respect of the Business); (d) books and records of the Companies to the extent related to the businesses of Seller and its Affiliates (other than the Business) and the of the Seller or its Affiliates (other than the Companies), including any internal corporate proceedings of Seller or its Affiliates (other than the Companies), and including minutes books, shareholder consents, consolidated financial reports, documents and other materials to the extent reflecting or relating to internal approval processes of Seller or its Affiliates (other than the Companies); (e) any financial records (including general ledgers) or Tax Returns of Seller or its Affiliates (other than the Companies); (f) any books and records, reports, internal drafts, opinions, valuations, correspondence or other materials prepared or received by Seller or any of its Affiliates (including the Companies prior to the Closing) or its or their respective Representatives in connection with a potential sale of the Business or the Companies; (g) all bids, letters of intent and expressions of interest received from third parties with respect to the proposed sale of the Business (provided that any portion of the rights in any confidentiality, non-disclosure agreements, non-use or non-solicitation or non-hire agreements relating to the Business would not be excluded); (h) any consolidated, combined, affiliated or unitary Tax Return that includes Seller or any of its Affiliates or any Tax-related work papers; (i) any consolidated regulatory filings made by Seller or its Affiliates and any related correspondence with Governmental Bodies unless the information contained therein relates primarily to the Companies or the Business; (j) personnel and employment records for all employees and former employees of Seller or any of its Affiliates (other than copies of such records of the Companies (other than such records of the Companies in respect of current or former employees (except for any Affected Employees) of the businesses of Seller and its Affiliates (other than the Business))) who are not Affected Employees, and any other email, files, data and information with respect to the employees of Seller or its Affiliates; (k) evaluative and performance-related personnel and employment records for Business Employees who become Affected Employees only to the extent not permitted by Law to be transferred to Buyer; (l) any medical information regarding any current or former employee, consultant or contractor of Seller or its Affiliates (other than the Companies), including any “genetic information” within the meaning under GINA, any individual’s family medical history (except as otherwise permitted by GINA and the Family and Medical Leave Act), the results of an individual’s or family member’s genetic tests, the fact that an individual or an individual’s family member sought or received genetic services, or genetic information of a fetus carried by an individual or an individual’s family member or an embryo lawfully held by an individual or family member receiving assistive reproductive services; (m) any books and records which Seller reasonably and in good faith believes are necessary to enable Seller or any of its Affiliates to prepare and/or file Tax Returns (copies of which, unless privileged, will be made available to Buyer or its Representative at no cost (other than for reasonable out-of-pocket expenses) upon Buyer’s reasonable request to the extent permitted by Law and in respect of the Business); and (n) all privileged materials, documents and records to the extent not related to the Business.

Excluded Data Centers has the meaning specified under the defined term “Excluded Assets.”

Excluded Intellectual Property” has the meaning specified under the defined term “Excluded Assets.”

 

12


Excluded Liabilities” means the following Liabilities of the Seller or any of its Subsidiaries (other than the Companies):

(i)    any Indebtedness that is outstanding immediately prior to Closing and is not paid off in full without ongoing obligation or liability in connection with Closing;

(ii)    all Liabilities of Seller and its Subsidiaries (other than the Companies) to the extent arising under or relating to any Excluded Asset; provided, however, that (A) Shared Contract Liabilities and (B) Liabilities arising out of the post-Closing operation or use of the Excluded Data Centers shall not be considered Excluded Liabilities;

(iii)    any Liability of Seller or any of its Affiliates arising under Title IV of ERISA or Section 412 of the Code and any Liabilities with respect to any Seller Benefit Plan, in each case, except as expressly assumed by Buyer pursuant to Section 8.3; and

(iv)    except to the extent otherwise provided in Section 8.2, all Liabilities for Taxes (A) imposed on Seller or any of its Affiliates, in all cases other than those applicable to the Business or any Contributed Asset, (B) (whether assessed or unassessed) applicable to the Business or any Contributed Asset that are attributable to the ownership and operation of the Business or any Contributed Asset on or prior to the Closing Date (for the avoidance of doubt, in each of clause (A) and (B) including Taxes related to the transactions contemplated by this Agreement (including the Reorganization)) or (C) to the extent such Liabilities are attributable to Seller Assets for which Seller or one of its Subsidiaries (other than the Companies) bear the economic benefits, burdens and liabilities pursuant to Section 7.9(b) or Section 7.10(b) (collectively, the “Excluded Taxes”).

Excluded Taxes” has the meaning specified under the defined term “Excluded Liabilities.”

Excluded Trademarks” has the meaning specified under the defined term “Excluded Assets.”

Exercise Notice” has the meaning set forth in Section 7.13(b).

Financial Services” means debt collection services or the provision of loan products for borrowed money, including vehicle loan repayment.

Financial Statements” means the Interim Financial Statements and the Historical Financial Statements.

Financing” has the meaning specified in Section 6.4.

Financing Sources” has the meaning specified in Section 13.16.

 

13


Financing Sources Related Parties” has the meaning specified in Section 13.16.

Fraud” means, with respect to any party, any actual fraud by such party in respect of one of the representations and warranties of such party included in this Agreement. For the avoidance of doubt, “Fraud” does not include any claim for equitable fraud, negligent misrepresentation, promissory fraud, unfair dealings fraud, extra-contractual fraud or any torts based on negligence or recklessness.

FTC” has the meaning specified in Section 7.3(c).

Fully Configured” means, in respect of the process of migration of a Biller to the NextGen Platform, that the Companies have completed applicable Biller configuration, including custom java script and pipe configuration, including all development, testing and quality assurance related to the foregoing.

GAAP” means United States generally accepted accounting principles, consistently applied, as in effect at the date of the financial statement to which it refers.

GINA” Genetic Information Nondiscrimination Act of 2008.

Governmental Body” means any foreign, federal, state, local or other governmental authority, including any court of competent jurisdiction, tribunal, judicial or regulatory body.

Governmental Matters” means permits and licenses, fines and citations issued by U.S. Governmental Bodies, and similar payments mandated by a U.S. Governmental Body.

Governmental Permits” has the meaning specified in Section 5.7(a).

Guaranties” has the meaning specified in Section 8.6.

Hazardous Materials” has the meaning specified in Section 5.16(b).

Held Asset” has the meaning specified in Section 7.11(a)(i).

Historical Financial Statements” means the audited combined balance sheet of the Business as of December 31, 2017 and the audited combined statements of income of the Business for the year ended December 31, 2017.

HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Indebtedness” of any Person as of any date means, without duplication, (a) all indebtedness for borrowed money, notes, bonds, indentures, debt securities or warrants or other rights to acquire any debt securities of such Person, in each case, including any prepayment penalties, premiums, costs, breakage or other amounts payable upon discharge, (b) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (c) all capitalized finance lease obligations of such Person, (d) all “earn-out”, contingent purchase price, deferred purchase price or similar payment obligations under any Contract that relates to

 

14


the acquisition of any business or assets by such Person, (e) all obligations of such Person in respect of dividends declared by such Person that are accrued and unpaid, (f) net payment obligations of such Person under any interest rate or currency swap transactions, caps, collars or other hedging transactions, (g) all obligations of such Person for reimbursement of any letters of credit, performance bonds, surety bonds, corporate guarantees or similar instruments, (h) all obligations of indebtedness of other Persons secured by (or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Encumbrance on any property or asset of such Person (whether or not such obligation is assumed by such Person), but only to the extent that any amounts thereunder are drawn upon or against, and (i) all guarantees of any of the foregoing obligations of another Person; provided, that, in the case of Closing Date Indebtedness, Indebtedness shall not include (a) any indebtedness solely between the Companies or (b) any items included in Working Capital.

Indemnification Claim” has the meaning specified in Section 12.5.

Indemnified Party” has the meaning specified in Section 12.3(a).

Indemnifying Party” has the meaning specified in Section 12.5.

Insurance Coverage” has the meaning specified in Section 8.5.

Intellectual Property” means Copyrights, Patent Rights, Trademarks and Trade Secrets.

Intercompany Agreements” has the meaning specified in Section 7.5(b).

Interim Financial Statements” means the audited combined balance sheet of the Business as of the Interim Financial Statements Date, and the related statements of income for the nine months then ended.

Interim Financial Statements Date” means September 30, 2018.

International Business Employee” means any Business Employee who is not a U.S. Business Employee.

Joint Service Contracts” has the meaning specified in Section 7.3(f).

Knowledge of Buyer” means, as to a particular matter, the current actual knowledge, as of the date hereof of the Persons listed on Schedule 1.1(c) after reasonable inquiry of their direct reports.

Knowledge of Seller” means, as to a particular matter, the current actual knowledge, as of the date hereof of the Persons listed on Schedule 1.1(d) after reasonable inquiry of their direct reports.

Law” means any law, statute, regulation, rule, code or ordinance enacted, adopted, issued or promulgated by any Governmental Body.

 

15


Leased Real Property” has the meaning specified in Section 5.9.

Liability” means any liability or obligation, fixed or contingent.

Listing Representation” means the representations and warranties set forth in Section 5.5(a) and (b), the first sentence of Section 5.7, the first sentence of Section 5.9, Section 5.10(b), the first sentence of Section 5.10(d), Section 5.10(f), Section 5.13 and the first and last sentences of Section 5.15(a).

Loss” or “Losses” means any and all losses, Liabilities, damages, Taxes and reasonable and documented out-of-pocket costs and expenses (including reasonable attorneys’ fees), in each case that are due and payable, including any of the foregoing arising under, out of or in connection with any Proceeding; provided, however, that “Losses” exclude (a) any Liability to the extent that it has been accrued for or reserved against in the Interim Financial Statements and (b)any special, indirect, incidental, punitive, exemplary or consequential damages, except for (i) special, indirect, incidental, exemplary or punitive damages paid to a third party as a result of a binding judgment in a legal proceeding and (ii) indirect, incidental and consequential damages to the extent both (A) reasonably foreseeable and (B) such damages result from, or arise out of, the Business as currently conducted after taking into account any current plans of Seller for the Business and giving effect to the Reorganization and not from any future plans of Buyer with respect to the Business.

Marketing Period” means the first period of 15 consecutive calendar days commencing on or after the date hereof throughout which and on the first and last day of which Parent has the Required Information except that for purpose of this definition, (i) the following days shall not be counted as calendar days: May 24, 2019 through May 27, 2019, July 4, 2019 through July 7, 2019, November 27, 2019 through December 1, 2019, January 18, 2020 through January 20, 2020, and February 15, 2020 through February 17, 2020, (ii) if such 15 consecutive calendars day period has not been completed on or prior to August 16, 2019, then such period shall be deemed not to have commenced prior to September 3, 2019, and (iii) if such 15 consecutive calendar day period has not been completed on or prior to December 20, 2019, then such period shall be deemed to have not commenced prior to January 6, 2020; it being understood that once the Marketing Period has commenced it shall not recommence as a result of any delivery of subsequent financial statements contemplated in the definition of “Required Information” after the date hereof.

Material Adverse Effect” means any change, event or effect that, individually or in the aggregate, (1) has had or would reasonably be expected to have, a material adverse effect on the assets, results of operations or financial condition of the Business taken as a whole or (2) prevents or materially restrains the ability of Seller to consummate the Contemplated Transaction, in each case, other than as to clause (1) only any change, event or effect arising out of, resulting from or attributable to (either alone or in combination): (a) economic conditions (or changes after the date hereof in such conditions) or the Companies’ industry or industry sector, (b) political conditions generally of the United States, (c) the securities markets, credit markets, currency markets or other financial markets, (d) the disclosure of the Contemplated Transactions, the negotiation or execution of this Agreement or consummation of the Contemplated Transactions, including effects related to compliance with the covenants or agreements contained

 

16


herein or the failure to take any action as a result of any restrictions or prohibitions set forth herein (including, in each case, the loss of, or disruption in, any customer (including Billers), supplier, vendor and/or other business relationships resulting from the Contemplated Transactions), and any adverse change or effect caused by (i) loss of, or disruption in, any customer (including Billers), supplier, vendor and/or other business relationships that primarily results from the identity of Buyer, or any failure or potential failure to renew or enter into contracts with Billers or (ii) loss of any personnel, (e) changes or prospective changes in Law, GAAP or the enforcement or interpretation thereof, (f) actions specifically permitted to be taken or omitted pursuant to this Agreement or taken with the Buyer’s written consent, (g) any action taken by Buyer or its Affiliates, (h) any action taken at the request or with the consent of Buyer or any of its Affiliates, (i) any acts of God, (j) any hostilities, acts of war, sabotage, terrorism or military actions, or any escalation or worsening of any such hostilities, act of war, terrorism or military actions, or (k) any failure to meet internal or published projections, estimates or forecasts of revenues, earnings, or other measures of financial or operating performance for any period (provided that the underlying causes of such failures (subject to the other provisions of this definition) shall not be excluded); provided, that any change or effect referred to in clauses (a), (b), (c), (e), (i) and (j) above shall be taken into account in determining whether a Material Adverse Effect has occurred to the extent such change or effect has a disproportionate effect on the Companies, taken as a whole, compared to other participants in the principal industries in which the Companies operate.

Material Billers” has the meaning specified in Section 5.20(a).

Material Vendors” has the meaning specified in Section 5.20(b).

Name” means “Speedpay”.

NextGen Platform” means the proprietary source code and executable object code for front end application developed and maintained by the Companies, and hosted on Amazon Web Service, as the “next generation”, future-state application to support the submission and processing of payments by payers to Billers of the Business.

Non-Assignable Asset” has the meaning specified in Section 7.10(a).

Obligations” has the meaning specified in Section 13.17(a).

Offering Documents” means customary debt syndication documents, including information memoranda, lender presentations, rating agency materials, and similar documents relating to the Financing.

Omitted Asset” has the meaning set forth in Section 7.11(a)(ii).

Online Bill Payment Agreement” means the Master Services Agreement, dated as of the Closing Date between the Seller Licensed Subsidiary and Buyer in a form to be mutually agreed upon in good faith between Buyer and Seller prior to the Closing.

Open Source Software” means any software that is generally available to the public in source code form under licenses now approved by the Open Source Initiative and listed at

 

17


http://www.opensource.org/licenses, which licenses include the GNU General Public License (GPL), the GNU Library or Lesser General Public License (LGPL) or under any other license that requires such software to (a) be licensed for the purpose of making modifications or derivative works or (b) be redistributable at no charge.

Parent” has the meaning specified in the Preamble.

Outside Date” means November 27, 2019.

Patent Rights” means patents and patent applications issued or pending with a Governmental Body that are enforceable in the United States, and any continuations, continuations-in-part, divisionals, or reissues of the foregoing.

Permitted Encumbrances” means (a) Encumbrances for Taxes and other governmental charges and assessments which are not yet due and payable or which are being contested in good faith in accordance with applicable Law and for which adequate reserves have been established in the Interim Financial Statements in accordance with GAAP, (b) Encumbrances of landlords and Encumbrances of carriers, warehousemen, mechanics and materialmen and other like Encumbrances arising in the ordinary course of business for sums not yet due and payable, (c) Encumbrances specifically identified on the Schedules to this Agreement, (d) other Encumbrances or imperfections on property which do not materially detract from the value of or materially impair the existing use of the property affected by such Encumbrance or imperfection, and (e) arising under applicable Laws, including building and zoning Laws now or hereafter in effect relating to the Leased Real Property.

Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or Governmental Body.

Post-Closing Data Center Liabilities” means lease obligations in respect of the Excluded Data Centers and Liabilities to the extent arising out of the post-Closing services provided by Seller or any of its Subsidiaries to the Business in respect of the Excluded Data Centers.

Preliminary Purchase Price” has the meaning specified in Section 4.2(a).

Prior Companies Counsel” has the meaning specified in Section 13.15.

Proceeding” means any action, Court Order, writ, injunction or any claim, suit, litigation, proceeding, arbitration, audit or investigation, in each case by or before any Governmental Body, or arbitration or mediation.

PTO” has the meaning specified in Section 8.3(e).

Purchase Price” has the meaning specified in Section 3.1.

Purchase Price Allocation” has the meaning specified in Section 8.2(g).

 

18


Purchase Price Cap” has the meaning specified in Section 12.2(b).

R&W Policy” has the meaning specified in Section 7.12.

Real Property Lease” has the meaning specified in Section 5.9.

Remainco Non-Assignable Asset” has the meaning specified in Section 7.10.

Reorganization” has the meaning specified in Section 7.9(a).

Reorganization Agreement” has the meaning specified in Section 7.10(a).

Reorganization Certificate” means the certificate duly executed by an officer of Seller at Closing substantially in the form attached hereto as Exhibit B.

Replacement Shared Contract” has the meaning specified in Section 7.3(g).

Required Information” means (a) the Financial Statements, (b) the audited balance sheet for the Business as of December 31, 2018 and related audited statement of income for the fiscal year ended December 31, 2018, and (c) the unaudited balance sheet for the Business as of the end of each fiscal quarter ending at least 60 days prior to the Closing Date (commencing with the fiscal quarter ended March 31, 2019) and related unaudited statement of income for each such fiscal quarter.

SEC” means the Securities and Exchange Commission.

Section 338(h)(10) Election” has the meaning specified in Section 8.2(g).

Securities Act” means the Securities Act of 1933.

Seller” has the meaning specified in the first paragraph of this Agreement.

Seller Ancillary Agreements” means all agreements, instruments and documents being or to be executed and delivered by Seller under this Agreement or in connection herewith.

Seller Assets” means all assets that do not primarily related to the Business, including the assets set forth on Schedule 1.1(f).

Seller Benefit Plans” has the meaning specified under the defined term “Excluded Assets.”

Seller FSA Program” has the meaning specified in Section 8.3(g).

Seller Fundamental Representations” means those representations and warranties of Seller set forth in Section 5.1, the first sentence of Section 5.2(a), Section 5.2(b), Section 5.3(a) and Section 5.23.

Seller Indemnified Persons” has the meaning specified in Section 12.3(a).

 

19


Seller Liabilities” means all liabilities of ECG and Sprint to the extent arising out of or relate to the Seller Assets.

Seller Licensed Subsidiary” means Western Union Financial Services, Inc., a Colorado corporation.

Seller Licensed Subsidiary Contract” means a Contract to which a Biller and Seller Licensed Subsidiary is a party pursuant to which the Seller Licensed Subsidiary, either alone or together with one or more of the Companies, provides services of the Business to a Biller, excluding any such Contract that primarily relates to a business or businesses of Seller or any Subsidiary of Seller that are not the Business.

Seller Service” means any service provided by Seller or a Seller Subsidiary.

Seller Tax Returns” has the meaning set forth in Section 8.2(b)(i).

Seller Trademarks” has the meaning set forth in Section 8.1(a).

Seller’s Accountants” has the meaning specified in Section 4.5(b).

Shared Contract Liabilities” has the meaning specified under the defined term “Assumed Liabilities.”

Shared Contracts” means any Shared Vendor Contract or Joint Service Contract.

Shared Vendor Contract” means any Contract to which Seller or any of its Subsidiaries (other than the Companies) is a party and pursuant to which a vendor provides services to both the Business, on the one hand, and the other businesses of Seller and its Subsidiaries (other than the Companies), on the other hand, that are (a) material to the operation of the Business and (b) are not (i) services of the type listed on Schedule 5.11 or (ii) services of the type to be provided pursuant to the Transition Services Agreement. A complete list of Shared Vendor Contracts as of the date hereof is listed on Schedule 1.1(h).

Shares” has the meaning specified in the recitals of this Agreement.

SISP” has the meaning specified in Section 5.15(a).

Software” means computer software programs, including tool sets, compilers, higher level “proprietary” languages, related documentation and materials, whether in source code, object code or human readable form.

Sprint” has the meaning specified in the recitals of this Agreement.

Sprint Platform” means the hardware, software, systems and equipment, both front-end and back-end, operated, utilized and accessed by the Companies or accessed by the Seller Licensed Subsidiary in respect of the Business.

Straddle Period” has the meaning specified in Section 8.2(e)(i).

 

20


Subsidiary” means, with respect to any party, any Person of which (a) such party or any other Subsidiary of such party is a general partner or managing member or (b) at least 50% of the securities or other equity interests having by their terms voting power to elect a majority of the board of directors (or others performing similar functions with respect to such corporation or other organization) is, directly or indirectly, owned or controlled by such party or by any one or more of its Subsidiaries.

Target Conversion Date” with respect to any Biller of the Business, means the date that, as of February 21, 2019, the Companies are targeting to convert such Biller to the NextGen Platform.

Target Settlement Working Capital Amount” has the meaning set forth in Schedule 1.1(j).

Target Working Capital Amount” means $5,100,000 plus the Target Settlement Working Capital Amount.

Tax” (and, with correlative meaning, “Taxes”) means (a) any tax of any kind, including any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value added, transfer or excise tax, or any similar tax, custom, duty, governmental fee or other like assessment or charge, together with any interest or penalty, imposed by any Governmental Body, (b) Liability for the payment of any amounts of the type described in clause (a) above of another Person arising as a result of being (or ceasing to be) a member of an Affiliated Group (or being included (or requiring to be included)) in any Tax Return relating thereto, and (c) Liability for the payment of any amounts of the type described in clause (a) above of another Person under any Contract (other than a Contract entered into in the ordinary course of business and not primarily relating to Taxes) or as a result of being a transferee or successor under applicable Law.

Tax Attributes” means, with respect to any Tax, any tax basis, net operating loss carryovers, net capital loss carryovers, credits and similar Tax items of any Person.

Tax Claim” has the meaning specified in Section 8.2(f)(i).

Tax Return” means any return, report election, declaration or similar statement required to be filed with a Governmental Body with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.

Third Party Claim” has the meaning specified in Section 12.6.

Third Party Rights” has the meaning specified in Section 7.10(b).

Trademarks” means trademarks, service marks and trade names registered or pending for registration with a Governmental Body that are enforceable in the United States, and all goodwill associated with any of the foregoing.

 

21


Trade Secrets” means confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, reports, data, customer lists, mailing lists, business plans and other proprietary information that, in each case, are protected by the applicable Law as a “trade secret.”

Transaction Expenses” means collectively, (a) all of the out-of-pocket fees and expenses incurred at or before the Closing by either of the Companies and not paid at or before the Closing to the extent they arise out of the engagement of third parties in connection with the negotiation, documentation and consummation of this Agreement and the Contemplated Transactions, including all fees, expenses, disbursements and other similar amounts paid to attorneys, financial advisors or accountants of the Companies, (b) change of control, retention bonus, discretionary bonus or other compensatory payments made to, or due to, any employee of either of the Companies as a result of the execution of this Agreement or the consummation of the Contemplated Transactions and any other acceleration or increases in rights or benefits required to be provided or payable by either Company after the Closing Date pursuant to any employment Contract with any Affected Employee, including the employer portion of any payroll, social security, Medicare, unemployment and similar Taxes payable by either Company in connection with or as a result of the payment of such obligations (excluding, for the avoidance of doubt, any payment subject to a “double-trigger” requirement or otherwise contingent upon the occurrence of any subsequent event (including the termination of the employment of such employee)), (c) any out-of-pocket fees and expenses incurred by the Companies at or before the Closing in connection with the Reorganization and not paid at or before the Closing (excluding, for the avoidance of doubt, any costs or expenses in respect of any consents of the counterparties to the Reorganization Agreements), and (d) 50% of the premium amount for the R&W Policy; provided, however, that except as provided in clause (d) Transaction Expenses shall not include any fees, costs, payments, expenses or disbursements incurred by, on behalf of or for the account of Parent, Buyer or their Affiliates (including, after the Closing and as applied to post-Closing events, the Companies). For the avoidance of doubt (solely so as to avoid double counting), and notwithstanding anything to the contrary contained herein, the term “Transaction Expenses” shall not include: (i) amounts to the extent included in Working Capital, (ii) amounts to the extent included in Closing Date Indebtedness or (iii) fees and expenses or liabilities related to Parent and Buyer obtaining financing in connection with this Agreement.

Transfer Taxes” has the meaning set forth in Section 8.2(a).

Transferred Contracts” has the meaning specified under the defined term “Contributed Assets.”

Transferred Domain Names” has the meaning specified under the defined term “Contributed Assets.”

Transferred Intellectual Property” has the meaning specified under the defined term “Contributed Assets.”

Transferred Owned Software” has the meaning set forth under the defined term “Contributed Assets.”

 

22


Transferred Permits” has the meaning set forth under the defined term “Contributed Assets.”

Transferred Trademarks” has the meaning set forth under the defined term “Contributed Assets.”

Transition Services Agreement” means the Transition Services Agreement, dated as of the Closing Date between Seller and ECG in the form attached hereto as Exhibit A.

U.S. Affected Employee” has the meaning specified in the definition of “Affected Employee”.

U.S. Business Employee” means any Business Employee whose primary work location is in the United States.

Utility Services” means the supply of electricity, water, gas, waste disposal services, telecommunications services and sewer connections.

Walletron Option” has the meaning set forth in Section 7.13(a).

Walletron Purchase Price” has the meaning set forth in Section 7.13(a).

Walletron Shares” has the meaning set forth in Section 7.13(a).

WARN” means the Worker Adjustment Retraining and Notification Act of 1988, as amended, and any similar foreign, state, or local applicable Law.

willful breach” means (a) if the Buyer Termination Fee has been paid in accordance with the terms of this Agreement, a deliberate breach of this Agreement that an officer of such breaching Party has or would reasonably be expected to have knowledge that the action taken or not taken constitutes a breach of this Agreement or (b) if the Buyer Termination Fee has not been paid in accordance with the terms of this Agreement, a willful and material breach of this Agreement, that an officer of such breaching Party has or would reasonably be expected to have knowledge that the action taken or not taken constitutes a breach of this Agreement

Working Capital” means the working capital of the Business, as defined on Schedule 1.1(i)(A), and calculated in accordance with the Agreed Accounting Principles. Schedule 1.1(i)(B) sets forth an illustrative calculation of the Working Capital as of the December 31, 2018. For the avoidance of doubt, amounts to the extent included in Closing Date Cash, Closing Date Indebtedness and Transaction Expenses shall not be included in Closing Date Working Capital.

Section 1.2.    Interpretation. In this Agreement (including in any Schedules):

(a)    words denoting the singular include the plural and vice versa and words denoting any gender include all genders;

(b)    “including,” means “including without limitation”;

 

23


(c)    “business day” means any day other than a Saturday, Sunday, or a day that is a statutory holiday under the Laws of the United States or the State of New York;

(d)    the use of headings is for convenience of reference only and shall not affect the meaning or interpretation of this Agreement (including any Schedules);

(e)    when calculating the period of time within which or following which any act is to be done or step taken, the date that is the reference day in calculating such period shall be excluded and, if the last day of such period is not a business day, the period shall end on the next day that is a business day;

(f)    all dollar amounts are expressed in United States funds, and all amounts payable hereunder shall be paid in United States funds;

(g)    money shall be tendered by wire transfer of immediately available federal funds to the account designated in writing by the party that is to receive such money;

(h)    the words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement refer to this Agreement as a whole and not only to a particular Section in which such words appear;

(i)    references herein to articles, sections, exhibits and schedules mean the articles and sections of, and the exhibits and schedules attached to, this Agreement;

(j)    exhibits and Schedules referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein;

(k)    the word “or” shall not be exclusive;

(l)    (A) for purposes of Article V and, in the case of the obligations of Seller, Articles VII and VIII, transactions contemplated by this Agreement or words of similar effect does not include the Financing and (B) Seller does not make any representations or warranties with respect to the Financing or the effect of the Financing on the Companies, the Business or any of their or its respective assets or Liabilities or the Contemplated Transactions;

(m)    the words “to the extent” mean “the degree by which” and do not simply mean “if”;

(n)    unless the context otherwise requires, references herein: (i) to a Contract, instrument or other document means such Contract, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and (ii) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any rules and regulations promulgated thereunder; and

(o)    neither the specification of any item or matter in any representation or warranty contained in this Agreement nor the inclusion of any item or matter in any schedule is intended to imply that such item or matter is or is not material, and no party shall use the fact of the inclusion of any such item or matter in any dispute or controversy between the parties as to whether any item or matter described herein or included in any schedule is or is not material for purposes of this Agreement.

 

24


ARTICLE II

PURCHASE AND SALE

Section 2.1.    Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing, Seller shall sell, transfer, assign, convey and deliver to Buyer, free and clear of all Encumbrances other than those Encumbrances imposed by federal or state securities Laws, and Buyer shall purchase and accept from Seller, all of Seller’s right, title and interest in the Shares.

ARTICLE III

PURCHASE PRICE

Section 3.1.    Purchase Price. The purchase price for the Shares shall be equal to the Base Purchase Price, plus (or, if a negative amount, minus the absolute value of) the Adjustment Amount (the Base Purchase Price, as so adjusted, the “Purchase Price”). The Purchase Price shall be paid by Buyer pursuant to Section 4.2 hereof.

ARTICLE IV

CLOSING

Section 4.1.    Closing Date. Unless this Agreement shall have been terminated pursuant to Article XI, and subject to the satisfaction or waiver (in writing by the applicable party) of the conditions set forth in Article IX and X, the Closing shall be consummated at 10:00 a.m. eastern time on the first Thursday or Friday that is at least two business days following satisfaction or waiver of all of the closing conditions set forth in Article IX and X (other than those to be satisfied at Closing), at the offices of Sidley Austin LLP, One South Dearborn Street, Chicago, Illinois 60603, or remotely via the exchange of executed documents and other closing deliverables, or at such other time and place as shall be agreed upon by Buyer and Seller. The date on which the Closing is actually held is referred to herein as the “Closing Date.” Notwithstanding the foregoing, (i) if the Marketing Period has not ended by the date on which the conditions set forth in Articles IX and X have been satisfied or waived, then the Closing shall occur instead on the date following the satisfaction or waiver of the conditions set forth in Articles IX and X (other than those to be satisfied at Closing) that is the earliest to occur of (a) any business day during or before the expiration of the Marketing Period as may be specified by Buyer on no fewer than three business days’ prior written notice to the Seller and (b) three business days after the final day of the Marketing Period, unless another date is agreed to by Buyer and Seller and (ii) unless consented to in writing by Buyer and Seller, the Closing Date shall not occur prior to the 90th day after the date hereof.

Section 4.2.    Payment on the Closing Date.

(a)    At the Closing, Buyer shall pay Seller an amount equal to the Base Purchase Price plus (or, if a negative amount, minus the absolute value of) the Estimated Adjustment Amount (the “Preliminary Purchase Price”) by wire transfer of immediately available funds to the bank account or accounts specified by Seller in accordance with paragraph (b) hereof.

 

25


(b)    Not less than five business days prior to the Closing Date, Seller shall prepare and deliver to Buyer a statement setting forth (i) the amount of the Estimated Closing Date Working Capital, (ii) the amount of the Estimated Closing Date Cash, (iii) the amount of the Estimated Closing Date Indebtedness, (iv) the amount of the Estimated Transaction Expenses, (v) the Estimated Adjustment Amount, (vi) the amount of the Preliminary Purchase Price, (vii) the amount of the Target Settlement Working Capital Amount (including all underlying calculations thereto) and (viii) the wire transfer instructions for Seller, and to the extent reasonably requested by Buyer, following the delivery of such statement, Seller shall respond to any of Buyer’s reasonable inquiries and provide it with such collaborating information as Buyer shall reasonably request; provided, however, Seller shall not be obligated to revise such statement upon, or in connection with, such inquiries and requests.

Section 4.3.    Buyer and Parents Additional Closing Date Deliveries. Subject to fulfillment or waiver (where permissible) of the conditions set forth in Article IX, at the Closing, Buyer and Parent shall deliver to Seller all of the following:

(a)    certificate of the secretary or an assistant secretary of each of Buyer and Parent, dated the Closing Date, in form and substance reasonably satisfactory to Seller, as to (i) the resolutions of each of the Board of Directors of Buyer and Parent authorizing the execution and performance of this Agreement, any Buyer Ancillary Agreement and the transactions contemplated hereby and thereby and (ii) incumbency and signatures of the officers of each of Buyer and Parent executing this Agreement and any Buyer Ancillary Agreement;

(b)    the certificate contemplated by Section 10.1, duly executed by a duly authorized officer of Buyer; and

(c)    duly executed original counterparts of the Transition Services Agreement executed on behalf of ECG.

Section 4.4.    Sellers Closing Date Deliveries. Subject to fulfillment or waiver (where permissible) of the conditions set forth in Article X, at the Closing, Seller shall deliver to Buyer all of the following:

(a)    certificate of the secretary or an assistant secretary of Seller, dated the Closing Date, in form and substance reasonably satisfactory to Buyer, as to (i) the resolutions of the Board of Directors of Seller authorizing the execution and performance of this Agreement, any Seller Ancillary Agreement to which Seller is a party and the Contemplated Transactions and (ii) incumbency and signatures of the officers of Seller executing this Agreement and any Seller Ancillary Agreement to which Seller is a party;

(b)    the certificate(s) representing all of the Shares, duly endorsed to Buyer or accompanied by duly executed stock/equity powers;

(c)    the certificate contemplated by Section 9.1, duly executed by a duly authorized officer of Seller;

 

26


(d)    duly executed original counterparts of the Transition Services Agreement executed on behalf of Seller;

(e)    the written resignations of each of the members of the board of directors of the Companies in his or her capacity as such;

(f)    a properly completed and duly executed certification of non-foreign status, for purposes of Section 897 and 1445 of the Code and IRS Form W-9;

(g)    an executed intercompany termination agreement, or similar agreement, in connection with Seller’s obligations to terminate the Intercompany Agreements as contemplated by Section 7.5 of this Agreement;

(h)    an IRS Form 8023 (Elections under Section 338 for Corporations Making Qualified Stock Purchases) with respect to the Companies, duly executed by Seller (or an Affiliate of Seller, as applicable), and any other analogous or corresponding form, requested and prepared by Buyer and duly executed by Seller (or an Affiliate of Seller, as applicable), that is required to be filed with any state, local or foreign Governmental Body to effect the Section 338(h)(10) Election;

(i)    customary payoff letters of Closing Date Indebtedness in respect of such Closing Date Indebtedness for borrowed money from the obligees thereof, including the amounts necessary to pay such Indebtedness as of the Closing;

(j)    all organizational documents of the Companies; and

(k)    the Reorganization Certificate.

Section 4.5.    Determination of the Adjustment Amount.

(a)    On or before 90 days following the Closing Date, Buyer shall prepare and deliver to Seller a report (the “Adjustment Report”) setting forth Buyer’s computation of (i) the Closing Date Working Capital, (ii) the Closing Date Indebtedness, (iii) the Closing Date Cash, (iv) the Transaction Expenses, and (v) the Target Settlement Working Capital Amount (including all underlying calculations thereto). Seller shall reasonably assist Buyer in the preparation of the Adjustment Report and shall provide Buyer reasonable access at all reasonable times to the personnel, properties, books and records of the Companies for such purpose. The parties acknowledge that the sole purpose of the determination of the process in this Section 4.5 is to determine the final Closing Date Working Capital, final Closing Date Cash, final Closing Date Indebtedness, Transaction Expenses and Target Settlement Working Capital Amount (including all underlying calculations thereto) and such process is not intended to permit the introduction of different judgments, accounting methods, policies, principles, practices, procedures, classifications or estimation methodologies in a manner inconsistent with the Agreed Accounting Principles or Schedule 1.1(j).

(b)    After delivery of the Adjustment Report to Seller, Seller and/or a firm of independent public accountants designated by Seller (“Seller’s Accountants”) shall be entitled to reasonable access during normal business hours to the relevant records and working papers of

 

27


Buyer to aid in their review of the Adjustment Report. The Adjustment Report shall be deemed to be accepted by Seller and shall be conclusive for purposes of determining the Adjustment Amount except to the extent, if any, that Seller or Seller’s Accountants shall have delivered within 30 days after the date on which the Adjustment Report is delivered to Seller, a written notice to Buyer stating each and every item to which Seller takes exception, specifying in reasonable detail the nature and extent of any such exception (it being understood that any portion of the Adjustment Amounts that is not disputed shall be deemed final). If a change proposed by Seller is disputed by Buyer, then Seller and Buyer shall negotiate in good faith to resolve such dispute. If, after a period of 30 days following the date on which Seller gives Buyer notice of any such proposed change, any such proposed change still remains disputed, then Buyer and Seller shall engage PricewaterhouseCoopers LLP, or, if PricewaterhouseCoopers LLP is unwilling or unavailable, another independent firm of public accountants of nationally recognized standing mutually acceptable to Buyer and Seller (the “Accounting Firm”) to resolve any remaining disputes. The Accounting Firm shall act as an arbitrator to determine, based solely on presentations by Buyer and Seller, and not by independent review, only those issues still in dispute with respect to the Adjustment Amount. The decision of the Accounting Firm shall be final and binding and shall be in accordance with the provisions of this Section 4.5. All of the fees and expenses of the Accounting Firm shall be paid by Buyer and Seller in inverse proportion as they may prevail on the disputed items resolved by the Accounting Firm, utilizing the values of such items as initially submitted by the parties to the Accounting Firm. Such proportional allocations shall be determined by the Accounting Firm at the time its determination is rendered on the disputed items.

(c)    Any Adjustment Amount shall be paid within five business days following the Adjustment Report Finalization Date as follows:

(i)    if the Estimated Adjustment Amount equals the Adjustment Amount, no payment shall be made;

(ii)    if the Estimated Adjustment Amount exceeds the Adjustment Amount, as calculated in accordance with this Section 4.5, Seller shall pay to Buyer the difference thereof, by wire transfer of immediately available funds to an account specified in writing to Seller by Buyer; and

(iii)    if the Adjustment Amount, as calculated in accordance with this Section 4.5, exceeds the Estimated Adjustment Amount, Buyer shall pay to Seller the difference thereof, by wire transfer of immediately available funds to an account or accounts specified in writing to Buyer by Seller.

Any payment required to be made pursuant to this Section 4.5(c) shall be made together with interest thereon from the Closing Date to the date of payment at the rate of interest per annum equal to the 30-day LIBOR in effect on the Closing Date as reported in The Wall Street Journal.

 

28


ARTICLE V

REPRESENTATIONS AND WARRANTIES OF SELLER

As an inducement to Buyer to enter into this Agreement and to consummate the Contemplated Transactions, except as set forth on the Schedules (it being understood and agreed that any disclosure on a Schedule shall qualify all of the representations and warranties in this Article V to the extent the applicability of such information and disclosure is reasonably apparent on its face), Seller hereby represents and warrants to Buyer as follows:

Section 5.1.    Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware.

Section 5.2.    Organization; Capital Structure of the Companies; Power and Authority.

(a)    Each of the Companies is duly organized, validly existing and in good standing under the Laws of New York. Each of the Companies is duly qualified to transact business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualifications necessary, except where the failure to be so qualified or in good standing would not reasonably be expected to, individually or in the aggregate, be material and adverse to the Business. Each of the Companies has the corporate power and corporate authority to own or lease and operate its assets and to carry on the Business in the manner as it is currently being conducted, except as would not reasonably be expected to, individually or in the aggregate, be material and adverse to the Business. Seller has made available to Buyer true, correct and complete copies of the certificate of incorporation and bylaws of each Company, in each case, as amended and in effect on the date hereof.

(b)    As of the date hereof, each of the Companies has the authorized, issued and outstanding equity as set forth on Schedule 5.2(b). Seller owns all the outstanding equity of ECG, free and clear of all Encumbrances other than those Encumbrances imposed by federal or state securities laws. ECG owns all of the outstanding equity of Sprint, free and clear of all Encumbrances other than those Encumbrances imposed by federal or state securities laws. All such equity is duly authorized, validly issued and outstanding, fully paid and nonassessable and free of preemptive rights. Except for this Agreement, there are no commitments to issue or sell any shares of capital stock or equity or any securities or obligations convertible into or exchangeable for, or giving any Person any right to acquire from Seller or either of the Companies, any shares of capital stock or equity of either of the Companies, and no such securities or obligations are outstanding. There are no outstanding options, warrants, calls or any other similar rights or any other agreements relating to the sale, issuance, transfer or voting of any shares of the capital stock or other equity interests of either Company to which such Company is party, or any securities, agreements or other instruments directly or indirectly convertible into, exchangeable or exercisable for or evidencing the right to purchase any shares of capital stock or other equity interests of such Company, other than this Agreement.

(c)    Neither of the Companies owns, or has any obligation to acquire or make an investment in, any equity interest in any other Person. There are no phantom stock, or stock appreciation, profit participation or similar rights, obligations or arrangements outstanding issued by either Company. ECG has no Subsidiaries other than Sprint, and Sprint has no Subsidiaries.

 

29


Section 5.3.    Authority of Seller; Conflicts.

(a)    Seller has the corporate power and corporate authority to execute, deliver and perform this Agreement and each of the Seller Ancillary Agreements. The execution, delivery and performance of this Agreement and the Seller Ancillary Agreements by Seller have been duly authorized and approved by Seller’s board of directors and do not require any further authorization or consent of Seller or its stockholders. This Agreement has been duly authorized, executed and delivered by Seller and (assuming the valid authorization, execution and delivery of this Agreement by Buyer) is the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, and each of the Seller Ancillary Agreements has been duly authorized by Seller and upon execution and delivery by Seller shall be (assuming the valid authorization, execution and delivery by Buyer, where Buyer is a party, or the other party or parties thereto) a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, subject, in the case of this Agreement and each of the Seller Ancillary Agreements, to bankruptcy, insolvency, reorganization, moratorium and similar Laws of general application relating to or affecting creditors’ rights and general equity principles.

(b)    Except as set forth in Schedule 5.3, neither the execution and delivery of this Agreement or any of the Seller Ancillary Agreements or the consummation of any of the Contemplated Transactions nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(i)    result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon any of the Shares or any of the assets of the Companies, under (A) (1) the Certificate of Incorporation or Bylaws of Seller or either of the Companies, (2) any Business Agreement or Biller Contract, (3) any Court Order to which Seller or either of the Companies is a party or by which Seller, the Business, or either of the Companies is bound or (B) or assuming the receipt of all necessary consents and approvals and the filing of all necessary documents as described in Section 5.3(b)(ii), (1) any Law affecting Seller, the Business or either of the Companies, or (2) any Governmental Permits, other than, in the case of clauses (A)(2), (B)(1) and (B)(2) above, any such breaches, defaults, rights, loss of rights or Encumbrances that would not reasonably be expected to individually or in the aggregate, be material and adverse to the Business, or

(ii)    require the approval, consent, authorization or act of, or the making by Seller or either of the Companies of any declaration, filing or registration with, any Person, except (1) in connection, or in compliance, with the provisions of the HSR Act and (2) such approvals, consents, authorizations, declarations, filings or registrations, the failure of which to be obtained or made would not reasonably be expected to be material to the Companies, taken as a whole, or could not prevent the consummation of any of the Contemplated Transactions.

 

30


The representations and warranties of Seller herein assume Buyer’s representations and warranties in Section 6.3 are true and correct (without giving effect to any knowledge or date limitations therein).

Section 5.4.    Financial Statements. The Business is not a separately reported unit of Seller. As a result, the financial statements prepared for the Business are not prepared as part of Seller’s normal reporting process. Schedule 5.4 contains the Financial Statements. The Financial Statements were derived from the books and records of Seller from source document subject to the controls and procedures of Seller’s accounting systems. The books and records of Seller for which such Financial Statements were derived from were maintained in accordance with GAAP. The Financial Statements present fairly, in all material respects, the financial position and results of operations of the Business, as of their respective dates and for the respective periods covered thereby subject, in the case of the Interim Financial Statements, to normal period-end adjustments, but do not necessarily reflect what the consolidated operations and financial positions of the Business would have been had the Business been operated independently of Seller during the periods presented. Seller, in respect of the Business, has established and maintains a system of internal accounting controls sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Financial Statements in accordance with GAAP.

Section 5.5.    Operations Since Interim Financial Statements Date. Except as set forth on Schedule 5.5, since the Interim Financial Statements Date, (a) there has been no Material Adverse Effect, (b)to the date hereof neither of the Companies nor Seller has taken any action that, if taken after the date hereof and prior to the Closing would require the approval of Buyer under clauses (i), (ii), (iii), (v), (vi), (vii), (viii), (ix), (x), (xi), (xv) or (xvii) of Section 7.4(b), and (c) to the date hereof Seller and its Subsidiaries have conducted the Business in all material respects in the ordinary course.

Section 5.6.    Taxes.

(a)    All Tax Returns required to have been filed by or on behalf of the Companies or with respect to the Business have been timely and properly filed (taking into account extensions properly obtained). Such Tax Returns are correct and complete in all material respects.

(b)    All Taxes required to have been paid by the Companies (whether or not shown on any Tax Return) have been timely paid or appropriately accrued in the Financial Statements.

(c)    The Companies have not waived any statute of limitations in respect of Taxes of the Companies or otherwise agreed to any extension of time with respect to any Tax assessment or deficiency for which the Companies may be liable, which period (after giving effect to such waiver or extension) has not yet expired, in each case other than with respect to a Consolidated Tax Group.

 

31


(d)    All written deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (a) by a Taxing authority have been paid in full or otherwise finally resolved.

(e)    There are no Encumbrances for Taxes upon assets of the Companies other than Permitted Encumbrances.

(f)    All Taxes which the Companies are required by Law to withhold or to collect for payment, including from any employee, shareholder, creditor, holder of securities or other third party, have been duly withheld and collected and have been timely paid to the appropriate Taxing Authority or will be accrued, reserved against and entered on the statement of Closing Date Working Capital, and all IRS Forms W-2 and 1099, and other similar forms required with respect thereto have been properly completed and timely filed.

(g)    The Companies do not have any Liability for Taxes of another Person (other than Seller or its Affiliates) under Treasury Regulation §1.1502-6 (or any similar provision of Law), or under any Contract (other than a Contract entered into in the ordinary course of business and not primarily relating to Taxes), or as a transferee or successor under applicable Law.

(h)    Neither of the Companies has distributed stock of another Person, or has had its stock distributed by another Person, in the past five years in a transaction that purported or intended to be governed in whole or in part by Section 355 of the Code.

(i)    No unresolved written claim for Taxes has ever been made by an authority in a jurisdiction where the Companies do not file Tax Returns that such Company may be subject to taxation by that jurisdiction.

(j)    None of the assets of the Companies is an interest in an entity or arrangement classified as a partnership or a “controlled foreign corporation” for United States federal, state or local income Tax purposes.

(k)    Neither Company has participated in “reportable transaction” within the meaning of Treasury Regulation §1.6011-4(b)(1).

(l)    Neither of the Companies or any of Seller or its Affiliates has requested or received a ruling from any Taxing Authority with respect to Taxes or signed any binding agreement with any Taxing Authority, in each case which could affect either Company’s liability for Taxes for taxable years or periods ending after the Closing Date (other than any liability for Taxes arising as a result of having been a member of a Consolidated Tax Group).

(m)    Neither of the Companies shall be required to include any item of income in, or exclude any deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for a taxable period ending on or prior to the Closing Date (including, for the avoidance of doubt, any 481 adjustment pursuant to Section 13221(d) of U.S. P.L. 115-97), (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign income Tax Law) executed on or prior to the Closing Date, (iii) prepaid or deposit

 

32


amount received on or prior to the Closing Date, or (iv) election described in Section 108(i) of the Code (or any corresponding or similar provision of state, local or foreign Tax Law) made on or prior to the Closing Date. Neither of the Companies owns or has in the past owned an interest in any deferred foreign income corporation within the meaning of Section 965(h) of the Code.

(n)    Each of the Companies is member of a selling consolidated group for U.S. federal income Tax purposes and is a “target corporation” within the meaning of, and with respect to which an election may be may be made under Section 338(h)(10) of the Code.

Section 5.7.    Governmental Permits.

(a)    As of the date hereof, Schedule 5.7 sets forth a true and complete list of all material licenses, franchises, permits, privileges, immunities, approvals and other authorizations from a Governmental Body held by or possessed by (i) the Companies or (ii) Seller and its Subsidiaries and used primarily in the conduct of the Business (herein collectively called “Governmental Permits”).

(b)    As of the date hereof, except for such regulatory services provided by the Seller Licensed Subsidiary and assuming the accuracy of the representations and warranties of Buyer in Section 6.3(c), the Governmental Permits represent the material licenses, franchises, permits, privileges, immunities, approvals or other authorizations from a Governmental Body necessary to conduct of the Business immediately following the Closing on substantially the same basis as currently conducted.

(c)    Since January 1, 2016, the Companies have complied in all material respects with the terms and conditions of the Governmental Permits, except as would not reasonably be expected to be, individually or in the aggregate, material to the Business. All Governmental Permits are in full force and effect.

Section 5.8.    Owned Real Property. Neither of the Companies owns any real property.

Section 5.9.    Leased Real Property. Schedule 5.9 sets forth a true and complete list as of the date hereof of each material lease, license, sublease or similar occupancy agreement (each a “Real Property Lease”) under which either of the Companies, or Seller or any of its Subsidiaries in respect of the Business, is lessee, sublessee or licensee of, or holds or operates, any real property that is primarily used in the Business and owned by any third Person (collectively, the “Leased Real Property”).

Section 5.10.    Intellectual Property.

(a)    Schedule 5.10(a) contains a true, correct and complete list as of the date hereof (specifying the owner thereof, and, if applicable, the patent, registration or application number and issuance, registration or filing date) of all registered Copyrights, Patent Rights and Trademarks owned by either of the Companies, or by Seller or any of its Subsidiaries and used primarily in the conduct of the Business, as currently conducted.

(b)    Schedule 5.10(b) contains a true, correct and complete list as of the date hereof of all Software owned or licensed by either of the Companies, or to the extent primarily used in the Business, by Seller or any of its other Subsidiaries or is otherwise not readily commercially available.

 

33


(c)    Other than with respect to Intellectual Property owned by Seller or any of its Subsidiaries (other than the Companies) that will be utilized in connection with the provision of the services under the Transition Services Agreement, the Companies either: (i) own the entire right, title and interest in and to the material Intellectual Property used in the conduct of the Business free and clear of any Encumbrance (except for Permitted Encumbrances) including all right, title and interest in and to the Name, or (ii) have a valid contractual right or license to use the same in the conduct of the Business as currently conducted.

(d)    All registrations for Copyrights, Patent Rights and Trademarks identified in Schedule 5.10(a) are valid and in force, and all applications to register any unregistered Copyrights, Patent Rights and Trademarks so identified and used in the conduct of the Business are pending and in good standing. The Companies have the right to bring actions for infringement or unauthorized use of the Copyrights, Patent Rights, Trademarks and Software owned by the Companies.

(e)    Except as set forth in Schedule 5.10(e), since January 1, 2016: (i) the conduct of the Business has not infringed, misappropriated or violated any third party’s Intellectual Property, (ii) no infringement, misappropriation or violation by Seller or its Subsidiaries of any Intellectual Property of any other Person has occurred or resulted in any way from their conduct of the Business, (iii) no written notice of a claim of any infringement, misappropriation or violation of any Intellectual Property of any other Person has been made or asserted to the Companies or the Seller or any of its Subsidiaries in respect of the conduct of the Business, and (iv) to the Knowledge of Seller, no other Person is infringing, misappropriating or otherwise violating any Intellectual Property owned by Seller or its Subsidiaries and used primarily in the conduct of the Business, which in the case of any of clauses (i) through (iv), would individually or in the aggregate reasonably be expected to be result in a material Liability to the Business.

(f)    No proceedings are pending or, to the Knowledge of Seller, threatened against the Companies, the Seller or their respective Subsidiaries which challenge the validity of any Copyright, Patent Right or Trademark identified in Schedule 5.10(a) or ownership of any other material Intellectual Property rights owned by the Companies, the Seller or their respective Affiliates and used in the conduct of the Business.

(g)    The Companies, and Seller and its Subsidiaries in connection with the Business, have taken commercially reasonable steps to maintain and protect their Trade Secrets that each own.

(h)    The Companies and Seller and its Subsidiaries have implemented commercially reasonable measures designed to maintain and protect the material source code for all Software (i) owned by any of the Companies or (ii) owned by Seller and its other Subsidiaries, which is used primarily in the conduct of the Business as currently conducted. None of the Companies, the Seller or their respective Affiliates have disclosed, delivered, licensed or otherwise made available any source code for any Software owned by any of them

 

34


which is used in the conduct of the Business, as currently conducted, to any Person who was not, as of the date of disclosure or delivery, an employee or contractor of the Companies or otherwise under an obligation to preserve the confidentiality of such source code.

(i)    Seller and its Subsidiaries, in each case in connection with conduct with respect to the Business have implemented commercially reasonable measures designed to protect the internal and external security and integrity of all Company IT Systems, and the data stored or contained therein or transmitted thereby. Except as set forth in Schedule 5.10(i), there have been (i) since January 1, 2016, to the Knowledge of Seller, no material unauthorized intrusions or breaches of the security of the Company IT Systems or any Software owned or licensed by Seller or its Subsidiaries, which is used primarily in the conduct of the Business as currently conducted and (ii) no material failures or interruptions in (A) the Company IT Systems or (B) any Software owned or licensed by Seller or any of its Subsidiaries that is used primarily in the conduct of the Business, since January 1, 2016 that have not been remedied in all material respects.

(j)    To the Knowledge of Seller, in no case does the use, incorporation or distribution of Open Source Software by (i) any of the Companies in connection with any Software owned or licensed by any of them which is used in the conduct of the Business, as currently conducted or (ii) Seller or its Subsidiaries in connection with any Software owned or licensed by any of them and used primarily in the conduct of the Business, give rise to any obligation to disclose or distribute any source code, to license any such Software or Intellectual Property for the purpose of making derivative works or to distribute any such Software or Intellectual Property without charge.

Section 5.11.    Title to Property; Sufficiency of Assets.

(a)    Except for assets disposed of in the ordinary course of business, the Companies have (or following consummation of the Reorganization shall have) valid title to, or hold by valid and existing lease or license, each item of equipment and other tangible personal property reflected on the Financial Statements as owned by the Companies, Seller or the Subsidiaries of Seller, or acquired after the December 31, 2018, free and clear of all Encumbrances, except for Permitted Encumbrances.

(b)    Except as set forth on Schedule 5.11, after giving effect to the Reorganization including the acquisition of the Contributed Assets by the Companies, the assets, properties and rights owned or held by the Companies constitute all of the assets, properties and rights necessary to operate the Business in all material respects as conducted by the Companies on the date hereof, other than (i) assets (including Contracts and Governmental Permits) and properties being provided pursuant to the Transition Services Agreement or assets utilized by Seller and its Subsidiaries (other than the Companies) in providing services under the Transition Services Agreement and (ii) Governmental Permits and Contracts for which consent is required in connection with the consummation of the Transactions contemplated hereby and appropriate disclosure was made on Schedule 5.3(b).

 

35


Section 5.12.    No Violation, Litigation or Regulatory Action; Privacy.

(a)    Except as set forth on Schedule 5.12(a), since January 1, 2016, the Companies, and to the extent in respect of matters arising from the conduct of the Business, Seller and its other Subsidiaries, have complied in all respects with all applicable Laws, the Payment Card Industry Data Security Standard and Court Orders, except as would not, individually or in the aggregate, reasonably be expected to result in material Liability to the Business.

(b)    Since January 1, 2016, neither of the Companies or, solely in respect of matters arising from the conduct of the Business, Seller and its other Subsidiaries, has engaged in any activity, practice or conduct which would constitute a violation in any material respect of the United States Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act 2010, or any applicable Law implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business, other applicable international conventions or other anti-corruption Laws in any applicable jurisdiction.

(c)    Except as set forth on Schedule 5.12(c), as of the date hereof, there are no Proceedings pending or, to the Knowledge of Seller, threatened in writing against either of the Companies, or in respect of matters to the extent in respect of the Business, Seller or its other Subsidiaries. As of the date hereof, there are no Proceedings to which either Company, or in respect of matters to the extent in respect of the Business, Seller or its other Subsidiaries, was a party that were resolved since January 1, 2017 and for which any such Person was required to pay, or agreed to pay, over $500,000 in connection with such Proceeding.

(d)    As of the date hereof, there is no Proceeding pending or, to the Knowledge of Seller, threatened that questions the legality of the Contemplated Transactions.

(e)    The Companies, and with respect to matters to the extent related to the Business, Seller and its other Subsidiaries, are subject to policies and procedures regarding data security and privacy of data and information that they believe in good faith are commercially reasonable and that are in compliance in all material respects with applicable Law.

(f)    The Companies, and with respect to matters to the extent related to the Business, Seller and its Subsidiaries, have information security programs that include commercially reasonable administrative, electronic, technical, physical and other security measures and safeguards with respect to the Company IT Systems and personal data.

Section 5.13.    Contracts. As of the date hereof, except as set forth on Schedule 5.13, none of the Companies, or Seller or its Subsidiaries primarily used in the Business, is a party to or bound by:

(a)    any Real Property Lease or any Contract for the future purchase or sale of real property;

(b)    any Contract for the purchase by the Companies, Seller or its other Subsidiaries of services, supplies, components or equipment which involved the payment of more than $1,500,000 in the year ended December 31, 2018;

 

36


(c)    any Contract for the sale by the Companies, Seller or its other respective Subsidiaries of any services or products of the Business with any of the Material Billers;

(d)    any material partnership, joint venture or other similar Contract or arrangement;

(e)    any Contract containing “requirements” provisions or other provisions obligating the Companies, Seller or its other Subsidiaries to purchase or obtain a minimum or specified amount of any product or service from any Person;

(f)    indentures, mortgages or loan agreements or other Contracts for borrowed money of the Companies;

(g)    Contracts for the acquisition or sale of any business enterprise with the counterparty to such acquisition or sale, which such transaction occurred after January 1, 2016 and for which the Seller or its Subsidiaries have ongoing material obligations;

(h)    any Contract (including employment and consulting Contracts) with (A) any current or former director, officer or employee of any of Seller and/or its Affiliates, including the Companies or (B) any current or former shareholder or holder of options, warrants or other rights, in each case, to acquire shares of capital stock or other equity interests of either Company;

(i)    exclusive distributor, dealer or similar Contracts or Contracts under which the Companies, Seller or its other Subsidiaries is obligated to pay after the date of this Agreement an amount in excess of $500,000 during any calendar year;

(j)    Contracts that contain any material “most-favored nation” pricing or similar pricing terms or any material provisions regarding minimum volumes, in each case, in favor of the counterparty that survive the Closing;

(k)    Biller Contracts with any Governmental Body or, to the Knowledge of Seller, any other Contract with any Governmental Body;

(l)    Contracts with any of the Persons required to be listed on Schedule 5.21(b); or

(m)    any Contract containing any material covenant or provision prohibiting the Companies, Seller or its other Subsidiaries from engaging in any line or type of business (except for such agreements which shall not apply to the Companies upon Closing).

Section 5.14.    Status of Contracts. As of the date hereof, each of the Contracts listed or required to be listed in Schedules 5.10, and 5.13 (collectively, the “Business Agreements”) is in full force and effect and is a valid binding agreement of the applicable Company and, to the Knowledge of Seller, each of the other parties thereto, except as would not reasonably be expected to, individually or in the aggregate, be material and adverse to the Business. As of the date hereof, none of the Companies, or Seller or its Subsidiaries to the extent relating to the Business are in, or, to the Knowledge of Seller, alleged to be in, material breach or default under any of the Business Agreements. Seller has made available to Buyer true, complete and correct copies of all Business Agreements.

 

37


Section 5.15.    ERISA.

(a)    As of the date hereof, each material “Employee Benefit Plan” is listed in Schedule 5.15(a)(i) (other than any employment agreement that is consistent with the form agreements made available to Buyer). For purposes of this Agreement, “Employee Benefit Plan” means (i) each “employee benefit plan” (as defined in Section 3(3) of ERISA), “employee welfare benefit plan” (within the meaning of Section 3(1) of ERISA), “multi-employer plan” (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) and “multiple employer welfare arrangement” (within the meaning of Section 3(40) of ERISA), (ii) all other severance, salary continuation, change in control, employment, incentive, bonus, stock option, stock purchase, restricted stock, equity incentive, retirement, pension, redundancy, profit sharing or deferred compensation plans, programs, Contracts (including employment agreements and consulting agreements) or policies, (iii) medical plans, life insurance plans, long-term disability plans and dental plans, and (iv) all other material employee benefit plans, arrangements, programs or personnel policies (including vacation time, holiday pay, bonus programs, moving expense reimbursement programs and sick leave), in each case, in which Business Employees or former employees of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, participate (other than any such plans, programs, agreements or policies required by Law to be provided to any such employees, including workers’ compensation or similar benefits) and which are sponsored or maintained by Seller or any of its Subsidiaries with respect to the Business or the Companies or with respect to which the Companies or Seller have made or are required to make payments, transfers or contributions on behalf of Business Employees. A true, correct and complete copy of The Western Union Company Supplemental Incentive Savings Plan (the “SISP”), and a true, correct and complete copy of each other material Employee Benefit Plan, or a summary thereof, has been made available to Buyer. No material Employee Benefit Plan is sponsored by either of the Companies, other than the commission arrangements identified on Schedule 5.15(a)(ii).

(b)    Each Employee Benefit Plan is maintained and operated in all material respects in compliance with the applicable requirements of the Code, ERISA and all other Law. Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service or is the subject of a favorable opinion letter from the Internal Revenue Service on the form of such Employee Benefit Plan, and, to the Knowledge of Seller, nothing has occurred that would reasonably be expected to adversely affect the qualified status of any such Employee Benefit Plan in any material respect.

(c)    No Employee Benefit Plan is, and none of the Companies, nor to the extent related to matters in respect of the Business, Seller or its Subsidiaries, in respect of the Business, has any obligation to contribute to, a multiemployer plan (as defined in ERISA Section 4001(a)(3)) or a plan that is or was otherwise subject to Title IV of ERISA, and none of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, would otherwise reasonably be expected to have any Liability with respect to any multiemployer plan or plan subject to Title IV of ERISA that is or was maintained or contributed to by any ERISA Affiliates.

 

38


(d)    No Employee Benefit Plan provides life or health insurance benefits to former or retired employees of a Company, or to the extent related to matters in respect of the Business, Seller or any of its Subsidiaries, and none of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, has any material Liability to provide life or medical insurance benefits to former or retired employees, other than pursuant to COBRA or similar state Laws which require limited continuation of coverage for such benefits.

(e)    The consummation of the Contemplated Transactions, other than by reason of actions taken by Buyer following the Closing, shall not (i) entitle any current or former Business Employee or employee of one of the Companies, or to the extent related to matters in respect of the Business, Seller or any of its Subsidiaries, to severance pay, unemployment compensation or any other payment, (ii) accelerate the time of payment or vesting, or increase the amount of any compensation due to any Business Employee or other current or former employee of one of the Companies, or Seller or any of its Affiliates in respect of the Business, or (iii) give rise to the payment of any amount that would not be deductible as a result of Code Section 280G.

(f)    With respect to each Employee Benefit Plan sponsored by a Company, or to the extent related to matters in respect of the Business, Seller or any of its Subsidiaries, all required payments, premiums, contributions, distributions or reimbursements of the Companies, or to the extent related to the Business, Seller or any of its other Subsidiaries, for all periods ending prior to or as of the date hereof have been timely made or properly accrued as required by GAAP.

(g)    Neither of the Companies, nor, to the Knowledge of Seller, any other “disqualified person” (within the meaning of Section 4975 of the Code) or any “party in interest” (within the meaning of Section 3(14) of ERISA) has engaged in any nonexempt “prohibited transaction” (within the meaning of Section 4975 of the Code or Section 406 of ERISA) with respect to any of the Employee Benefit Plans which could subject any Employee Benefit Plans sponsored by either Company to any material Liability or Tax under Section 502(i) of ERISA or Section 4975 of the Code.

(h)    Each Employee Benefit Plan that is subject to the health care continuation requirements of COBRA and/or the requirements of HIPAA, has been administered in compliance with such requirements in all material respects. With respect to each material Employee Benefit Plan sponsored by a Company, Seller or its Subsidiaries, Seller has made available to Buyer true, complete and correct copies of (to the extent applicable): (i) all documents pursuant to which the Employee Benefit Plan is maintained (including the plan, any amendments thereto and the summary plan descriptions), (ii) the three most recent annual reports (IRS Form 5500 series) filed with the IRS (with applicable attachments), and (iii) the most recent determination or opinion letter, if any, received from the IRS.

(i)    Each Employee Benefit Plan sponsored by a Company, or to the extent related to matters in respect of the Business, Seller or any of its Subsidiaries, that is a “non-qualified

 

39


deferred compensation plan” (as such term is defined in Section 409A(d)(1) of the Code) has been administered and drafted or amended, in such a manner so that the additional tax described in Section 409A(1)(B) of the Code shall not be assessed against any individual participating in any such non-qualified deferred compensation plan with respect to benefits due or accruing thereunder.

(j)    The Companies, and to the extent related to matters in respect of the Business, and/or Seller and its Subsidiaries (as applicable), have, for purposes of each relevant Employee Benefit Plan, correctly classified those individuals performing services for the Business as common law employees or independent contractors in all material respects.

(k)    The Companies, and to the extent related to matters in respect of the Business, and/or Seller and its Subsidiaries (as applicable) have correctly classified all Business Employees as exempt or non-exempt and have paid all amounts due to all Business Employees and current or former employees of the Companies, whether under applicable Law or otherwise, in connection with the provision of services by such employees in all material respects, and (i) none of the Companies, Seller and its other Subsidiaries have any material liability with respect to the classification of the Business Employees, and (ii) the Companies do not otherwise have any material liability with respect to the classification of their current or former employees.

Section 5.16.    Environmental Matters. Except as would not reasonably be expected to be materially adverse to the Business:

(a)    since January 1, 2016, the Companies, and to the extent related to matters in respect of the Business, Seller and its Subsidiaries, have complied with all applicable Laws pertaining to pollution or protection of the environment, natural resources or human health and safety (to the extent relating to exposure to Hazardous Materials) or the use, handling or disposal of Hazardous Materials (collectively, “Environmental Laws”);

(b)    there are no Proceedings pending or, to the Knowledge of Seller, threatened against either of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, asserting a violation of or any Liability under Environmental Laws or relating to the spill, release or disposal of any materials defined as “hazardous substances,” “pollutants,” “contaminants,” “solid wastes” or “hazardous wastes” under, or that are otherwise regulated pursuant to, any applicable Environmental Law, including any (i) asbestos and asbestos-containing materials, (ii) petroleum or petroleum-containing materials, (iii) radiation and radioactive materials and (iv) polychlorinated biphenyls (“Hazardous Materials”);

(c)    there has been no spill or release of any Hazardous Material by either of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, at any property, or to the Knowledge of Seller, at any property formerly owned, occupied or operated by either of the Companies, or to the extent related to matters in respect of the Business, Seller or its Subsidiaries, or at any third party disposal location. Since January 1, 2016, to the extent related to matters in respect of the Business, neither Seller or its Subsidiaries, nor either Company has received written notice from any Person alleging that the Business or either Company is actually or potentially responsible for the presence or release of any Hazardous Materials at any location, whether at any Leased Real Property or otherwise; and

 

40


(d)    with respect to material Liabilities relating to the operation of the Business under Environmental Laws or the environmental condition of any Leased Real Property, as of the hereof, Seller has made available to Buyer complete and accurate copies of the most recent environmental audit, investigation or environmental reports reasonably in Seller’s or its Affiliates possession that provide disclosure of all such material Liabilities.

Section 5.17.    Employee Relations and Agreements.

(a)    Neither of the Companies or Seller or any of its Subsidiaries (to the extent related to the Business) is a party to any labor Contract or collective bargaining Contract.

(b)    No union or similar organization represents Business Employees and, to the Knowledge of Seller, no such organization is attempting to organize such employees.

(c)    As of the date hereof, no Business Employee is a party to any agreement with the Companies, or Seller or its Affiliates in respect of the Business, that entitles him or her to material compensation or other material consideration upon the acquisition by any Person of control of the Companies or the Business.

(d)    The Employee List indicates as of the date hereof the function and title (including whether full or part-time), base salary or hourly wage rate, exempt or non-exempt status, cash bonus target and other incentive compensation targets, retention or other stay-put bonuses paid or payable, employment site, leave status (including, if applicable, date leave began, nature of leave and anticipated return date), and date of hire for each individual listed therein.

(e)    The individuals included in the Employee List are all of the employees of Seller or any of its Subsidiaries who are necessary to operate the Business on a stand-alone basis (except for (i) the individuals who provide any of the services contemplated to be provided by Seller or any of its Subsidiaries under the Transition Services Agreement or (ii) the individuals who provide any of the services or functions described on Schedule 5.11). To the Knowledge of Seller, (i) no employee of Seller or its Subsidiaries is included on the Employee List unless such employee has devoted a majority of his or her working hours performing services for the Business in the 12-month period prior to the date hereof (other than new hires for the Business who have been employed by the Business for less than 12-months, but in such case, who have during their period of employment devoted a majority of his or her time performing services for the Business) and (ii) no employee of Seller or its Subsidiaries is included on the Employee List if such employee did not devote a majority of his or her working hours performing services for the Business during 2018.

Section 5.18.    No Undisclosed Liabilities. Except for (a) Transaction Expenses incurred in connection with this Agreement, (b) liabilities that individually or in the aggregate would not reasonably be expected to be material to the Business, (c) liabilities set forth in the Financial Statements or incurred in the ordinary course of business since the Interim Financial Statements Date, or (d) liabilities set forth in Schedule 5.18, none of the Companies has incurred any Liabilities, or Sellers or its Subsidiaries have incurred any Liabilities that will be assumed by Buyer pursuant to the Reorganization, in each case that would be required to be reflected or reserved against in a balance sheet of the Companies prepared in accordance with GAAP.

 

41


Section 5.19.    Insurance. As of the date hereof, Seller maintains the insurance policies and coverages set forth in Schedule 5.19 with respect to the Business. There are no material outstanding claims under any insurance policy with respect to the Business or material defaults with respect to provisions in any such policy.

Section 5.20.    Customers and Suppliers.

(a)    (i) Set forth on Schedule 5.20(a) are the 25 largest Billers of the Business, by revenue, for the 12-month period ended December 31, 2018 (collectively, the “Material Billers”), and set forth opposite the name of each such customer is the dollar amount of sales attributable to such customer for such period. Except as would not reasonably be expected to be individually or in the aggregate material and adverse to the Business, from January 1, 2018 to the date hereof (A) none of Seller or its Subsidiaries, including the Companies, has received written notice of any dispute with respect to the Business with any Material Biller, and (B) no Material Biller has notified Seller or the Companies in writing that it intends to terminate or materially reduce its business with the Companies or otherwise with respect to the Business. (ii) As of the date hereof, Biller Contracts representing at least 65% of the 2018 revenue of the Business will, assuming the accuracy of Buyer’s representation in Section 6.3(c) and assuming that such Biller Contracts are not terminated or expire prior to Closing and applying the principles set forth on Schedule 7.3, (i) in the case of Transferred Contracts be transferred to the Companies pursuant to the Reorganization or (ii) be, directly or indirectly, transferred to Buyer at the Closing, in each case, without requirement for consent under the terms of such Biller Contract.

(b)    Set forth on Schedule 5.20(b) are the 10 largest suppliers of the Business, by dollar volume, for the 12-month period ended December 31, 2018 (collectively, the “Material Vendors”). Except as would not reasonably be expected to be individually or in the aggregate material and adverse to the Business, from January 1, 2018 to the date hereof (i) none of the Seller or its Subsidiaries, including the Companies, has received written notice of any material dispute with respect to the Business with any Material Vendor and (ii) no Material Vendor has notified Seller or the Companies in writing that it intends to terminate, or materially and adversely change the terms of, its relations with the Companies or otherwise with respect to the Business.

(c)    On or prior to the date hereof, Seller or one of its Subsidiaries has provided notice to each Biller of the Business that has not already migrated to NextGen Platform about end-of-life of the legacy platform either (i) over the phone, (ii) in an in-person presentation that includes a slide regarding end of life, or (iii) by email or other digital communication. Prior to the date hereof, no Biller of the Business has notified Seller or any of its Subsidiaries that such Biller does not intend to convert over to NextGen Platform on or prior to the Target Conversion Date for such Biller. As of the date of this agreement, Schedule 5.20(c)(ii) sets forth (A) a list of Billers who have been converted over to NextGen Platform and (B) the list of Billers of the Business who have not converted to NextGen Platform but with respect to which the NextGen Platform application is Fully Configured (a “Fully Configured Biller”). Schedule 5.20(c)(iii) sets forth, as of February 21, 2019 (1), with respect to each Fully Configured Biller, the Target

 

42


Conversion Date for such Biller (if one has been set) and whether the Biller had Confirmed such Target Conversion Date, and (2) with respect to Billers of the Business not in clause (A) or (B), the Target Conversion Date with respect to such Biller (if applicable).

Section 5.21.    Shared Contracts; Joint Service Contracts. As of the date hereof, Schedule 5.21 sets forth a true, correct and complete list of all (a) the Joint Service Contracts (defined below) with the Material Billers and (b) the Shared Vendor Contracts (defined below) with the Material Vendors.

Section 5.22.    Affiliate Transactions. Other than the Joint Services Contracts and the Shared Contracts, neither of the Companies is party to any Contract with, or in favor or for the benefit of, Seller or any of its Affiliates (other than the Companies) that will survive the Closing.

Section 5.23.    No Brokers. Neither Seller nor any Person acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the Contemplated Transactions that shall be payable by the Companies.

Section 5.24.    No Other Representations or Warranties. Except for the representations and warranties contained in this Article V (as modified by the Schedules) and in the Seller Ancillary Agreements, none of Seller or any of its Affiliates (including the Companies), representatives or any other Person makes or shall be deemed to make any other express or implied representation or warranty with respect to Seller, the Companies, the Shares, the Business, any Contemplated Transaction, any other rights or obligations to be transferred pursuant to this Agreement or any Seller Ancillary Agreement, or any other matter, and Seller hereby disclaims any other express or implied representations or warranties, whether made by Seller or any of its Affiliates (including the Companies), or any other Person.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Seller to enter into this Agreement and to consummate the Contemplated Transactions, Buyer and Parent hereby represents and warrants to Seller as of the date hereof and as of the Closing as follows:

Section 6.1.    Organization of Parent and Buyer. Parent is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Nebraska. Each of Parent and Buyer has the corporate power and corporate authority to own or lease and operate its assets and to carry on its businesses in the manner that they were conducted immediately prior to the date of this Agreement.

Section 6.2.    Authority of Parent and Buyer; Conflicts.

(a)    Each of Parent and Buyer has the corporate power and corporate authority to execute, deliver and perform this Agreement and each of the Buyer Ancillary Agreements. The execution, delivery and performance of this Agreement and the Buyer Ancillary Agreements by both Parent and Buyer have been duly authorized and approved by Parent’s and Buyer’s board of directors, as applicable, and do not require any further authorization or consent of either

 

43


Parent or Buyer or their respective stockholders. This Agreement has been duly authorized, executed and delivered by each of Parent and Buyer and (assuming the valid authorization, execution and delivery of this Agreement by Seller) is the legal, valid and binding agreement of both Parent and Buyer enforceable against each of Parent and Buyer in accordance with its terms, and each of the Buyer Ancillary Agreements has been duly authorized by Parent and Buyer and upon execution and delivery by Parent or Buyer, as applicable, shall be (assuming the valid authorization, execution and delivery by Seller, where Seller is a party) a legal, valid and binding obligation of Parent or Buyer enforceable against Parent or Buyer in accordance with its terms, subject, in the case of the Agreement and each of the Buyer Ancillary Agreements, to bankruptcy, insolvency, reorganization, moratorium and similar Laws of general application relating to or affecting creditors’ rights and to general equity principles.

(b)    Neither the execution and delivery of this Agreement or any of the Buyer Ancillary Agreements or the consummation of any of the Contemplated Transactions nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(i)    assuming the receipt of all necessary consents and approvals and the filing of all necessary documents as described in Section 6.2(b)(ii), result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under (1) the constituent documents of Parent or Buyer, (2) any note, instrument, mortgage, lease, franchise or financial obligation to which Parent or Buyer is a party or any of its properties is subject or by which Parent or Buyer is bound, (3) any Court Order to which Parent or Buyer is a party or by which it is bound or (4) any Law affecting Parent or Buyer, other than, in the case of clauses (2), (3) and (4) above, any such breaches, defaults, rights or loss of rights that, individually or in the aggregate, would not materially impair the ability of Parent or Buyer to perform its obligations hereunder or prevent the consummation of any of the Contemplated Transactions, or

(ii)    require the approval, consent, authorization or act of, or the making by Parent or Buyer of any declaration, filing or registration with, any Person, except for (1) in connection, or in compliance, with the provisions of the HSR Act and (2) such approvals, consents, authorizations, declarations, filings or registrations the failure of which to be obtained or made would not materially impair the ability of Parent or Buyer to perform its obligations hereunder or prevent the consummation of any of the Contemplated Transactions.

Section 6.3.    No Violation, Litigation or Regulatory Action; Required Approvals.

(a)    As of the date hereof, there are no Proceedings pending or, to the Knowledge of Buyer, threatened against Parent, Buyer or their respective Subsidiaries which are reasonably expected to materially impair the ability of Parent or Buyer to perform its obligations hereunder or delay or prevent the consummation of any of the Contemplated Transactions.

(b)    As of the date hereof, there is no (i) Proceedings pending or, to the Knowledge of Buyer, threatened or (ii) investigation by any Governmental Body that is pending or, to the Knowledge of Buyer, threatened, that questions the legality of the Contemplated Transactions;

 

44


(c)    Parent and Buyer understand that Buyer is not acquiring, and the Companies shall not receive in the Reorganization, any money transfer licenses held by Seller Licensed Subsidiary or any of its Affiliates. Buyer or its applicable Subsidiary has and at all times through Closing shall have all money transfer licenses and other similar permits or licenses required to operate the Business immediately after Closing (including as contemplated by the Business Agreements) without assistance of Seller or any of its Affiliates.

(d)    As of the date hereof, neither Parent, Buyer nor any of their respective Affiliates is subject to any Governmental Orders (or has violated any Law in such a manner) that would reasonably be expected to prevent or delay the consummation of the Contemplated Transactions.

Section 6.4.    Financing. As of the date of this Agreement, Parent has, and as of the Closing Date, Buyer will have, sufficient funds available for it to pay the Purchase Price on the terms contemplated hereby and to pay related fees and expenses. Without limitation of the foregoing, Parent has furnished to Seller complete and accurate fully executed copies of a debt commitment letter (as may be amended, modified, supplemented, replaced or extended in accordance with this Agreement, the “Commitment Letter”), dated as of the date hereof, among the banks party thereto and Parent, pursuant to which such banks have committed to provide or cause to be provided debt financing to Parent in connection with the transactions contemplated hereby (such debt financing, the “Financing”). The aggregate proceeds to be disbursed pursuant to the agreements contemplated by the Commitment Letter, together with cash on hand of Parent that is not subject to any restrictions and is able to be used to pay the Purchase Price, is sufficient to allow Buyer to (a) consummate the transactions contemplated hereby, including payment of the Purchase Price and (b) satisfy in cash all other obligations of Buyer required to be satisfied at the Closing. As of the date hereof, the Commitment Letter (together with the fee letters (copies of which have been provided to Seller, redacted with respect to any fees, flex amounts and other information customarily redacted provided that no provisions that, or would reasonably be expected to, adversely affect the availability of or impose additional conditions on, the availability of the Financing have been redacted)) constitute all of the agreements entered into by Parent and/or its Affiliates with respect to the Financing and the Commitment Letter. The Commitment Letter is not subject to any contingency or condition of any kind whatsoever, including any subsequent approval process, related to the funding of the full amount of the financing contemplated by the Commitment Letter other than as set forth in the executed Commitment Letter. As of the date hereof, the Commitment Letter is in full force and effect, constitute the legal, valid and binding obligations of Parent and, to the Knowledge of Buyer, the other parties thereto, and have not been modified or amended in any respect, and the respective commitments contained in the Commitment Letter have not been withdrawn or rescinded. No event has occurred which, with or without notice, lapse of time or both, would constitute a default or breach on the part of Parent under any term, or a failure of any condition, of the Commitment Letter or otherwise result in any portion of the Financing contemplated thereby being unavailable on the date on which the Closing should occur pursuant to Section 4.1. Neither Parent nor any of its Affiliates is in breach of the Commitment Letter, nor are any of the other parties thereto in breach of the Commitment Letter. As of the date hereof, Parent has no reasonable reason to believe that,

 

45


(1) Parent and, to the Knowledge of the Buyer, each other party to the Commitment Letter shall be unable to satisfy on a timely basis any of the conditions that are required to be satisfied by it or such other party as a condition to the obligations under the Commitment Letter prior to the expiration thereof and (2) any portion of the financing contemplated by the Commitment Letter shall not be made available to Buyer at the Closing. As of the date hereof, Parent has paid in full any and all commitment fees and/or other fees required to be paid on or prior to the date hereof under the terms of the Commitment Letter and shall pay all other commitment fees and/or other fees required to be paid under the terms of the Commitment Letter upon the Closing.

Section 6.5.    Solvency. Immediately after giving effect to the consummation of the transactions contemplated hereby:

(a)    the fair saleable value (determined on a going concern basis) of the assets of Buyer and its Subsidiaries (on a consolidated basis) shall be greater than the total amount of their liabilities;

(b)    Buyer and its Subsidiaries (on a consolidated basis) shall be able to pay their respective debts and obligations in the ordinary course of business as they become due; and

(c)    Buyer and its Subsidiaries (on a consolidated basis) shall have adequate capital to carry on their respective businesses and all businesses in which they are about to engage.

Section 6.6.    Investment Intent. Buyer is acquiring the Shares as an investment for its own account and not with a view to the distribution thereof. Buyer shall not sell, transfer, assign, pledge or hypothecate any of the Shares in the absence of registration under, or pursuant to an applicable exemption from, federal and applicable state securities laws.

Section 6.7.    No Brokers. Neither Parent, Buyer nor any Person acting on their behalf has become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the Contemplated Transactions that may be the responsibility or obligation, in whole or in part, of Seller or any of its Affiliates.

Section 6.8.    Investigation. Each of Parent and Buyer acknowledges and agrees that it (a) has made its own inquiry and investigation into, and, based thereon, has formed an independent judgment concerning, the Companies, the Shares, the Business and the Contemplated Transactions, and any other rights or obligations to be transferred, directly or indirectly, pursuant to this Agreement and the Buyer Ancillary Agreements and (b) has been furnished with, or given access to, certain projections, forecasts, estimates, appraisals, statements, data or information about Seller, the Companies, the Shares, the Business and any other rights or obligations to be transferred, directly or indirectly, pursuant to this Agreement and the Buyer Ancillary Agreements, as it has requested. Each of Parent and Buyer further acknowledges and agrees that (i) the only representations and warranties made by Seller are the representations and warranties expressly set forth in Article V (as modified by the Schedules), (ii) except as to those matters expressly covered by the representations and warranties set forth in Article V (as modified by the Schedules), Seller is selling the Shares (and the Business and the Companies represented thereby) on an “as is, where is” basis, and Seller disclaims all other representations and warranties,

 

46


whether express or implied, (iii) neither Parent nor Buyer has relied upon any other express or implied representations, warranties or other projections, forecasts, estimates, appraisals, statements, data or information made, communicated or furnished by or on behalf of Seller or any of its Affiliates, representatives or any other Person, including through any investment banker, or management presentations, data rooms (electronic or otherwise) or other due diligence information, and (iv) any claims Parent or Buyer may have for breach of any representation or warranty shall be based solely on the representations and warranties of Seller expressly set forth in Article V (as modified by the Schedules).

Section 6.9.    No other Representations or Warranties. Except for the representations and warranties contained in this Article VI (as modified by the Schedules) and in the Buyer Ancillary Agreements, none of Buyer, Parent or any of their respective Affiliates, representatives or any other Person makes or shall be deemed to make any other express or implied representation or warranty with respect to Parent, Buyer, any Contemplated Transaction, any other rights or obligations to be transferred pursuant to this Agreement or any Seller Ancillary Agreement, or any other matter, and Parent and Buyer each hereby disclaim any other express or implied representations or warranties, whether made by Parent, Buyer or any other Person.

ARTICLE VII

ACTION PRIOR TO THE CLOSING DATE

The respective parties hereto covenant and agree to take the following actions between the date hereof and the Closing Date:

Section 7.1.    Access to Information. Prior to the Closing, Seller shall afford to the officers, employees and authorized representatives of Buyer and Parent (including independent public accountants and attorneys) reasonable access during normal business hours, upon reasonable advance notice, to the offices, properties, employees and business and financial records (including computer files, retrieval programs and similar documentation) of the Business to the extent Buyer or Parent shall reasonably deem necessary and shall furnish to Buyer and Parent or their respective authorized representatives such additional information concerning the Business as shall be reasonably requested; provided, however, that Seller shall not be required to violate any Requirement of Law, Court Order or obligation of confidentiality to which Seller, any of its Affiliates or the Companies is subject or to waive any privilege which any of them may possess in discharging their obligations pursuant to this Section 7.1; provided, further, that Seller, its Affiliates and the Companies shall not be required to furnish or otherwise make available to Buyer (i) competitively sensitive information relating to areas of the Company’s business in which Buyer or its Affiliates directly or indirectly compete against the Business or (ii) Tax Returns or other Tax records or information relating to any Consolidated Tax Group; and provided, further, Buyer shall not, without the prior written consent of Seller, contact or communicate with any vendor, customer, employee, independent contractor or other business partner of the Companies with respect to or in connection with the Contemplated Transactions. Buyer agrees to use commercially reasonable efforts to ensure that such investigation shall be conducted in a manner as not to interfere unreasonably with the operations of the Companies or Seller and Buyer shall not undertake any invasive or intrusive environmental testing without Seller’s prior consent. Notwithstanding the foregoing, the obligations of Seller pursuant to this Section 7.1 shall be subject to the right of Seller to determine, in its discretion, the appropriate timing of the disclosure of information it deems proprietary commercial information or privileged information. The parties shall act at all times in accordance with the terms and provisions of the Confidentiality Agreement.

 

47


Section 7.2.    Notifications. From the date hereof to the Closing Date, each of Buyer and Seller shall promptly notify the other of any action, suit or proceeding of which they are aware that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any Contemplated Transaction. Prior to Closing, each party hereto shall promptly notify the other of any lawsuit, claim, proceeding or investigation that may be threatened, brought, asserted or commenced against the Companies, Seller or Buyer, as the case may be, that would have been listed in Schedule 5.12 or Schedule 6.3, as the case may be, if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof. If a party fails to notify the other party under this Section 7.2, a failure to comply with this Section 7.2 shall not cause the failure of any condition set forth in Article IX or X to be satisfied unless the underlying change, event or development would independently result in the failure of a condition set forth in Article IX or X to be satisfied.

Section 7.3.    Consents of Third Parties; Governmental Approvals; Shared Contracts.

(a)    Prior to the Closing, Seller and Buyer shall cooperate with each other and use their respective reasonable best efforts to secure, as promptly as practicable, the consent, approval or waiver required to be obtained from any party to any Transferred Contract or other Business Agreement to consummate the Contemplated Transactions; provided, however, that notwithstanding anything to the contrary set forth in this Section 7.3, such action shall not include any requirement of Seller or Buyer or any of their respective Affiliates (including the Companies) to expend money (other than customary legal advisor costs), commence or participate in any Proceeding or offer or grant any accommodation or concession (financial or otherwise) to any third party.

(b)    Prior to the Closing, Buyer shall act diligently and reasonably, and Seller, upon the request of Buyer, shall act diligently and reasonably in cooperating with Buyer, in attempting to secure any consents and approvals of any Governmental Body required to be obtained by Buyer in order to permit the consummation of the Contemplated Transactions.

(c)    Parent, Buyer and Seller shall (and shall cause their respective Affiliates to) file not more than ten business days after the date hereof with the Federal Trade Commission (the “FTC”) and the Antitrust Division of the Department of Justice (the “DOJ”) the notifications and other information required to be filed under the HSR Act. Each of Parent, Buyer and Seller agrees to file (and to cause its Affiliates to file) any additional information requested by such Governmental Bodies under the HSR Act or any other competition Laws as promptly as practicable after receipt of such request. Each of Parent and Buyer, on the one hand, and Seller, on the other hand, shall furnish to the other party such necessary information and reasonable assistance as the other party may request in connection with its preparation of any filing or submission that is necessary under the HSR Act or other competition Law, as the case may be. Each of Seller, on the one hand, and Parent and Buyer, on the other hand, shall use reasonable best efforts to comply promptly with any inquiries or requests for additional information from the FTC and the DOJ. Upon the terms and subject to the conditions set forth in

 

48


this Agreement (including the following sentence), prior to Closing, each of the parties agrees to (and to cause its Affiliates to) use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other party in doing all things necessary, proper or advisable, consistent with this Section 7.3, to consummate, in the most expeditious manner practicable, the Contemplated Transactions. In addition, and notwithstanding anything to the contrary in this Agreement, each of Parent and Buyer agrees to (and to cause its Affiliates to) use reasonable best efforts to take any and all actions necessary to obtain all consents and approvals of any antitrust Governmental Bodies, including but not limited to: (i) causing the expiration or termination of the applicable waiting periods under the HSR Act and obtaining all other necessary actions or non-actions, waivers, consents and approvals from all Governmental Bodies and making all necessary registrations and filings (including filings with Governmental Bodies) and taking all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Body, (ii) defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement, any of the Ancillary Agreements or any of the Contemplated Transactions, including opposing any motion or action for a temporary, preliminary or permanent injunction against the Contemplated Transactions and seeking to have any stay or temporary restraining order entered into by any court or other Governmental Body vacated or reversed, and (iii) promptly taking all steps and making all undertakings to secure antitrust clearance; provided, however, that the foregoing covenants do not require Parent or Buyer to propose, negotiate, offer to commit to enter into or effect, by consent decree, hold separate order or otherwise, sell, offer to sell or otherwise dispose of, properties of Parent, Buyer, their respective Affiliates and/or the Companies or hold separate such properties pending such sale or other disposition. Prior to Closing, each of the parties agrees to (and to cause its Affiliates to) keep the other party informed in all material respects and on a reasonably timely basis of any material communication received by such party from, or given by such party to, any Governmental Body and of any material communication received or given in connection with any proceeding by a private party relating to the Contemplated Transactions, in each case regarding any of the Contemplated Transactions. Subject to applicable Law relating to the exchange of information, prior to Closing, each of the parties shall permit the other party to review in advance any material communication delivered to, and to the extent practicable consult with the other party in advance of any substantive meeting or discussion with, any Governmental Body relating to the Contemplated Transactions or in connection with any proceeding by a private party, and give the other party the opportunity to attend and participate in such meetings and discussions (to the extent practicable and permitted by such Governmental Body or private party). No party to this Agreement shall consent to any voluntary delay of the consummation of the transactions contemplated hereby at the behest of any Governmental Body without the consent of the other party to this Agreement. Notwithstanding the forgoing, the parties shall mutually agree to the strategy, manner and process relating to seeking the expiration or termination of the waiting period under the HSR Act, including, if applicable, to pull and refile thereunder or to extend the period for any action.

(d)    Buyer acknowledges that certain consents (including consents contingent on the fulfillment of certain conditions), approvals, waivers, agreement, or actions of, or (with or without lapse of time) notice to, third parties relating to the transactions contemplated by this Agreement may be required under instruments, contracts, commitments, agreements or arrangements (the “Applicable Consents”), which Applicable Consents may have not been obtained or are themselves subject to conditions not fulfilled as of the Closing. Other than (if

 

49


applicable) with respect to claims for indemnification under Section 12.2(a)(i) in respect of a breach of the representations and warranties in Section 5.3(b)(i)(A)(2) or Section 5.20(a)(ii), Seller shall not have any liability whatsoever to Buyer arising out of or relating to the failure to obtain any Applicable Consents except to use efforts as herein provided. Subject to Section 7.3(i), if an Applicable Consent is not obtained in respect of a Seller Licensed Subsidiary Contract prior to the expiration of the applicable term of the Transition Services Agreement, such Contract shall nevertheless be assigned to one of the Companies in accordance with this Agreement and the Transition Services Agreement, and the Companies and Buyer shall be responsible for all liabilities and obligations relating to or arising out of such Seller Licensed Subsidiary Contract (including any breaches thereof) and shall indemnify Seller and its Subsidiaries from any losses relating thereto.

(e)    The parties acknowledge that the Seller Licensed Subsidiary and/or the Companies are parties to certain Seller Licensed Subsidiary Contracts. Prior to Closing, the Parties shall cooperate with each other and use their respective reasonable best efforts to with respect to the Seller Licensed Subsidiary Contracts set forth on applicable subsections of Schedule 7.3(e)(i), (1) obtain the consent of such Biller to remove the Seller Licensed Subsidiary as a party to such Contract, (2) assign the rights and obligations of the Seller Licensed Subsidiary under such Contract effective as of the Closing to the Buyer Licensed Subsidiary and obtain the consent of such Biller to such assignment, or (3) assign the rights and obligations of the Seller Licensed Subsidiary under such Contract in respect of retail money transfer services to the Buyer Licensed Subsidiary effective as of the Closing and obtain the agreement of the applicable Biller that is the counterparty to such Contract to enter into a new contract effective as of the Closing Date pursuant to which the Seller Licensed Subsidiary will receive substantially the same goods and services provided by such Contract to the Seller Licensed Subsidiary prior to the Closing in respect of the walk-in services contemplated thereby and to remove such walk-in services from such Seller Licensed Subsidiary Contract.

(f)     The parties acknowledge that the Companies are parties to certain Biller Contracts (other than the Contracts set forth on Schedule 7.3(e)) pursuant to which (A) the Companies provide services in respect of the Business and (B) Seller and its Affiliates (excluding the Companies), provide services relating to the businesses of Seller other than the Business (the “Joint Service Contracts”). Prior to the Closing, the parties shall cooperate with each other and use their respective reasonable best efforts to obtain the agreement of the Biller that is the counterparty to each Joint Service Contract to enter into (1) a new replacement contract effective as of the Closing Date or as soon thereafter as practicable pursuant to which the Companies will provide the services to such Biller that the Companies provided under the applicable Joint Service Contract and (2) a new replacement contract effective as of the Closing Date pursuant to which Seller or its applicable Subsidiary will provide the services to such Biller that Seller or its applicable Subsidiary (other than the Companies) provided to such Biller under the Joint Service Contract.

(g)    The parties acknowledge that the Companies are parties to certain Contracts that relate to the operations or conduct of the business of Seller and its Affiliates (excluding the Companies) and the Business, but will remain with Seller or its Affiliates (excluding the Companies) after the Closing. In the case of those contracts set forth on Schedule 7.3(e)(ii) (the “Shared Contracts”), prior to Closing, the parties shall cooperate with

 

50


each other and use their respective reasonable best efforts to (A) obtain the agreement of the third party that is the counterparty to each Shared Contract to enter into a new contract effective as of the Closing Date pursuant to which the Companies will receive substantially the same goods and services provided by the Shared Contract to the Companies, or Seller or its Subsidiaries in respect of the Business, prior to the Closing (each, a “Replacement Shared Contract”) and, where applicable, to cause the applicable counterparty to release the Seller and its applicable Affiliates (excluding, prior to Closing, the Companies) from any applicable minimum quantity or other commitments to the extent such commitments become the obligation of the Companies under the Replacement Shared Contract and (B) to the extent either of the Companies is a party to a Shared Contract, cause the applicable counterparty to release the applicable Company from obligations arising after the Closing Date under the Shared Contract effective as of the Closing Date.

(h)    If one or more Replacement Shared Contracts are not entered into prior to or on the Closing Date, unless the parties otherwise agree in writing, during the remaining term of the applicable Shared Contract, the parties shall use their respective reasonable best efforts to allow the Companies to the extent permitted by applicable Requirements of Law to receive substantially the same goods and services of the subject matter of the Shared Contract received prior to the Closing and the economic and other burdens of such Shared Contract; provided, however, that the Buyer shall reimburse the Seller for any reasonable and documented out-of-pocket expenses incurred in connection with any such arrangement and, subject to the requirements of the Transition Services Agreement, the Seller shall have no obligation to engage in the Business following the Closing. Nothing in Section 7.3(e), 7.3(f), 7.3(g) or 7.3(h) shall require Seller or any of its Affiliates (including the Companies) to expend money (other than customary legal advisor costs), commence or participate in any litigation or offer or grant any accommodation or concession (financial or otherwise) to any third party.

(i)    For the avoidance of doubt, none of the transactions contemplated by Section 7.3(e) shall occur until the applicable Biller is an Eligible Biller. In the event that any Biller does not become an Eligible Biller prior to the expiration of the applicable service under the Transition Services Agreement, Seller and its Affiliates shall be permitted to terminate such Biller Contract and the obligations of Seller and its Affiliates in respect of such Biller Contract in this Section 7.3 shall terminate. Buyer will be responsible for any liability to a Biller arising from a claim that such termination was a breach of the Biller Contract.

(j)    Seller and the Buyer will each designate a qualified employee to serve as its principal representative to coordinate and facilitate the transactions contemplated by Section 7.3(e), 7.3(f), 7.3(g) and 7.3(h). Such employees designated will be granted sufficient authority to resolve on behalf of Seller and the Buyer all questions and problems arising with respect to the transactions contemplated by Section 7.3(e), 7.3(f), 7.3(g) and 7.3(h). From the date hereof until further written notice to the other party, unless changed by the relevant Party by notice given in accordance with this Agreement the representative of Seller shall be John Jones, and the representative of the Buyer shall be Rob Osborne. Such representatives shall discuss any issues regarding the transactions contemplated by Section 7.3(e), 7.3(f), 7.3(g) and 7.3(h) at least twice per week during the first four weeks following the date hereof and weekly thereafter. Unless otherwise agreed by the parties in writing, all communications relating to this Agreement will be made in accordance with Section 13.3. In the event that such representatives are not able

 

51


to resolve any issues or disputes that may arise in connection with the transactions contemplated by Section 7.3(e), 7.3(f), 7.3(g) and 7.3(h), the applicable issues shall be escalated to Sanjay Gupta, on behalf of Buyer, and Caleb Kim, on behalf of Seller, or other senior management team members mutually agreed by the parties, who shall cooperate in good faith to resolve any such issues or disputes.

(k)    From the date of this Agreement to the Closing Date, none of Seller, Buyer, nor any of their respective Affiliates, will enter into any agreement or effect a transaction that would reasonably be expected to delay obtaining any antitrust approvals with respect to the transactions contemplated by this Agreement.

(l)    Subject to the services to be provided by Seller and its Affiliates pursuant to the Transition Services Agreement, Buyer shall use its reasonable best efforts to take, and cause its Affiliates to take, any and all actions necessary to ensure that from and after Closing Buyer and its Affiliates have any and all money transfer licenses and similar permits necessary to operate the Business from and after Closing.

(m)    Seller and Buyer will cooperate and use their respective reasonable best efforts to convert each Biller of the Business to NextGen Platform as promptly as reasonably practical; provided, however, that (i) this Section 7.3(m) shall not require Seller or its Subsidiaries to expend any funds or make any concessions other than those customarily made by Seller or its Subsidiaries in connection with the NextGen Platform migration and (ii) the obligations in this Section 7.3(m) shall terminate as of the Closing.

(n)    Nothing in Section 7.3(a) or Section 7.3(d) through 7.3(h) shall include any requirement of Seller or Buyer or any of their respective Affiliates (including the Companies) to expend money (other than customary legal advisor costs), commence or participate in any Proceeding or offer or grant any concession (financial or otherwise) to any third party.

(o)    The parties acknowledge and agree that Buyer’s obligation to obtain the Financing is governed by Sections 7.6 and 7.7 and not this Section 7.3.

Section 7.4.    Operations Prior to the Closing Date.

(a)    Prior to the Closing, except as set forth on Schedule 7.4, requested by any Governmental Body, required or expressly permitted by this Agreement or Law, or with the express written approval of Buyer (which Buyer agrees shall not be unreasonably withheld, conditioned or delayed), Seller shall use its commercially reasonable efforts to cause the Companies to operate and carry on the Business in all material respect in the ordinary course and substantially as operated immediately prior to the date of this Agreement and to use their commercially reasonable efforts to preserve the goodwill of the suppliers, contractors, licensors, employees, customers, distributors and others having business relations with the Companies.

(b)    Notwithstanding Section 7.4(a), except as set forth on Schedule 7.4(b), requested by any Governmental Body, required by any Law, required or expressly permitted by this Agreement or with the express written approval of Buyer (which Buyer agrees shall not be unreasonably withheld, conditioned or delayed with respect to the matters in clauses (ii), (iv), (xiv), (xiv) and (xvii) below and, to the extent related thereto, (xviii)), prior to the Closing, Seller shall not permit either of the Companies to:

(i)    acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division, other than as contemplated by the Reorganization;

 

52


(ii)    make capital expenditures or enter into any Contract or commitment therefor in excess of $1,000,000 in the aggregate that are not contemplated in the 2019 budget for the Business provided to Buyer prior to the date hereof (or with respect to expenditures in 2020, 120% in excess of such budget on a pro rata basis for the applicable months) or otherwise required for emergency maintenance or repairs;

(iii)    make, or agree to make, any payment or distribution of assets of the Business (other than cash) to Seller or any of its Affiliates, other than in the ordinary course of business or as contemplated by the Reorganization;

(iv)    grant to any Business Employee any increase in cash compensation or other material employee benefits, other than (A) annual raises in accordance with past practice, (B) pursuant to existing Contracts disclosed in the Schedules (including any Employee Benefit Plan), (C) under Employee Benefit Plans, increases broadly applicable to all similarly situated employees at Seller and its Affiliates, or (D) for which the Company, Buyer and Buyer’s Affiliates shall not have any Liability following the Closing;

(v)    make any material change in the accounting policies applied in the preparation of the Financial Statements, unless such change is required by GAAP;

(vi)    make a material change in practices and procedures with respect to collection of accounts receivable, prepayment of expenses or payment of trade accounts payable;

(vii)    settle any material Proceeding, except to the extent such settlement does not obligate the Companies to (A) pay money following the Closing or (B) take or refrain from taking any action following the Closing that would reasonably be expected to harm the Business;

(viii)    make or change any Tax election, change any Tax accounting period, change any Tax method of accounting, file any amended Tax Return, settle or otherwise compromise and proposed assessment of Taxes, or forego any right to a refund of Taxes, in each case if such action would materially adversely affect the Liability of the Buyer, any Company or their respective Affiliates for Taxes for any taxable period (or portion thereof) beginning after the Closing Date;

(ix)    make any change in the charter or bylaws or comparable organization document of either of the Companies;

 

53


(x)    authorize for issuance, issue, deliver, sell, transfer or grant to any Person (other than to Seller) (A) any equity or similar interests of either of the Companies, (B) any debt equity or other voting securities of either of the Companies, or (C) any securities convertible into or exchangeable for, or any options, warrants or rights to acquire, any equity or similar interests, voting securities or convertible or exchangeable securities of either of the Companies;

(xi)    adopt a plan of complete or partial liquidation or dissolution, restructuring, recapitalization or reorganization of any Company or resolutions providing for or authorizing such a liquidation or dissolution, restructuring, recapitalization or reorganization;

(xii)    recognize any labor union or enter into or amend any collective bargaining agreement;

(xiii)    acquire any real property;

(xiv)    (A) enter into any Shared Vendor Contract, or (B) enter into, terminate, cancel or modify in any material respect any Business Agreement (or any Contract that would be a Business Agreement if in effect as of the date of this Agreement), in each case other than extensions to renew the Business Agreement in the ordinary course of business on terms that are not materially inconsistent with the practice of the Business in 2018 in respect of extensions and renewals; provided, however, that with respect to Business Agreements described in Section 5.13(b), 5.13(c) or 5.13(k) (or Contracts that would have been Business Agreements under such Sections if in effect as of the date hereof), the Companies shall be permitted to enter into modify such Contracts in the ordinary course of business (even if such Business Agreements or Contracts also constitute or would constitute Business Agreements under other provisions of Section 5.13);

(xv)    implement any material change with respect to any business line of the Business, which such change is materially inconsistent with the business plans Seller has provided in writing to Buyer with respect to the Business on or prior to the date hereof;

(xvi)    enter into any Contract with Seller or its Affiliates (other than the Companies) that would survive the Closing or enter into any Biller Contract that requires a third-party consent or approval to effect the Closing without breach of such Biller Contract;

(xvii)    incur any Indebtedness that will not constitute Indebtedness that will be repaid at Closing; or

(xviii)    agree to enter into any of the transactions set forth in the foregoing clauses.

(c)    Notwithstanding anything contained herein to the contrary, Seller shall be entitled to transfer any Cash of the Companies to Seller, via dividend or otherwise, at any time

 

54


and from time to time prior to midnight on the day immediately preceding Closing; provided, however, from midnight on the Closing Date through the Closing, Seller shall not use or transfer any Cash of the Companies or assets included in Closing Date Working Capital, to the extent such assets are sold, liquidated, disposed of or otherwise used to (i) make payment in respect of or discharge any Indebtedness or Transaction Expenses or (ii) pay any dividends, make any distribution or make any other payment to or for the benefit of the Seller or any Affiliate of the Seller (other than the Companies).

(d)    Seller shall, and shall cause its Subsidiaries to, use reasonable best efforts to obtain as promptly as practicable and in any event prior to the Closing an attestation of compliance with respect to the matter set forth on Schedule 7.4(d). Seller shall promptly deliver to Buyer such attestation upon receipt.

(e)    Prior to the Closing, the Parties shall negotiate in good faith in an effort to agree upon the terms of, and use their respective commercially reasonable efforts to execute as of the Closing Date, the Online Bill Payment Agreement.

Section 7.5.    Termination of Certain Intercompany Accounts; Intercompany Agreements.

(a)    At or prior to the Closing, Seller shall release, cancel, terminate or otherwise settle all intercompany accounts among Seller and its Affiliates relating to the Companies on or prior to the Closing Date other than as described on Schedule 7.5(a).

(b)    Other than as described on Schedule 7.5(b), or otherwise contemplated by the Transition Services Agreement, Seller shall cause all rights and obligations of Seller and its Affiliates (other than the Companies), on the one hand, and of the Companies, on the other hand, under agreements (other than the Buyer Ancillary Agreements and the Seller Ancillary Agreements) (together, the “Intercompany Agreements”) between Seller and its Affiliates (other than the Companies), on the one hand, and the Companies, on the other hand, to terminate or otherwise be released, including by way of assignment of rights and obligations of the Companies to Seller or one of its Affiliates, as of the Closing without creating any Liabilities of either Company. Following the Closing, neither Seller and its Affiliates (other than the Companies), on the one hand, nor the Companies, on the other hand, shall have any Liability to the other with respect to such terminated Intercompany Agreements.

Section 7.6.    Efforts to Obtain Funding.

(a)    Parent shall use reasonable best efforts to obtain the Financing as promptly as practical and, in any event, not later than the date the Closing is required to be effected in accordance with Section 4.1, on the terms and subject to the conditions described in the Commitment Letter (including the “flex” provisions of the related fee letter), including using its reasonable best efforts to: (i) maintain in effect the Commitment Letter and negotiate in good faith and enter into as promptly as practicable definitive agreements (the “Definitive Financing Agreements”) with respect to the Financing (on the terms and subject to the conditions reflected in the Commitment Letter (including the “flex” provisions of the related fee letter), provided that such terms do not contain any conditions to funding that are not set forth in the Commitment

 

55


Letter and otherwise would not reasonably be expected to prevent, impair or delay the Closing); (ii) comply on a timely basis with all covenants, and satisfy on a timely basis all conditions, required to be complied with or satisfied by Parent in the Commitment Letter (including the “flex” provisions of the related fee letter) and in such Definitive Financing Agreements; (iii) cause the Financing to be consummated at such time or from time to time as is necessary for Parent to satisfy its obligations under this Agreement; (iv) pay in a timely manner any and all commitment or other fees that become payable by Buyer or Parent under the Commitment Letter on or following the date hereof; and (v) enforce its rights under the Commitment Letter or the Definitive Financing Agreements, as applicable. In the event that all conditions to funding contained in the Commitment Letter have been satisfied, Parent shall use its reasonable best efforts to cause the lenders under the Commitment Letters to fund the Financing on the date the Closing is required to occur pursuant to Section 4.1 (without giving effect to the first proviso therein). Parent shall not, without the prior written consent of Seller, amend, replace, supplement or otherwise modify the Commitment Letter or the Definitive Financing Agreements, as applicable, in any manner (including by way of a side letter or other binding agreement, arrangement or understanding) in a way that would (A) add new, or expand any existing, conditions to the consummation of all or a portion of the Financing, (B) reduce the amount of the Financing, (C) adversely affect the ability of Parent or Buyer to enforce its rights against other parties to the Commitment Letter or the Definitive Financing Agreements, or (D) reasonably be expected to prevent, impede or materially delay the consummation of the Contemplated Transactions or otherwise adversely affect the ability or likelihood of Buyer to timely consummate the Contemplated Transactions or make the satisfaction of the conditions to obtaining the Financing less likely to occur. Parent shall not release or consent to the termination of the obligations of any of the parties under the Commitment Letter or the Definitive Financing Agreements.

(b)    In the event any portion of the Financing becomes unavailable on the terms and conditions contemplated in the Commitment Letter (including the “flex” provisions of the related fee letter) for any reason or the Commitment Letter shall be terminated or modified in a manner adverse to Seller for any reason, Parent shall use reasonable best efforts to obtain, as promptly as practicable, and in any event no later than three business days prior to the date the Closing is required to occur pursuant to Section 4.1, from the same or alternative financing sources, alternative financing on terms not less favorable (including, for the avoidance of doubt, (1) all conditions precedent and contingencies to funding of such financing being in the aggregate, in respect of certainty of funding, equivalent to (or more favorable to Parent than) the conditions precedent and contingencies set forth in the Commitment Letter (prior to such Alternative Financing) and (2) such substitution not (x) delaying or preventing the Closing, (y) adversely impacting the likelihood of the funding of the Financing or (z) adversely impacting the ability of Parent or Buyer to enforce its rights against the other parties to the Commitment Letter or the Definitive Financing Agreements or the ability of Parent or Buyer to timely consummate the transactions contemplated hereby) to Parent than the terms of the Financing in an amount equal to the lesser of (i) an amount sufficient to consummate the transactions contemplated by this Agreement (after taking into consideration the funds otherwise available to Parent), and (ii) the amount of financing that was contemplated by the Commitment Letter on the date hereof. In the event any alternative or substitute financing is obtained by Parent in accordance with the terms of this Section 7.6(b) (the “Alternative Financing”), references herein to the Financing (including, for avoidance of doubt, the references in this Section 7.6, but excluding references in

 

56


Section 6.4) shall be deemed to refer to the Alternative Financing, and if a new financing commitment letter is entered into in connection with such Alternative Financing, references herein to the Commitment Letter (including, for avoidance of doubt, the references in this Section 7.6, but excluding the references in Section 6.4) shall be deemed to refer to the new financing commitment letter entered into in connection with the Alternative Financing and any references to the fee letters shall refer to the new fee letters entered into in connection with the Alternative Financing.

(c)    Parent and Buyer each acknowledges and agrees that obtaining the Financing is not a condition to its obligations to consummate the Contemplated Transactions.

(d)    Buyer shall promptly (i) reimburse Seller for all documented reasonable third-party out-of-pocket costs and expenses (including reasonable attorneys’ and accountants fees’) incurred by Seller or any of its Affiliates in connection with their cooperation with Buyer in its efforts to obtain the Financing and (ii) indemnify and hold harmless the Companies and their Affiliates for and against any and all Losses suffered or incurred by any of them in connection with the arrangement of the Financing or any information used in connection therewith (other than information provided by the Seller or any of its Affiliates) and all actions taken by the Companies or their respective Affiliates pursuant to this Section 7.6.

(e)    Prior to the Closing, Seller shall cause the Companies to use their reasonable best efforts to, at Parent’s and Buyer’s sole expense, provide all customary cooperation reasonably requested by Parent in connection with Parent arranging the Financing, including, if requested by Parent, using reasonable best efforts to (i) assist with the preparation of customary offering and syndication documents and materials, including lender and investor presentations, rating agency materials and presentations, and similar documents and materials, in connection with the Financing, (ii) have the Companies designate a member of senior management of the Companies to participate in a reasonable number of presentations, road shows, due diligence sessions, drafting sessions and sessions with ratings agencies in connection with the Financing, including direct contact between such senior management of the Companies and the Financing Sources and potential lenders in the Financing, (iii) assist Parent in obtaining any corporate credit and family ratings from any ratings agencies contemplated by the Commitment Letters, (iv) assist in the preparation of definitive financing documents, including guarantee documents and other certificates and documents as may be reasonably requested by Parent, (v) obtain from the Companies’ existing lenders such consents, approvals, authorizations and instruments which may be reasonably requested by Parent in connection with the Financing, if applicable and taking corporate actions reasonably requested by Parent to permit the consummation of the Financing provided that they are contingent on the completion of the Financing, (vi) obtain from the Companies’ existing banking lenders customary payoff letters, lien releases, instruments of termination or discharge, if applicable, (vii) provide assistance with respect to the review and grant of any security interests in and/or pledging of collateral for and providing of guarantees supporting the Financing and obtaining any consents associated therewith, (viii) provide Parent with any financial statements of the Companies required to be provided pursuant to this Agreement, and (ix) provide, no later than four business days prior to Closing, all documentation and other information as has been reasonably requested in writing at least 10 business days prior to Closing by the Financing Sources that they reasonable determine is required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the PATRIOT Act.

 

57


(f)    For the avoidance of doubt and notwithstanding anything herein to the contrary, (i) nothing herein shall require such cooperation to the extent it would unreasonably interfere in any material respect with the business or operations of either of the Companies or their Affiliates or require either of the Companies or their Affiliates to agree to pay any fees, reimburse any expenses, incur any Liability, in each case, that is not indemnified by or subject to reimbursement by the Parent or Buyer, or give any indemnities (other than with respect to customary “representation and authorization letters” in connection with the Offering Documents); (ii) the Companies shall not be required to enter into (or approve) any definitive agreement related to any proposed Financing, (iii) the Companies and their Affiliates shall not be required to take any action that would require any director, officer or employee of any Company or any of their Affiliates to execute, or be required to enter into, or adopt any resolutions approving, any document, agreement, certificate or instrument (provided, that the Companies shall cooperate with the Buyer to appoint Buyer’s designees to the respective boards of directors (or equivalent bodies) of the Companies as of Closing for purposes of approving resolutions, the effectiveness of which is to be conditioned upon the Closing, related to the Financing), (iv) nothing herein shall require either of the Companies or their Affiliates to cause the delivery of legal opinions, reliance letters or certificates; and (v) neither Company or any of their Affiliates shall be required to take any action that conflicts with or violates their respective organizational documents, any applicable Law or Business Agreement or provide in connection with the Financing any information the disclosure of which is prohibited or restricted under Law or is legally privileged. Notwithstanding anything to the contrary herein, the condition set forth in Section 9.1(a), as it applies to the Seller’s obligations under this Section 7.6(f), shall be deemed satisfied unless the Financing has not been obtained primarily as a result of the Seller’s willful and material breach of its obligations under this Section 7.6(f) with respect to the Financing.

Section 7.7.    Financing Status. Parent shall keep Seller reasonably informed to the extent requested in writing by Seller from time to time with respect to all material activity concerning the status of the Financing, and shall give Seller prompt notice of any event or change that Parent determines shall materially and adversely affect the ability of Parent timely to consummate the Financing. Without limiting the foregoing, Parent agrees to notify Seller as promptly as reasonably practicable, if at any time: (a) the Commitment Letter shall expire or be terminated for any reason, (b) any financing source that is a party to the Commitment Letter notifies Buyer in writing that such source no longer intends to provide financing to Buyer on the terms set forth in the Commitment Letter (including the “flex” provisions of the related fee letter), or (c) a material breach, default, dispute or disagreement occurs or is alleged under the Commitment Letter or the Definitive Financing Agreements. Buyer shall deliver to Seller copies of drafts of the Definitive Financing Agreements (and its comments thereon) promptly as reasonably practicable after receipt (or delivery) thereof and a copy of the Definitive Financing Agreements as promptly as reasonably practicable after the execution and delivery thereof.

Section 7.8.    Audited Financial Statements. As promptly as practicable after the date hereof and in any event no later than (i) with respect to the financial statements other than fiscal year 2018, 60 days following the Closing and (ii) with respect to the financial statements for fiscal

 

58


year 2018, the Closing, Seller shall deliver to Parent (a) historical consolidated financial statements for the Business for the fiscal years 2016 through 2018 and the relevant quarterly periods of 2018 and 2019 (reviewed by an independent registered accounting firm in accordance with applicable review standards), in a form that complies with the requirements of Item 9.01 of Form 8-K and Rule 3-05 of Regulation S-X of the SEC for a business acquisition required to be described under Item 2.01 of Form 8-K, including information required for Parent to prepare the pro forma financial information required by Item 9.01 of Form 8-K and opening balance sheet balances and detailed support thereof, and (b) an unqualified report from Seller’s independent accounting firm stating that such fiscal year financial statements present fairly, in all material respects, the consolidated financial position, as well as the consolidated results of operations and cash flows, comprehensive income (loss) and shareholder’s equity of the Business for the periods covered by the such financial statements, in conformity with GAAP. As promptly as practicable and in any event no later than (i) with respect to the financial statements other than fiscal year 2018, 60 days following the Closing and (ii) with respect to the financial statements for fiscal year 2018, the Closing, Seller shall deliver to the Parent an executed consent of Seller’s independent accounting firm, in form and substance reasonably satisfactory to the Parent and suitable for filing by the Parent with the SEC, which consent shall authorize the Parent to file with the SEC the report referred to in this Section 7.8 and all other reports delivered by Seller hereunder.

Section 7.9.    Reorganization.

(a)    Prior to Closing, Seller shall, and shall cause its Subsidiaries to effect the following steps (collectively, the “Reorganization”):

(i)    Seller and each of the Asset Transferors shall assign to ECG, without any consideration in exchange therefor, all of the Contributed Assets.

(ii)    ECG shall assume, without any consideration, all of the Assumed Liabilities.

(iii)    Each of the Companies shall transfer to Seller, without any consideration in exchange therefor, all of the Seller Assets.

(iv)    Seller shall assume (or cause one of its Subsidiaries to Assume), without any consideration in exchange therefor, all of the Seller Liabilities.

(b)    To the extent any Contributed Assets are not transferred or assigned to ECG or Sprint prior to the Closing, the parties shall allow the Companies without any additional costs to the Companies, to the extent permitted by Law and to the extent reasonably within the contractual or other ability or control of the parties, to enjoy the economic and other benefits, and to have the economic and other burdens, of such Contributed Assets as if they had been transferred to ECG or Sprint prior to the Closing. To the extent any Seller Assets are not transferred or assigned to Seller or one of its Subsidiaries (other than the Companies) prior to the Closing, the parties shall allow Seller, to the extent permitted by Law and to the extent reasonably within the contractual or other ability or control of the parties, to enjoy the economic and other benefits, and to have the economic and other burdens, of such Seller Assets as if they had been transferred to Seller or one of its Subsidiaries (other than the Companies) prior to the Closing.

 

59


Section 7.10.    Non-Assignable Assets.

(a)    No Agreement to Transfer. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall not require and no Contract evidencing the Reorganization (a “Reorganization Agreement”) shall constitute an agreement to sell, contribute, dividend, assign, transfer, convey or deliver any (i) Contributed Asset that constitutes a Transferred Contract or a Transferred Permit and any claim or right or benefit arising thereunder or resulting therefrom if (A) an attempted sale, contribution, dividend, assignment, transfer, conveyance or delivery thereof (without the consent, approval or waiver of a Third Party), would violate, constitute a default under or breach of such Contributed Asset or would violate any applicable Law or (B) such Contract is with a Biller who is not an Eligible Biller (collectively, a “Business Non-Assignable Asset”) or (ii) asset, license, lease, permit or property that constitutes a Seller Asset that is to be transferred from a Company to an Affiliate of Seller as part of the Reorganization and any claim or right or benefit arising thereunder or resulting therefrom if an attempted sale, contribution, dividend, assignment, transfer, conveyance or delivery thereof (without the consent, approval or waiver of a Third Party) would violate, constitute a default under or breach of such license, lease, permit or property thereunder or would violate any applicable Law (collectively, a “Remainco Non-Assignable Asset” and, together with any Business Non-Assignable Asset, each a “Non-Assignable Asset”), in each case of clause (a)(i) or (a)(ii), without first obtaining all such necessary approvals, consents and waivers of such Third Parties or, if applicable, until such Biller is an Eligible Biller, and this Agreement and any applicable Reorganization Agreement shall not be deemed to constitute a sale, contribution, dividend, assignment, transfer, conveyance or delivery or attempted contribution, dividend, assignment, transfer, conveyance or delivery thereof and the applicable provisions of this Section 7.10 shall apply in regard to all such Non-Assignable Assets.

(b)    Post-Closing Treatment of Certain Non-Assignable Assets and Liabilities. Notwithstanding anything to the contrary contained in this Agreement or any Reorganization Agreement, to the extent permitted by applicable Law and Contract, in the event that (i) any applicable approval, consent or waiver to the contribution, dividend, assignment, transfer, conveyance or delivery of any Non-Assignable Asset cannot be obtained prior to the Closing or (ii) in the case of any Biller Contracts, such Biller is not an Eligible Biller at the Closing, (A)(1) in the case of any Biller Contracts, (x) Seller and its Subsidiaries shall provide the services with respect thereto as expressly provided in Section 7.3 or the Transition Services Agreement for the time periods contemplated thereby and (y) the Companies and Buyer shall be responsible for all Liabilities with respect thereto that would be considered Assumed Liabilities if the Biller Contract had been assigned, including all liabilities arising under such Biller Contract after the Closing and (2) in the case of all other Business Non-Assignable Assets, the applicable Asset Transferor shall hold, or cause to be held, such Business Non-Assignable Asset, as of and from the Closing, in trust for the applicable Company (and Seller shall cause such applicable Asset Transferor to do so) and the covenants and Liabilities (except for any Excluded Liabilities) thereunder shall be performed by the applicable Company (and Buyer shall cause such applicable Company to do so) in the applicable Asset Transferor’s name and all benefits and Liabilities (except for Excluded Liabilities) existing thereunder shall be for the applicable

 

60


Company (in each case solely to the extent they would otherwise be Contributed Assets and Assumed Liabilities and Seller shall cause the Asset Transferors to take, at Buyer’s cost and expense (except to the extent Seller is liable therefor under this Agreement), such commercially reasonable actions in its name or otherwise as Buyer may reasonably request so as to provide the applicable Company with the benefits of the Business Non-Assignable Assets, to effect the collection of money or other consideration that becomes due and payable under the Business Non-Assignable Assets and to enforce for the benefit of the applicable Company and at the expense of such Company, any and all rights against a Third Party arising under such Business Non-Assignable Asset (“Third Party Rights”), and Seller shall cause the Asset Transferors to promptly pay, or cause to be paid, to such Company all money or other consideration received by the Asset Transferors in respect of all Business Non-Assignable Assets. In the case of a Remainco Non-Assignable Asset, unless otherwise determined by Seller, to the extent permitted by applicable Law or Contract, Buyer shall cause the applicable Company to hold, or cause to be held, such Remainco Non-Assignable Asset, as of and from the Closing, in trust for Seller or its applicable Affiliate and the covenants and Liabilities (except for any Assumed Liabilities) thereunder shall be performed by Seller or its applicable Affiliate (and Seller shall, and shall cause such applicable Affiliate to, do so) in the applicable Company’s name and all benefits and Liabilities (except for any Assumed Liabilities) existing thereunder shall be for Seller or its applicable Affiliate (in each case solely to the extent they would otherwise be Excluded Assets or Excluded Liabilities). Following the Closing, to the extent permitted by applicable Law and Contract, Buyer shall cause the applicable Company to take, at Seller’s cost and expense (except to the extent Buyer is liable therefor under this Agreement), such commercially reasonable actions in its name or otherwise as Seller may reasonably request so as to provide Seller or its applicable Affiliate with the benefits of the Remainco Non-Assignable Assets, to effect the collection of money or other consideration that becomes due and payable under the Remainco Non-Assignable Assets and to enforce for the benefit of Seller or its applicable Affiliate and at the expense of Seller, any and all rights against a Third Party arising under such Remainco Non-Assignable Asset, and Buyer shall cause the Companies to promptly pay, or cause to be paid, to Seller or such of its Affiliates all money or other consideration received by the Company in respect of all Remainco Non-Assignable Assets, net of any Tax incurred in connection with the receipt of such money (or other consideration) or required to be withheld on payment.

(c)    Post-Closing Efforts to Obtain Consents to Assign. Following the Closing, (i) Seller shall, and shall cause the Asset Transferors to, use reasonable best efforts to, with Buyer’s participation and assistance, obtain the necessary approvals, consents and waivers to effect the sale, assignment, transfer, conveyance and delivery of any Business Non-Assignable Asset to the applicable Company (provided, that neither Seller nor any of its Affiliates shall be required to compensate any Third Party (other than any such compensation agreed to be reimbursed by the Buyer), commence or participate in any litigation or offer or grant any concession (financial or otherwise) to any Third Party to obtain any such consent, approval or waiver) and (ii) Buyer shall, and shall cause the applicable Company to, use reasonable best efforts to, with Seller’s participation and assistance, obtain the necessary approvals, consents and waivers to effect the sale, assignment, transfer, conveyance and delivery of any Non-Assignable Asset with respect to a Remainco Non-Assignable Asset to Seller or the applicable Affiliate of Seller (provided, that neither Buyer nor any Buyer Affiliate shall be required to compensate any Third Party (other than any such compensation agreed to be reimbursed by Seller), commence or participate in any litigation, or offer or grant any concession (financial or otherwise) to any Third

 

61


Party to obtain any such consent, approval or waiver). If and when such necessary approvals, consents and waivers are obtained after the Closing to effect the sale, assignment, transfer, conveyance and delivery of any Contributed Asset or Remainco Non-Assignable Asset that had constituted a Non-Assignable Asset, such sale, assignment, transfer, conveyance and delivery shall be effected reasonably promptly in accordance with the terms of this Agreement and/or the Reorganization, for no additional consideration, after which, such Contributed Asset or Remainco Non-Assignable Asset shall no longer be subject to this Section 7.10 as a Non-Assignable Asset.

Section 7.11.    Wrong Pockets.

(a)    During the 12-month period following the Closing Date, if Buyer, Parent or Seller discover that any:

(i)    Seller Asset, Excluded Asset or settlement funds of Seller or its Affiliates (other than those held by the Seller Licensed Subsidiary reflected in dedicated accounts which have been established in respect of the Business), were directly or indirectly transferred to Buyer (or held by the Companies) at Closing (each, a “Held Asset”), Buyer shall, and shall cause its Buyer Affiliates to, use reasonable best efforts to (A) promptly assign and transfer all right, title and interest in such Held Asset to Seller or its designated assignee and (B) pending such transfer, (x) hold in trust such Held Asset and provide to Seller or its designated assignee all of the benefits associated with the ownership of the Held Asset and (y) cause such Held Asset to be used or retained as may be reasonably instructed by Seller;

(ii)    any Contributed Asset or settlement funds of the (A) Seller Licensed Subsidiary reflected in dedicated accounts which have been established in respect of the Business or (B) the Companies were not transferred to Buyer at Closing (each of (A) and (B), an “Omitted Asset”),Seller shall, and shall cause its Affiliates to use reasonable best efforts to (1) promptly assign and transfer all right, title and interest in such Omitted Asset to Buyer or its designated assignee, and (2) pending such transfer, (x) hold in trust such Omitted Asset and provide to Buyer or its designated assignee all of the benefits associated with the ownership of the Omitted Asset, and (y) cause such Omitted Asset to be used or retained as may be reasonably instructed by Buyer.

(b)    Buyer or Seller, as applicable, shall (and shall cause their Affiliates, as applicable, to) use reasonable best efforts to, in addition to the other actions set forth in Section 7.11(a)(i) and Section 7.11(a)(ii), promptly upon the request of the other party, (A) obtain all consents from Persons necessary or appropriate for the purposes of transferring, assigning and conveying such Held Asset or Omitted Asset (or part thereof), as applicable, or the relevant interests in them to the other party and (B) complete all such further acts or things as the other party may reasonably direct in order to transfer, assign and convey such Held Asset or Omitted Asset (or parts thereof), as applicable, or the relevant interests in them to the other party; provided, that the transferring party and its Affiliates shall not be required to incur any out-of-pocket expense pursuant to this clause (b) which is not agreed to be paid or reimbursed by the transferring party or its Affiliates.

 

62


Section 7.12.    R&W Policy. Without the prior written consent of the Seller, neither Parent nor Buyer shall amend, waive or otherwise modify any provision in the Representation and Warranty Policy attached hereto as Exhibit C (the “R&W Policy”) in any manner that would allow, except as set forth in such R&W Policy, the insurer thereunder or any other Person to subrogate or otherwise make or bring, or cause Parent, Buyer or any of their Affiliates to make or bring, any claim or Proceeding against Seller or any Affiliate thereof or any past, present or future director, manager, officer, employee or advisor of any of the foregoing based upon, arising out of, or related to this Agreement, or the negotiation, execution or performance of this Agreement.

Section 7.13.    Walletron.

(a)    Seller hereby grants to Buyer an option (the “Walletron Option”) to acquire Walletron, Inc. (Walletron) at the Closing by virtue of a purchase by Buyer from Seller of 100% of the issued and outstanding capital stock of Walletron, Inc. (the “Walletron Shares”) for an aggregate consideration equal to $3,400,000 (the “Walletron Purchase Price”).

(b)    Seller shall use commercially reasonable efforts to assist in Buyer’s due diligence review of Walletron. Buyer may exercise the Walletron Option (i) only in whole and not in part and (ii) only one time, at any time during the period commencing on the date of this Agreement and terminating on date that is 30 days after the date of this Agreement by providing written notice to Seller (an “Exercise Notice”) of such exercise. Subject to Section 7.13(c), any exercise of the Walletron Option by Buyer shall create an irrevocable and binding obligation of Buyer and Seller to consummate the acquisition of the Walletron Shares concurrently with the Closing.

(c)    Notwithstanding anything herein to the contrary, Buyer may rescind its exercise of the Walletron Option and the Exercise Notice if, and only if, in the 30-day period following the date of the Exercise Notice a material and adverse event occurs with respect to Walletron and Buyer delivers notice of option termination in writing to Seller prior to the expiration of such 30-day period. For the avoidance of doubt, Buyer may only acquire the Walletron Shares pursuant to this Section 7.13 concurrently with the Closing, and if this Agreement is terminated in accordance with its terms, any prior exercise of the Walletron Option shall be cancelled and of no further force or effect.

(d)    If the Walletron Option has been properly exercised and not rescinded or terminated in accordance with Section 7.13(c), at the Closing Seller shall assign and transfer to Buyer all of its right, title and interest in and to the Walletron Shares to Buyer and Buyer shall pay the Walletron Purchase Price to Seller by wire transfer of immediately available funds to the account specified by Seller.

ARTICLE VIII

ADDITIONAL AGREEMENTS

Section 8.1.    Use of Names; Intellectual Property.

(a)    Seller is not conveying ownership rights or granting Buyer or the Companies a license to use any of the tradenames or trademarks of Seller or any Affiliate of Seller (“Seller Trademarks”) (other than the Transferred Trademarks and the limited rights with

 

63


respect to the Companies as set forth in Section 8.1(b)), and except as set forth in Section 8.1(b), after the Closing, Buyer shall not permit the Companies or any Affiliate of the Companies to use in any manner the names or marks of Seller or any Affiliate of Seller or any word that is similar in sound or appearance to such names or marks.

(b)    Promptly following the Closing Date, (but no later than 90 days following the Closing Date), Buyer shall cause the Companies and any Affiliates thereof to (i) cease and discontinue any and all uses of the Seller Trademarks, (ii) remove, destroy or irrevocably strike over the labeling, stationery, forms, supplies, displays, advertising and promotional materials, manuals, and other materials existing as of the Closing Date that bear any Seller Trademarks, and (iii) remove all Seller Trademarks from all assets, websites, email and other online materials and from all signage and other displays. All goodwill associated with the use by the Companies or any Affiliate of the Companies of the Seller Trademarks shall inure to the benefit of Seller or its Affiliates, as applicable. Neither Buyer nor any of its Affiliates shall seek to register in any jurisdiction any trade, corporate or business name, Trademark or other name or source identifier that is a derivation, translation, adaptation, combination or variation of, or confusingly similar to, any of the Seller Trademarks.

(c)    In the event that after the Closing Buyer becomes aware of any instance of any Software in its possession that is owned by or licensed to Seller or any of its Affiliates and that is not licensed to Buyer or the Companies, Buyer shall, and shall cause the Companies to, use reasonable best efforts to delete such instances of the Software as soon as practicable.

(d)    If Buyer or any Affiliate of Buyer violates any of its obligations under this Section 8.1, Seller and its Affiliates may proceed against it in law or in equity for such damages or other relief as a court may deem appropriate. Buyer acknowledges that a violation of this Section 8.1 may cause Seller and its Affiliates irreparable harm which may not be adequately compensated for by money damages. Buyer therefore agrees that in the event of any actual or threatened violation of this Section 8.1, Seller and any of its Affiliates shall be entitled, in addition to other remedies that they may have, to a temporary restraining order and to preliminary and final injunctive relief against Buyer or such Affiliate of Buyer to prevent any violations of this Section 8.1, without the necessity of posting a bond.

Section 8.2.    Tax Matters.

(a)    Transfer Taxes. Buyer and Seller shall each be liable for and pay 50% of any transfer, documentary, sales, use, stamp, registration and other similar Taxes (including any penalties and interest) incurred in connection with the consummation of the Contemplated Transactions (“Transfer Taxes”), the party primarily required by applicable Law to do so shall file the necessary Tax Returns and other documentation with respect to Transfer Taxes and, if required by applicable Law, non-preparing party shall, and shall cause its Affiliates to, join in the execution of any such Tax Returns and other documentation; provided, however, that Seller shall be liable and pay 100% of any Transfer Taxes incurred in connection with the Reorganization, including any Transfer Taxes resulting from the transactions contemplated by Section 7.9.

(b)    Tax Returns. (i) Seller shall prepare and timely file or cause to be prepared and timely filed when due (taking into account all extensions properly obtained) (A) all

 

64


Tax Returns that are required to be filed by or with respect to either Company (or, if the Walletron Option has been properly exercised and not rescinded or terminated, in each case, in accordance with Section 7.13, Walletron) on a combined, consolidated or unitary basis as a member of an Affiliated Group that includes Seller or any Affiliate of Seller (other than the Companies or Walletron) and (B) all other Tax Returns that are required to be filed by or with respect to either Company or, if the Walletron Option has been properly exercised and not rescinded or terminated, in each case, in accordance with Section 7.13, Walletron (taking into account all extensions properly obtained) for taxable periods ending on or prior to the Closing Date (such Tax Returns, “Seller Tax Returns”). With respect to Tax Returns described in clause (B) of the first sentence of this Section 8.2(b)(i), Seller shall (1) prepare and timely file any such Tax Returns in a manner consistent with past practice, except as required under this Agreement or as required by applicable Law and (2) provide such Tax Return to Buyer for its review and comment not later than 20 days prior to the due date for such Tax Return and shall consider in good faith any reasonable comments provided by Buyer no later than 20 days after receipt of such Tax Return (or, if earlier, 10 days prior to the due date for such Tax Return) with respect to such Tax Returns. Seller shall timely pay all Taxes due and payable with respect to any Seller Tax Return. Buyer shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all other Tax Returns that are required to be filed by or with respect to either Company after the Closing Date (such Tax Returns, “Buyer Tax Returns”). To the extent any Buyer Tax Return includes a taxable period (or portion thereof) for which Seller would be responsible pursuant to Section 8.2(e), Buyer shall (i) prepare and timely file any such Buyer Tax Returns in a manner consistent with past practice, except as required under this Agreement or as required by applicable Law and (ii) provide such Buyer Tax Return to Seller for its approval (not to be unreasonably withheld, conditioned or delayed) not later than 20 days prior to the due date for such Buyer Tax Return, with Seller’s response to be provided no later than 20 days after receipt of such Tax Return (or, if earlier, 10 days prior to the due date for such Tax Return). Seller shall, in accordance with Section 8.2(e)(iii), timely reimburse Buyer for all Taxes due and payable with respect to any such Buyer Tax Return to the extent Seller is liable for such Taxes pursuant to Section 8.2(e). (ii) Notwithstanding anything to the contrary contained or implied in this Agreement, after the Closing Date, neither Buyer nor any Affiliate of Buyer (including, after the Closing, the Companies) shall, without the prior written consent of Seller (which consent shall not be unreasonably withheld, conditioned or delayed), grant any extension of any statute of limitation, or file or cause to be filed (A) any amended Tax Return, (B) any claim for Tax refund or (C) any Tax election, with respect to the Companies (or relating to its income, properties or operations), if any such grant or filing could have the effect of (1) increasing the Tax Liability of Seller or their respective Affiliates (other than any Company) or (2) increasing the Tax Liability of any Company with respect to any taxable period (or portion thereof) for which Seller would be responsible pursuant to Section 8.2(e)(i).

(c)    Refunds. Seller shall be entitled to any refund of (or credit against) Taxes of the Companies that are actually received by the Companies (or any Affiliate of the Companies, including Buyer) allocable to any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date, except for any such refunds or credits attributable to the carryback of an item of loss or deduction generated in a taxable year (or portion thereof) beginning after the Closing Date and except to the extent any such refunds or credits are included

 

65


in the calculation of Closing Date Working Capital, as determined pursuant to Section 4.5. Buyer shall, and shall cause its Affiliates to, make reasonable best efforts to secure any such refund or credit. Buyer shall (i) after the end of each calendar year, upon written request of Seller, use reasonable best efforts to inform Seller as to whether any such refund or credit is, or with the taking of action would be, available and (ii) pay over, or cause its Affiliates to pay over, to Seller any such refund or credit promptly after actual receipt thereof, net of any costs (including Taxes) incurred by Buyer or its Affiliates in connection with obtaining such refund or credit.

(d)    Assistance and Cooperation. After the Closing Date, each of Seller and Buyer shall (and cause their respective Affiliates to):

(i)    timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns or other reports with respect to, Taxes described in paragraph (a) of this Section 8.2 (relating to sales, transfer and similar Taxes);

(ii)    assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing, and in connection therewith, provide the other party with any necessary powers of attorney in a timely manner and promptly upon the reasonable request of such other party;

(iii)    cooperate fully in preparing for and defending any audits of, or disputes with Taxing authorities regarding, any Tax Returns of the Companies (and, if the Walletron Option has been properly exercised and not rescinded or terminated, in each case, in accordance with Section 7.13, Walletron);

(iv)    make available to the other and to any Taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Companies (and, if the Walletron Option has been properly exercised and not rescinded or terminated, in each case, in accordance with Section 7.13, Walletron); and

(v)    furnish the other with copies of all correspondence received from any Taxing authority in connection with any Tax audit or information request.

(e)    Tax Indemnity. (i) Without limiting the generality or effect of any other provision hereof, from and after the Closing, Seller shall indemnify Buyer, Parent and their respective officers, directors, employees, agents representatives and Affiliates (including, after the Closing, the Companies and, in the event the Walletron Option is exercised, Walletron) and hold each of them harmless against (A) any Taxes of the Companies for any taxable period ending on or before the Closing Date and, with respect to any taxable period that begins before and ends after the Closing Date (a “Straddle Period”), any Taxes allocable (pursuant to Section 8.2(e)(vii)) to the portion of a Straddle Period ending on the Closing Date (in each case to the extent not otherwise included in the calculation of Closing Date Working Capital, as determined pursuant to Section 4.5), (B) Seller’s share of the Transfer Taxes, if any, as set forth in Section 8.2(a), (C) any Liability of the Companies for the payment of the Taxes of another Person (1) arising as a result of being (or ceasing to be) a member of a Consolidated Tax Group

 

66


(or being included (or requiring to be included)) in any Tax Return relating thereto, (2) under any Contract entered into prior to the Closing Date (other than any Contract entered into in the ordinary course of business and not primarily relating Taxes), or (3) as a result of being a transferee or successor under applicable Law in a transaction consummated prior to the Closing Date and (D) Excluded Taxes. Notwithstanding anything herein to the contrary, the Tax indemnity provided under this Section 8.2(e) shall not cover Tax Liabilities resulting from any action taken after the Closing on the Closing Date by Buyer, the Companies or any of their respective Affiliates that is outside the ordinary course of business and not contemplated by this Agreement. (ii) Without limiting the generality or effect of any other provision hereof, from and after the Closing, Buyer shall indemnify Seller and its officers, directors, employees, agents, representatives and Affiliates and hold each of them harmless against all Taxes (A) of the Companies properly allocable to a Tax period or portion thereof beginning after the Closing Date, (B) Buyer’s share of the Transfer Taxes, if any, as set forth in Section 8.2(a), and (C) described in clauses (B) and (C) of the definition of Assumed Taxes. (iii) Payment by the indemnifying party of any amount due under this Section 8.2(e) shall be made within 10 Business Days following written notice by the Indemnified Party that payment of such amounts to the appropriate Taxing authority is due; provided that the indemnifying party shall not be required to make any payment earlier than five Business Days before it is due to the appropriate Taxing authority. In the case of a Tax that is contested in accordance with the provisions of Section 8.2(e) below, payment of the Tax to the appropriate Taxing authority shall not be considered to be due earlier than the date a final determination to such effect is made by the appropriate Taxing authority or court. (iv) The parties agree that any indemnification payment made pursuant to this Section 8.2(e) shall be treated as an adjustment to the Purchase Price for Tax purposes, unless otherwise required by applicable Law. (v) Any disputes between the parties with respect to the Tax matters regarding the Companies in Section 8.2 shall be resolved by the Accounting Firm, whose fees and expenses shall be borne in accordance with Section 4.5(b). (vi) For purposes of this Section 8.2, Taxes (other than Transfer Taxes) with respect to a Straddle Period shall be allocated to the portion of the Straddle Period ending on and including the Closing Date (A) in the case of any real or personal property Taxes, ad valorem Taxes and similar periodic Taxes, by multiplying the amount of such Taxes for the entire Straddle Period by a fraction, the numerator of which is the number of days during the Straddle Period up to and including the Closing Date and the denominator of which is the number of days in the entire Straddle Period and (B) in the case of all other Taxes, by way of a closing of books, as though the relevant taxable period had ended on the Closing Date (provided that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned on a daily basis). Notwithstanding the foregoing, any deductions attributable to Transaction Expenses that have not been reflected on a Seller Tax Return shall, insofar as permissible, be allocated to the taxable period ending on or before the Closing Date. (vii) Notwithstanding anything to the contrary herein, Seller and Buyer agree that Seller makes no representation, warranty, and provides no other assurance, with respect to the amount of any Tax Attributes of the Companies, or with respect to the availability on and after the Closing Date of any Tax Attributes of the Companies.

(f)    Procedures Relating to Indemnity of Tax Claims. (i) If a Tax claim, audit, examination, notice of deficiency or other adjustment, assessment or redetermination shall be made or threatened against Buyer or Seller, as the case may be, or any of their Affiliates by any Taxing authority, which, if successful, would result in an indemnity payment pursuant to

 

67


Section 8.2(e) (a “Tax Claim”), the indemnified party shall promptly notify the indemnifying party in writing of such Tax Claim stating the nature and basis of such Tax Claim and the amount thereof, to the extent known by the indemnified party. If notice of a Tax Claim is not given to the indemnifying party within a reasonable period of time to allow the indemnifying party to effectively contest such Tax Claim, or in reasonable detail to apprise the indemnifying party of the nature of the Tax Claim, in each case taking into account the facts and circumstances with respect to such Tax Claim, the indemnifying party shall not be liable to the indemnified party or any of their Affiliates if, and to the extent that, the indemnified party’s ability to effectively contest such Tax Claim is actually prejudiced as a result thereof. (ii) With respect to any Tax Claim that relates to a Tax for which Seller would be solely responsible pursuant to Section 8.2(e)(i), Seller shall control at its expense all proceedings taken in connection with such Tax Claim (including selection of counsel), but shall not, without the prior written approval of Buyer (which approval shall not be unreasonably withheld, conditioned or delayed), agree or consent to compromise or settle, either administratively or after the commencement of a Proceeding, any issue or claim arising in such Proceeding, or otherwise agree or consent to any Tax Liability, to the extent that any such compromise, settlement, consent or agreement may directly increase (A) the Tax Liability of Buyer or any of its Affiliates (other than any Company) or (B) the Tax Liability of any Company with respect to any taxable period (or portion thereof) for which Buyer would be responsible pursuant to Section 8.2(e)(ii). (iii) With respect to any Tax Claim for which Buyer would be solely responsible pursuant to Section 8.2(e)(ii), Buyer shall have the right to control at its expense all proceedings taken in connection with such Tax Claim (including selection of counsel), but shall not, without the prior written approval of Seller (which approval shall not be unreasonably withheld, conditioned or delayed), agree or consent to compromise or settle, either administratively or after the commencement of a Proceeding, any issue or claim arising in such Proceeding, or otherwise agree or consent to any Tax Liability, to the extent that any such compromise, settlement, consent or agreement may directly increase (A) the Tax Liability of Seller or any of its Affiliates (other than any Company) or (B) the Tax Liability of any Company with respect to any taxable period (or portion thereof) for which Seller would be responsible pursuant to Section 8.2(e)(i). (iv) With regard to a Tax Claim that is (A) related to any Company with regard to a Straddle Period and (B) would be described in Sections 8.2(e)(i) or (ii), but for not being the sole responsibility of either Seller or Buyer, Seller and Buyer shall jointly control and participate in all proceedings taken in connection with any such Tax Claim, and shall bear their own respective costs and expenses; provided, however, neither Seller nor Buyer shall agree or consent to compromise or settle, either administratively or after the commencement of a Proceeding, any issue or claim arising in such Proceeding, or otherwise agree or consent to any Tax Liability, without the prior written consent of the other party (such consent not to be unreasonably withheld, conditioned or delayed). (v) Buyer and Seller shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the resolution of any Tax Claims for which Buyer or Seller would be responsible pursuant to Section 8.2(e) (including by the provision of reasonably relevant records or information). The party requesting such cooperation shall pay the reasonable out-of-pocket expenses of the other party.

(g)    338(h)(10) Election. Seller shall join with Buyer in making an election under Section 338(h)(10) of the Code (and any corresponding election under state, local, and foreign Law) with respect to the purchase and sale of all issued and outstanding shares of the Companies hereunder (collectively, the “Section 338(h)(10) Election”). In furtherance of the

 

68


preceding sentence, Buyer shall complete, execute and timely file with the appropriate Taxing authority any such forms provided by Seller pursuant to Section 4.4(h) and Seller shall execute and deliver to Buyer any other documents or forms as Buyer shall reasonably request or as are required by Law to effect the Section 338(h)(10) Election, in each case, as reasonably prepared by Buyer. Seller shall include any income, gain, loss, deduction, or other Tax item resulting from the Section 338(h)(10) Election on its Tax Returns to the extent required by Law, and shall take no position inconsistent with treating the purchase by Buyer of all issued and outstanding shares of the Companies as a transaction to which Section 338(h)(10) applies unless required by Law. The consideration paid for all issued and outstanding shares of the Companies hereunder and the Liabilities (to the extent included in amount realized for U.S. federal income Tax purposes) of the Companies shall be allocated among the assets of the Companies in accordance with Section 338 of the Code and their fair market values as shown on an allocation schedule provided by Buyer and approved, or deemed approved, by Seller (the “Purchase Price Allocation”). Within 90 days after the Adjustment Report Finalization Date, Buyer shall deliver to Seller a draft Purchase Price Allocation. If within 30 days after Seller’s receipt of the draft Purchase Price Allocation, Seller has not objected in writing to such draft Purchase Price Allocation, it shall become final. In the event that Seller objects in writing within such 30-day period, the parties shall negotiate in good faith to resolve the dispute. Any issues with respect to the Purchase Price Allocation which have not been finally resolved within 30 days following Seller’s provision of an objection pursuant to this Section 8.2(g) shall be referred to the Accounting Firm, whose determination shall be final and binding upon the parties. To the extent that the Purchase Price is adjusted pursuant to Section 4.5 or other provision of this Agreement, the parties shall amend the Purchase Price Allocation to reflect such adjustments and each of Buyer and Seller shall file an amended IRS Form 8883 (Asset Allocation Statement Under Section 338) as required. Buyer, Seller and each of their Affiliates shall file all Tax Returns in a manner consistent with such Purchase Price Allocation (as it may be amended pursuant to this Section 8.2(g)), and none of the parties will voluntarily take any position inconsistent with the Purchase Price Allocation in any audit, inquiry, assessment, Proceeding or other similar event relating to Tax.

Section 8.3.    Employee Matters.

(a)    Prior to or at the Closing, except as set forth on Schedule 8.3(a), (i) the employment of each U.S. Business Employee not then employed by a Company, along with all Liabilities of Seller and its Affiliates attributable to each such Business Employee (other than Liability under any Employee Benefit Plan to the extent not otherwise addressed in Section 8.3(e), (f), (g), (h), (i), or (j), and, with respect to current liabilities, only to the extent reflected in Closing Date Working Capital) shall be transferred to one of the Companies and (ii) Buyer or one of its Affiliates (including the Companies) shall offer employment to each International Business Employee, effective as of the Closing, with terms and conditions of employment substantially similar in the aggregate to those provided by Seller prior to the Closing, including with respect to compensation and benefits and any other material terms, as required by applicable Law. Effective as of the Closing, each International Business Employee shall cease to be employed by Seller or any of its Affiliates, as applicable. Seller and its Affiliates shall be solely liable for any Liability (i) to any Business Employee that occurs by reason of a change in control of either Company or the Contemplated Transactions, including the Reorganization, (ii) to any International Business Employee, for all accrued vacation time with

 

69


respect to employment periods through the Closing Date, (iii) for all claims under welfare benefit plans or retirement plans (other than with respect to rollover contributions and transferred accounts contemplated by Section 8.3(h) and (j), respectively) with respect to employment periods through the Closing Date, and (iv) for any severance or similar costs incurred by Seller or its Affiliates in connection with the termination of employment of any International Business Employee except to the extent caused by Buyer’s failure to comply with this Section 8.3.

(b)    Effective as of the Closing (or such later date mandated by Laws), each Affected Employee shall cease to be eligible to participate in the Employee Benefit Plans and any other employee benefit plan or arrangement maintained by Seller or any of its Affiliates or to accrue benefits thereunder with respect to services performed after the Closing.

(c)