<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number: 0-26802
CHECKFREE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1013521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA 30092
(Address of principal executive offices, including zip code)
(770) 441-3387
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 56,001,427 shares of
Common Stock, $.01 par value, were outstanding at November 6, 1997.
<PAGE> 2
FORM 10-Q
CHECKFREE CORPORATION
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
September 30, 1997 and June 30, 1997
Condensed Consolidated Statements of 4
Operations For Three Months Ended
September 30, 1997 and 1996
Condensed Consolidated Statements of 5
Cash Flows For the Three Months Ended
September 30, 1997 and 1996
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three Months
Ended September 30, 1997 and 1996
Item 2. Management's Discussion and Analysis of Financial 7-11
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 51,670,895 $ 32,085,872
Investments 12,371,618 4,430,558
Accounts receivable, net 40,566,908 44,506,852
Prepaid expenses and other 2,430,145 2,197,477
Deferred income taxes 3,002,341 3,002,341
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Total current assets 110,041,907 86,223,100
Property and equipment, net 40,558,162 44,027,188
Capitalized software, net 20,373,276 26,644,084
Intangible assets, net 46,395,206 56,895,587
Deferred income taxes 2,034,719 3,063,250
Other noncurrent assets 6,986,225 6,983,057
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Total $ 226,389,495 $ 223,836,266
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,348,304 $ 7,050,860
Accrued liabilities and other 29,384,170 32,289,023
Current portion of long-term obligations 927,563 953,220
Deferred revenue 21,341,857 26,497,863
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Total current liabilities 57,001,894 66,790,966
Long term obligation - less current portion 8,216,288 8,401,027
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Total Liabilities 65,218,182 75,191,993
Stockholders' Equity
Preferred stock - 15,000,000 authorized shares,
$.01 par value; no amounts issued or outstanding -- --
Common stock - 150,000,000 authorized shares,
$.01 par value; issued 55,733,023 shares,
55,546,321 shares 557,330 555,464
Additional paid-in capital 455,911,897 454,850,522
Treasury stock - at cost 963,295 shares, 1,041,552 shares (4,315,081) (6,007,391)
Accumulated deficit (290,982,833) (300,754,322)
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Total stockholders' equity 161,171,313 148,644,273
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Total $ 226,389,495 $ 223,836,266
============= =============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements.
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CHECKFREE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1997 1996
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<S> <C> <C>
Revenues:
Processing and servicing $34,509,790 $ 17,242,834
Merchant discount -- 3,489,180
License 5,803,635 4,891,855
Maintenance 6,841,001 3,586,845
Other 4,932,881 3,451,151
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Total revenues 52,087,307 32,661,865
Expenses:
Cost of processing, servicing and support 29,330,574 21,802,533
Research and development 8,067,980 6,954,934
Sales and marketing 7,427,202 5,560,792
General and administrative 5,438,876 5,045,584
Depreciation and amortization 7,042,317 5,560,810
Exclusivity amortization 2,962,500 --
----------- ------------
Total expenses 60,269,449 44,924,653
Net gain on dispositions of assets 25,369,091 --
----------- ------------
Income (loss) from operations 17,186,949 (12,262,788)
Interest, net 358,040 371,075
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Income (loss) before income taxes 17,544,989 (11,891,713)
Income tax expense (benefit) 7,773,500 (4,162,100)
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Net income (loss) $ 9,771,489 $ (7,729,613)
=========== ============
Earning per share and common stock equivalents:
Net income (loss) per common share $ 0.17 $ (0.19)
=========== ============
Equivalent number of shares 56,702,917 41,620,174
=========== ============
Earnings per share assuming full dilution:
Net income (loss) per common share $ 0.17 $ (0.19)
=========== ============
Equivalent number of shares 56,919,685 41,620,174
=========== ============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) $ 9,771,489 $(7,729,613)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 7,042,317 5,399,781
Exclusivity amortization 2,962,500 --
Deferred income taxes 7,773,500 (4,162,100)
Net gain on dispositions of assets (25,369,091) --
Loss on disposal of property and equipment 398,479 --
Changes in operating assets and liabilities:
Accounts receivable 722,776 51,333
Prepaid expenses and other (804,864) 707,421
Accounts payable (1,729,673) (3,375,245)
Accrued liabilities (1,101,385) (1,937,497)
Customer deposits (73,477) (135,073)
Deferred revenues (2,953,535) 2,400,882
Income taxes payable 17,761 136,002
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Net cash provided by (used in) operating activities (3,343,203) (8,644,109)
Cash Flows From Investing Activities:
Purchase of property and software (3,839,237) (3,260,250)
Proceeds from the sale of property and equipment 340,006 --
Proceeds from the sale of assets 33,499,990 --
Purchase of investments (7,941,060) --
Proceeds from maturities and sales of investments, net -- 10,100,615
------------ -----------
Net cash provided by (used in) investing activities 22,059,699 6,840,365
Cash Flows From Financing Activities:
Repayment of stockholder and other notes payable -- (62,500)
Principal payments under capital lease obligations (184,739) (310,707)
Proceeds from exercise of stock options including related income
tax benefits 299,024 203,611
Proceeds from employee stock purchase plan 754,242 --
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Net cash provided by (used in) financing activities 868,527 (169,596)
------------ -----------
Net Increase (Decrease) in Cash and Cash Equivalents 19,585,023 (1,973,340)
Cash and Cash Equivalents at Beginning of Period 32,085,872 20,987,355
------------ -----------
Cash and Cash Equivalents at End of Period $ 51,670,895 $19,014,015
============ ===========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 142,776 $ 147,890
============ ===========
Income taxes paid $ 339,155 $ 6,890
============ ===========
Issuance of treasury shares $ 1,692,311 $ --
============ ===========
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. The accompanying condensed consolidated financial statements and
notes thereto have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the three months
ended September 30, 1997 and 1996 are not necessarily indicative of the results
for the full year.
These financial statements should be read in conjunction with the
financial statements, accounting policies and financial notes thereto included
in the Company's Annual Report filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. Primary earnings (loss) per common share amounts were computed by
dividing earnings (loss) by the average number of common and dilutive
equivalent shares outstanding. Fully diluted per-common-share amounts assume the
issuance of common stock for all potentially dilutive equivalents outstanding.
Dilutive equivalent shares are comprised of outstanding stock options. Fully
diluted per-common-share amounts are not applicable for loss periods.
3. The Company reissued 78,257 shares of treasury stock to fund it's
401(k) match which accrued during the year ended June 30, 1997.
4. On August 29, 1997 the Company sold certain software and related
assets for $33.5 million. The gain from the sale of approximately $28.4 million
has enabled the Company to eliminate a deferred tax benefit valuation allowance
of $6.0 million in the quarter ended September 30, 1997. The deferred tax
benefit valuation allowance reduction was first applied against the balance of
goodwill and remaining amounts were ratably applied against remaining intangible
asset balances resulting from the Servantis acquisition.
5. The Company periodically assesses the likelihood of recovering the
cost of long-lived assets based on its expectation of future profitability and
undiscounted cash flow of the related operations. These factors, along with
management's plans with respect to the operations, are considered in assessing
the recoverability of property and purchased intangibles. During the quarter
ended September 30, 1997, the Company recorded a writedown of approximately $3.0
million for certain equipment and capitalized costs and reflected this in net
gain on dispositions of assets.
6. On October 3, 1997 the Company acquired the assets of Advanced
Mortgage Technologies, Inc. (AMTI) for cash of $1.0 million. The acquisition
will be accounted for under the purchase method of accounting and is expected to
include a charge for in-process research and development. AMTI provides mortgage
default management software.
7. On October 29, 1997 the Company announced a ten year processing
agreement with a strategic partner which is expected to close in the quarter
ended March 31, 1998. Under the terms of the proposed agreement the strategic
partner will acquire 10-year warrants exercisable at 20 15/16 for 10 million
shares of the Company's common stock. Three million warrants vest upon execution
of the agreement and the Company expects to incur a non-cash charge of between
$30 million and $50 million dependent upon the market value of the stock on that
date. The remaining seven million warrants are to vest upon achievement of
specific performance targets set forth in the agreement. Any shares acquired by
the strategic partner upon exercise of the warrants will be subject to certain
transfer restrictions.
8. Certain amounts in the June 30, 1997 balance sheet have been
reclassified to conform with the September 30, 1997 presentation. In addition,
certain amounts in the condensed consolidated statements of operations for the
three months ended September 30, 1996 have been reclassified to conform with
September 30, 1997 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1981 and is the leading provider of electronic
commerce services, software and related products for 2 million consumers, 1,000
businesses and 850 financial institutions. The Company designs, develops and
markets services that enable its customers to make electronic payments and
collections, automate paper-based recurring financial transactions and conduct
secure transactions on the Internet. As a result of significant acquisitions in
1996 and 1997, the Company now operates in three business segments - Electronic
Commerce, Software, and Institutional Investment Services. The Company's
electronic transaction processing services, software, and related products are
targeted to financial institutions, businesses, institutional investment
portfolio managers, and their customers.
The Company's focus has turned from integration of acquisitions to quality
improvement combined with greater efficiency. The Company is driving to grow the
profitability of the business by continuing to grow revenue and improve costs
primarily in remittance, customer care and data processing. With the Company's
continued sales and marketing efforts promoting its new electronic commerce
offerings and existing and enhanced investment and software product and service
offerings, and the continued growth in subscribers resulting from the continued
acceptance in the marketplace of electronic commerce services, the Company
expects revenue to continue to increase. Improvements in remittance and customer
care costs and quality will primarily be driven by increasing the percentage of
electronic versus paper transactions processed. Improvements in data processing
costs and quality are addressed by the Company's Genesis project, which is
designed to provide a single, state of the art processing platform and to
promote customer care efficiency.
The Company expects that these efforts will allow it to defend and extend its
leading position in the rapidly growing electronic commerce market. Barring any
unforeseen circumstances, this trend is expected to continue in the near future.
There can be no assurance, however, that the Company will be able to
successfully compete against current or future competitors or that the
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results, and financial condition.
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating revenues
certain consolidated statements of operations' data:
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1997 1996
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<S> <C> <C>
Total Revenues: 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 56.3% 66.8%
Research and development 15.5% 21.3%
Sales and marketing 14.3% 17.0%
General and administrative 10.4% 15.4%
Depreciation and amortization 13.5% 17.0%
Exclusivity amortization 5.7% 0.0%
----- -----
Total Expenses 115.7% 137.5%
Net gain on dispositions of assets 48.7% 0.0%
----- -----
Income (loss) from operations 33.0% -37.5%
Interest expense 0.7% 1.1%
----- -----
income (loss) before income taxes 33.7% -36.4%
Income tax expense (benefit) 14.9% -12.7%
----- -----
Net income (loss) 18.8% -23.7%
===== =====
</TABLE>
Revenue increased 59% from $32.7 to $52.1 million for the three months ended
September 30, 1996 and 1997, respectively. The increase in revenue was primarily
due to internal growth in the Company's electronic commerce and investment
services businesses, additional revenue contributed from the purchase of ISC
which was completed in
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<PAGE> 8
January of 1997 and the elimination of purchased profits amounting to a $6.0
million decrease in revenue in the quarter ended September 30, 1996. On a
proforma basis, revenue increased 35% over the prior year primarily driven by
internal growth of 55% in the electronic commerce business, 33% in the
investment services business and 7% in the software business. The proforma basis
results are based on prior year numbers adjusted for the acquisitions noted
above as well as for divestitures of the Company's securities business which was
sold in October of 1996, the credit card processing business which was sold in
March of 1997 and the credit management business which was sold in August, 1997.
The proforma growth rates in the electronic commerce business unit is primarily
driven by an increase in subscribers from approximately 1,150,000 at September
30, 1996 (includes ISC subscribers) to over 2.0 million at September 30, 1997.
The growth in investment services revenue is due primarily to the increase in
portfolios managed from approximately 276,000 at September 30, 1996 to over
370,000 at September 30, 1997. The increase in software segment revenue is due
to the growth in maintenance revenue and consulting fees generated from new
license sales in 1996 and 1997.
Processing and servicing revenue increased from $17.2 million to $34.5 million
in September 30, 1996 and 1997, respectively due to the growth in subscribers
and portfolios in the electronic commerce and investment services businesses as
noted above as well as the purchase of ISC in January, 1997.
Merchant discount revenue decreased from $3.5 million at September 30, 1996 to
$0 in the same period in 1997 due to the sale of the Company's credit card
processing business in March, 1997.
License revenue increased from $4.9 million to $5.8 million in September 30,
1996 and 1997 respectively, due primarily to the elimination of purchased
profits amounting to $1.3 million in 1996. On a proforma basis, excluding the
elimination of purchased profits, license fees remained flat at $5.8 million
from 1996 to 1997 due to seasonally low sales in the quarter which is typical
for the first fiscal quarter in the software segment.
Maintenance revenue increased from $3.6 million in the quarter ended September
30, 1996 to $6.8 million in the same period in 1997 due primarily to the
elimination of purchased profits amounting to $3.6 million in 1996. On a
proforma basis, excluding the elimination of purchased profits, maintenance fees
increased by $.7 million from 1996. The Company's customer retention rate
remains in the high 80% range which is offset by an average price increase of 7%
from 1996 and first year maintenance additions from new license sales.
Other revenue, consisting mostly of consulting fees, increased from $3.5 million
to $4.9 million on a quarter over quarter basis due primarily to the elimination
of purchased profits amounting to $1.1 million in 1996. On a proforma basis,
excluding the elimination of purchased profits, other revenue increased by $1.4
million from 1996 due primarily to increased implementations of business in all
business segments.
The cost of processing, servicing and support was $29.3 million and $21.8
million or 56.3% and 66.8% of total revenue for the three months ended September
30, 1997 and 1996, respectively. Cost of processing as a percentage of servicing
only revenue (all revenue except license) and net of purchased profits of $4.7
million in the 1996 servicing revenue, was 63.4% and 67.2% for the three months
ended September 30, 1997 and 1996. The efficiency improvement is primarily
attributable to an increase the percentage of electronic transactions versus
paper transactions which resulted in lower customer care and material cost per
transaction in the electronic commerce business.
Research and development costs were $8.1 million and $7.0 million, or 15.5% and
21.3% of revenue for the three month periods ended September 30, 1997 and 1996,
respectively. Excluding purchased profits adjustments, research and development
costs were 15.5% and 18.0% for the same periods. The dollar increase of $1.1
million is primarily the result of added resources for Genesis development.
Other research and development spending on existing products and services has
remained consistent from year to year resulting in the decrease of R&D as a
percentage of revenue from 1996 to 1997. The Company did not capitalize any
development cost in the quarters ended September 30, 1996 and 1997.
Sales and marketing costs were $7.4 million and $5.6 million, or 14.3% and 17.0%
of revenue for the three months ended September 30, 1997 and 1996, respectively.
The $1.8 million increase is due to costs associated with ISC which was
purchased in January, 1997 as well as cost associated with the electronic
billing sales force which the Company continued to build in the quarter ended
September 30, 1997. Excluding the purchased profits adjustment, the 1996 costs
were 14.4% of revenue. On a percent of revenue basis, sales and marketing
efforts toward financial institutions and institutional investment portfolio
managers have remained consistent on a quarter over quarter basis as there have
been no individually significant marketing programs in either period and no
significant changes to variable commission or royalty programs.
General and administrative expenses were $5.4 million and $5.0 million or 10.4%
and 15.4% of revenue for the three months ended September 30, 1997 and 1996,
respectively. Excluding purchased profits, 1996 costs were 13.1% of revenue. The
Company's general and administrative costs decreased as a percent of revenue due
to the Company's ability to leverage corporate support resources as revenues
continue to grow.
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Depreciation and amortization expenses increased by $1.5 million from the three
month period ended September 30, 1996 to the same period in 1997. Approximately
$1.0 million of the increase is the result of tangible and intangible asset
amortization resulting from the purchase of ISC in January of 1997. The
remaining increase is the result of capital expenditures necessary to support
the growth of the business.
Exclusivity amortization totaling $2.9 million for the quarter ending September
30, 1997 is the final amortization expense related to the exclusivity
arrangement entered into with Intuit in conjunction with the purchase of ISC.
The net gain on the dispositions of assets in the three months ended September
30, 1997 includes two separate items. In August, 1997 the Company sold certain
software and related assets which resulted in a gain on the sale of
approximately $28.4 million. Additionally, the Company recorded a charge of
approximately $3.0 million related to certain equipment and capitalized costs as
it was determined that the book value of these assets exceeded their net
realizable value.
Net interest income decreased by 3.5% from $371,075 through September 30, 1996
to $358,040 for the same period in 1997. This change is the net result of an
increase in interest income of $128,171 and an increase in interest expense of
$141,206 on a quarter over quarter basis. Although investment yield has remained
fairly consistent from year to year, average outstanding cash and investments
increased on a quarter over quarter basis due to the payment of $33.5 million
received on the sale of certain software and related assets at the end of August
1997. Additionally, although average outstanding notes payable were consistent
on a quarter over quarter basis, interest expense increased as a result of
amortization of the discount recorded on the net present value of a $10 million
accrued liability recorded at the acquisition of ISC.
The Company incurred income tax expense of $7.8 million and an income tax
benefit of $4.2 million in the three month period ended September 30, 1997 and
1996 respectively. The effective tax rates for the respective periods were 44.3%
and (35.0%). The reported rates differ from the blended statutory rate of 40%
primarily due to certain goodwill amortization which is not deductible for
income tax purposes.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income by
industry segment for the periods noted (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1997 1996
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<S> <C> <C>
Operating Revenue:
Electronic Commerce $30,305 $ 16,501
Software 15,148 11,189
Institutional Investment Services 6,634 4,972
------- --------
Total Operating Revenue $52,087 $ 32,662
======= ========
Operating Income (Loss):
Electronic Commerce $ (892) $ (3,932)
Software 202 (3,518)
Institutional Investment Services 1,072 750
Corporate (5,601) (5,563)
Exclusivity (2,963) --
Net Gain on Dispositions of Assets 25,369 --
------- --------
Total Operating Income (Loss) $17,187 $(12,263)
======= ========
</TABLE>
Revenue in the electronic commerce business unit increased by $16.5 million to
$30.3 million or 83.6% due primarily to internal growth as well as the
acquisition of the ISC business in January of 1997. This growth was partially
offset by the Company's credit card processing business which contributed $3.5
million of revenue in 1996 quarter. On a proforma basis, assuming ISC results
are included in the prior quarter, and excluding revenue contributed by the
credit card processing business, revenue increased 55% driven by growth in
subscribers from approximately 1,150,000 at September 30, 1996 to over 2,000,000
at September 30, 1997. The subscriber growth is driven by the addition of
approximately 80 new financial institution customers from September 30, 1996 to
September 30, 1997 as well as continued marketing efforts by financial
institutions and the resulting adoption of electronic commerce by their
customers. Operating losses in the electronic commerce segment decreased from
$3.9 million at September 30, 1996 to $900,000 at September 30, 1997. On a
proforma basis, assuming ISC results are included in the prior quarter, and
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<PAGE> 10
excluding operating income contributed by the credit card processing business,
operating losses decreased from $9.7 million at September 30, 1996 to $900,000
at September 30, 1997. The improvement in operating results from the prior
period is due to the leverage and economies of scale existing in the Company's
business model, the reduction in cost from the integration of the ISC
acquisition and the continued decrease in remittance and customer care cost
generated by increasing the percentage of electronic versus paper payments.
Software revenue increased from $11.2 million at September 30, 1996 to $15.1
million in 1997. Excluding the effect of purchased profits of $6.0 million and
adjusting prior year numbers to eliminate results contributed by the credit
management business sold in the current quarter, revenue increased 7%, primarily
driven by growth in maintenance revenue and consulting fees generated on new
license sales over the past year. Reported operating results improved from a
loss of $3.5 million at September 30, 1996 to a profit of $200,000 at September
30, 1997. Excluding the effect of purchased profits of $6.0 million and
restating prior year numbers to eliminate results contributed by the credit
management business sold in the current quarter, operating income decreased from
$1.0 million to $200,000. This decrease was primarily due to low license sales
in the quarter which is typical for the first fiscal quarter in the software
segment.
Revenue in the Institutional Investment Services segment has increased by $1.6
million or 33% from $5.0 million to $6.6 million in the three months ended
September 30, 1996 and 1997, respectively. This increase is due to a
corresponding increase in portfolios managed from approximately 276,000 at
September 30, 1996 to over 371,000 at September 30, 1997. Operating income has
improved by $.3 million from $.8 million to $1.1 million on a quarter over
quarter basis. The improvement in operating results is due to the leverage and
economies of scale in the Company's business model.
The corporate segment represents charges for resources in human resources, legal
and accounting and finance and various other of the Company's unallocated
overhead charges. Corporate incurred operating costs of approximately $5.6
million for both periods ended September 30, 1996 and 1997 due to successful
efforts to assimilate the various acquisitions without adding significant cost
to the Company's infrastructure.
Exclusivity amortization represents amortization of charges capitalized in
conjunction with the exclusivity arrangement with Intuit entered into in the
acquisition of ISC. The charge of $2.9 million in the three month period ended
September 30, 1997 is the final charge in this regard as the assumed useful life
of the exclusivity arrangement has expired.
The net gain on dispositions of assets in the three months ended September 30,
1997 includes two separate items. In August, 1997 the Company sold certain
software and related assets which resulted in a gain on the sale of
approximately $28.4 million. Additionally, the company recorded a charge of
approximately $3.0 million related to certain equipment and capitalized costs as
it was determined that the book value of these assets exceeded their net
realizable value.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1997, the Company's operating
activities used cash of $3.3 million. During the quarter the company received
$33.5 million from the sale of the credit management business, invested $3.8
million in property additions primarily for computer related equipment and
facilities and invested approximately $7.9 million of the proceeds in the
purchase of investments. From a financing perspective, the Company received
approximately $1.0 million combined from the exercise of stock options and the
employee stock purchase plan, and made payments of $.2 million on capital lease
obligations. As a result of the above, at September 30, 1997 the Company's cash
and cash equivalents were $51.7 million, a net increase of $19.6 million from
June 30, 1997. Additionally, the Company's invested assets increased from $4.4
million at June 30, 1997 to $12.4 million at September 30, 1997. As a result of
the increase in cash and invested assets, the Company's current ratio has
improved from 1.3 to 1.9 and the related working capital has improved from $19.4
million to $53.0 million from June 30, 1997 to September 30, 1997, respectively.
The Company expects to incur an operating loss for the three months ending
December 31, 1997 and additionally, under the terms of a Services and License
Agreement with Intuit, Inc., the Company is required to make a $10.0 million
payment in the same period. The Company expects to fund these items with
available cash and investments.
The Company believes the existing cash, cash equivalents and investments will be
sufficient to meet presently anticipated operating, working capital and capital
expenditure requirements for the foreseeable future. To the extent that
additional capital resource are needed, the Company has access to a $20 million
line of credit.
INFLATION
The Company believes the effects of inflation have not had a significant impact
on the Company's results of operations.
-10-
<PAGE> 11
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's fillings with
the Securities and Exchange Commission, including the Annual Report on Form 10-K
for the year ended June 30, 1997 and the Company's Proxy Statement for the
Annual Meeting of Stockholders held on October 30, 1997. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate.
Therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
presentation by the Company or any other person that the objectives and plans of
the Company will be achieved.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
27 * Financial Data Schedule.
----------
* Filed with this Report.
(B) REPORTS ON FORM 8-K.
The Registrant filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission:
(i) A current report on Form 8-K, dated July 1, 1997, was
filed with the Securities and Exchange Commission on July 3, 1997 (Item 5).
(ii) A current report on Form 8-K, dated July 17, 1997, was
filed with the Securities and Exchange Commission on July 18, 1997 (Item 5).
(iii) A current report on Form 8-K, dated August 30, 1997, was
filed with the Securities and Exchange Commission on September 5, 1997 (Item 2).
-11-
<PAGE> 12
SIGNATURES
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.
CHECKFREE CORPORATION
Date: November 13, 1997 By: /s/ James S. Douglass
------------------------
James S. Douglass, Executive Vice
President, Chief Financial
Officer, and Treasurer*
(Principal Financial Officer)
Date: November 13, 1997 By: /s/ Gary A. Luoma, Jr.
-------------------------
Gary A. Luoma, Jr., Vice
President, Chief Accounting
Officer, and Assistant Secretary
(Principal Accounting Officer)
* In his capacity as Executive Vice President, Finance and Chief
Financial Officer, Mr. Douglass is duly authorized to sign this report
on behalf of the Registrant.
-12-
<PAGE> 13
CHECKFREE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
EXHIBIT INDEX
<PAGE> 14
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 * Financial Data Schedule.
- ----------
* Filed with this Report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 51,670,895
<SECURITIES> 12,371,618
<RECEIVABLES> 44,776,400
<ALLOWANCES> 4,209,492
<INVENTORY> 0
<CURRENT-ASSETS> 110,041,907
<PP&E> 66,961,818
<DEPRECIATION> 26,403,656
<TOTAL-ASSETS> 226,389,495
<CURRENT-LIABILITIES> 57,001,894
<BONDS> 8,216,288
0
0
<COMMON> 557,330
<OTHER-SE> 160,613,983
<TOTAL-LIABILITY-AND-EQUITY> 161,171,313
<SALES> 0
<TOTAL-REVENUES> 52,087,307
<CGS> 0
<TOTAL-COSTS> 60,269,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,544,989
<INCOME-TAX> 7,773,500
<INCOME-CONTINUING> 9,771,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,771,489
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
