<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 March 31, 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) dentification 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: 54,399,712 shares of
Common Stock, $.01 par value, were outstanding at April 30, 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
June 30, 1996 and March 31, 1997
Condensed Consolidated Statements of 4
Operations For Three Months and the
Nine Months Ended March 31, 1996 and 1997
Condensed Consolidated Statements of 5
Cash Flows For the Nine Months Ended
March 31, 1996 and 1997
Notes to Interim Condensed Consolidated Unaudited 6-8
Financial Statements For the Three Months
and Nine Months Ended March 31, 1996 and 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-13
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. 14-15
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 15-16
Signatures 17
</TABLE>
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<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1996 March 31, 1997
------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 20,987,355 $ 37,985,150
Investments 18,089,029 3,712,623
Accounts receivable, net 29,591,417 40,711,273
Assets held for sale 20,000,000 --
Prepaid expenses and other 2,205,026 2,331,361
------------- -------------
Total Current Assets 90,872,827 84,740,407
Property and equipment, net 36,567,141 48,615,816
Capitalized software, net 34,407,680 29,821,421
Intangible assets, net 27,507,677 57,932,291
Investments and other assets 6,874,219 9,095,632
------------- -------------
Total $ 196,229,544 $ 230,205,567
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 5,139,607 4,999,304
Accrued liabilities 16,038,095 30,645,390
Current portion of long-term obligations 1,112,184 984,470
Deferred revenues 15,388,797 31,304,800
Deferred income taxes 7,819,505 --
------------- -------------
Total Current Liabilities 45,498,188 67,933,964
Deferred income taxes 4,732,324 --
Long-term obligations - less current portion 8,324,317 8,653,013
------------- -------------
Total Liabilities 58,554,829 76,586,977
------------- -------------
Stockholders' Equity:
Preferred stock - 15,000,000 authorized shares, $.01 par value; no
shares issued or outstanding -- --
Common stock - 150,000,000 authorized shares, $.01 par value;
42,274,800 and 55,371,421 shares issued 422,748 553,714
Additional paid in capital 276,823,109 453,795,649
Treasury stock - at cost, 757,536 and 1,034,005 shares (629,481) (5,882,392)
Accumulated deficit (138,941,661) (294,848,381)
------------- -------------
Total Stockholders' Equity 137,674,715 153,618,590
------------- -------------
Total $ 196,229,544 $ 230,205,567
============= =============
</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 March 31, Nine months ended March 31,
------------------------------ ------------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing $ 10,721,891 $ 26,932,138 $ 31,367,170 $ 62,664,034
Merchant discount 3,087,187 3,361,166 8,190,582 9,994,189
License 4,619,288 8,180,764 4,619,288 21,674,912
Maintenance 338,444 7,300,585 338,444 15,653,603
Other 2,921,950 4,413,593 2,921,950 11,368,399
------------- ------------- ------------- -------------
Total revenues 21,688,760 50,188,246 47,437,434 121,355,137
------------- ------------- ------------- -------------
Expenses:
Cost of processing, servicing and support 12,351,769 30,357,313 28,149,230 75,784,019
Research and development 4,719,572 8,556,483 8,576,528 22,526,795
Sales and marketing 6,894,229 8,868,132 11,076,312 21,278,162
General and administrative 3,351,170 3,922,894 5,569,934 12,923,913
Depreciation and amortization 1,918,958 6,696,524 3,210,008 18,013,065
Exclusivity amortization and other -- 2,994,417 -- 2,994,417
In process research and development 93,757,586 140,000,000 93,757,586 140,000,000
------------- ------------- ------------- -------------
Total expenses 122,993,284 201,395,763 150,339,598 293,520,371
Gain on sale of business -- 6,250,000 -- 6,250,000
------------- ------------- ------------- -------------
Loss from operations (101,304,524) (144,957,517) (102,902,164) (165,915,234)
Interest, net 873,103 250,058 2,158,679 1,132,433
------------- ------------- ------------- -------------
Loss before income taxes and extraordinary item (100,431,421) (144,707,459) (100,743,485) (164,782,801)
Income tax benefit (3,318,832) (1,850,985) (3,340,424) (8,876,081)
------------- ------------- ------------- -------------
Loss before extraordinary item (97,112,589) (142,856,474) (97,403,061) (155,906,720)
Extraordinary item, net of tax (364,374) -- (364,374) --
------------- ------------- ------------- -------------
Net loss $ (97,476,963) $(142,856,474) $ (97,767,435) $(155,906,720)
============= ============= ============= =============
Net loss per common share:
Loss before extraordinary item $ (2.80) $ (2.83) $ (3.06) $ (3.50)
Extraordinary item $ (0.01) $ -- $ (0.01) $ --
------------- ------------- ------------- -------------
Net loss $ (2.81) $ (2.83) $ (3.07) $ (3.50)
============= ============= ============= =============
Weighted average common shares outstanding 34,667,033 50,499,173 31,821,537 44,511,048
============= ============= ============= =============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (97,767,435) (155,906,720)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write-off of in process research and development 93,757,586 140,000,000
Write-off of capitalized software -- 2,018,570
Depreciation and amortization 3,210,008 18,013,065
Exclusivity amortization and other -- 2,994,417
Deferred income taxes (3,520,552) (8,877,353)
Gain on sale of business -- (6,250,000)
Loss on disposal of property and equipment 70,689 262,811
Change in certain assets and liabilities (net of business
acquisitions)
Accounts receivable, net (3,213,444) (6,369,375)
Prepaid expenses and other (76,181) (4,272,272)
Accounts payable 1,258,144 (802,833)
Accrued liabilities 2,868,144 2,741,887
Deferred revenues 286,499 12,316,003
----------- ------------
Net cash used in operating activities (3,126,542) (4,131,800)
----------- ------------
Cash flows from investing activities:
Purchase of property and software (8,155,513) (8,629,079)
Proceeds from the sale of property and equipment 33,413 1,040,677
Proceeds from sale of product lines -- 28,900,000
Purchase of business, net of cash acquired (38,937,027) (11,363,140)
Proceeds from maturities and sales of investments 47,811,179 19,869,508
Purchase of investments (55,409,194) (3,000,000)
----------- ------------
Net cash provided by (used in) investing activities (54,657,142) 26,817,966
----------- ------------
Cash flows from financing activities:
Proceeds from sales of common stock, net of expenses 82,698,642 --
Repayment of notes payable and other debt extinguishment (56,250) (93,750)
Proceeds from notes payable 1,100,000 --
Principal payments under capital lease obligations (797,652) (769,017)
Proceeds from stock options exercised including related income tax
benefits 784,713 427,307
Cash payments in lieu of fractional shares (542) --
Purchase of treasury stock -- (5,252,911)
Payments received on stockholder notes receivable 192,139 --
----------- ------------
Net cash provided by (used in) financing activities 83,921,050 (5,688,371)
----------- ------------
Net increase in cash and cash equivalents 26,137,366 16,997,795
Cash and cash equivalents at beginning of period 3,542,686 20,987,355
----------- ------------
Cash and cash equivalents at end of period 29,680,052 37,985,150
=========== ============
Supplemental disclosure of cash flow information:
Interest paid 467,939 586,547
=========== ============
Income taxes paid 300,100 142,990
=========== ============
Supplemental disclosure of non-cash investing and financing activities:
Capital lease additions -- 1,063,749
=========== ============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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<PAGE> 6
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1996 AND 1997
As used in this report, "Checkfree" is generally used to indicate
Checkfree Corporation prior to its acquisition of Servantis Systems Holdings,
Inc. on February 21, 1996 (the "Servantis Acquisition"), prior to its
acquisition of Security APL, Inc. on May 9, 1996 (the "Security APL
Acquisition"), and prior to its acquisition of Intuit Services Corporation on
January 27, 1997 (the "ISC Acquisition") (the Servantis Acquisition, the
Security APL Acquisition, and the ISC Acquisition are collectively referred to
as the "Acquisitions"). "Servantis" is generally used to indicate Servantis
Systems Holdings, Inc. prior to its acquisition by Checkfree, "Security APL" is
generally used to indicate Security APL, Inc. prior to its acquisition by
Checkfree, "ISC" is generally used to indicate Intuit Services Corporation prior
to its acquisition by Checkfree, and the term the "Company" is used to indicate
the combined company following the Acquisitions.
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 for Checkfree Corporation and subsidiaries (the
"Company"). The results of operations for the three months and nine months ended
March 31, 1996 and 1997 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 Transition Report filed with the Securities and
Exchange Commission on Form 10-K/A No. 1. 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 presentation of financial results for the interim periods
presented.
2. On January 27, 1997, the Company acquired Intuit Services
Corporation ("ISC") for a total of $199.0 million, including 12.6 million shares
of common stock valued at $177.2 million, the present value of the cash payments
due to Intuit, Inc. under the Services and License Agreement of $19.6 million,
acquisition costs of $2.3 million, and the assumption of liabilities of
approximately $1.6 million. The acquisition was treated as a purchase for
accounting purposes, and, accordingly, the assets and liabilities were recorded
based on their fair values at the date of the acquisition. Of the total purchase
price, $25.7 million was allocated to goodwill and is being amortized on a
straight-line basis over 10 years. In addition, $140.0 million was allocated to
in-process research and development, which was charged to operations at the time
of the acquisition. Further, $7.9 million was allocated to an exclusivity
agreement with Intuit, Inc. and is being amortized on a straight-line basis over
the contractual life of eight months. ISC's operations are included in the
consolidated results of operations from the date of the acquisition.
Consistent with the Company's policy for internally developed
software, the Company determined the amounts to be allocated to in-process
research and development based on
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whether technological feasibility had been achieved and whether there was any
alternative future use for the technology. As of the date of the acquisitions,
the Company concluded that the in-process research and development had no
alternative future use after taking into consideration the potential for usage
of the software in different products, resale of the software and internal
usage.
The unaudited pro forma results of operations of the Company
for the nine months ended March 31, 1996 and 1997, assuming the ISC acquisition
occurred on July 1, 1995 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1996 1997
---- ----
(In thousands, except per share data)
<S> <C> <C>
Total revenues $55,931 $139,264
Loss before income taxes (25,436) (37,107)
Loss before extraordinary item (15,487) (23,999)
Net loss (15,851) (23,999)
Loss before extraordinary item per share (0.35) ( 0.44)
Net loss per share (0.36) ( 0.44)
</TABLE>
The information is presented to facilitate meaningful
comparisons to on-going operations and to other companies. The unaudited pro
forma amounts above do not include the value of the $90.6 million and $140.0
million of purchased research and development arising from the Servantis
Acquisition in 1996 and the ISC Acquisition in 1997, respectively. The unaudited
pro forma information is not necessarily indicative of the actual results of
operations had the transaction occurred at the beginning of the earliest period
presented, nor should it be used to project the Company's results of operations
for any future periods.
The Company has not completed the valuation of tangible
property and equipment. The valuation should be completed in the quarter ended
June 30, 1997. The Company expects the final valuation will not have a material
impact on the estimated valuation used for the quarter ended March 31, 1997.
3. On March 26, 1997, the Company sold certain assets and certain
contracts and licensed certain proprietary software for processing automatic
accounts receivable through credit cards or the Automated Clearing House. The
gain on the sale of $6,250,000 was recognized in the fiscal quarter ended March
31, 1997.
4. In the quarter ended December 31, 1996, the Company accrued $1.3
million in personnel benefits related to a realignment of certain customer care
and programming operations. The charge was included in general and
administrative expenses and will affect approximately 60 associates. To date, 14
associates have been terminated and $61,000 in benefits have been paid against
the liability.
-7-
<PAGE> 8
5. The Company evaluates the estimated net realizable value of each
software product at each balance sheet date and records writedowns to net
realizable value for any products for which the net book value is in excess of
net realizable value. During the quarter ended March 31, 1997, the Company
recorded a writedown for a certain software product of $2.0 million, which was
included in cost of processing, servicing and support.
6. In the quarter ended March 31, 1997, the Company's stockholders
and/or Board of Directors approved: (a) the amendment to the Company's 1995
Stock Option Plan increasing the number of authorized shares for the Plan from
2,620,700 shares to 5,000,000 shares; (b) the adoption of the Company's
Associate Stock Purchase Plan which authorized the sale of up to 1,000,000
shares of Common Stock to eligible employees; and (c) the adoption of the
amendment to the Company's 401(k) Plan which authorized up to 1,000,000 shares
of Common Stock for the Company's matching contribution.
7. In February 1997, Statement of Financial Accounting Standards No.
128 "Earnings Per Share" was issued. The Statement is not effective until
periods ending after December 15, 1997. However, had the Company adopted the
Statement in the current quarter, basic and dilutive loss per share, as defined
in the Statement, would be the same as the loss per share currently reported in
the accompanying financial statements.
8. In May 1997, the Company obtained a working capital line of credit,
which enables the Company to borrow up to $20 million, based on the collateral
of eligible accounts receivable. The line expires in October 1999, and contains
certain restrictive covenants, including defined quarterly operating results,
minimum tangible net worth requirements, and the prohibition of paying
dividends.
9. In January 1997, the Company's Board of Directors declared a
dividend distribution of Preferred Share Purchase Rights to protect its
stockholders in the event of an unsolicited attempt to acquire the Company. On
February 14, 1997, the Rights were issued to the Company's stockholders of
record, with an expiration date of 10 years. Until a person or group acquires
15% or more of the Company's Common Stock, the Rights will automatically trade
with the shares of Common Stock. Only when a person or group has acquired 15% or
more of the Company's Common Stock, will the Rights be exercisable and separate
certificates be issued. Prior to the acquisition by a person or group of
beneficial ownership of 15% or more of the Company's Common Stock, the Rights
are redeemable for $.001 per Right at the option of the Board of Directors.
10. The Company evaluates the net realizable value of long-lived assets
at each balance sheet date and records writedowns to net realizable value for
any assets for which the net book value is in excess of net realizable value.
During the quarter ended March 31, 1997, the Company recorded a writedown of
approximately $1.0 million for certain equipment and intangible assets.
11. Certain amounts in the June 30, 1996 balance sheet have been
reclassified to conform with the March 31, 1997 presentation. In addition,
certain amounts in the condensed consolidated statements of operations for the
three and nine months ended March 31, 1996 have been reclassified to conform
with the March 31, 1997 presentation.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Acquisitions further Checkfree's strategy of providing an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience as a provider of electronic commerce and financial
applications software and services to financial institutions substantially
enhances the Company's presence in the financial institutions market of the
electronic commerce segment. Security APL's experience as a vendor of portfolio
management and software services to institutional investment managers and
investment services to consumers enhances the Company's presence in the consumer
and financial institutions market of the electronic commerce segment. ISC's base
of financial institution customers furthers the Company's home banking and bill
payment offering. The integration of Checkfree's electronic transaction
processing and remote delivery technology with Servantis' software products and
market presence, Security APL's portfolio management and software services, and
ISC's financial institution market share has created a single vendor of
electronic commerce services and related products to an expanded customer base
of financial institutions and businesses and their customers.
The Company expects to incur operating losses for the next several
quarters. However, with the Company's continued increase in sales and marketing
efforts to promote the Company's new electronic commerce offerings, and with the
continued acceptance in the marketplace of electronic commerce services, and
resulting growth in subscribers, the Company expects revenues to continue to
increase and operating results to continue to improve in the quarter ending June
30, 1997. The Company intends to continue to invest research and development
costs for new products and services, including the integration of the products
and services of Checkfree, Servantis, Security APL, and ISC.
The Company expects that these initiatives will allow it to maintain
and enhance its leading position in the rapidly growing electronic commerce
market. 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.
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<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth as percentages of total revenues certain
consolidated statements of operations' data:
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Expenses:
Cost of processing, servicing and support 57.0% 60.5% 59.3% 62.4%
Research and development 21.8% 17.0% 18.1% 18.6%
Sales and marketing 31.8% 17.7% 23.3% 17.5%
General and administrative 15.5% 7.8% 11.7% 10.6%
Depreciation and amortization 8.8% 13.3% 6.8% 14.8%
Exclusivity amortization and other 0.0% 6.0% 0.0% 2.5%
In process research and development 432.2% 279.0% 197.7% 115.5%
------ ------ ------ ------
Total expenses 567.1% 401.3% 316.9% 241.9%
Gain on sale of business 0.0% 12.5% 0.0% 5.2%
------ ------ ------ ------
Loss from operations (467.1%) (288.8%) (216.9%) (136.7%)
Interest, net 4.0% 0.5% (4.6%) 0.9%
------ ------ ------ ------
Loss before income taxes and extraordinary item (463.1%) (288.3%) (212.3%) (135.8%)
Income tax benefit (15.3%) (3.7%) (7.0%) (7.3%)
------ ------ ------ ------
Net loss before extraordinary item (447.8%) (284.6%) (205.3%) (128.5%)
Extraordinary item, net of tax (1.6%) 0.0% (0.8%) 0.0%
------ ------ ------ ------
Net loss (449.4%) (284.6%) (206.1%) (128.5%)
====== ====== ====== ======
</TABLE>
Revenues are reduced by purchased profits of $3.5 million and $0.2
million for the three months ended March 31, 1996 and 1997, respectively, and by
$3.5 million and $7.8 million for the nine months ended March 31, 1996 and 1997,
respectively. Purchased profits are the estimated profits in deferred revenues
at the Servantis Acquisition date, which were eliminated as a purchase
accounting adjustment. Excluding the purchased profits adjustment, revenues
increased 100% to $50.4 million and 154% to $129.2 million for the three months
and the nine months ended March 31, 1997, respectively. The increases were
primarily due to the acquisitions of Servantis, Security APL, and ISC and to a
lesser extent to the internal growth of the Company.
Costs of processing, servicing and support as a percentage of servicing
revenue (all revenue except licensing fees) and excluding the purchased profits
adjustment were 60.0% and 71.9% for the three months ended March 31, 1996 and
1997, respectively, and 60.8% and 70.5% for the nine months ended March 31, 1996
and 1997, respectively. Processing, servicing and support costs increased as a
percentage of servicing revenue for the quarter and year-to-date, due primarily
to an approximate 15% decrease in the average revenue per customer for the
Company's home banking and bill payment services. The decrease in the average
revenue per customer is a result of the Company's change in marketing strategy
in mid-1996 to distribute its bill payment services on a wholesale basis through
financial institutions. Additionally, the Company has increased its
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<PAGE> 11
implementation staff to service the increasing number of financial institutions
which have contracted for the Company's home banking and bill payment offerings.
Finally, the cost of processing transactions at ISC is higher than the
processing costs at the Company.
Research and development expenses as a percentage of total revenues
excluding the purchased profits adjustment were 18.7% and 17.0% for the three
months ended March 31, 1996 and 1997, respectively, and 16.8% and 17.4% for the
nine months ended March 31, 1996 and 1997, respectively. The decrease as a
percentage of revenue for the three month period was primarily due to the
increase in revenues and efficiencies gained from combining the entities. The
increase as a percentage of revenue for the nine month period was due to
increased product and business development for new and existing services and
related products, including electronic bill presentment and expanded business
and home banking and bill payment offerings, such as Web-based bill payment.
Sales and marketing expenses as a percentage of total revenues
excluding the purchased profits adjustment were 27.4% and 17.6% for the three
months ended March 31, 1996 and 1997, respectively, and 21.7% and 16.5% for the
nine months ended March 31, 1996 and 1997, respectively. The decreases as a
percentage of revenue were primarily due to the increase in revenues and
efficiencies gained from combining the entities. In addition, in the quarter
ended March 31, 1996, the Company incurred $3.5 million for direct marketing
initiatives to acquire new bill payment customers. The direct marketing campaign
was discontinued in mid-1996.
General and administrative expenses as a percentage of total revenues
excluding the purchased profits adjustment were 13.3% and 7.8% for the three
months ended March 31, 1996 and 1997, respectively, and 10.9% and 10.0% for the
nine months ended March 31, 1996 and 1997, respectively. The decrease as a
percentage of revenue was primarily due to the increase in revenues and
efficiencies gained from combining the entities.
Depreciation and amortization expenses as a percentage of total
revenues excluding the purchased profits adjustment were 7.6% and 13.3% for the
three months ended March 31, 1996 and 1997, respectively, and 6.3% and 13.9% for
the nine months ended March 31, 1996 and 1997, respectively. The increases as a
percentage of revenue were primarily due to depreciation and amortization from
the acquired companies. Included in depreciation and amortization expense is
purchased software amortization of $0.6 million and $2.0 million for the three
month and nine month periods ended March 31, 1997, respectively, which relates
solely to license fee revenue.
Exclusivity amortization and other includes $2.0 million amortization
for the value assigned to the exclusivity arrangement with Intuit. This asset is
amortized over the contractual exclusivity term, which expires October 1, 1997.
In addition, the Company incurred $1.0 million of write-offs of certain property
and intangibles.
In-process research and development reflects the amounts of the
purchase price independently appraised and allocated to in-process technology
and expensed at the time of the acquisitions. In-process research and
development represents research efforts underway which have not reached
technological feasibility and which do not have an alternative future use.
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<PAGE> 12
Net interest income decreased by $0.6 million and $1.0 million for the
three months and the nine months ended March 31, 1997, respectively, compared to
the same periods in 1996, due to lower cash, cash equivalent and investment
balances in 1997 compared to 1996. Such cash was used for acquisitions and to
fund operating activities.
The effective tax rate (benefit) was (3.3%) and (1.3%) for the three
months ended March 31, 1996 and 1997, respectively, and (3.3%) and (5.4%) for
the nine months ended March 31, 1996 and 1997, respectively. The three month and
nine month period effective tax rates vary from the statutory tax rate due
primarily to in-process research and development. The Company's underlying
effective tax benefit was 35%.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 1997, the Company's operating
activities used cash of $4.1 million. During the nine month period, the Company
invested $8.6 million in property and software additions, primarily for
computer related equipment and software and facilities, $11.4 for the ISC
Acquisition (net of cash acquired), and paid $5.2 million to purchase treasury
stock in conjunction with a put option granted to certain stockholders in an
acquisition. The Company used cash on hand, the net proceeds from the sale of
investments of $16.9 million, as well as the $28.9 million proceeds from the
sale of certain product lines to finance these operating and investing
activities.
At March 31, 1997, the Company's cash and cash equivalents and
investments were $42.1 million, an increase of $200,000 from June 30, 1996. As
of March 31, 1997, the Company's current ratio was 1.2 to 1, compared to a
current ratio of 2.0 to 1 as of June 30, 1996. In addition, working capital was
$16.8 million and $45.4 million at March 31, 1997 and June 30, 1996,
respectively.
The Company entered into a Service and License Agreement with Intuit,
Inc., which required a $10 million payment upon the closing of the ISC
acquisition and $10 million on October 1, 1997. The Company funded the initial
$10 million payment pursuant to the Services and License Agreement with
available cash and investments. The Company expects to fund the $10 million
payment due on October 1, 1997 pursuant to the Services and License Agreement
with available cash and investments.
With the acquisition of ISC, the Company expects to incur operating
losses into fiscal 1998. The Company believes the existing cash and cash
equivalents and investments will be sufficient to meet the Company's presently
anticipated operating, working capital and capital expenditure requirements for
the foreseeable future. To the extent that the Company needs additional capital
resources, the Company believes that it will have access to both bank financing
and capital leasing for additional facilities and equipment. In addition, in May
1997, the Company obtained a $20 million working capital line of credit.
-12-
<PAGE> 13
INFLATION
The Company believes the effects of inflation have not had a
significant impact on the Company's results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements that involve
risks and uncertainties. These forward-looking statements involve risks and
uncertainties, including without limitation, quarterly fluctuations in results,
the management of growth, the timely implementation of existing bank processing
agreements, the ability of the Company to sell its processing services to
additional banks, the acceptance of the Company's electronic banking and bill
payment services by financial institutions, businesses and their customers, the
acceptance of the Company's applications software, services and related products
by financial institutions, the impact of competitive services and products, the
Company's ability to efficiently integrate recent acquisitions, including ISC,
Servantis, and Security APL, the effect of any future acquisitions or
divestitures, and the timely development and acceptance of new electronic
commerce services and products, as well as the various risks inherent in the
Company's business and other risks and uncertainties detailed from time to time
in the Company's periodic reports filed with the Securities and Exchange
Commission, including the Transition Report on Form 10-K/A No. 1 for the six
months ended June 30, 1996 and the Company's Proxy Statement for the Special
Meeting of Stockholders held on January 27, 1997. One or more of these factors
have affected, and could in the future affect, the Company's business and
financial results in future periods and could cause actual results to differ
materially from plans and projections.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Stockholders on January 27, 1997
for the following purposes:
1. To consider and approve the issuance of common stock, $.01 par
value, of the Company (the "Common Stock") pursuant to the
Agreement and Plan of Merger, dated as of September 15, 1996,
as amended (the "Merger Agreement"). Pursuant to the Merger
Agreement, Checkfree Acquisition Corporation II, a Delaware
corporation ("Acquisition") and a wholly-owned subsidiary of
the Company, would be merged with and into Intuit Services
Corporation, a Delaware corporation ("ISC"), and the sole
stockholder of ISC would receive up to 12,600,000 shares of
Common Stock, as such number of shares may be adjusted in
accordance with the terms of the Merger Agreement, in exchange
for its shares of common stock of ISC, as more fully described
in the accompanying Proxy Statement;
2. To consider and act upon a proposed amendment to the Company's
1995 Stock Option Plan to increase the number of shares of
Common Stock issuable upon exercise of stock options under the
Company's 1995 Stock Option Plan from 2,630,700 shares to
5,000,000 shares; and
3. To consider and adopt the Company's Associate Stock Purchase
Plan which authorizes the sale of up to 1,000,000 shares of
Common Stock to eligible employees.
Each of management's proposals as presented in the proxy statement were
approved with the following vote:
Proposal 1: The issuance of 12,600,000 shares to Intuit Inc. for
the acquisition of Intuit Services Corporation:
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
----------------------
FOR AGAINST ABSTAIN NO VOTE TOTAL
--- ------- ------- ------- -----
<S> <C> <C> <C> <C>
30,001,056 45,539 19,456 193,235 30,259,286
</TABLE>
-14-
<PAGE> 15
Proposal 2: The amendment to the 1995 Stock Option Plan to
increase the number of shares available for issuance
under the Plan:
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
----------------------
FOR AGAINST ABSTAIN NO VOTE TOTAL
--- ------- ------- ------- -----
<S> <C> <C> <C> <C>
28,938,036 1,214,552 31,210 30,488 30,259,286
</TABLE>
Proposal 3: Approval of the Company's Associate Stock Purchase
Plan:
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
----------------------
FOR AGAINST ABSTAIN NO VOTE TOTAL
--- ------- ------- ------- -----
<S> <C> <C> <C> <C>
29,181,838 1,061,215 16,233 0 30,259,286
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
<S> <C>
4(a) Form of Rights Agreement dated as of January 31, 1997, between
Checkfree and KeyCorp Shareholder Services, Inc., including as
Exhibit A the Certificate of Designations of Series A Junior
Participating Cumulative Preferred Stock, as Exhibit B thereto the
form of Right Certificate and as Exhibit C thereto the Summary
of Rights. (Reference is made to Exhibit 4.1 to the Current
Report on Form 8-K, dated February 3, 1997, filed with the
Securities and Exchange Commission, and incorporated herein by
reference.)
10(a) Form of Amended Registration Rights Agreement, dated as of
January 27, 1997, between Checkfree and the former stockholders
of Security APL, Inc. (Reference is made to Exhibit 10(k) to the
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996, filed with the Securities and Exchange Commission, and
incorporated herein by reference.)
27 * Financial Data Schedule.
<FN>
--------------
* Filed with this Report.
</TABLE>
-15-
<PAGE> 16
(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 as of January 27,
1997, was filed with the Securities and Exchange
Commission on January 27, 1997 (Items 2 and 7).
(ii) A Current Report on Form 8-K, dated as of February 3,
1997, was filed with the Securities and Exchange
Commission on February 3, 1997 (Items 5 and 7).
-16-
<PAGE> 17
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: May 13, 1997 By: /s/ James S. Douglass
------------------------
James S. Douglass, Executive Vice
President, Finance and Chief
Financial Officer*
(Principal Financial Officer)
Date: May 13, 1997 By: /s/ John M. Stanton
----------------------
John M. Stanton, Vice President,
Treasurer, 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.
-17-
<PAGE> 18
CHECKFREE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1997
EXHIBIT INDEX
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
4(a) Form of Rights Agreement dated as of January 31,
1997, between Checkfree and KeyCorp Shareholder
Services, Inc., including as Exhibit A the Certificate
of Designations of Series A Junior Participating
Cumulative Preferred Stock, as Exhibit B thereto the
form of Right Certificate and as Exhibit C thereto the
Summary of Rights. (Reference is made to Exhibit
4.1 to the Current Report on Form 8-K, dated
February 3, 1997, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(a) Form of Amended Registration Rights Agreement,
dated as of January 27, 1997, between Checkfree and
the former stockholders of Security APL, Inc.
(Reference is made to Exhibit 10(k) to the Quarterly
Report on Form 10-Q for the quarter ended December
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
27 * Financial Data Schedule.
<FN>
- -------------
* Filed with this Report.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 37,985,150
<SECURITIES> 3,712,623
<RECEIVABLES> 43,480,200
<ALLOWANCES> 2,768,927
<INVENTORY> 0
<CURRENT-ASSETS> 84,740,407
<PP&E> 67,142,126
<DEPRECIATION> 18,526,310
<TOTAL-ASSETS> 230,205,567
<CURRENT-LIABILITIES> 67,933,964
<BONDS> 8,653,013
<COMMON> 533,714
0
0
<OTHER-SE> 153,064,876
<TOTAL-LIABILITY-AND-EQUITY> 230,205,567
<SALES> 0
<TOTAL-REVENUES> 121,355,137
<CGS> 0
<TOTAL-COSTS> 293,520,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (164,782,801)
<INCOME-TAX> (8,876,081)
<INCOME-CONTINUING> (155,906,720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,906,720)
<EPS-PRIMARY> (3.50)
<EPS-DILUTED> (3.50)
</TABLE>
