<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, 1998
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 HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2360335
(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: 55,361,875 shares of
Common Stock, $.01 par value, were outstanding at May 8, 1998.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
March 31, 1998 and June 30, 1997
Condensed Consolidated Statements of 4
Operations For the Three and the Nine Months Ended
March 31, 1998 and 1997
Condensed Consolidated Statements of 5
Cash Flows For the Nine Months Ended
March 31, 1998 and 1997
Notes to Interim Condensed Consolidated Unaudited 6-7
Financial Statements For the Nine Months
Ended March 31, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-15
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. 16
Signatures 17
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 63,973 $ 32,086
Investments -- 4,431
Accounts receivable, net 31,286 44,507
Prepaid expenses and other 3,033 2,197
Assets held for sale 25,216 --
Deferred income taxes 6,820 3,002
--------- ---------
Total current assets 130,328 86,223
Property and equipment, net 45,965 44,027
Capitalized software, net 12,017 26,644
Intangible assets, net 31,397 56,896
Deferred income taxes 11,105 3,063
Other noncurrent assets 7,066 6,983
--------- ---------
Total $ 237,878 $ 223,836
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,880 $ 7,051
Accrued liabilities and other 22,769 32,289
Current portion of long-term obligations 819 953
Deferred revenue 25,358 26,498
--------- ---------
Total current liabilities 53,826 66,791
Long-term obligations - less current portion 6,748 8,401
--------- ---------
Total Liabilities 60,574 75,192
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; issued 563 555
56,321,401 shares, 55,546,321 shares
Additional paid in capital 491,271 454,850
Treasury stock - at cost, 963,295 shares, 1,041,552 shares (4,315) (6,007)
Accumulated deficit (310,215) (300,754)
--------- ---------
Total Stockholders' Equity 177,304 148,644
--------- ---------
Total $ 237,878 $ 223,836
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements.
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing $ 42,147 $ 26,932 $ 115,093 $ 62,664
Merchant discount -- 3,361 -- 9,994
License 8,116 8,181 21,411 21,675
Maintenance 6,644 7,300 19,904 15,654
Other 4,843 4,414 13,945 11,368
-------- --------- --------- ---------
Total revenues 61,750 50,188 170,353 121,355
Expenses:
Cost of processing, servicing 34,213 30,357 94,332 75,784
and support
Research and development 9,360 8,556 26,157 22,527
Sales and marketing 6,692 8,868 22,002 21,278
General and administrative 5,215 3,923 15,748 12,924
Depreciation and amortization 6,264 6,697 19,380 18,013
In process research and -- 140,000 719 140,000
development
Charge for stock warrants 32,409 -- 32,409 --
Exclusivity amortization -- 2,994 2,963 2,994
-------- --------- --------- ---------
Total expenses 94,153 201,395 213,710 293,520
Net gain on dispositions of assets 3,080 6,250 28,449 6,250
-------- --------- --------- ---------
Loss from operations (29,323) (144,957) (14,908) (165,915)
Interest, net 752 250 1,866 1,132
-------- --------- --------- ---------
Loss before income taxes (28,571) (144,707) (13,042) (164,783)
Income tax benefit (11,031) (1,851) (3,581) (8,876)
-------- --------- --------- ---------
Net loss $(17,540) $(142,856) $ (9,461) $(155,907)
======== ========= ========= =========
Basic and diluted earnings per share:
Net loss per common share $ (0.32) $ (2.83) $ (0.17) $ (3.50)
======== ========= ========= =========
Equivalent number of shares 55,281 50,499 54,989 44,511
======== ========= ========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (9,461) $(155,907)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Charge for stock warrants 32,409 --
Depreciation and amortization 19,380 18,013
Exclusivity amortization 2,963 2,994
Deferred income taxes (4,082) (8,877)
Net gain on dispositions of assets (28,449) (6,250)
Write-off of in process research and development 719 140,000
Write-off of capitalized software -- 2,018
Loss on disposal of property and equipment 506 263
Changes in operating assets and liabilities:
Accounts receivable, net (6,228) (6,369)
Prepaid expenses and other (1,408) (4,272)
Accounts payable (2,222) (803)
Accrued liabilities and customer deposits 2,725 2,742
Deferred revenues 2,019 12,316
Income taxes payable 30 --
-------- ---------
Net cash provided by (used in) operating
activities 8,901 (4,132)
Cash Flows From Investing Activities:
Purchase of property and software (17,183) (8,629)
Proceeds from the sale of property and equipment 344 1,041
Purchase of business, net of cash acquired (11,000) (11,363)
Proceeds from purchase price adjustment 8,889 --
Proceeds from the sale of assets 36,900 28,900
Purchase of investments (7,941) (3,000)
Proceeds from maturities and sales of investments, net 12,372 19,870
-------- ---------
Net cash provided by investing activities 22,381 26,819
Cash Flows From Financing Activities:
Repayment of stockholder and other notes payable (1,144) (94)
Principal payments under capital lease obligations (549) (769)
Purchase of treasury stock -- (5,253)
Proceeds from exercise of stock options including related tax benefits 1,544 427
Proceeds from employee stock purchase plan 754 --
-------- ---------
Net cash provided by (used in) financing
activities 605 (5,689)
-------- ---------
Net Increase In Cash And Cash Equivalents 31,887 16,998
Cash And Cash Equivalents At Beginning Of Period 32,086 20,987
-------- ---------
Cash And Cash Equivalents At End Of Period $ 63,973 $ 37,985
======== =========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 401 $ 587
======== =========
Income taxes paid $ 1,587 $ 143
======== =========
Issuance of treasury shares $ 1,692 $ --
======== =========
Capital lease additions $ -- $ 488
======== =========
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
1. The accompanying condensed consolidated unaudited 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
nine months ended March 31, 1998 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 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. Basic loss per common share amounts were computed by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted per-common-share amounts assume the issuance of common
stock for all potentially dilutive equivalent shares outstanding. Due to
anti-dilution provisions of FAS 128, diluted per-common-share amounts are
consistent with basic per-common-share amounts in loss periods. For the periods
reported herein, there were no differences between basic and diluted earnings
per share.
3. During the quarter ended September 30, 1997, the Company reissued
78,257 shares of treasury stock to fund its 401(k) match, which accrued during
the year ended June 30, 1997. During the quarter ended March 31, 1998, the
Company issued 56,844 shares of common stock under the 1997 Associate Stock
Purchase Plan.
4. On August 29, 1997 the Company sold certain software and related
assets for $33.5 million. The gain from the sale of approximately $28.3 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. The previously reported
gain of $28.4 million was reduced by approximately $78,000 in the quarter ended
March 31, 1998 as the result of a working capital adjustment provision in the
sale agreement.
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 in the statement of operations.
6. On October 3, 1997 the Company acquired certain assets of Advanced
Mortgage Technologies, Inc. ("AMTI") for cash of $ 1.0 million. The acquisition
was treated as a purchase for accounting purposes, and accordingly, the assets
and liabilities were recorded based on their fair values at the date of the
acquisition. Of the total purchase price, $0.2 million was allocated to goodwill
and $0.1 million to other identifiable intangible assets. Additionally, $.7
million was allocated to in-process research and development, which was charged
to operations at the time of the acquisition. AMTI provides mortgage default
management software.
7. On October 29, 1997 the Company announced a 10 year processing
agreement with a strategic partner and executed the definitive agreements on
January 8, 1998. Under the terms of the agreements, the strategic partner
acquired 10 year warrants exercisable at 20-15/16 for 10 million shares of the
Company's common stock. Three million warrants vested upon the execution of a
processing outsourcing agreement on March 9, 1998 and, as a result, the Company
recorded a non-cash charge of $32.4 million in the quarter ended March 31, 1998.
The charge was based on a Black-Scholes option pricing model valuation of the
warrants. The remaining seven million warrants are to vest upon
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achievement of specific performance targets set forth in the agreement. Any
shares acquired by the strategic partner upon exercise of the warrants are
subject to certain transfer and other restrictions.
8. In November 1997, the Company paid $10 million as the final
installment of the exclusivity arrangement related to the purchase of Intuit
Services Corporation ("ISC") which occurred in January 1997. Additionally, under
the terms of the purchase agreement the Company received $8.9 million from the
seller as a purchase price adjustment, which resulted in a corresponding
reduction in goodwill effective October 1, 1997.
9. On March 24, 1998, the Company sold certain software and related
assets for $3.6 million resulting in a gain on the sale of $3.2 million, which
was recorded in the quarter ended March 31, 1998. Cash of $3.4 million was
received upon execution of the sales agreement and the remaining balance of $0.2
million was withheld pending the final valuation of working capital to take
place in the quarter ended June 30, 1998.
10. On April 1, 1998, the Company announced plans to divest several of
its software products through the sale of software and related assets.
Accordingly, the related assets totaling $25.2 million have been reclassified as
assets held for sale in the March 31, 1998 balance sheet. Proceeds from the
sales are expected to exceed net asset values.
11. On April 20, 1998, the Company announced the sale of certain
software and related assets for $18.25 million. Cash of $18.25 million was
received upon execution of the sales agreement and the final purchase price and
related gain on the sale is dependent upon a working capital valuation expected
in the quarter ended June 30, 1998.
12. Certain amounts in the June 30, 1997 balance sheet have been
reclassified to conform to the March 31, 1998 presentation. In addition, certain
amounts in the condensed consolidated statements of operations for the nine
months ended March 31, 1997 have been reclassified to conform with March 31,
1998 presentation.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The business was founded in 1981, and following a number of
acquisitions and divestitures reorganized its corporate structure on December
22, 1997. CheckFree Holdings Corporation (the "Company") is the parent
corporation of CheckFree Corporation, the principal operating company of the
business. In connection with the restructuring, holders of Common Stock of
CheckFree Corporation became holders of an identical number of shares of Common
Stock of CheckFree Holdings Corporation. The restructuring was effected by a
merger conducted pursuant to Section 251(g) of the Delaware General Corporation
Law, which provides for the formation of a holding company structure without a
vote of the stockholders of the Company. (For more detailed information
concerning the restructuring, please refer to the Company's Form 8-K filed on
December 30, 1997.)
The Company is the leading provider of electronic commerce services,
software and related products for over 2.4 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 operates in three business segments: Electronic Commerce,
Software, and 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 continued
sales and marketing efforts geared toward promoting its new electronic commerce
offerings, especially electronic bill presentment, 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
improve. Significant economies of scale and leverage are inherent in the
Company's business model. Improvements in remittance and customer care costs and
quality will primarily be driven by an increased percentage of electronic versus
paper transactions processed on certain platforms. 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. Genesis will contribute to an increased
percentage of transactions being effected electronically.
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.
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<PAGE> 9
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 Nine months ended
March 31, March 31,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenues: 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 55.4% 60.5% 55.4% 62.4%
Research and development 15.2% 17.0% 15.4% 18.6%
Sales and marketing 10.8% 17.7% 12.9% 17.5%
General and administrative 8.4% 7.8% 9.2% 10.6%
Depreciation and amortization 10.1% 13.3% 11.4% 14.8%
In process research and development -- 279.0% 0.4% 115.4%
Charge for stock warrants 52.5% -- 19.0% --
Exclusivity amortization -- 6.0% 1.7% 2.5%
----- ----- ----- -----
Total Expenses 152.5% 401.3% 125.5% 241.9%
Net gain on disposition of assets 5.0% 12.5% 16.7% 5.2%
----- ----- ----- -----
Loss from operations (47.5%) (288.8%) (8.8%) (136.7%)
Interest, net 1.2% 0.5% 1.1% 0.9%
----- ----- ----- -----
Loss before income taxes (46.3%) (288.3%) (7.7%) (135.8%)
Income tax benefit (17.9%) (3.7%) (2.1%) (7.3%)
----- ----- ----- -----
Net loss (28.4%) (284.6%) (5.6%) (128.5%)
===== ====== ==== ======
</TABLE>
Revenue increased 23%, from $50.2 million to $61.8 million, for the
three months ended March 31, 1997 and 1998, respectively, and 40%, from $121.4
million to $170.4 million, for the nine months ended March 31, 1997 and 1998,
respectively. The increases in revenue are due primarily to internal growth in
the Company's electronic commerce and investment services businesses, additional
revenue contributed from the purchase of ISC, which purchase was completed in
January 1997, and the elimination of purchased profits relating to the February
1996 Servantis acquisition amounting to $0.2 million and $7.8 million in the
quarter and nine months ended March 31, 1997, respectively. On a pro forma
basis, quarter over quarter revenue increased 30% driven by growth of 45% in the
electronic commerce business, 28% in the investment services business, and 7% in
the software business. Pro forma revenue increased 32% on a year to date basis
as a result of growth of 52% in electronic commerce, 34% in investment services,
and 5% in software. Pro forma results are based on prior year results adjusted
for the acquisitions noted above and divestitures of the Company's securities
business which was sold in October 1996, the credit card processing business
which was sold in March 1997, and the credit management business which was sold
in August 1997. Pro forma growth rates in the electronic commerce business unit
is driven primarily by an increase in subscribers from approximately 1.5 million
at March 31, 1997 (includes ISC subscribers) to 2.4 million at March 31, 1998.
Investment services revenue growth is due primarily to an increase in portfolios
managed from approximately 325,000 at March 31, 1997 to over 447,000 at March
31, 1998. Growth in software is primarily the result of increased license sales
and maintenance and services revenue generated from new license sales in fiscal
years 1998 and 1997.
Processing and servicing revenue increased by 57%, from $26.9 million
to $42.1 million, in the quarter ending March 31, 1997 and 1998, respectively
and by 84%, from $62.7 million to $115.1 million, in the nine month periods
ending March 31, 1997 and 1998, respectively. On a pro forma basis, processing
and servicing revenue increased by 42%, from $29.7 million to $42.1 million, in
the quarter ending March 31, 1997 and 1998, respectively and by 48%,
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from $77.8 million to $115.1 million, in the nine months ending March 31, 1997
and 1998, respectively. This growth was due to the increase in subscribers in
the Electronic Commerce segment and the increase in portfolios managed in the
Investment Services segment mentioned above.
Merchant discount revenue decreased from $3.4 million to $0 in the
three months ended March 31, 1997 and 1998, respectively, and from $10.0 million
to $0 in the nine months ended March 31, 1997 and 1998, respectively, due to the
sale of the Company's credit card processing business in March 1997.
License revenue remained consistent at $8.2 million versus $8.1 million
for the quarter ended March 31, 1997 and 1998, respectively. On a pro forma
basis, adjusting for the sales of the Company's securities and credit management
businesses, license revenue increased by $1.0 million, from $7.1 million to $8.1
million, on a quarter over quarter basis. For the nine months ended March 31,
1997 and 1998, license revenue declined slightly from $21.7 million to $21.4
million, respectively. On a pro forma basis, license revenue increased by 3%,
from $20.7 million to $21.4 million, on a year over year basis. Increases in pro
forma license revenue are driven primarily by growth in reconciliation software
sales.
Maintenance revenue declined from $7.3 million to $6.6 million for the
three months ended March 31, 1997 and 1998, respectively, and increased from
$15.7 million to $19.9 million for the nine months ended March 31, 1997 and
1998, respectively. On a pro forma basis, excluding elimination of purchased
profits and adjusting for the sales of the securities and credit management
businesses, maintenance revenue decreased by 3%, from $6.8 million to $6.6
million, in the quarter ending March 31, 1997 and 1998, respectively, and
increased by 5%, from $18.9 million to $19.9 million, year over year. Customer
retention rates in the mid to upper 80% range are offset by an average
maintenance price increase of approximately 7% as well as first year maintenance
from new license sales.
Other revenue, consisting mainly of consulting fees, increased from
$4.4 million to $4.8 million in the three months ended March 31, 1997 and 1998,
respectively, and from $11.4 million to $13.9 million for the nine months ended
March 31, 1997 and 1998, respectively. On a pro forma basis, excluding the
elimination of purchased profits and adjusting for the sales of the securities
and credit management businesses, other revenue increased from $4.0 million to
$4.8 million for the three months ended March 31, 1997 and 1998, respectively,
and from $11.3 million to $13.9 million for the nine months ended March 31, 1997
and 1998, respectively. Year to date and quarterly increases are due primarily
to increased implementations in all business segments.
The cost of processing, servicing and support was $30.4 million and
$34.2 million or 60.5% and 55.4% of total revenue for the three months ended
March 31, 1997 and 1998, respectively. These same costs were $75.8 million and
$94.3 million, or 62.4% and 55.4% of total revenue, for the nine months ended
March 31, 1997 and 1998, respectively. Cost of processing, servicing and support
as a percentage of servicing only revenue (all revenue except license) and net
of purchased profits of $0.2 million in the 1997 servicing revenue, was 72.0%
and 63.7% for the three months ended March 31, 1997 and 1998, respectively. For
the nine months ended March 31, 1997 and 1998, the cost of processing, servicing
and support as a percentage of servicing only revenue and net of purchased
profits of $6.5 million in the 1997 servicing revenue was 71.4% and 63.3%,
respectively. The efficiency improvements, both on a quarter over quarter and
year over year basis, are due primarily to an increase in the percentage of
electronic transactions versus paper transactions which resulted in lower
customer care and remittance costs per transaction and through significant
economies of scale and leverage inherent in the business model of the Electronic
Commerce and Investment Services segments.
Research and development costs were $8.6 million and $9.4 million, or
17.0% and 15.2% of total revenue, for the three months ended March 31, 1997 and
1998, respectively. These same costs were $22.5 million and $26.2 million or
18.6% and 15.4% of total revenue for the nine months ended March 31, 1997 and
1998, respectively. Excluding purchased profits, research and development costs
were 17.4% and 15.4% for the same nine month periods. The absolute dollar
increase of $0.8 million in the quarter over quarter period and $3.7 million in
the year over year period are primarily the result of resources added for
Genesis development and those costs absorbed by the acquisition of ISC in 1997.
Other research and development spending on existing products and services has
remained relatively stable from year to year resulting in the decrease of R&D as
a percentage of revenue. The Company did not capitalize development costs in the
three or nine-month periods ended March 31, 1997 and 1998, respectively.
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<PAGE> 11
Sales and marketing costs were $8.9 million and $6.7 million, or 17.7%
and 10.8% of total revenue, for the three months ended March 31, 1997 and 1998,
respectively. Sales and marketing costs were $21.3 million and $22.0 million or
17.5% and 12.9% of total revenue for the nine months ended March 31, 1997 and
1998, respectively. In conjunction with the purchase of ISC, the Company agreed
to pay a $1.0 million per month marketing charge to Intuit Inc. ("Intuit") for
six months commencing in February 1997. Excluding purchased profits and two
months of Intuit marketing charges, sales and marketing costs were 13.6% and
10.8% of total revenue for the three months ended March 31, 1997 and 1998,
respectively, and 14.9% and 12.9% of total revenue for the nine months ended
March 31, 1997 and 1998, respectively. Underlying cost as a percentage of
revenue has declined due to economies of scale and leverage inherent in the
Company's business model.
General and administrative expenses were $3.9 million and $5.2 million,
or 7.8% and 8.4% of total revenue, for the three months ended March 31, 1997 and
1998, respectively. General and administrative expenses were $12.9 million and
$15.7 million, or 10.6% and 9.2% of total revenue, for the nine months ended
March 31, 1997 and 1998, respectively. Excluding purchased profits, general and
administrative expenses were 7.8% and 8.4% of total revenue for the three months
ended March 31, 1997 and 1998, respectively, and 10.0% and 9.2% for the same
nine month periods. With the purchase of ISC, the quarter ended March 31, 1997
included only two months of general and administrative expenses related to rent,
utilities, and telephone charges causing the anomaly in quarter over quarter
results. Overall, the Company's general and administrative costs have decreased
as a percent of revenue on a year over year basis due to its ability to leverage
corporate support services as revenue continues to grow.
Depreciation and amortization expenses decreased by $0.4 million from
$6.7 million in the three months ended March 31, 1997 to $6.3 million in the
three months ended March 31, 1998. Depreciation and amortization expenses
increased by $1.4 million from $18.0 million to $19.4 million for the nine
months ended March 31, 1997 and 1998, respectively. Decreased amortization
related to reductions in tangible and intangible assets resulting from the sale
of the securities business in October 1996 and the credit management business in
August 1997 and reductions in intangible assets related to the release of a
deferred tax benefit valuation allowance in the quarter ended September 30, 1997
and a purchase price adjustment related to ISC in the quarter ended December 31,
1997 are offset largely by increases in depreciation and amortization resulting
from purchases of property, plant and equipment required for Genesis development
and in support of the growth of the business as well as tangible and intangible
asset additions related to the purchase of ISC in January 1997. The timing of
the identified adjustments resulting from acquisitions and divestitures has
caused the anomaly between year over year and quarter over quarter results in
this expense category.
The $140 million charge for in process research and development in the
three and nine month periods ending March 31, 1997 resulted from the purchase of
ISC in January 1997 and the $0.7 million charge in the nine month period ended
March 31, 1998 resulted from the purchase of AMTI in October 1997.
The $32.4 million charge for stock warrants in the three and nine
months ended March 31, 1998 resulted from the vesting of three million warrants
in March 1998 related to a ten year processing agreement with Integrion
announced by the Company in October 1997. The non-cash charge is based on a
Black-Scholes option pricing model valuation of the warrants at the date of
vesting.
Exclusivity amortization expense in all periods is the result of the
exclusivity arrangement the Company entered into with Intuit in conjunction with
the purchase of ISC in January 1997.
The net gain on dispositions of assets in the three and nine months
ended March 31, 1997 resulted from the sale of the credit card business in March
1997. In the quarter ended March 31, 1998 the Company incurred a gain of $3.2
million on the sale of its item processing business in March 1998 which was
offset by a working capital adjustment of $0.l million related to the sale of
its credit management business in August 1997. For the nine month period ended
March 31, 1998, the net gain on asset dispositions includes a gain on the sale
of the credit management business of $28.3 million from August 1997 and a gain
on the sale of the item processing business of $3.2 million from March 1998
which were offset by a charge of approximately $3.0 million in the quarter ended
September 30, 1997 related to certain equipment and capitalized costs where the
Company determined the book value of the assets exceeded their net realizable
value.
-11-
<PAGE> 12
Net interest income increased by 201% from $250,000 to $752,000 in the
three month periods ending March 31, 1997 and 1998, respectively. On a year over
year basis net interest income increased by 65% from $1.13 million to $1.87
million for the nine months ended March 31, 1997 and 1998, respectively. On a
quarter over quarter basis the Company's average cash and invested assets
increased by approximately 53% from $41.0 million for the three months ended
March 31, 1997 to $62.6 million for the three months ended March 31, 1998.
Additionally, the Company's average current and long term debt (including $9.8
million at March 31, 1997 and $9.9 million at June 30, 1997 which represents the
respective present value of the final installment of the ISC purchase price and
which was previously classified as a current liability in the balance sheet)
decreased by 43% from $14.3 million for the quarter ended March 31, 1997 to $8.2
million for the quarter ended March 31, 1998. The final purchase price
installment of $10 million was paid to Intuit in November 1997. The combination
of these factors resulted in the increase in net interest income quarter over
quarter. On a year over year basis, the Company's average cash and invested
assets increased by 24% from $40.4 million for the nine months ended March 31,
1997 to $50.2 million for the nine months ended March 31, 1998. Additionally,
for the same nine-month period, the Company's current and long term debt
decreased by 8%, from $14.5 million at March 31, 1997 to $13.4 million at March
31, 1998. The combination of these factors resulted in the increase in net
interest income year over year. Cash and invested assets have improved in fiscal
year 1998 due primarily to proceeds from the sale of the credit management
business in August 1997 totaling $33.5 million and proceeds from the sale of the
item processing business in March 1998 totaling $3.4 million.
The Company recorded income tax benefits in the amount of $3.6 million
and $11.0 million in the three months ended March 31, 1997 and 1998,
respectively. The effective tax rates for the respective three-month periods
were 1.3% and 38.6%. For the nine months ended March 31, 1997 and 1998 the
company recorded tax benefits of $8.9 million and $3.6 million, respectively.
The effective tax rates for the respective nine-month periods were 5.4% and
27.5%. The reported rates differ from the blended statutory rate of 40%
primarily due to certain goodwill amortization, in process research and
development and other expenses, which are not deductible for federal income tax
purposes. In the quarter ended March 31, 1998 the company recorded a charge for
stock warrants of $32.4 million. For federal income tax purposes, the charge
will become deductible upon the exercise of the warrants. The Company recorded a
deferred tax benefit related to the warrants charge. On a periodic basis, the
Company will evaluate the realizable value of the deferred tax asset and a
valuation allowance will be recorded if, based on available evidence, the
Company believes it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
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 Nine Months Ended
March 31, March 31,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenue:
Electronic Commerce $ 36,080 $ 24,330 $ 99,046 $ 57,915
Software 18,081 19,938 49,737 47,335
Investment Services 7,589 5,920 21,570 16,105
-------- -------- -------- --------
Total Operating Revenue $ 61,750 $ 50,188 $170,353 $121,355
======== ======== ======== ========
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Income (Loss):
Electronic Commerce $ 587 $ (7,273) $ (515) $ (16,421)
Software 2,454 4,286 4,497 2,821
Investment Services 1,699 667 4,147 1,739
Corporate (4,734) (5,893) (15,395) (17,310)
Exclusivity -- (2,994) (2,963) (2,994)
In Process Research and Development -- (140,000) (719) (140,000)
Charge from Issuance of Warrants (32,409) -- (32,409) --
Net Gain on Disposition of Assets 3,080 6,250 28,449 6,250
---------- ---------- --------- ----------
Total Operating Income (Loss) $ (29,323) $(144,957) $(14,908) $(165,915)
========== ========= ======== =========
</TABLE>
Revenue in the Electronic Commerce business unit increased by $11.8
million or 49% from $24.3 million to $36.1 million for the three months ended
March 31, 1997 and 1998, respectively, and by $41.1 million or 71% from $57.9
million to $99.0 million for the nine months ended March 31, 1997 and 1998,
respectively, due primarily to internal growth and the acquisition of ISC in
January 1997. On a pro forma basis, assuming ISC results are included in and the
credit card processing business is excluded from the quarter and year to date
results, revenue increased 45% quarter over quarter and 52% year over year
driven by growth in subscribers from approximately 1.5 million at March 31, 1997
to 2.4 million at March 31, 1998. From an operating profit perspective, the
Electronic Commerce segment became profitable for the first time in the quarter
ended March 31, 1998. On a quarter over quarter basis this segment improved from
an operating loss of $7.3 million for the quarter ended March 31, 1997 to an
operating profit of $587,000 for the quarter ended March 31, 1998. Operating
losses in the segment improved year over year from $16.4 million for the nine
months ended March 1, 1997 to $515,000 for the nine months ended March 31, 1998.
On a pro forma basis, quarter over quarter operating results improved from an
operating loss of $7.7 million for the three months ended March 31, 1997 to an
operating profit of $587,000 for the three months ended March 31, 1998 and year
over year the operating loss improved from $27.6 million to $515,000. Favorable
operating results are primarily due to continued revenue growth as well as
continued efficiency improvements in remittance and customer care costs,
reduction in costs from the integration of the ISC acquisition and significant
economies of scale and leverage inherent in the segment's business model. Cost
improvements in customer care and remittance are primarily the result of growth
in the percentage of electronic versus paper payments year over year.
Software revenue decreased from $19.9 million for the three months
ended March 31, 1997 to $18.1 million for the same period in 1998. For the nine
months ended March 31, 1997 and 1998 Software revenue increased from $47.3
million to $49.7 million, respectively. On a pro forma basis, adjusting the
prior year to exclude the effect of purchased profits and to eliminate results
contributed by the credit management business, revenue increased by 7% quarter
over quarter and by 5% year over year. Revenue growth is primarily the result of
increased license sales driven by growth in the reconciliation products and
maintenance and services revenue generated from new license sales in fiscal 1997
and 1998. Reported operating profits declined from $4.3 million for the three
month period ended March 31, 1997 to $2.5 million in for the same period in 1998
and improved from $2.8 million for the nine months ended March 31, 1997 to $4.5
million for the same period in 1998. On a pro forma basis, operating income
decreased from $2.9 million to $2.5 million for the quarter ended March 31, 1997
and 1998, respectively and from $6.3 million to $4.5 million for the nine months
ended March 31, 1997 and 1998, respectively. On April 1, 1998 the Company
announced the planned divestiture of seven of its software products. On March
24, 1998 the Company completed the sale of its item processing software and on
April 17, 1998 completed the sale of its cash management and wire transfer
software
-13-
<PAGE> 14
businesses. The divestitures of the leasing, imaging, mortgage and safe box
accounting products are expected to be completed by June 30, 1998.
Revenue in Investment Services has increased by 28%, from $5.9 million
to $7.6 million in the three months ended March 31, 1998 and 1997, respectively
and by 34%, from $16.1 million to $21.6 million, in the nine months ended March
31, 1997 and 1998, respectively. This improvement is due do a corresponding
increase in the number of portfolios managed from approximately 325,000 at March
31, 1997 to over 447,000 at March 31, 1998. Operating income has improved from
$0.7 million to $1.7 million in the quarter ended March 31, 1997 and 1998,
respectively and from $1.7 million to $4.1 million in the nine months ended
March 31, 1997 and 1998, respectively. Operating results have improved due to
the leverage and economies of scale inherent in the segment's business model.
The corporate segment represents charges for the Company's human
resources, legal, accounting and finance functions and various other unallocated
overhead charges. Corporate achieved an improvement in operating costs from $5.9
million to $4.7 million on a quarter over quarter basis and from $17.3 million
to $15.4 million on a year over year basis. The improvements are due to
successful efforts to assimilate the various acquisitions and to leverage the
existing infrastructure in response to overall growth in the business.
Exclusivity amortization expense in all periods is the result of the
exclusivity arrangement the Company entered into with Intuit in conjunction with
the purchase of ISC in January 1997.
The $140 million charge for in process research and development in the
three and nine month periods ending March 31, 1997 resulted from the purchase of
ISC in January 1997 and the $0.7 million charge in the nine month period ended
March 31, 1998 resulted from the purchase of AMTI in October 1997.
The $32.4 million charge for stock warrants in the three and nine
months ended March 31, 1998 resulted from the vesting of three million warrants
in March 1997 related to a ten year processing agreement with Integrion
announced by the Company in October 1997. The non-cash charge is based on a
Black-Scholes option pricing model valuation of the warrants at the date of
vesting.
The net gain on dispositions of assets in the three and nine months
ended March 31, 1997 resulted from the sale of the credit card business in March
1997. In the quarter ended March 31, 1998 the Company incurred a gain of $3.2
million on the sale of its item processing business in March 1998 which was
offset by a working capital adjustment of $0.1 million related to the sale of it
credit management business in August 1997. For the nine month period ended March
31, 1998, the net gain on asset dispositions includes a gain on the sale of the
credit management business of $28.3 million from August 1997 and a gain on the
sale of the item processing business of $3.2 million from March 1998 which were
offset by a charge of approximately $3.0 million in the quarter ended September
30, 1997 related to certain equipment and capitalized costs where the Company
determined the book value of the assets exceeded their net realizable value.
YEAR 2000
The Company is currently engaged in several projects designed to
address the Year 2000 computer programming issue related to products available
for sale and to software programs for internal use. In the Electronic Commerce
segment the Company anticipates it will incur approximately $1.4 million in
remaining costs to correct outstanding issues in the various processing
programs. In the Software segment, work has been completed on over 80% of the
products to be modified and it will require an estimated cost of approximately
$1.0 million to complete the remaining work. The Investment Services segment
expects to incur future costs of approximately $375,000 to correct existing
issues. For internal purposes the Company utilizes a small number of non-Year
2000 compliant computer programs and, in light of recently announced software
product divestitures, is, currently evaluating whether to upgrade or replace the
systems. In either case, the cost to upgrade is not expected to exceed $300,000
at this time. Failure by the Company, its customers or vendors to adequately
address the Year 2000 issue in a timely manner could result in a material
financial risk. Accordingly, the Company plans to adequately address all Year
2000 issues before problems materialize and believes that all such costs are
adequately provided for in its 1998 and 1999 business plans.
-14-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 1998, the Company's operating
activities provided cash of $8.9 million. From an investing perspective, during
the nine-month period the company received $33.5 million from the sale of its
credit management business and $3.4 million from the sale of its item processing
business and paid $1.0 million for the purchase of AMTI. In conjunction with the
purchase of ISC, the Company paid the final installment of $10 million in
November 1997 which was offset by receipt of $8.9 million for a purchase price
adjustment per the terms of the purchase agreement. An additional $17.2 million
has been invested in property additions primarily for computer and operational
equipment and facilities related to the completion of the Norcross processing
center and in conjunction with project Genesis and net proceeds of $4.4 million
was received from dispositions of investments. From a financing perspective, the
Company received approximately $2.3 million from the exercise of stock options
and the employee stock purchase plan and made payments of $1.1 million against
notes payable and $0.5 million against capital lease obligations. As a result,
at March 31, 1998, the Company's cash and cash equivalents were $64.0 million, a
net increase of $31.9 million from June 30, 1997 and a net increase of $12.2
million from December 31, 1997. As a result of the increase in cash and cash
equivalents, the Company's current ratio has improved from 1.3 to 2.4 and the
related working capital has improved from $19.4 million to $76.5 million from
June 30, 1997 to March 31, 1998, respectively. Net of $9.5 million of long term
assets reclassified as assets held for sale in the quarter ended March 31, 1998,
the adjusted current ratio would be 2.2 and the adjusted working capital would
be $67.0 million at March 31, 1998.
The Company expects to earn a profit for the three months ending June
30, 1998 and believes the existing cash and cash equivalents will be sufficient
to meet presently anticipated operating, working capital and capital expenditure
requirements for the foreseeable future. To the extent that additional capital
resources may be 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.
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 filings 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.
-15-
<PAGE> 16
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 February 19, 1998, was
filed with the Securities and Exchange Commission on February 23, 1998 (Item 5).
(ii) A current report on Form 8-K, dated March 11, 1998, was
filed with the Securities and Exchange Commission on March 13, 1998 (Items 5 and
7).
(iii) A current report on Form 8-K, dated March 24, 1998, was
filed with the Securities and Exchange Commission on April 3, 1998 (Items 5 and
7).
(iv) A current report on Form 8-K, dated April 1, 1998, was
filed with the Securities and Exchange Commission on April 3, 1998 (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 amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: May 13, 1998
By:
--------------------------------------------
James S. Douglass, Executive Vice
President, Chief Financial Officer, and
Treasurer*
(Principal Financial Officer)
Date: May 13, 1998
By:
--------------------------------------------
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.
-17-
<PAGE> 18
CHECKFREE HOLDINGS
CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1998
EXHIBIT INDEX
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<C> <C> <C>
27 * Financial Data Schedule.
</TABLE>
- ----------
* Filed with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 63,973
<SECURITIES> 0
<RECEIVABLES> 35,097
<ALLOWANCES> 3,811
<INVENTORY> 0
<CURRENT-ASSETS> 130,328
<PP&E> 73,590
<DEPRECIATION> 27,625
<TOTAL-ASSETS> 237,878
<CURRENT-LIABILITIES> 53,826
<BONDS> 6,748
0
0
<COMMON> 563
<OTHER-SE> 176,741
<TOTAL-LIABILITY-AND-EQUITY> 237,878
<SALES> 0
<TOTAL-REVENUES> 170,353
<CGS> 0
<TOTAL-COSTS> 213,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,042)
<INCOME-TAX> (3,581)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,461)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
