<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 50,992,552 shares
of Common Stock, $.01 par value, were outstanding at November 11, 1998.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<S> <C>
Condensed Consolidated Balance Sheets as of 3
September 30, 1998 and June 30, 1998.
Condensed Consolidated Statements of 4
Operations For the Three Months Ended
September 30, 1998 and 1997.
Condensed Consolidated Statements of 5
Cash Flows For the Three Months Ended
September 30, 1998 and 1997.
Notes to Interim Condensed Consolidated Unaudited 6-7
Financial Statements For the Three Months
Ended September 30, 1998 and 1997.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-16
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. 17
Signatures 18
</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>
September 30, June 30,
1998 1998
-------------- --------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 30,614 $ 36,535
Investments 25,539 24,533
Accounts receivable, net 37,097 32,960
Assets held for sale -- 15,881
Notes receivable 15,382 14,882
Prepaid expenses and other assets 7,990 4,678
Deferred income taxes 8,460 7,231
-------------- --------------
Total current assets 125,082 136,700
Property and equipment, net 55,074 50,920
Capitalized software, net 13,527 11,387
Intangible assets, net 29,726 30,474
Investments -- 1,006
Deferred income taxes 13,345 12,889
Other noncurrent assets 6,742 6,736
-------------- --------------
Total $ 243,496 $ 250,112
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,736 $ 8,536
Accrued liabilities 37,752 30,365
Current portion of long-term obligations 1,197 1,180
Deferred revenue 13,821 19,710
-------------- --------------
Total current liabilities 57,506 59,791
Long-term obligations - less current portion 7,006 6,467
-------------- --------------
Total Liabilities 64,512 66,258
Stockholders' Equity
Preferred stock - 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding -- --
Common stock - 150,000,000 authorized shares, $.01 par value;
issued 56,535,428 shares, 56,364,839 shares 565 564
Additional paid-in capital 492,496 492,109
Treasury stock - at cost, 1,414,683 shares, 963,295 shares (8,152) (4,362)
Accumulated deficit (305,925) (304,457)
-------------- --------------
Total Stockholders' Equity 178,984 183,854
-------------- --------------
Total $ 243,496 $ 250,112
============== ==============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements.
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<PAGE> 4
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Processing and servicing $ 45,054 $ 34,510
License 2,971 5,803
Maintenance 4,964 6,841
Other 3,825 4,933
-------------- --------------
Total revenues 56,814 52,087
Expenses:
Cost of processing, servicing and support 37,089 29,331
Research and development 6,578 8,068
Sales and marketing 7,824 7,427
General and administrative 6,733 5,439
Depreciation and amortization 5,966 7,042
Exclusivity amortization -- 2,962
-------------- --------------
Total expenses 64,190 60,269
Net gain on dispositions of assets 3,914 25,369
-------------- --------------
Income (loss) from operations (3,462) 17,187
Interest, net 793 358
-------------- --------------
Income (loss) before income taxes (2,669) 17,545
Income tax expense (benefit) (1,201) 7,774
-------------- --------------
Net income (loss) $ (1,468) $ 9,771
============== ==============
Basic earnings per share:
Net income (loss) per common share $ (0.03) $ 0.17
============== ==============
Equivalent number of shares 55,510 56,703
============== ==============
Diluted earnings per share:
Net income (loss) per common share $ (0.03) $ 0.17
============== ==============
Equivalent number of shares 55,510 56,920
============== ==============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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<PAGE> 5
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) $ (1,468) $ 9,771
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 5,966 7,042
Exclusivity amortization -- 2,962
Deferred income taxes (1,201) 7,774
Net gain on dispositions of assets (3,914) (25,369)
Loss on disposal of property and equipment -- 398
Changes in operating assets and liabilities:
Accounts receivable 937 723
Prepaid expenses and other 675 (805)
Accounts payable (3,768) (1,729)
Accrued liabilities 1,589 (1,101)
Customer deposits 65 (73)
Deferred revenues (2,325) (2,954)
Income taxes payable (1,430) 18
-------------- --------------
Net cash provided by (used in) operating activities (4,874) (3,343)
Cash Flows From Investing Activities:
Purchase of property and software (10,444) (3,839)
Capitalization of software development costs (1,241) --
Proceeds from the sale of property and equipment -- 340
Proceeds from the sale of assets 11,421 33,500
Purchase of investments -- (7,941)
-------------- --------------
Net cash provided by (used in) investing activities (264) 22,060
Cash Flows From Financing Activities:
Principal payments under capital lease obligations (175) (185)
Proceeds from exercise of stock options including related tax benefits 388 299
Proceeds from employee stock purchase plan 1,070 754
Purchase of treasury stock (2,066) --
-------------- --------------
Net cash provided by (used in) financing activities (783) 868
-------------- --------------
Net Increase (Decrease) In Cash And Cash Equivalents (5,921) 19,585
Cash And Cash Equivalents At Beginning Of Period 36,535 32,086
-------------- --------------
Cash And Cash Equivalents At End Of Period $ 30,614 $ 51,671
============== ==============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 128 $ 143
============== ==============
Income taxes paid $ 1,624 $ 339
============== ==============
Capital lease additions $ 1,583 $ --
============== ==============
Unsettled portion of treasury share repurchase $ 3,757 $ --
============== ==============
Treasury share funding of 401(k) match $ 963 $ 1,692
============== ==============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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<PAGE> 6
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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
three months ended September 30, 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 earnings (loss) per common share amounts were computed by
dividing income (loss) available to shareholders by the weighted average number
of shares outstanding. Diluted per-common-share amounts assume the issuance of
common stock for all potentially dilutive equivalent shares outstanding except
in loss periods when such an adjustment would be anti-dilutive. The following
table reconciles differences in income and shares outstanding between basic and
dilutive for the periods indicated.
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
---------------------------------------------- ------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available
to common
shareholders $(1,468) 55,510 $(0.03) $9,771 56,703 $0.17
======= =====
Effect of Dilutive
Securities Stock
Option 0 0 0 217
-------- ------ ------ ------
Diluted EPS
Income (loss)
available to
stockholders and
assumed conversions $(1,468) 55,510 $(0.03) $9,771 56,920 $0.17
======== ====== ======= ====== ====== =====
</TABLE>
There were 4,492,868 and 258,854 options to purchase shares of common
stock at various prices outstanding at September 30, 1998 and 1997,
respectively, that were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares during the period.
3. In the quarter ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement requires disclosure of total non-shareowner changes in
equity in interim periods and additional disclosures of the components of
non-shareowner changes in equity on an annual basis. Total non-shareowner
changes in equity includes all changes in equity during a period except those
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<PAGE> 7
resulting from investments by and distributions to shareowners. The specific
components of comprehensive income applicable to the Company would include net
income and unrealized gains or losses on the Company's available-for-sale
securities. There were no available-for-sale securities held during the quarter
ended September 30, 1998 and the carrying value of available-for-sale securities
held during the quarter ended September 30, 1997 approximated market value. As a
result, there were no reported unrealized gains or losses reported on
available-for-sale securities in either period.
4. In the quarter ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and interim financial
reports issued to shareholders. The adoption of this Statement did not have a
material impact on the Company's disclosures.
5. In the quarter ended September 30, 1998, the Company adopted
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The
Statement provides guidance for recognizing revenue on software transactions and
supersedes SOP 91-1, "Software Revenue Recognition." The adoption of the
Statement did not result in a material impact on reported results.
6. During the quarter ended September 30, 1998, the Company issued
74,981 shares of common stock out of treasury to fund its 401(k) match, the cost
of which was accrued during the year ended June 30, 1998. Additionally, during
the quarter ended September 30, 1998, the Company issued 48,631 shares of common
stock out of treasury in conjunction with the employee stock purchase plan which
was funded through employee payroll deductions accumulated in the immediately
preceding six-month period.
7. During the quarter ended September 30, 1998, the Company purchased
575,000 shares of its common stock and recorded them as treasury shares. Of the
total shares repurchased, settlement of trades on 200,000 shares was completed
within the quarter and the remaining trades were settled by October 5, 1998.
8. On September 11, 1998, the Company sold certain software and other
assets related to its mortgage line of business for $19.1 million, net of a
working capital adjustment. As part of the sale agreement, the Company retained
responsibility for certain customer obligations and agreed to subcontract with
the acquiring company to perform consulting services at retail hourly rates for
these retained obligations. The Company received cash of $15 million, net of
$4.0 million of prepaid subcontract services due the acquiring company. The net
gain on the sale of $6.4 million is included in the Net Gain on Dispositions of
Assets in the Company's Statement of Operations.
9. On October 1, 1998, the Company sold certain software and other
assets related to its imaging line of business for $0.8 million consisting of a
note receivable of $0.5 million and future services of $0.3 million. The
estimated loss on the sale of $2.4 million was recorded in the quarter ended
September 30, 1998 and is included in the Net Gain on Dispositions of Assets in
the Company's Statement of Operations.
10. Certain amounts in the June 30, 1998 balance sheet have been
reclassified to conform with the September 30, 1998 presentation. In addition,
certain amounts in the condensed consolidated statements of operations for the
three months ended September 30, 1997 have been reclassified to conform with
September 30, 1998 presentation.
-7-
<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.
The Company is the leading provider of electronic commerce services,
software and related products for over 2.5 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 remains focused on quality enhancement combined with
efficiency improvement in anticipation of overall market growth. The Company is
driving to improve the profitability of the business through efforts to
facilitate revenue growth in all business segments and improve cost efficiency
primarily in remittance, customer care and data processing. From a revenue
perspective the Company is taking several steps to promote growth. In the
Electronic Commerce segment, the Company is currently reliant upon its financial
institution customers to promote its electronic bill payment, banking and bill
presentment product offerings. The Company supports financial institutions'
efforts to convert from a personal computer based software front-end offering to
a more efficient web-based offering. As financial institutions complete their
web-based offerings and revitalize marketing efforts toward electronic bill
payment and electronic banking, the Company believes this will result in
enhanced subscriber growth. An important variable in the anticipated subscriber
growth is the timing of the rollout of these web-based offerings. Additionally,
Company efforts to rapidly enroll significant national merchants in electronic
bill presentment programs, which will be integrated with financial institutions'
electronic bill payment and banking offerings, will allow consumers complete
electronic "round trip" payment capabilities. The growth in bill presentment is
expected to drive growth in bill payment revenue through a more complete
electronic offering, more so than providing a new stand alone revenue stream.
Efforts are also underway to provide enhanced product offerings in both the
Software and Investment Services business segments, which are expected to
further enhance revenue growth opportunities in these segments as well. As a
result of integration of the various acquisitions, the completion of the data
center consolidation in Norcross, Georgia and the continued rollout of project
Genesis (which is designed to provide a single, state of the art processing
platform and to promote customer care efficiency), economies of scale and
leverage are inherent in the Company's business model. Improvements in
remittance and customer care cost efficiency and quality will primarily be
driven by an increased percentage of electronic versus paper transaction
processing and the design and implementation of electronic customer self help
offerings. Improvements in data processing costs and quality are addressed by
the Genesis project, which will also contribute to an increased percentage of
electronic versus paper transactions.
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
foreseeable 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.
-8-
<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 September 30,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Total revenues: 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 65.3% 56.3%
Research and development 11.6% 15.5%
Sales and marketing 13.8% 14.3%
General and administrative 11.9% 10.4%
Depreciation and amortization 10.5% 13.5%
Exclusivity amortization 0.0% 5.7%
--------------- ---------------
Total expenses 113.0% 115.7%
Net gain on disposition of assets 6.9% 48.7%
--------------- ---------------
Income (loss) from operations -6.1% 33.0%
Interest, net 1.4% 0.7%
--------------- ---------------
Income (loss) before income taxes -4.7% 33.7%
Income tax expense (benefit) -2.1% 14.9%
--------------- ---------------
Net income (loss) -2.6% 18.8%
=============== ===============
</TABLE>
Revenue increased 9%, from $52.1 million to $56.8 million, for the
three months ended September 30, 1997 and 1998, respectively. The increases is
due primarily to internal growth in the Company's Electronic Commerce and
Investment Services business, offset by a reduction in reported revenue in the
Software business. Reported Software business revenue reductions are the result
of divestitures of the Company's recovery management business in August 1997,
its item processing business in March 1998, its wire and electronic banking
business in April 1998, its leasing business in July 1998 and its mortgage
business in September 1998. On a pro forma basis, excluding the impact of the
divested software products and the discontinuance of the Web Investor business
in the Electronic Commerce segment in June 1998, revenue increased 26% on a year
over year basis. A 26% growth in electronic commerce revenue, 29% growth in
investment services revenue and 24% growth in software revenue drove this
adjusted consolidated revenue growth. Growth in Electronic Commerce revenue was
primarily the result of subscriber growth of 27% to over 2.5 million on a year
over year basis. Investment Services revenue growth is due primarily to an
increase in portfolios managed from 371,000 at September 30, 1997 to 546,000 at
September 30, 1998. In the quarter ended September 30, 1998, reported software
revenue included approximately $1.7 million of revenue from business ultimately
divested during the quarter. Therefore, retained Software segment revenue
actually grew 2% on a year over year basis, as the first quarter of the fiscal
year is typically very slow in this segment.
Processing and servicing revenue increased $10.5 million, or 31%, from
$34.5 million for the three months ended September 30, 1997 to $45.0 million for
the same period in 1998. This growth was due primarily to the increase in
subscribers in the Electronic Commerce segment and the increase in portfolios
managed in the Investment Services segment mentioned previously.
Reported license revenue declined by $2.8 million, or 49%, from $5.8
million for the three months ended September 30, 1997 to $3.0 million for the
same period in 1998. On a pro forma basis, excluding the impact of divested
software businesses mentioned previously, license revenue declined from $3.9
million to $3.0 million for the three
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<PAGE> 10
months ended September 30, 1997 and 1998, respectively. The relatively low
license performance in both periods is due to typically low seasonal license
sales in the first fiscal quarter in the Software segment.
Reported maintenance revenue declined by $1.8 million, or 26%, from
$6.8 million to $5.0 million for the three months ended September 30, 1997 and
1998, respectively. On a pro forma basis, excluding the impact of divested
software businesses mentioned previously, maintenance revenue increased from
$3.8 million in the three months ended September 30, 1997 to $5.0 million for
the same period in 1998. This is due primarily to the first year maintenance
impact of strong sales of reconciliation and compliance software in the last
half of fiscal 1998.
Reported other revenue, consisting mostly of consulting fees, declined
by $1.1 million, or 22%, from $4.9 million to $3.8 million for the three months
ended September 30, 1997 and 1998, respectively. On a pro forma basis, excluding
the impact of divested Software businesses mentioned previously, other revenue
increased from $3.2 million to $3.8 million on a year over year basis. This
growth is due primarily to increased implementation fees in retained software
businesses and Investment Services.
The cost of processing, servicing and support was $37.9 million and
$29.3 million, or 65.3% and 56.3% of total revenue for the three months ended
September 30, 1998 and 1997, respectively. Cost of processing as a percentage of
servicing only revenue (all revenue except license) was 68.9% and 63.4% for the
three months ended September 30, 1998 and 1997, respectively. Revenue growth in
Electronic Commerce has slowed temporarily as financial institutions convert
from a personal computer software-based front-end to a web-based offering for
their customers. During this time, the Company is continuing to invest in
customer care resources in anticipation of expected revenue growth when these
web-based conversions are completed and the financial institutions reinstate
related marketing efforts toward subscriber growth. Additionally, the Company is
currently incurring the cost of electronic bill presentment or E-Bill
implementations with little current revenue to offset the cost. E-Bill
implementations are expected to have a positive influence on bill payment
subscriber growth more so than to provide a stand-alone revenue stream.
Research and development costs were $6.6 million and $8.1 million, or
11.6% and 15.5% of total revenue for the three months ended September 30, 1998
and 1997, respectively. The drop in absolute dollars is due primarily to two
factors. First, software development resources left the Company in conjunction
with the software divestitures indicated previously. Additionally, in the prior
year, development activities related to the core development of Genesis were not
deemed appropriate for capitalization under FAS 86. In the quarter ended
September 30, 1998, capitalization is appropriate on projects promoting new
functionality designed to improve revenue and/or efficiency, such as customer
self help initiatives and an integrated bill payment and bill presentment
offerings. In this regard, approximately $1.2 million of development costs were
capitalized in the quarter. Total expenditures for research and development
activities as a percentage of revenue during the period were therefore about the
same as in the quarter ended September 30, 1997. The Company is continuing to
focus significant resources in research and development activities in
anticipation and support of revenue growth, quality improvement, and efficiency
enhancement opportunities. Capitalized development expenses may reach as much as
$10 million during the fiscal year.
Sales and marketing costs were $7.8 million and $7.4 million, or 13.8%
and 14.3% of revenue for the three months ended September 30, 1998 and 1997,
respectively. The loss of sales personnel and related variable commission and
other costs from the divested software businesses has been replaced by sales
personnel added to support increased activity in the bill presentment area.
Additionally, in the quarter ended September 30, 1998, incremental costs were
incurred in the creation and launch of a new trade group, the Electronic Banking
Association, which is intended to increase the general population's awareness
and interest in the electronic banking industry.
General and administrative expenses were $6.7 million and $5.4 million,
or 11.9% and 10.4% of revenue for the three months ended September 30, 1998 and
1997, respectively. Historical growth in infrastructure costs has remained below
the rate of revenue growth, as the Company has been able to leverage its
existing infrastructure. The divestiture of the various software businesses has
not resulted in a corresponding reduction in infrastructure as business specific
systems and administrative functions must remain in place to support retained
software businesses, as well as the growing Electronic Commerce and Investment
Services segments. As anticipated revenue growth materializes in the third and
fourth quarters of the fiscal year, management expects general and
administrative costs to decline as a percentage of revenue from its current
levels to be more in line with historical experience.
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<PAGE> 11
Depreciation and amortization expenses decreased by $1.1 million on a
year over year basis. Divestitures of the various software businesses have
resulted in a significant reduction in related tangible and intangible assets.
The resulting decrease in depreciation and amortization expense more than
offsets added depreciation costs resulting from capital additions throughout
fiscal 1998 primarily in support of the data center migration to Norcross,
Georgia and the development of project Genesis.
Exclusivity amortization of $2.9 million in the three months ended
September 30, 1997 was the final amortization expense related to the exclusivity
arrangement entered into with Intuit in conjunction with the purchase of Intuit
Services Corporation ("ISC").
The net gain on dispositions of assets is the result of various
transactions in the periods presented. The gain of $3.9 million in the three
months ended September 30, 1998 is the net result of the gain on the sale of the
mortgage business of approximately $6.4 million and the estimated loss on the
sale of the imaging business of approximately $2.4 million. The gain of $25.4
million in the three months ended September 30, 1997 is the net result of the
gain on the sale of the credit management business of $28.4 million less charges
of $3.0 million related to certain equipment and capitalized costs where
management determined the book value of the related assets exceeded their net
realizable value.
Net interest income increased from $0.4 million to $0.8 million for the
three months ended September 30, 1997 and 1998, respectively. Average invested
assets increased by $8.8 million from $50.3 million to $59.1 for the same
respective periods. Additionally, the Company incurred non recurring interest
expense in the three months ended September 30, 1997 resulting from a $10
million liability due Intuit in October 1997 per the ISC purchase agreement.
The Company reported an income tax benefit of $1.2 million and an
income tax expense of $7.8 million in the three month periods ended September
30, 1998 and 1997, respectively. The related effective tax rates were 45% and
44.3% for the same respective periods. The reported effective tax rates differ
from the blended statutory rate of 40% due primarily to goodwill amortization
and other costs that are not deductible for income tax purposes.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by industry segment for the periods noted (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating Revenue:
Electronic Commerce $ 38,087 $ 30,305
Software 10,195 15,148
Investment Services 8,532 6,634
------------- -------------
Total Operating Revenue $ 56,814 $ 52,087
============= =============
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating Income (Loss):
Electronic Commerce $ (4,610) $ (892)
Software 1,215 202
Investment Services 1,795 1,072
Corporate (5,776) (5,601)
Exclusivity -- (2,963)
Net Gain on Disposition of Assets 3,914 25,369
------------- -------------
Total Operating Income (Loss) $ (3,462) $ 17,187
============= =============
</TABLE>
Revenue in the Electronic Commerce segment increased by $7.8 million,
or 26%, from $30.3 million to $38.1 million for the three months ended September
30, 1997 and 1998, respectively. This increase is due primarily to an increase
of 27% in subscribers to over 2.5 million on a year over year basis. Operating
losses in the Electronic Commerce segment increased from $0.9 million for the
three months ended September 30, 1997 to $4.6 million for the same period in
1998. On a pro forma basis, excluding the Web Investor business that was
discontinued in 1998, operating losses increased from $0.7 million to $4.6
million for the same periods, respectively. As previously indicated, revenue
growth has slowed temporarily as financial institutions convert their personal
computer software-based front-end interfaces to the Company's electronic bill
payment and banking processes to more efficient web-based front-end interfaces.
During this time the Company has continued to commit resources geared toward
quality and efficiency improvement in anticipation of the revenue growth when
financial institutions complete their technology conversions and refocus
marketing efforts toward subscriber growth. Investments include additional
customer care resources geared toward improved quality and significant E-Bill
implementation costs, which are not offset by significant related revenue. While
the Company expects that revenue will begin to grow at an increasing rate during
the third quarter of the fiscal year, such increasing revenue growth is
currently dependent upon financial institutions completing their technology
conversions and implementing planned marketing programs in a timely fashion.
Software segment revenue declined from $15.1 million in the three
months ended September 30, 1997 to $10.2 million on a reported basis in the
same period in 1998. On a pro forma basis, net of the impact of divested
software businesses, revenue increased from $8.3 million to $10.2 million for
the three months ended September 30, 1997 and 1998, respectively. The 1998
quarterly results included $1.8 million of revenue from products divested during
the quarter, therefore, retained business revenue grew from $8.3 million to $8.4
million from 1997 to 1998. The first quarter of the fiscal year is typically
very slow in the Software segment from a revenue perspective. Reported operating
profit increased from $0.2 million to $1.2 million for the three months ended
September 30, 1997 and 1998, respectively. On a pro forma basis, operating
profit decreased from $1.6 million to $1.2 million for the same respective
periods. The retained businesses, net of $1.6 million of operating losses in
divested businesses in the first quarter of 1998, incurred operating profit
growth from $1.6 million to $2.8 million for the three months ended September
30, 1997 and 1998, respectively. The increase in retained business profit is a
reporting anomaly related to allocated corporate fixed costs in the 1997
quarter. The 1997 results are carrying the full burden of fixed overhead from
the Software segment to avoid unreasonably impacting other segments on a
restated pro forma basis. If the effect of allocations is ignored, underlying
operating profit margins in the Software segment are relatively consistent from
year to year.
Revenue in the Investment Services segment has increased by $1.9
million, or 29%, from $6.6 million to $8.5 million in the three months ended
September 30, 1997 and 1998, respectively. This revenue growth is primarily the
result of an increase in portfolios managed from 371,000 to 546,000 on a year
over year basis. Operating income increased from $1.1 million to $1.8 million on
a year over year basis as the segment has been able to leverage its existing
infrastructure in light of increased portfolio growth.
-12-
<PAGE> 13
The Corporate segment represents charges for the human resources,
legal, accounting and finance and various other of the Company's unallocated
overhead charges. Corporate incurred operating costs of $5.7 million in the
quarter ended September 30, 1998 versus $5.6 million in the same period in 1997.
The unallocated portion of the Company's costs have remained fairly consistent
in light of total revenue growth due to management's ability to leverage these
resources as the dynamics of the other operating segments have changed over the
past year.
Exclusivity amortization of $2.9 million in the three months ended
September 30, 1997 was the final amortization expense related to the exclusivity
arrangement entered into with Intuit in conjunction with the purchase of ISC.
The net gain on dispositions of assets is the result of various
transactions in the various periods presented. The gain of $3.9 million in the
three months ended September 30, 1998 is the net result of the gain on the sale
of the mortgage business of approximately $6.4 million and the estimated loss on
the sale of the imaging business of approximately $2.4 million. The gain of
$25.4 million in the three months ended September 30, 1997 is the net result of
the gain on the sale of the credit management business of $28.4 million less
charges of $3.0 million related to certain equipment and capitalized costs where
management determined the book value of the related assets exceeded their net
realizable value.
The following table represents pro forma segment revenue and operating
profit information, by quarter for fiscal year 1998, net of divested businesses.
This information may be used quarterly for the remainder of the year to better
understand trends in the underlying businesses
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------
PRO FORMA FISCAL 1998 RESULTS September 30, December 31, March 31, June 30,
(in thousands) 1997 1997 1998 1998
--------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Operating Revenue:
Electronic Commerce $ 30,088 $ 32,452 $ 35,949 $ 38,773
Software 8,254 8,824 9,030 11,324
Investment Services 6,617 7,366 7,588 8,179
--------------- ----------------- ------------- ----------------
Total Segment Operating Revenue $ 44,959 $ 48,642 $ 52,567 $ 58,276
=============== ================= ============= ================
Operating Income (Loss):
Electronic Commerce $ (689) $ (23) $ 795 $ (535)
Software 1,599 2,699 2,322 4,095
Investment Services 1,050 1,397 1,703 2,076
Corporate (5,685) (5,023) (4,654) (4,760)
--------------- ----------------- ------------- ----------------
Total Operating Income (Loss)* $ (3,725) $ (950) $ 166 $ 876
=============== ================= ============= ================
* Exclusivity amortization, Net gain on dispositions of assets, In-process research and development and
Charge for stock warrants have been omitted to facilitate understanding of the underlying business
segments.
</TABLE>
YEAR 2000 READINESS
The goal of the Company is to ensure that all systems and products will
be ready for any date-based processing related to the millennium. The following
readiness disclosure is presented for each of the Company's business segments:
Electronic Commerce, Software and Investment Services.
-13-
<PAGE> 14
State of Readiness. The Company is moving all of its Electronic
Commerce Division processing to Year 2000-ready environments and is making
satisfactory progress to ensure that all of its systems will be ready for any
date-based functions related to the millennium. An inventory of all information
technology and non-information technology systems is maintained and periodically
updated. Those functions that are likely to have a material effect on Company
business have been identified and assessed. Validation is based on third-party
representations and/or internal testing. Based on a review of third-party
representations, the Company is not currently aware of any third-party issue
applicable to the Year 2000 that is likely to have a material impact on the
conduct of business, the results of operations or the financial condition of the
Company. The Company has not performed its own tests on these third-party
systems and no assurances can be given at this time that these systems are Year
2000-ready.
The Federal Financial Institutions Examination Council ("FFIEC") has
issued guideline dates for financial institutions and service providers (such as
the Company). The following key dates provided with this guidance are part of
the Company's project plan.
- December 31, 1998 - Testing of internal mission-critical
systems should be substantially complete. Service providers
should be ready to test with customers.
- March 31, 1998 - Testing by institutions relying on service
providers for mission-critical systems should be
substantially complete. External testing with material other
third parties (customers, other financial institutions,
business partners, payment system providers, etc.) should
have begun.
- June 30, 1999 - Testing of mission-critical systems should be
complete and implementation should be substantially complete.
Previous implementation phases included building a Year 2000-ready data
center and the physical move of the processing systems to that center. The final
implementation phase will include the planned migration of customers from the
Chicago and Columbus systems to the Year 2000-ready environment followed by
applicable testing on that system to be completed by the middle of 1999. In
anticipation of limited customer migration from the Austin system to Genesis
before January 1, 2000, the Austin system has been made Year 2000-ready and
testing with financial institutions is underway. Any of the existing systems or
facilities that will be retained have been or will be made Year 2000-ready by
the end of calendar 1998. During the first half of calendar 1999, the Company
will address any remaining Year 2000 functions that are not considered mission-
critical.
Costs to Address the Company's Year 2000 Issues. Although the
development of Genesis has taken into account relevant Year 2000 issues, the
planned conversion was not accelerated due to Year 2000 issues and Year 2000
costs are not included in development for the Norcross system. The following
chart reflects the Company's Year 2000 specific costs. The fiscal year 1998
costs are attributed to remediation of legacy systems and applications. The cost
to complete includes remediation, testing and independent verification but is
primarily budgeted to remedy any Year 2000 related situations that management
has not heretofore anticipated.
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------
YEAR TO
COST TO DATE FISCAL
BUSINESS SEGMENT COMPLETE 1999 1998 1997 TOTAL
- ------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Electronic Commerce $ 1,189 $ 211 $ 100 $ -- $ 1,500
Software 300 200 500 -- 1,000
Investment Services 425 276 375 -- 1,076
Corporate 249 51 -- -- 300
------------ ------------ ------------ ------------ ------------
Total $ 2,163 $ 738 $ 975 $ -- $ 3,876
============ ============ ============ ============ ============
</TABLE>
- 14 -
<PAGE> 15
Risks of the Company's Year 2000 Issues. In order to accurately process
transactions, the Company must rely on technology supported by its customers and
suppliers. Transaction processing relies on transmissions of data from consumer
personal computers, through financial institution and merchant web servers and
the Internet, over third party data and voice communication lines, and through
the Federal Funds System. Failure by the Company, its customers or suppliers to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to process transactions and have a direct impact on its
ability to process transactions and have a direct impact on its ability to
generate revenue per agreements with financial institution, portfolio
management, merchant and direct customers. This in turn could have a material
impact on the conduct of the business, the results of operations and the
financial condition of the Company. Accordingly, the Company plans to address
all Year 2000 issues before problems materialize. The Company believes that
associated costs are adequately budgeted for in its fiscal 1999 business plans.
However, should efforts on the part of the Company, its customers and suppliers
fail to adequately address their relevant Year 2000 issues, the most likely
worst case scenario would be a total loss of revenue to the Company.
The Company's Contingency Plans. The Company is internally reviewing
and testing all mission-critical systems and major system components for Year
2000 readiness and intends to have an independent review of this testing
completed by the end of calendar 1998. Additionally, Year 2000 considerations
will be incorporated into the Company's business contingency plans in the same
timeframe.
The Company cannot guarantee that its efforts will prevent all
consequences and there may be undetermined future costs due to business
disruption that may be caused by customers, suppliers or unforeseen
circumstances.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1998, the Company's operating
activities used cash of $4.9 million. While the Company incurred a net loss of
only $1.5 million for the quarter, cash payments for annual incentive bonuses
and commissions on year-end license sales are made in the first quarter of the
fiscal year, which has a significant impact on cash flow from operations. From
an investing perspective, during this same three month period, the Company
incurred a net use of $0.3 million of cash. This amount is made up of net
receipts of $11.4 million for software business unit sales offset by capital
expenditures of $10.5 million and capitalization of software development costs
of $1.2 million. In the financing area the Company used $0.8 million of cash.
The Company purchased shares of its common stock and settled trades of $2.1
million in the quarter and made principle payments under capital leases of $0.2
million. These expenditures were offset by proceeds of $1.1 million from the
employee stock purchase plan and $0.4 million in exercised stock options. As of
September 30, 1998, the Company had $67.6 million of available working capital
and its balance sheet reflects a related current ratio of 2:2.
In the first several days of October 1998, the Company expended $29.1
million on additional purchases of its common stock and as of October 10, 1998,
the resulting cash and cash equivalent balance was approximately $27 million.
The Company has received Board approval to purchase up to an additional
1.3 million shares should the appropriate circumstances arise. By the end of the
third quarter of the fiscal year, the Company plans to sell its existing
building in Columbus, Ohio and is considering mortgaging the new building in
Dublin, Ohio or entering into a sale and leaseback arrangement with the new
facility. The real estate transactions are expected to generate net cash in
excess of $10 million. Additionally, the Company expects to earn a profit in the
year ended June 30, 1999 and expects to generate positive cash flow from
operations in the second half of the year. As a result, the Company believes
that existing cash and expected cash from operations and real estate
transactions 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.
-15-
<PAGE> 16
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 of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, 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 involving 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, 1998 and the Company's Proxy Statement for the Annual
Meeting of Stockholders held on November 9, 1998. 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.
-16-
<PAGE> 17
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 September 9, 1998, was
filed with the Securities and Exchange Commission on September 14, 1998 (Items 5
and 7).
(ii) A current report on Form 8-K, dated October 9, 1998, was
filed with the Securities and Exchange Commission on October 13, 1998 (Items 5
and 7).
-17-
<PAGE> 18
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.
<TABLE>
<S> <C>
CHECKFREE HOLDINGS CORPORATION
Date: November 13, 1998 By: /s/ Allen L. Shulman
--------------------------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer, and General
Counsel*
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ Gary A. Luoma, Jr.
--------------------------------------------
Gary A. Luoma, Jr., Vice President, Chief
Accounting Officer, and Assistant Secretary
(Principal Accounting Officer)
</TABLE>
* In his capacity as Executive Vice President, Finance and Chief Financial
Officer, Mr. Shulman is duly authorized to sign this report on behalf of the
Registrant.
-18-
<PAGE> 19
CHECKFREE HOLDINGS
CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
EXHIBIT INDEX
<PAGE> 20
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
27 * Financial Data Schedule.
- ------------------------
* Filed with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 30,614
<SECURITIES> 25,539
<RECEIVABLES> 40,818
<ALLOWANCES> (3,721)
<INVENTORY> 0
<CURRENT-ASSETS> 125,082
<PP&E> 91,974
<DEPRECIATION> 36,900
<TOTAL-ASSETS> 243,496
<CURRENT-LIABILITIES> 57,506
<BONDS> 0
0
0
<COMMON> 565
<OTHER-SE> 178,419
<TOTAL-LIABILITY-AND-EQUITY> 243,496
<SALES> 0
<TOTAL-REVENUES> 56,814
<CGS> 0
<TOTAL-COSTS> 64,190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> (2,669)
<INCOME-TAX> (1,201)
<INCOME-CONTINUING> (1,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,468)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
