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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended June 30, 1998
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $404,038,440 on September 9,
1998.
There were 55,571,546 shares of the Registrant's Common Stock
outstanding on September 9, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended June 30, 1998 are incorporated by reference in Part II.
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
Signatures 33
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PART I
ITEM 1. BUSINESS.
GENERAL
As used in this report, "CheckFree" is generally used to indicate
CheckFree Holdings Corporation(1) prior to its acquisition of Servantis Systems
Holdings, Inc. on February 21, 1996 (the "Servantis Acquisition"), prior to its
acquisition of Security APL, Inc. on May 9, 1996 (the "Security APL
Acquisition"), and prior to its acquisition of Intuit Services Corporation on
January 27, 1997 (the "ISC Acquisition") (the Servantis Acquisition, the
Security APL Acquisition, and the ISC Acquisition are collectively referred to
as the "Acquisitions"). "Servantis" is generally used to indicate Servantis
Systems Holdings, Inc. prior to its acquisition by CheckFree, "Security APL" is
generally used to indicate Security APL, Inc. prior to its acquisition by
CheckFree, "ISC" is generally used to indicate Intuit Services Corporation prior
to its acquisition by CheckFree, and the term the "Company" is used to indicate
the combined company following the Acquisitions.
CheckFree Holdings Corporation (the "Company") is a leading provider of
electronic commerce services, institutional portfolio management services, and
financial application software for financial institutions and businesses and
their customers. The Company services approximately 2.4 million consumers, 1,000
businesses, and 850 financial institutions (including the 500 largest banks in
the United States). The Company has also signed agreements with over 350
financial institutions to provide electronic home banking services for the
customers of those financial institutions.
This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Business
- - -- Business Risks."
The business of the Company is pursued through three independent but
inter-related divisions: Electronic Commerce, Institutional Investment Services,
and Software. All three divisions market their services and products to
financial institutions, the investment industry, and to their customers, both
consumer and business. The Company's current business has been developed through
expansion of its core electronic commerce business and the acquisition of
companies operating businesses similar to, or complementary with, that business.
EVOLUTION OF CURRENT BUSINESS
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has three direct and indirect wholly owned
subsidiaries: CheckFree Corporation, a Delaware corporation; CheckFree
Investment Corporation, a Delaware corporation; and RCM Systems, Inc., a
Wisconsin corporation. The Company's principal executive offices are located at
4411 East Jones Bridge Road, Norcross, Georgia 30092 and its telephone number is
(770) 441-3387. The Company's Internet address is http://www.checkfree.com.
5B CAPABILITY
Prior to the Acquisitions, the Company operated its business in one
business segment, electronic bill payment. Through the Acquisitions the Company
obtained the customer relationships, technology, skilled personnel, and other
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(1)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 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.)
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resources required to fulfill its strategy of diversifying its offerings in
electronic commerce to embrace each of the 5Bs: electronic bill payment, bill
presentment, banking, brokerage, and business payments ("5Bs"). These
acquisitions also helped to enable the Company to extend the application of its
expertise and relationships in electronic commerce to two related areas,
investment services and software.
THE SERVANTIS ACQUISITION
On February 21, 1996, CheckFree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of the
Company's Common Stock valued at $20.00 per share and $42.5 million in cash to
repay Servantis' long-term debt. The Company accounted for the Servantis
Acquisition using the purchase method of accounting.
THE SECURITY APL ACQUISITION
On May 9, 1996, CheckFree acquired Security APL for approximately $53.3
million, consisting of the issuance of 2.8 million shares of the Company's
Common Stock valued at $18.50 per share. The Company accounted for the Security
APL Acquisition using the purchase method of accounting.
THE ISC ACQUISITION
On January 27, 1997, CheckFree acquired ISC for approximately $199.0
million, consisting of the issuance of 12.6 million shares of the Company's
Common Stock and $20.0 million payable in two equal cash payments to the seller,
Intuit Inc. ("Intuit"). The Company accounted for the ISC Acquisition using the
purchase method of accounting.
INTEGRATION OF ACQUISITIONS
The Acquisitions further CheckFree's strategy of providing an expanding
range of convenient, secure, and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience and relationships developed as a provider of electronic
commerce and financial applications software and services to financial
institutions substantially enhances the Company's presence in the financial
institutions market of the electronic commerce industry. Security APL's
experience as a vendor of portfolio management and software services to
institutional investment managers and consumers permits the Company to continue
to enhance these service offerings to institutional investment managers and for
consumers through the Company's financial institution distribution channels.
ISC's base of financial institution banking customers expanded the Company's
home banking and bill payment offering, and made the Company's services more
readily available to a wider base of financial institutions and their customers.
The integration of each of the Acquisitions with the original core business has
created a single vendor of electronic commerce services and related products to
an expanded customer base of financial institutions and businesses and their
customers.
POST-ACQUISITIONS STRATEGY
The Acquisitions support CheckFree's attainment of its overall goal of
providing an expanding range of convenient, secure, and cost-effective
electronic commerce services and related products to financial institutions,
businesses and their customers. The Company has designed its services and
products to take advantage of opportunities it perceives in light of current
trends and the Company's fundamental strategy. The components of the Company's
strategy are to:
Offer Services to Consumers and Businesses Through Financial
Institutions. The Company believes that the public will most readily adopt
electronic methods for financial transactions when they are offered with the
imprimatur of a trusted financial institution. The Company believes that this
strategy enhances user confidence in the underlying technology and encourages
financial institutions to promote use of the Company's services.
Exploit Multiple Distribution Channels. In addition to distributing
directly through financial institutions, the Company maintains alliances with
market-leading companies to achieve deeper market penetration. To better reach
smaller financial institutions, the Company has entered into distribution
agreements with certain independent firms
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which the Company believes can more efficiently address the needs of this
segment of the industry. Additionally, by making its services available to users
of personal financial management software, such as Quicken, and of business
management software, such as QuickBooks, the Company expands public access to,
and awareness of, its services. Similarly, the Company offers web-based products
to both bank and non-bank financial institutions for their own and for their
customers' use. The Company also sponsors the Electronic Banking Association, a
non-profit organization, which promotes electronic banking and related services.
Leverage Customers and Alliances Across Markets. The Company's efforts
in each target market are designed to increase its successor opportunities in
its other markets. The products and customer bases of the acquired companies
substantially increase the Company's offerings to financial institutions, which
the Company expects will enhance its opportunity to expand its electronic
commerce services through them to businesses and ultimately to the end users.
Expand Customer Care and Technical Support. The Company supports and
services its customers through numerous activities, including annual user group
meetings and customer satisfaction surveys, technical and non-technical support
(through help desk, e-mail, facsimile, and bulletin board), service
implementation, and training. The Company is enhancing its ability to provide
first and second-tier support of its services through advanced communications
technologies which enable the Company to efficiently respond, either directly or
as part of financial institutions' customer support systems, to end-user
inquiries on the World Wide Web. The Company believes that providing superior
quality and accessible and reliable customer care is essential to establishing
and maintaining successful relationships with its customers.
ELECTRONIC COMMERCE
INTRODUCTION
Over the last decade, electronic execution of financial transactions
has increased substantially. Increased use of credit cards, automated teller
machines ("ATMs"), electronic funds transfer and direct payroll deposit have
automated, simplified and reduced the costs of financial transactions for
financial institutions and businesses and their customers. The Company believes
that increasing public awareness and acceptance of electronically-effected
transactions creates an expanding market for its services. Electronic commerce
offers the potential to complete financial transactions more quickly, with
greater accuracy, and at a lower cost than traditional paper-based methods.
OPPORTUNITIES
The Company considers activities traditionally conducted on paper or in
person as offering it opportunities to sell its services. The Company believes
that the greater the volume of such activities, and the higher chance for error,
or the imposition of inconvenience, the greater will be the Company's
opportunity.
Continued Use of Paper Checks. A substantial portion of financial
transactions in the U.S. are still executed by paper check. Checks impose
significant costs on financial institutions and businesses and their customers.
Time costs include the writing, mailing, recording, and processing of checks.
Financial costs include postage, processing costs and costs associated with the
"float" created between the time checks are written and cleared.
Paper Billing. Many financial transactions are initiated by the
rendering of a paper bill or invoice which is delivered to the payer by U.S.
mail. It is estimated that over 15 billion paper bills are produced each year,
and that the cost of submitting a printed bill, including printing, postage, and
advertisements, ranges between $0.65 and $1.25. Additional costs inherent in the
system include delays, opportunity for losses in the mail, misplaced bills,
printing errors, and accessibility limited to a single physical mail-drop.
Moreover, merchants continue to seek better means of marketing to their
customers than can be accomplished through mailings.
Conventional Banking. Many financial transactions are currently
conducted in person at bank branches. For many bank customers, conducting
banking requires a physical visit to a branch in order to check balances,
transfer sums from one account to another, inquire on the status of an item, to
make deposits, or to obtain assistance in reconciling accounts. Banks incur
substantial expenses in providing personnel and physical plants to service these
requirements.
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Bank customers incur transportation costs and personal inconvenience and delay
by traveling to a branch location to complete these transactions.
Conventional Brokerage. Traditional investment brokerage houses render
statements of account to customers on paper conveyed to their clients through
the U.S. mail. For active account-holders, or in rapidly-changing markets, by
the time the paper statement is received and reviewed, the information may be
seriously out-of-date. Tax lot accounting, and comparison to historical balances
is often unavailable through the paper statement. There are considerable costs
involved in preparing and mailing paper statements, and in providing personnel
at the brokerage to respond to inquiries regarding the status of accounts.
Business Payments. In addition to the costs and inconvenience borne by
consumers in receiving and paying paper bills, businesses often receive multiple
invoices from the same vendor comprising periodic statements. Issues such as
discounts for prompt payment, returns, allowances, disputed charges, and other
adjustments, as well as reconciliation to the business's own records, increase
the costs of payment. It is estimated that businesses issue more than 28 billion
checks annually.
TRENDS
Notwithstanding the current predominant usage of conventional methods
of conducting financial transactions, there are a number of current trends that
are driving increasing acceptance of electronic commerce in the U.S.:
- Increase in Electronic Financial Transactions. Over the last
decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards, ATMs,
electronic funds transfer, and direct payroll deposit have
automated, simplified, and reduced the costs of financial
transactions for consumers, businesses, and financial
institutions.
- Continuing Penetration of Personal Computers and Modems into
U.S. Households.
- Rapid Growth in On-line Interactive Services, Particularly in
the Internet. A presence on the World Wide Web is
increasingly being viewed as a necessity by companies of all
sizes. At the same time, security concerns in using the
Internet to conduct financial transactions appear to have been
substantially allayed.
- Growth in Small Business Use of Personal Computers.
- Continuing Automation of Financial Institutions' Operations.
Financial institutions are facing increasing competition as a
result of banking deregulation and technological innovation.
The competition is not only from within the financial
institution industry, but also from new competitors in related
industries, such as insurance companies and mutual funds. The
Company believes that in an increasingly competitive
environment, financial institutions will seek opportunities to
automate their operations by providing electronic banking,
electronic bill payment and automated portfolio services to
their customers, and by investing in cost-saving software.
These services, the Company believes, will enable financial
institutions to reduce costs, generate fee-based income and
strengthen their customer relationships.
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- Competition Between Banks and Non-Bank Financial Institutions
for Customers. The traditional supremacy of banks as the
provider of financial services is being increasingly
challenged by others such as brokerage houses, mortgage
brokers, software companies, and web-based portals and
specialty financial sites on the World Wide Web.
THE COMPANY'S RESPONSE
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions, businesses, and
their customers. Paper transactions impose significant costs that can be reduced
through electronic execution. The continuing penetration of personal computers
and modems into U.S. households, along with the rapid growth in on-line
interactive services, are providing the technical infrastructure required to
accelerate the acceptance of electronic commerce. In addition, the Company
believes the key requirements that must be addressed to increase acceptance of
electronic commerce applications include: (i) maintenance of industry-wide
quality levels for security, accuracy, reliability and convenience; (ii)
reduction in transaction processing costs; (iii) application of easy-to-use
interfaces; and (iv) development of seamless integration with the existing
financial infrastructure and existing relationships among all parties to a
financial transaction. As a result, the Company believes that the opportunity
exists to provide an integrated set of electronic services that further automate
financial transactions for financial institutions and businesses and their
customers.
PRODUCTS, SERVICES, AND COMPETITION
ELECTRONIC COMMERCE SERVICES
The Company has adopted a "5B" response to the electronic commerce
market, comprising Bill Payment, Bill Presentment, Banking, Brokerage, and
Business Payment services. The Company's electronic commerce services and
related products are targeted to financial institutions, businesses, and their
customers. To ensure the security of all the electronic commerce transactions
that the Company processes, the Company utilizes a combination of measures,
including various proprietary security technologies and existing industry
security standards such as encryption and multiple authorization and
authentication technologies. The Company is continually developing new
electronic commerce services and enhancing its existing services for each of its
target markets.
(1) Bill Payment. The Company's origins were in offering electronic
bill payment to consumers. In keeping with the Company's primary strategy of
offering electronic commerce alternatives through financial institutions, the
Company accommodates several alternative means for consumers to pay bills. The
Company designs and develops private label services for financial institutions,
which in turn offer electronic payment as one component of home banking services
available to their customers. Interfaces with personal financial management
software, such as Quicken, Managing Your Money and Microsoft Money are available
to users of most versions. Additionally, the Company provides bill payment
services to users of Intuit's financial services website, Quicken.com.
The Company also offers bill payment services in conjunction with bill
presentment through the Internet to consumers whose financial institutions are
not yet able to offer such services. The Company believes that its services
offer significant benefits to financial institutions, including lower
transaction processing costs, additional fee income, potential new customers,
and attractive additional services to offer existing customers. By providing
access to its services through widely-sold PFMs, through proprietary financial
institution software, and through the Internet, the Company intends to encourage
the greatest use of its services.
Revenues are generated through contracts that the Company signs with
individual financial institutions. Although the structure of contracts vary, the
Company typically negotiates with the institution an implementation fee, a
monthly base fee per customer account on the service provided by the Company,
plus a variable per transaction fee which decreases based on the volume of
transactions. Contracts typically have one-to-three year terms and generally
provide for minimum fees if certain transaction volumes are not met. The Company
utilizes direct sales and distribution alliances to market to financial
institutions and has the ability to customize services for each institution.
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The Company has contracts with more than 350 financial institutions
through which electronic payment services are provided to customers of the
financial institutions. Some of the financial institutions served by the Company
include: Bank of America, Bank One, Chase Manhattan, KeyCorp, NationsBank, Wells
Fargo, Charles Schwab, and Merrill Lynch.
The Company's bill payment services enable financial institution
customers and direct consumer subscribers to pay bills electronically using a
variety of devices such as personal computers and touch-tone telephones. Bills
paid by consumers using the Company's bill payment services typically include
payments such as credit card statements, monthly mortgage payments, and utility
bills, but a cornerstone of the Company's offering is that it can facilitate
payment to anyone. Consumers can use the Company to make any payments from any
checking account at any financial institution in the United States. Recurring
bills such as mortgages can be paid automatically and scheduled in advance for
an indefinite period of time, as specified by the user. As of June 30, 1998, the
Company had approximately 2.4 million consumers benefitting from its bill
payment and/or home banking services.
(2) Bill Presentment. In March 1997, the Company announced the market
release of its electronic bill presentment and payment product, CheckFree
E-Bill. Offered originally as a world-wide web based service, it permits billing
companies to deliver full-color electronic bills to their customers' personal
computers, together with detailed information and the electronic equivalent of
promotional inserts. The recipients can use the service to electronically make
payment. Pursuant to its strategy of offering services through financial
institutions, the Company is marketing the service to banks to be incorporated
into their electronic banking and bill payment services. The Company enters into
a variety of arrangements with banks and billing companies to provide such
services and, in some cases, will share revenue derived from billing companies
with banks. The Company believes that billing companies could eventually achieve
substantial savings by utilizing the Company's bill presentment service, but the
Company believes that an even stronger incentive for billers to present bills
electronically is the opportunity such a system offers for more effective
marketing to customers.
(3) Banking. The Company supports home electronic banking services for
financial institutions and their customers. Using a variety of PFMs, institution
proprietary software, and other front ends, customers can access their accounts
through personal computers, the Internet, or telephone-based voice recognition
unit (VRU) systems, to effect a wide variety of banking transactions. Among
these are balance inquiries, fund transfers, customer service, customer billing,
and marketing. The service facilitates on-line reconciliation to PC-based
account registers, matching cleared items with previously-entered transactions.
Revenues are generated through contracts that the Company signs with individual
financial institutions. The Company typically negotiates with the institution an
implementation fee, a base monthly fee per customer account on the service
provided by the Company, plus a variable per transaction fee which decreases
based on the volume of transactions. Contracts typically have three-to-five-year
terms and generally provide for minimum fees if certain transaction volumes are
not met. The Company utilizes direct sales and distribution alliances to market
to financial institutions and has the ability to customize services for each
institution.
The Company believes that banks that offer electronic banking increase
customer retention, have a superior marketing channel, and experience fewer
time-consuming customer service problems.
(4) Brokerage. The Company provides customized solutions for financial
service providers either for internal use, or to support offerings to their
customers. The Company's services provide fully integrated, on-line trading,
portfolio accounting, quotes, news services, research, and fundamental data. The
Company believes the service offers significant benefits to financial
institutions, including lower costs, additional fee income, potential new
customers, and attractive additional services to offer to existing customers.
A web-based product enables financial institutions to add to their own
web sites services which include a cost basis tax lot accounting tool that
allows financial institution customers to keep track of the investments they
own, and provides the customers with enough information to make informed
decisions about generating gains or losses from their portfolios when required.
It also provides a seamless connection to electronic brokerage via various order
entry screens. The system also allows for integration of third party information
(e.g,. research reports, financial news, fundamental data, etc.). These products
and services permit banks to offer many of the services required for them to
compete effectively with non-bank financial institutions. Although the Company
has discontinued the sale of its web-based product, it will continue to service
existing customers under contracts through December 31, 1999.
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(5) Business Payments. The Company facilitates electronic payments for
businesses through its offerings of business bill payment and banking, ACH
processing, and automatic accounts receivable processing services. As it does
for consumers, the Company enables businesses to make payments to anyone. The
business bill payment system accommodates the special requirements of businesses
which can obtain the service through their financial institution. The Company
employs a direct sales force to market the service through banks, and others.
Subject to certain non-compete obligations assumed in conjunction with the
termination of the Company's joint venture with ADP, the Company offers its
business bill payment capability directly to developers of business accounting
systems. ADP continues to utilize the Company's services to provide bill payment
capability to its customers. The Company's ACH processing offering affords
financial institutions the opportunity to outsource their ACH processing which
has traditionally been handled in-house. The Company's service provides a more
cost efficient solution to financial institutions and allows the institutions to
focus on their higher profitability core competencies. The Company provides
automatic accounts receivable collections for businesses in the on-line
interactive services, Internet access, health and fitness and various other
industries, enabling these businesses to collect monthly membership or access
fees through links to the customer's credit card or bank account. Services are
typically provided under exclusive contracts for three years with automatic
renewals. For providing collection services, businesses pay the Company
implementation fees, transaction fees and credit card discount fees.
Competition. Portions of the electronic commerce market are becoming
increasingly competitive. The Company faces significant competition in all of
its customer markets. A number of banks have developed, and others may in the
future develop, home banking services in-house. A number of relatively small
companies, such as Travelers Express (a division of Viad), compete with the
Company in electronic bill payment. In the business market, the Company competes
with ACH processors. The Federal Reserve's ACH is the national payment clearance
system through which any bank can effect debit transactions to any authorized
consumer checking account. The Company also faces competition in ACH processing
from numerous banks. Microsoft Corporation and First Data Corporation have
formed a joint venture, originally known as MSFDC, which competes aggressively
with the Company in the area of bill payment and bill presentment. In September
1998, it was announced that MSFDC had changed its name to TransPoint and had
accepted an equity investment from Citibank which will perform bill payment
processing for the venture.
In the brokerage segment, the Company competes with Shaw Data and
Advent, and the Company competes for business bill payment customers with ACI
and Deluxe Data, which provide ACH processing.
Because the electronic commerce industry is expected to grow
substantially in the coming years, the Company anticipates continued strong
competition, but it believes that the increased attention and credibility such
competition will bring to the industry may broaden the market and increase the
percentage of financial transactions which are effected by electronic means.
INVESTMENT SERVICES
Generally. The Company offers portfolio accounting and performance
measurement to investment advisors, brokerage firms, banks, and insurance
companies. Clients are able to leverage their systems and streamline their
operations. The Company designs custom solutions with clients, allowing
investment managers the kind of functionality that dramatically increases
productivity. The full-range of portfolio management system solutions include
data conversion, personnel training, trading system, graphical client reporting,
performance measurement, technical network support, interface setup, and DTC
processing on behalf of clients. The Company supports money managers who charge
a flat fee for their services (the "Wrap Industry") and is a leading supplier to
such money managers.
Competition. Competition for portfolio services includes two main
segments. The Company competes with providers of portfolio accounting software,
including Advent Software, and PORTIA (a division of Thomson Financial). The
Company also competes with service bureau providers such as Shaw Data (a
Sunguard Company) and FMC Service Bureau.
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SOFTWARE
Generally. The Company is a leading provider of electronic commerce and
financial applications software and services for businesses and financial
institutions. The Company designs, markets, licenses, and supports software
products for electronic corporate banking, financial lending, regulatory
compliance, and document imaging. In addition, the Company offers software
consulting and remote processing services.
The Company's financial application software revenues are derived
primarily from the sale of software licenses and software maintenance fees. The
Company's software is sold under perpetual licenses, and maintenance fees are
received through renewable agreements. The Company also derives revenues from
project consulting services and from remote transaction processing fees.
In April 1998, the Company announced its intention to divest itself of
many of its software businesses. By September 1998, it had sold its item
processing, wire transfer and cash management, leasing, and mortgage businesses.
The Company's planned sale of its imaging business is expected to close by
mid-October 1998, but the contemplated divestiture of its Safe Box Accounting
software business has been indefinitely postponed because received offers were
considered inadequate.
Retained software products licensed by the Company provide systems that
range from back office operations to front-end interface with the clients of the
Company's customers. Applications include reconciliation, regulatory compliance,
ACH origination and processing, and safe deposit box accounting.
The Company's software products are sold under individual brand names.
Its most significant products include:
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BRAND NAME FUNCTION CUSTOMERS
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PEP+ Automated Clearing House Processing Businesses and financial institutions
RECON-PLUS Group Account Reconciliation Businesses and financial institutions
ARP/SMS Financial Account Reconciliation Financial institutions
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ACH. The ACH network was developed in the 1970s to permit the
electronic transfer of funds and thus curtail the growth in the number of paper
checks in circulation. The ACH network acts as the clearing facility for routing
electronic funds transfer entries between financial institutions. All ACH
transfers are handled in a standard format established through the National
Automated Clearing House Association ("NACHA"). More than 15,000 financial
institutions participate in the ACH system. There are 31 ACHs, which
geographically coincide with the 12 Federal Reserve Banks, their branches and
processing centers. The Company's electronic funds transfer products are
inter-related and may be used by either businesses or financial institutions
depending on the services they offer their customers and employees.
The Company developed the most widely used, comprehensive ACH
processing system in the United States, the Paperless Entry Processing System
Plus ("PEP+"). PEP+ is an on-line, real-time system providing an operational
interface for originating and receiving electronic payments through the ACH. The
Company continues to support the Paperless Entry Processing System ("PEP"),
which was the predecessor to PEP+.
Reconciliation. The Company's reconciliation products provide U.S.
banks, international banks and corporate treasury operations with automated
check and non-check reconciliations in high volume, multi-location environments.
These systems are often tailored so that banks and multi-bank holding companies
may deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. Some of the services the Company's reconciliation
products provide are automated deposit verification, consolidated bank account
reconciliations and cash mobilization, immediate and accurate funds availability
data, and improved cash control.
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In 1995, the Company introduced RECON-Plus for Windows a client/server
based "horizontal" reconciliation system. RECON-Plus for Windows is most
frequently used for internal reconciliation by large businesses, financial
service firms, and utilities, including the reconciliation of debit and credit
card transactions, checks, ATM transactions, ACH transfers, and securities
transactions.
The Company's Account Reconciliation Package ("ARP"), is one of the
most widely used account reconciliation systems in the U.S. banking industry.
The ARP/Service Management System ("ARP/SMS"), developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that enables banks to immediately process their customer transactions to
produce accurate, timely reconciliations while streamlining back-office
processes. ARP/SMS also groups accounts across banks within bank holding
companies and allows banks to streamline their operations by reconciling their
intra-bank transactions.
Other. The Company also offers software products and services in the
following areas: safe box accounting and compliance with certain IRS
regulations.
Licenses. The Company generally grants non-exclusive, non-transferable
perpetual licenses to use its application software at a single site. The
Company's standard license agreements contain provisions designed to prevent
disclosure and unauthorized use of its software. License fees vary according to
a number of factors, including the services to be provided by the Company.
Multiple site licenses are available for an additional fee. In its license
agreements, the Company generally warrants that its products will function in
accordance with the specifications set forth in its product documentation. A
significant portion of the license fee payable under the Company's standard
license agreement is payable upon the delivery of the product documentation and
software to the customer, with the balance of the license fee due upon
installation. The standard license fee for most products covers the installation
of the Company's software and maintenance for the first three to twelve months.
Installation, Maintenance, and Support. Maintenance includes certain
enhancements to the software. Customers who obtain maintenance generally retain
maintenance service from year to year. To complement customer support, the
Company and many of its customers frequently participate in user groups. These
groups exchange ideas and techniques for using the Company's products and
provide a forum for customers to make suggestions for product acquisition,
development, and enhancement.
Competition. The computer application software industry is highly
competitive. In the financial applications software market, the Company competes
directly or indirectly with a number of firms, including large diversified
computer software service companies and independent suppliers of software
products. Management believes there is at least one direct competitor for most
of its software products. Nonetheless, no competitor of the Company competes
with it in all software product areas.
The Company's product lines also face competition from numerous
competitors. The Company's Imaging/COLD product lines compete with the products
of several companies, including IBM, IIC, and Computron, and its RECON-Plus
product competes with Chesapeake, Driscoll and GEAC.
Management believes that the major factors affecting customer
decisions in its market, in addition to price, are product availability,
flexibility, the comprehensiveness of offered products, and the availability and
quality of product maintenance, customer support and training. The Company's
ability to compete successfully also requires that it continue to develop and
maintain software products and respond to regulatory change and technological
advances. Management believes that it currently competes favorably in the
marketplace with respect to these criteria. See "Business -- Risk Factors
(Intense Competition)."
DISTRIBUTION ALLIANCES
An element of the Company's strategy is the creation and maintenance
of distribution alliances that maximize access to potential customers for the
Company's electronic commerce services and related products. The Company
believes that these partnerships enable the Company to offer its services and
related products to a larger customer base
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than can be reached through stand-alone marketing efforts. The Company seeks
distribution alliance partners which have maximum penetration and leading
reputations for quality with the Company's target customers. To date, the
Company has entered into or is negotiating distribution alliances with several
companies, including Automatic Data Processing, Inc. ("ADP"), AT&T Corporation
("AT&T"), Alltel, EDS, Fiserv, Inc. ("Fiserv"), FiTech, Inc. ("FiTech"), Five
Paces, Inc. ("Five Paces"), and Home Financial Network. The Company also has
arrangements with Optika in connection with its imaging offerings, and with
MicroBank for RECON-Plus for Windows. On October 29, 1997, the Company entered
into a 10-year processing partnership with Integrion Financial Network, L.L.C.
("Integrion") to provide financial institutions with a fully integrated,
end-to-end, cost effective electronic billing and payment processing service
employing Integrion's Gold Message Standard for Electronic Commerce, its
Interactive Financial Services platform and the Company's processing
infrastructure. (For more detailed information concerning the Integrion
partnership, please refer to the Company's Form 8-K filed on November 12, 1997.)
RESEARCH AND DEVELOPMENT
The Company maintains a research and development group with a
long-term perspective of planning and developing new services and related
products for the electronic commerce, financial application software, and
investment services markets. The Company has established the following
guidelines for pursuing the development of new services:
- Distinctive benefits to customers
- Ability to establish a leadership position in the market
served
- Sustainable technological advantages
- First to market
The Company believes that in the emerging electronic commerce market
it will be critical to rapidly develop, test and offer new services and
enhancements. To that end, the Company's goal for the time period from
conceptualization to commercial availability of new services is less than one
year. As of June 30, 1998, the research and development group consisted of
approximately 250 employees. Additionally, the Company uses independent third
party software development contractors as needed. During calendar 1995,
transition fiscal 1996, fiscal 1997, and fiscal 1998, the Company spent 13.9%,
17.9%, 18.6%, and 15.5% of revenues, respectively, on research and development.
The Company anticipates that it will continue to commit substantial resources to
research and development activities for the foreseeable future.
TECHNOLOGY
The Company's historical approach to technology has been to utilize a
combination of hardware, networks, proprietary software and databases to solve
customer needs and to meet the varying requirements of the electronic commerce
market.
Electronic Commerce. The Company's original core technology
capabilities were developed to handle settlement services, merchant database
services, and on-line inquiry services on a traditional mainframe system with
direct bi-synchronous communications to businesses. As business
telecommunication requirements increased, the Company utilized links to an X.25
Value-Added Network.
Today, the Company has implemented a logical, nationwide client-server
system. Consumer, business, and financial institution customers all act as
clients communicating across dial-up telephone lines, private leased lines, a
private X.25 network, a frame relay network, or the Internet to the Company's
computing complex. Within this complex, there is a wide variety of application
servers seamlessly connected via TCP/IP across switched Ethernet. The Company
currently is able to support virtually any communication method required in a
secure manner.
Proprietary applications have been developed for the client-server
system on a variety of platforms with each platform selected and optimized for
specific electronic commerce needs. Applications to effect settlement services,
merchant database services, financial institution database services, and
heuristic risk management services have been implemented on an IBM mainframe,
optimized for high volume batch processing. Applications to confirm payment
instructions, enhance data integrity and security, and reduce fraud have been
implemented on Digital Equipment Alpha servers, optimized for high volume,
device independent, real-time data communication across a private X.25 network.
To handle financial transactions across the Internet, applications have been
implemented on Sun Microsystems servers
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designed for premium data security and integrity. Applications to effect
electronic bill presentment have been implemented on Hewlett-Packard Unix
servers, designed for efficient real-time processing and data integrity and
applications to effect real-time connections to banks, ATM networks, and credit
card networks have been implemented on a Tandem Himalaya server. Other special
purpose application servers are deployed to handle unique electronic commerce
requirements such as electronic payments direct to merchant institutions, VRUs
to telephone customers, and electronic mail with customers and real-time
connections to ATM networks.
The Company has implemented appropriate backup and recovery procedures
to ensure against any loss of data on any platform. Archival storage is kept on
site as well as off site in fireproof facilities. To maximize availability, the
Company has redundant computer systems to ensure that financial transaction
requests can always be honored. Diesel generators provide power to the computing
facilities in the event of a power disruption.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunications failure or similar event. Although the Company has contracted
for the emergency provision of an alternate site to aid in disaster recovery,
this measure will not eliminate the significant risk to the Company's operations
from a natural disaster or system failure. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business -- Business
Risks (Risk of System Failure)."
With the growth anticipated for electronic commerce, the Company's
architecture has been designed to address incremental capacity requirements as
needed. The entire infrastructure and set of product technologies allow the
Company to efficiently service and support its three customer markets. Although
the Company's principal business is to provide electronic commerce services
rather than sell or license software products, the consumer financial software
products offered by the Company to access such services could contain errors or
"bugs" that could adversely affect the performance of the service or damage a
user's data. In addition, as the Company increases its share of the electronic
commerce services market, software reliability and security demands will
increase. The Company attempts to limit its potential liability for warranty
claims through disclaimers in its software documentation and limitation of
liability provisions in its shrinkwrap license and customer agreements. There
can be no assurance that the measures taken by the Company will prove effective
in limiting the Company's exposure to warranty claims. Additionally, despite the
existence of various security precautions, the Company's computer infrastructure
may be also vulnerable to viruses or similar disruptive problems caused by its
customers or third parties gaining access to the Company's processing system.
See "Business -- Business Risks (Risk of Product Defects)."
The Company has developed proprietary databases within the
client-server system, including a financial institution file that allows
accurate editing and origination of ACH and paper transactions to financial
institutions. The Company has also developed a merchant information file
consisting of over one million companies that allows accurate editing and
initiation of payments to merchants. These databases have been constructed over
the past 15 years as a result of the Company's transaction processing
experience.
Platform Integration: The Genesis Project. The Company intends to
integrate the existing data processing sites and platforms formerly operated at
Columbus, Ohio, Aurora, Illinois, and Austin, Texas, into a central processing
site at the Company's headquarters in Norcross, Georgia, and to migrate its
customers to the new platform. The Company has designated this integration the
Genesis Project. The integration has required the acquisition of, and investment
in, extensive hardware and in operating and system software, as well as
extensive communications links and systems. The Genesis Project requires
substantial engineering and development of proprietary software. Redundancy,
anomaly monitoring, and off-site backup and recovery systems are planned as a
part of the project. Communications, in addition to the technology described
above, will be aided by the installation of a SONET network provided through
BellSouth.
Significant numbers of high-level employees have and will be hired to
facilitate the accomplishment of the project, and to manage the integrated site.
Management intends to operate the existing sites without substantial disruption
until the central site is completed and tested, and only then will a staged
migration be effected. The integrated site began accepting operations processing
in September 1998, and the cost expended during the fiscal year ending June 30,
1998 was approximately $18 million. As of September 15, 1998, the project had
met its interim deadlines and targets and management expects the project to be
completed on time and within budget. Nonetheless, because of the
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magnitude of the project, and an aggressive schedule, no assurance can be given
that the project will be completed on time or successfully. See "Business --
Business Risks (Rapid Technological Change; Risk of Delays)."
Financial Application Software. Financial application suite of
software products offers a wide range of software addressing both end user
access and back room operational systems located in the customer data centers.
Every effort is taken to insure that each system is targeted for the appropriate
platform to optimize the characteristics of available technology with the
business requirements of each application and its market. This strategy utilizes
large IBM mainframes as the platform for high volume batch oriented systems,
IBM's RS/6000 UNIX Servers and Hewlett-Packard UNIX Servers for high volume OLTP
systems, Microsoft Windows NT for medium volume OLTP systems and Windows for
client connectivity.
Investment Services. Investment Services employs advanced technology
for its portfolio management services and utilizes IBM RS/6000's to process the
portfolio management software. Services are provided primarily as a service
bureau offering with the data center residing at the Company's Chicago office.
This data center functions seven days a week, twenty-four hours a day. Clients
can obtain access across a private TCP/IP Wide Area Network (WAN) either via
dedicated circuit or via dial-up methodologies. The Chicago data center is the
communication center for more than 70 dedicated links together with four
concentration hub sites located in New Jersey, New York, Boston, and San Diego.
Each of these hub sites support the concentration of local dedicated links plus
dial-up access. In addition to the dedicated private network, clients use frame
relay services from LDDS, MFS, MCI, and AT&T to access services. These services
are also available through AT&T Frame Relay national network with local numbers
in major cities across the U.S.
The system has been exclusively UNIX since 1991 and consists of 26 IBM
RS/6000 machines running AIX. In addition, there are another 11 IBM RS/6000
machines in various client sites. The Company's investment advisory clients
receive hardcopy reporting for either internal usage or for quarterly reports.
Hardcopy, either ASCII or graphical PostScript, is produced on four Xerox
DocuPrints 90 page per minute duplexed laser printers.
SALES, MARKETING, AND DISTRIBUTION
The Company's sales, marketing, and distribution efforts are designed
to maximize access to potential customers. The Company markets and supports its
services both directly and indirectly through a direct sales and technical sales
support force of over 100 employees and, to achieve deeper market penetration,
through select distribution alliances with companies who are involved in the
Company's target customer markets. In order to foster a better understanding of
the needs of its larger bank customers, and to help the Company respond to
identified needs, the Company employs a number of account managers assigned to
specific banks. The Company solicits billers for its electronic bill presentment
services through a regionally-assigned sales force.
In the electronic commerce segment, the Company offers its services
and related products to the nations largest financial institutions directly
through its sales force, and markets to smaller institutions through its
strategic alliances with companies such as EDS, Fiserv, FiTech, Alltel, and Gold
Leaf. The Company offers its services and related products to the business
market directly through its sales force, through an arrangement with ADP, and
through the integration of the Company's services and related products into
major commercial accounting software programs. The Company currently offers
substantially all of its services and related products only to the domestic
marketplace.
Additionally, the Company's distribution of its home banking and
electronic consumer and business bill payment services is widened though
inclusion or access through front ends, such as Quicken, QuickBooks, Managing
Your Money, and Microsoft Money.
The Company markets its financial application software products
through its direct sales force and indirect sales through Alltel banking
services. Salespersons have specific product responsibility and receive support
from technical personnel as needed. The Company generates new customers through
direct solicitations, user groups, responses to advertisements, direct mail
campaigns and strategic alliances. The Company also participates in trade shows
and sponsors industry technology seminars for prospective customers. Existing
customers are often candidates for sales of additional products or for
enhancements to products they have already purchased.
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<PAGE> 15
The Company markets its investment services through its direct sales
force. The Company generates new customers through direct solicitation, user
groups, and responses to advertisements. The Company also participates in trade
shows and sponsors industry seminars for distribution alliances.
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of the Company's strategy in each of its
customer markets. To meet the needs of the Company's customers most efficiently,
the customer care staff is organized into vertical teams that support each
customer market. However, these teams share common resources, training and
orientation to ensure cost efficiency and consistency of quality standards and
measures. From an accessibility standpoint, all customer care teams provide
service by phone, e-mail, and facsimile. The Company has provided, through
advanced communications technology, a virtual call center enabling incoming
calls to be transparently routed to various physical support sites as volume
demands dictate. An important driver of profit margins for the Company is the
percentage of transactions completed through electronic means. Experience has
shown that the demand on customer care resources reduces substantially as the
percentage of electronic remittances grows. The Company has long been a leader
in electronic remittance, and its merchant systems group continually establishes
and maintains electronic links directly to the internal systems of payees.
The level and types of services provided vary by customer market. The
customer care group, consisting of more than 475 employees, supports payment
inquiry, customer service and technical support and interfaces with the merchant
systems group to improve posting efficiencies. Representatives in the business
customer care group are individually assigned to business customers in order to
provide high level customer service and technical support. The retail services
customer care group provides various levels of support that depend upon the
individual institution's requirements. This includes providing direct customer
care on a private label basis as well as research and support.
To maintain its customer care standards, the Company employs extensive
internal monitoring systems and conducts ongoing customer surveys. The feedback
from these sources is used to identify areas of strength and opportunities for
improvement in customer care and to aid in adjusting resources to a level
commensurate with efficient response.
GOVERNMENT REGULATION
Management believes that the Company is not required to be licensed by
the Office of the Comptroller of the Currency, the Federal Reserve Board, or
other federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. The Company, however, is periodically
audited by the Office of the Comptroller of the Currency since it is a supplier
of products and services to financial institutions. There can be no assurance
that a federal or state agency will not attempt to regulate providers of
electronic commerce services such as the Company which could impede the
Company's ability to do business in the regulator's jurisdiction. A number of
states have legislation regulating or licensing check sellers or money
transmitters, and the Company has registered under such legislation in specific
instances. Management does not believe that any state or federal legislation of
this type materially affects the Company. In addition, through its processing
agreements, the Company agrees to comply with the data, recordkeeping,
processing, and other requirements of applicable federal and state laws and
regulations, Federal Reserve Bank operating letters, and the National Automated
Clearing House Association Operating Rules imposed on the Company's processing
banks. The Company may be subject to audit or examination under any of these
requirements. Violations by the Company of these requirements could limit or
further restrict the Company's access to the payment clearance systems or the
Company's ability to obtain access to such systems from banks. Further, the
Federal Reserve rules provide that the Company can only access the Federal
Reserve's ACH through a bank. If the Federal Reserve rules were to change to
further restrict access to the ACH or limit the Company's ability to provide ACH
transaction processing services, the Company's business could be materially
adversely affected. See "Business -- Business Risks" and "-- Payment Clearance
Systems."
In conducting various aspects of its business, the Company is subject
to laws and regulations relating to commercial transactions generally, such as
the Uniform Commercial Code, and is also subject to the electronic funds
transfer rules embodied in Regulation E, promulgated by the Federal Reserve
Board. The Federal Reserve's Regulation E implements the Electronic Fund
Transfer Act, which was enacted in 1978. Regulation E protects
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consumers engaging in electronic transfers, and sets forth basic rights,
liabilities, and responsibilities of consumers who use electronic money transfer
services and of financial institutions that offer these services. For the
Company, Regulation E sets forth disclosure and investigative procedures. For
consumers, Regulation E establishes procedures and time periods for reporting
unauthorized use of electronic money transfer services and limitations on the
consumer's liability if the notification procedures are followed within
prescribed periods. Such limitations on the consumer's liability may result in
liability to the Company.
Given the expansion of the electronic commerce market, it is possible
that the Federal Reserve might revise Regulation E or adopt new rules for
electronic funds transfer affecting users other than consumers. Because of
growth in the electronic commerce market, Congress has held hearings on whether
to regulate providers of services and transactions in the electronic commerce
market, and it is possible that Congress or individual states could enact laws
regulating the electronic commerce market. If enacted, such laws, rules, and
regulations could be imposed on the Company's business and industry and could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Government Regulation)."
PAYMENT CLEARANCE SYSTEMS
Payment Systems. Across the Company's various electronic commerce
service offerings, the Company utilizes the Federal Reserve's ACH for electronic
funds transfers, and the conventional paper check clearing systems for
settlement of payments by check or draft. Like other users of these payment
clearance systems, the Company accesses these systems through contractual
arrangements with processing banks. For access to conventional paper check
clearing systems, the Company does not need a special contractual relationship,
except for its contractual relationships with its processing bank and its
customers. Such users are subject to applicable federal and state laws and
regulations, Federal Reserve Bank operating letters, and the National Automated
Clearing House Association Operating Rules. There are certain risks typically
faced by companies utilizing each of these payment clearance systems, and the
Company has its own set of operating procedures and proprietary risk management
systems and practices to mitigate credit-related risks. See "Business --
Business Risks (Risk of Loss from Returned Transactions, Merchant Fraud or
Erroneous Transmissions)," " -- Business Risks (ACH Access)," and " -- Business
Risks (Government Regulation)."
ACH. The ACH is used by banks, corporations and governmental entities
for electronic settlement of transactions, direct deposits of payroll and
government benefits, and payment of bills such as mortgages, utility payments,
and loans. The Company uses the ACH to execute certain of its customers' payment
instructions. Like other users of the ACH, the Company bears credit risk
resulting from returned transactions caused by insufficient funds, stop payment
orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or
fraud.
Paper Drafts. The Company uses conventional check clearance methods
for paper drafts to execute certain of its customers' payment instructions using
its bank and its customers' banks. The Company bears no credit risk with paper
drafts written on a customer's checking account returned for insufficient funds,
stop payment orders, closed accounts or frozen accounts. Nonetheless, the
Company may bear other risks for theft or fraud associated with paper drafts due
to unauthorized use of the Company's services. When a customer instructs the
Company to pay a bill, the Company has the ability to process the payment either
by electronic funds transfer or by paper draft, drawn on the customer's checking
account, on which the customer's pre-authorized signature is laser imprinted.
The Company manages the risk it assumes by adjusting the mix of electronic and
paper draft transactions in individual cases and overall. Regardless whether the
Company uses paper drafts or electronic funds transfers, the Company retains all
risks associated with transmission errors when it is unable to have erroneously
transmitted funds returned by an unintended recipient.
Other Clearance Systems. While the Company presently primarily
utilizes the two principal payment clearance systems, the Company intends to use
other clearance systems such as ATM networks to provide balance inquiry and fund
transfers functions, and such other clearance systems that may develop in the
future.
Risk Mitigation. The Company's patented bill payment processing system
determines the preferred method of payment to balance processing costs,
operational efficiencies, and risk of loss. The Company manages its risks
associated with its use of the various payment clearance systems through its
risk management systems, internal controls, and system security. The Company
also maintains a reserve for such risks, which reserve was $1.9 million as of
June
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30, 1998, and the Company has not incurred losses in excess of 0.76% of its
revenues in any of the past five years. As further protection against losses due
to transmission errors, the Company maintains errors and omissions insurance.
See "Business -- Risk Factors (Risk of Loss from Returned Transactions, Merchant
Fraud or Erroneous Transactions)."
PROPRIETARY RIGHTS
The Company owns the following federally registered trademarks and
service marks: CHECKFREE(R), CHECKFREE and Design(R), CHECKFREE (Stylized
Letters)(R), CHECKFREE EASY(R), CHECKFREE EXTRA(R), CHECKFREE MANAGER(R),
CHECKFREE WALLET(R), CHECKFREE-BILL and design(R), CLUB HOOCH(R), DECISION
MANAGER(R), DISC and Design(R), DISC CHECKBOOK PLUS(R), DISC WORLD$NET(R),
ECP(R), MOBILEPAY(R), PAWWS(R), PAWTRACKS(R), PEP+(R), PEP PAPERLESS ENTRY
PROCESSING(R), PTT(R), SERVANTIS WORLD$NET(R), and THE WAY MONEY MOVES and
Design(R). Additionally, the Company has applied to federally register the
following service marks: CHARITY NET(SM), CHECKFREE CONNECT(SM), CHECKFREE
E-BILL(SM), CHECKFREE ELECTRIC MONEY(SM), CHECKFREE FREES YOU FROM CHECKS(SM),
CHECKFREE RECON SELECT(SM), CHECKFREE YES/PC(SM), DEFAULT NAVIGATOR(SM),
ECX(SM), and RCM 2001...THE NEXT GENERATION(SM). The Company is awaiting further
information to file applications for the following marks: CHECKFREE APECS,
CHECKFREE A.R.M., CHECKFREE ARP, CHECKFREE ARP/SMS, CHECKFREE DIRECTCOLLECT,
CHECKFREE IRS, CHECKFREE IRS/SRS, CHECKFREE LCR, CHECKFREE RRS, CHECKFREE RECON,
CHECKFREE RECON-PLUS, CHECKFREE RECON TRADE, CHECKFREE RPS, CHECKFREE WEB RECON,
ECENTER, JOIN THE CLUB, and REVOLUTIONIZING THE WAY MONEY WORKS.
The Company regards its financial transaction services and related
products such as its software as proprietary and relies on a combination of
patent, copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements, and other intellectual property protection methods to
protect its services and related products. Although the Company believes its
consumer financial software to be proprietary, it does not depend on its
software to compete, but rather on its services to which the software provides
access.
The Company also copyrights certain of its programs and software
documentation and trademarks certain product names. Management believes that
these actions provide appropriate legal protection for the Company's
intellectual property rights in its software products. Furthermore, management
believes that the competitive position for some of the Company's products
depends primarily on the technical competence and creative ability of its
personnel and that its business is not materially dependent on copyright
protection or trademarks. See "Business -- Business Risks (Limited Protection of
Proprietary Technology; Risk of Third Party Infringement Claims)."
The Company's United States Letters Patent No. 5,383,113, issued on
January 17, 1995, relates to its system and method for electronically providing
services including payment of bills and financial analysis. Incorporating the
system described in the patent, the Company can pay any bill from any checking
account at any financial institution in the United States on the consumer's
behalf by selecting a preferred means of payment from various options described
above. See "Business -- Payment Clearance Systems." The Company's patent expires
on January 17, 2012. See "Business -- Competition," "-- Business Risks (Intense
Competition)," and "-- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy the Company's
services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company. As the technology used by the Company evolves, however, its dependence
upon the patented technology continues to decrease.
EMPLOYEES
As of June 30, 1998, the Company employed 1,659 full-time employees,
including 530 in systems and development (including software development), 475
in customer care, and 145 in administration, financial control, corporate
services, and human resources. The Company is not a party to any collective
bargaining agreement and is not aware of any efforts to unionize its employees.
The Company believes its relations with its employees are
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good. The Company believes its future success and growth will depend in large
measure upon its ability to attract and retain qualified technical, management,
marketing, business development, and sales personnel.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Many
of the following important factors discussed below have been discussed in the
Company's prior filings with the Securities and Exchange Commission. In addition
to the other information in this report, readers should carefully consider that
the following important factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause the
Company's actual consolidated results of operations for the fiscal year ended
June 30, 1998, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Emerging Electronic Commerce Market; Security and Privacy Concerns.
The electronic commerce market is a relatively new and growing service industry.
If the electronic commerce market fails to grow or grows more slowly than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results, and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and ATM
industries, the Company and other organizations serving the electronic commerce
market must educate users that electronic transactions use encryption technology
and other electronic security measures that make electronic transactions more
secure than paper-based transactions. While the Company believes that it is
utilizing proven applications designed for premium data security and integrity
to process electronic transactions, there can be no assurance that the Company's
use of such applications will be sufficient to address the changing market
conditions or the security and privacy concerns of existing and potential
customers. Adverse publicity raising concerns about the safety or privacy of
electronic transactions, or widely reported breaches of the Company's or another
providers security have the potential to undermine consumer confidence in the
technology and thereby have a materially adverse effect on the Company's
business. See "Business -- General" and "-- Services and Related Products."
Additionally, the Company's growth and acceptance in the electronic
commerce market is dependent on its continued growth in its target markets. See
"Business -- Services and Related Products." Although demand for the Company's
services and related products continues to grow, there can be no assurance that
the Company will be successful in each of its target markets. Accordingly, the
Company's inability to grow in any one of these markets could have a material
adverse effect on the Company's business, operating results, and financial
condition.
Because the Company's strategy is focused on relationships with
financial institutions, mergers, acquisitions, and personnel changes within key
financial institutions have the potential to adversely affect the Company's
business. Moreover, an important source of growth in demand for the Company's
services is generated by financial institutions marketing to their customer
base. Were these financial institutions to insufficiently increase, abandon, or
curtail their marketing efforts, a material adverse effect on the Company's
business, operating results, and financial condition would likely result.
Integration of Servantis, Security APL, and ISC. On February 21, 1996,
the Company acquired Servantis for approximately $165.1 million, consisting of
the issuance of 5.7 million shares of the Company's Common Stock valued at
$20.00 per share (approximately 16% of the Company's total shares outstanding
following the Servantis Acquisition) and $42.5 million in cash to repay
Servantis' long-term debt. In addition, on May 9, 1996, the Company acquired
Security APL for approximately $53.3 million, consisting of the issuance of 2.8
million shares of the Company's Common Stock valued at $18.50 per share
(approximately 7% of the Company's total shares outstanding following the
Security APL Acquisition). Finally, on January 27, 1997, the Company acquired
ISC for approximately $199.0 million, consisting of the issuance of 12.6 million
shares of the Company's Common Stock and $20.0 million payable in cash to
Intuit. In addition, in fiscal 1997, the Company wrote-off $140.0 million of the
purchase price for ISC as in process research and development, which had a
material adverse impact on the Company's results in 1997.
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<PAGE> 19
Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. A number of banks have developed, and others in the
future may develop, home banking services in-house. Additionally, Microsoft has
individually, and as part of a joint venture with First Data, announced its own
alliances with financial institutions to offer on-line home banking and
financial services as well as bill presentment and bill payment services to
consumers. In the business market, the Company competes with other ACH
processors. The Federal Reserve's ACH is the national payment clearance system
through which any bank can effect debit or credit transactions to any authorized
consumer checking account. The Company also faces competition in ACH processing
from numerous banks. The financial application software segment also faces
significant competition.
The Company's product lines also face competition from competitors
which include TSAI, Fiserv, FiTech, EDS, Alltel, Computer Power, Inc. ("CPI"),
Associated Software Consultants, Inc. ("ASC"), and Gallagher Financial Systems,
Inc. ("GFS") in products offered to the mortgage services industry; the
Company's Imaging/COLD product lines compete with the products of several
companies, including IBM, IIC, and Computron, and its RECON-Plus product
competes with Chesapeake and Driscoll. Competitors for mortgage-related products
include CPI (an Alltell Company). Competition for portfolio services includes
two main segments. The Company competes with providers of portfolio accounting
software, including Advent Software, PORTIA (a division of Thomson Financial),
and Shaw Data (a SunGard Company) . The Company also competes with service
bureau providers such as Shaw Data and FMC Service Bureau. In the brokerage
segment the Company's primary competitor is Shaw Data, and the Company competes
for business bill payment customers with ACI and Deluxe Data, which provide ACH
processing.
The Company expects competition to increase from both established and
emerging companies and that such increased competition will result in price
reductions and may result in a reduction of the Company's market share, either
or both of which could materially adversely affect the Company's business,
operating results, and financial condition. Moreover, the Company's current and
potential competitors, many of whom have significantly greater financial,
technical, marketing, and other resources than the Company, may respond more
quickly than the Company to new or emerging technologies or could expand to
compete directly against the Company in any or all of its target markets.
Accordingly, it is possible that current or potential competitors could rapidly
acquire significant market share. There can be no assurance that the Company
will be able to compete against current or future competitors successfully or
that competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results, and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- General," and "-- Products, Services, and
Competition."
Today, the Company is the leading provider of electronic payment
services to users of personal finance software. The Company believes that as
consumer-based on-line interactive and telecommunications services continue to
grow, and as financial institutions offer their own proprietary or licensed
front-ends, retail-marketed personal financial software will become a less
important channel for the Company in acquiring new customers.
Management of Growth. The Company is currently experiencing a period
of rapid growth which has placed, and could continue to place, a significant
strain on its resources. The Company's ability to manage growth successfully
will require the Company to continue to improve its operational, management and
financial systems and controls as well as to expand its work force. A
significant increase in the Company's customer base would necessitate the hiring
of a significant number of additional customer care and technical support
personnel as well as computer software developers and technicians, qualified
candidates for which, at the present time, are in short supply. In addition, the
expansion and adaptation of the Company's computer and administrative
infrastructure will require substantial operational, management, and financial
resources. Although the Company believes that its current infrastructure is
adequate to meet the needs of its customers in the foreseeable future, there can
be no assurance that the Company will be able to expand and adapt its
infrastructure to meet additional demand on a timely basis, at a commercially
reasonable cost, or at all. If the Company's management is unable to manage
growth effectively, hire needed personnel, expand and adapt its computer
infrastructure or improve its operational, management, and financial systems and
controls, the Company's business, operating results, and financial condition
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Acquisition-Related Risks. In the future, the Company may pursue
additional acquisitions of complementary service or product lines, technologies,
or businesses. Future acquisitions by the Company could result in potentially
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<PAGE> 20
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
operating results, and financial condition. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies, services, and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time, the
Company evaluates potential acquisitions of businesses, services, products, or
technologies. The Company has no present commitments or agreements with respect
to any material acquisition of other businesses, services, products, or
technologies. In the event that such an acquisition were to occur, however,
there can be no assurance that the Company's business, operating results, and
financial condition would not be materially adversely affected.
Potential Fluctuations in Quarterly Results; Seasonality. The
Company's quarterly results of operations may fluctuate significantly as a
result of a number of factors, including changes in the Company's pricing
policies or those of its competitors, relative rates of acquisition of new
customers, delays in the introduction of new or enhanced services, software, and
related products by the Company or by its competitors or market acceptance of
such services and products, other changes in operating expenses, personnel
changes, and general economic conditions. In addition, the Company's growth in
new consumer customers is impacted by certain seasonal factors such as
holiday-based personal computer sales. These seasonal factors may impact
operating results by concentrating customer acquisition and set-up costs, which
may not be immediately offset by revenue increases primarily due to introductory
service price discounts. Additionally, on-line interactive service customers
generally tend to be more active users during the non-summer seasons,
potentially causing revenue fluctuations during the summer months. Software
sales have historically displayed seasonal variation, with sales and earnings
generally stronger in the quarters ended December 31 and June 30 of each year
and generally weaker in the quarters ended September 30 and March 31 of each
year. The seasonality is due, in part, to calendar year-end buying patterns of
financial institution customers and software sales compensation structure, which
is based on fiscal year (June 30) sales performance. Moreover, the Company's
intention to aggressively promote the acceptance of its electronic commerce
services and rapidly expand its customer base may adversely impact the Company's
short-term profitability. These factors will impact the Company's operating
results. Fluctuations in operating results could result in volatility in the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Risk of Product Defects. The software products offered by the Company
could contain errors or "bugs" that could adversely affect the performance of
the Company's software or services or damage a user's data. In addition, as the
Company increases its share of the electronic commerce services market, software
reliability and security demands will increase. Additionally, the Company
attempts to limit its potential liability for warranty claims through
disclaimers in its software documentation and limitation-of-liability provisions
in its license and customer agreements. There can be no assurance that the
measures taken by the Company will prove effective in limiting the Company's
exposure to warranty claims. Additionally, despite the existence of various
security precautions, the Company's computer infrastructure may be also
vulnerable to viruses or similar disruptive problems caused by its customers or
third parties gaining access to the Company's processing system. See "Business
- - -- Technology."
Erosion of Maintenance Base; License Revenue. The profitability of the
Software segment of the Company's business depends, to a substantial degree,
upon users of products electing to continue to periodically renew contracts for
maintenance. In the event that a substantial number of these customers were to
decline to renew these contracts, because use of the software product has been
abandoned, or for any other reason, the Company's revenues and profits would be
adversely affected. Sales of software licenses are dependent upon customer
demand for the product, which is affected by pricing decisions, the competition
of similar products, and reputation of the products for performance. Most of the
Company's software products are sold within the financial services industry, and
poor performance by one product has the potential to undermine the Company's
reputation and affect future sales of other products. A substantial decrease in
software license revenue would have a material adverse effect upon the Company's
business, operating results, and financial condition.
Proportion of Electronic Remittances. The Company's future financial
performance will be materially affected by the percentage of bill payments which
can be cleared electronically. As compared with making payment by paper check or
by draft, electronic payments: (i) cost much less to complete; (ii) give rise to
far fewer errors, which are costly to resolve; (iii) generate far fewer customer
inquiries and therefore consume far fewer customer care resources.
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<PAGE> 21
Accordingly, the Company's inability to continue to decrease the percentage of
remittances effected by paper documents will result in flat or decreased
margins, and a reversal of the current trend toward a smaller proportion of
paper-based payments would have a material adverse effect upon the Company's
business, operating results, and financial condition.
Rapid Technological Change; Risk of Delays. The Company's success is
highly dependent on its ability to develop new and enhanced software, services,
and related products that meet changing customer requirements. The market for
the Company's software, services, and related products is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology, and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. There can be no assurance that the Company can successfully identify
new service opportunities and develop and bring new and enhanced software,
services, and related products to market in a timely manner, that such software,
services, products or technologies will develop or will be commercially
successful, that the Company will benefit from such developments or that
services, products, or technologies developed by others will not render the
Company's software, services, and related products noncompetitive or obsolete.
If the Company is unable, for technological or other reasons, to develop and
introduce new services and products in a timely manner in response to changing
market conditions or customer requirements, or if new or enhanced software,
services, and related products do not achieve a significant degree of market
acceptance, the Company's business, operating results, and financial condition
would be materially adversely affected.
The Company's program to integrate its various processing sites and
platforms into a central site carries with it the risk of delays and performance
failures that have the potential to substantially interfere with the Company's
ability to provide acceptable service levels to its customers. Although
management believes that it has taken all reasonable steps to plan and monitor
this integration, there can be no assurance that its efforts will be successful
or timely, and a failure to provide adequate service levels could result in a
material adverse effect upon the Company's business, operating results, and
financial condition. See "Business -- General," "-- Products, Services, and
Competition," and "-- Research and Development."
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes the Federal Reserve's ACH for electronic
fund transfers and conventional paper check and draft clearing systems for
settlement of payments by check or drafts. In its use of these established
payment clearance systems, the Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by insufficient funds, stop payment orders, closed accounts,
frozen accounts, unauthorized use, disputes, theft, or fraud. In addition, the
Company also assumes the risk of merchant fraud and transmission errors when it
is unable to have erroneously transmitted funds returned by an unintended
recipient. Merchant fraud includes such actions as inputting false sales
transactions or false credits. The Company manages all of these risks through
its risk management systems, internal controls, and system security. The Company
also maintains a reserve for such credit risks and has not historically incurred
losses in excess of its reserve nor greater than 0.76% of its revenues in any of
the past five years. Past reserving experience cannot predict the adequacy of
reserves in the future. The Company believes that its risk management and
reserving practices are adequate. Nonetheless, there can be no assurance that
the Company's risk management practices or reserves will be sufficient to
protect the Company from returned transactions, merchant fraud, or erroneous
transmissions which could have a material adverse effect on the Company's
business, operating results, and financial condition. See "Business -- Payment
Clearance Systems."
Risk of System Failure. The Company's operations are dependent on its
ability to protect its computer equipment against damage from fire, earthquake,
power loss, telecommunications failure or similar event. All of the Company's
computer equipment, including its processing operations, is located at its
facilities in Columbus, Ohio, Norcross, Georgia, Chicago, Illinois, Aurora,
Illinois, Downers' Grove, Illinois, and Austin, Texas. A disproportionate amount
of the Company's computer equipment, including its primary processing
operations, is located in Norcross, Georgia. As a precautionary measure, the
Company has entered into disaster recovery agreements for the processing systems
at all sites, and conducts business resumption tests on a scheduled basis.
Additional risks may arise during the transition from the pre-existing platforms
to the Genesis platform, and during the migration of processing to the new
platform. During this transition, the Company may be exposed to loss of data or
unavailability of systems due to inadequate backups, reduced or eliminated
redundancy, or both. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, operating
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<PAGE> 22
results, and financial condition. The Company's property and business
interruption insurance may not be adequate to compensate the Company for all
losses that may occur. See "Business -- Technology."
Limited Protection of Proprietary Technology; Risk of Third Party
Infringement Claims. The Company regards its financial transaction services and
related products such as its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party nondisclosure agreements, and other intellectual property protection
methods to protect its services and related products.
The Company has been granted a patent for certain features of its
electronic bill payment processing system. See "Business -- Proprietary Rights."
While the Company believes that the ownership of the patent is a significant
factor in its business, its success does not depend on the ownership of the
patent or future patents, but on the innovative skills, technical competence,
quality of service and marketing abilities of its personnel. The Company
believes its patent provides some measure of security against competition, and
the Company intends to enforce its patent against infringement by third parties.
If the Company's patent is found to be invalid, to the extent it has or would in
the future serve as a barrier to entry in this marketplace, there may be
increased competition in the market. See "Business -- Competition" and "--
Business Risks (Intense Competition)."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy the Company's
services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of its key management,
marketing, service and related product development and operational personnel,
including its Chairman, President, and Chief Executive Officer, Peter J. Kight,
its Chief Operating Officer, Peter F. Sinisgalli, its Vice Chairman for
Corporate Development and Marketing, Mark A. Johnson, and its Chief Technology
Officer, Ravi Ganesan. The Company's operations could be affected adversely if,
for any reason, any of these officers ceased to be active in the Company's
management. The Company maintains proprietary nondisclosure and noncompete
agreements with all of its key employees. The Company maintains key person life
insurance policies on Mr. Kight. The success of the Company depends to a large
extent upon its ability to retain and continue to attract highly skilled
personnel. Competition for employees in the electronic commerce industry is
intense especially in light of the Year 2000 computer issues, and there can be
no assurance that the Company will be able to attract and retain enough
qualified employees. If the business of the Company grows or certain market
conditions exist (e.g., the Year 2000 computer issue), it may become
increasingly difficult to hire, train and assimilate the new employees needed.
For example, the demand for software programmers and computer personnel is high
as a result of companies seeking to hire skilled employees to address their Year
2000 computer issues, which makes it increasingly difficult for the Company to
hire and retain the skilled employees necessary for the operation and expansion
of its business. The Company's inability to retain and attract key employees
could have a material adverse effect on the Company's business, operating
results, and financial condition. See "Business -- Employees."
ACH Access. The Federal Reserve rules provide that the Company can
only access the Federal Reserve's ACH through a bank. If the Federal Reserve
rules were to change to further restrict access to the ACH or limit the
Company's ability to provide ACH transaction processing services, the Company's
business could be materially adversely affected. See "Business -- Government
Regulation" and "-- Payment Clearance Systems."
Limited Prior Market; Volatility of Stock Price. Prior to September
28, 1995, there was no public market for the Company's Common Stock. Although
the Company is listed on the Nasdaq National Market, there can be no assurance
that an active or liquid trading market in the Company's Common Stock will
continue. The market price of the Company's Common Stock is subject to
significant fluctuations in response to variations in quarterly operating
results, the failure of the Company to achieve operating results consistent with
securities analysts' projections of the Company's performance, and other
factors. The stock market has experienced extreme price and volume fluctuations
and volatility that has particularly affected the market prices of many
technology, emerging growth, and developmental stage companies. Such
fluctuations and volatility have often been unrelated or disproportionate to the
operating performance of such companies. Factors such as announcements of the
introduction of new or enhanced services or related products by the Company or
its competitors, announcements of joint development efforts or corporate
partnerships in the electronic commerce market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to the Company or its competitors may have a significant impact
on the market price of the Company's Common Stock.
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<PAGE> 23
Control by Principal Stockholders. At September 9, 1998, the directors,
executive officers, and principal stockholders of the Company and their
affiliates collectively owned approximately 39% of the outstanding shares of the
Company's Common Stock. As a result, these stockholders will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
Shares Eligible for Future Sale; Possible Adverse Effect on Market
Price. At September 9, 1998, the Company had 55,571,546 shares of the Company's
Common Stock outstanding. Of these shares, 33,669,870 shares are held by
nonaffiliates of the Company. The holders of the remaining 21,901,676 shares are
entitled to resell them only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
an exemption provided by Rule 144, Rule 145, or Rule 701 under the Securities
Act of 1933, as amended (the "Securities Act"). Additionally, as of June 30,
1998, the Company had outstanding options to purchase 4,365,562 shares of the
Company's Common Stock at a weighted average exercise price of $15.23, of which
options for 1,352,516 shares of the Company's Common Stock were exercisable as
of June 30, 1998 at a weighted average exercise price of $6.81.
The Company issued 5,692,734, 2,805,652, and 12,600,000 shares of the
Company's Common Stock in connection with the Servantis Acquisition, the
Security APL Acquisition, and ISC Acquisition, respectively. A portion of these
shares have been sold by the respective stockholders and the remainder are
available for resale subject to Rule 144 and Rule 145 under the Securities Act
or certain registration rights agreements.
On September 9, 1998, the Company announced that the Board of
Directors had authorized the Company to repurchase up to 1,500,000 shares of
its outstanding Common Stock during the next twelve months. (For more detailed
information concerning the stock repurchase, please refer to the Company's Form
8-K filed on September 14, 1998.)
Sales of substantial amounts of these shares in the public market or
the prospect of such sales could adversely affect the market price of the
Company's Common Stock.
Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation, By-Laws, and Stockholder Rights Plan. Certain
provisions of Delaware law the Company's Certificate of Incorporation, By-Laws,
and Stockholder Rights Plan could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company. The Company's Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. Certain provisions of Delaware law, the Company's Certificate
of Incorporation, and the Stockholder Rights Plan allow the Company to issue
preferred stock with rights senior to those of the Company's Common Stock
without any further vote or action by the stockholders. The issuance of the
Company's Preferred Stock under the Stockholder Rights Plan could decrease the
amount of earnings and assets available for distribution to the holders of the
Company's Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Company's Common Stock. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Company's Common Stock. See Note 14 to Notes to the
Consolidated Financial Statements.
Government Regulation. Management believes that the Company is not
required to be licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. There
can be no assurance that a federal or state agency will not attempt to regulate
providers of electronic commerce services such as the Company which could impede
the Company's ability to do business in the regulator's jurisdiction. In
addition, through its processing agreements, the Company agrees to comply with
the data, recordkeeping, processing and other requirements of applicable federal
and state laws and regulations, Federal Reserve Bank operating letters, and the
National Automated Clearing House Association Operating Rules imposed on the
Company's processing banks. In conducting various aspects of its business, the
Company is subject to various laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and is also subject
to the electronic funds transfer rules embodied in Regulation E, promulgated by
the Federal Reserve Board. Given the expansion of the electronic commerce
market, it is possible that the Federal Reserve might revise Regulation E or
adopt new rules for electronic funds transfer affecting users other than
consumers. Because of growth in the electronic commerce market, Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating the electronic commerce market. If enacted,
such laws, rules and regulations could
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<PAGE> 24
be imposed on the Company's business and industry and could have a material
adverse effect on the Company's business, operating results, and financial
condition. See "Business -- Government Regulation."
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and funds from
operations will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements both for the short-term and through at
least December 31, 1998. The Company has a $20 million line of credit available
for unanticipated needs. However, the Company may need to raise additional funds
through public or private debt or equity financings in order to take advantage
of unanticipated opportunities, including more rapid expansion or acquisitions
of complementary businesses or technologies, or to develop new or enhanced
services and related products, or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take advantage
of unanticipated opportunities, develop new or enhanced services and related
products or otherwise respond to unanticipated competitive pressures and the
Company's business, operating results, and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 2. PROPERTIES.
The Company leases office facilities in Norcross, Georgia, Columbus,
Ohio, Aurora, Illinois, Downers' Grove, Illinois, Owings Mills, Maryland,
Austin, Texas, Jersey City, New Jersey, Chicago, Illinois, San Diego,
California, Boston, Massachusetts, Houston, Texas, and Ashburn, Virginia with
square footage of approximately 229,000, 107,000, 51,000, 14,000, 30,000,
32,000, 17,100, 10,000, 3,000, 2,000, 1,000, and 3,000, respectively. The
Company owns approximately eight acres of real property adjacent to the
Company's facility in Columbus, Ohio. The Company owns a 51,000 square foot
conference center in Norcross, Georgia which includes lodging, training, and
fitness facilities for the Company's customers and employees. Although the
Company owns the building, it is on land which is leased through June 30, 2021.
The Company believes that its facilities are adequate for current and near-term
growth and that additional space is available to provide for anticipated growth.
The Company leases its Columbus, Ohio facility from the Director of
Development, State of Ohio, pursuant to the terms of a capitalized lease entered
into as part of the issuance by the State of Ohio of State Economic Development
Revenue Bonds (the "Bonds") in the aggregate principal amount of $7.5 million.
Pursuant to the terms of the lease, the Company pays monthly lease payments
equal to the amount of the debt service on the Bonds. Upon full payment of the
amount due on the Bonds, the Company has a right to purchase the real property
from the Director of Development, State of Ohio, for the sum of one dollar.
Under the terms of the lease, the Company has the right to prepay all amounts
owed thereunder without significant prepayment penalty. On May 8, 1998, the
Company beneficially purchased an office building in Dublin, Ohio comprising
149,961 square feet, for a price of $14,288,600. The Company intends to complete
relocation of its Columbus, Ohio personnel and equipment to the Dublin facility
by the end of calendar 1998 and to sell the Columbus facility. See "Item 13.
Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market on
the Nasdaq National Market under the symbol "CKFR." The following table sets
forth, for the periods indicated, the high and low sales prices for the
Company's Common Stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
CALENDAR PERIOD COMPANY COMMON STOCK
-------------------------------------------------------- -------------------------------
Fiscal 1997: HIGH LOW
<S> <C> <C>
First Quarter $22.125 $10.750
Second Quarter $25.00 $14.125
Third Quarter $17.375 $11.125
Fourth Quarter $19.625 $9.50
Fiscal 1998:
First Quarter $23.125 $16.50
Second Quarter $31.438 $20.25
Third Quarter $28.50 $20.00
Fourth Quarter $30.625 $20.438
Fiscal 1999:
First Quarter (through September 9, 1998) $31.50 $8.25
</TABLE>
The number of record holders of the Company's Common Stock, as of
September 9, 1998, was 564. The closing sales price of the common stock on
September 9, 1998, was $12.00.
The Company has paid no cash dividends since 1986. The Company
presently anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on the
Company's Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors. Presently, the Company's line of credit
restricts the payment of dividends on the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included under the caption
"SELECTED FINANCIAL DATA" in the Company's Annual Report and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included under the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" in the Company's Annual Report and is incorporated herein by
reference.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report contains 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
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<PAGE> 26
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 and its operating and growth
strategy. Investors are cautioned that all forward-looking statements involve
risks and uncertainties including, without limitation, the factors set forth
under the caption "Business -- Business Risks" in this report and other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. 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 annual report 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 representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of as of June 30, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995, and the notes to the
financial statements, together with the independent auditors' report thereon
appear in the Company's Annual Report and are incorporated herein by reference.
The Company's Financial Statement Schedule and Independent Auditors'
Report on Financial Statement Schedule are included in response to Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-26-
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement (the "Proxy
Statement") relating to the Company's 1998 Annual Meeting of Stockholders to be
held on November 9, 1998, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE BOARD OF DIRECTORS" and "EXECUTIVE COMPENSATION" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS" and "OWNERSHIP
OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in the Proxy Statement and is incorporated
herein by reference.
-27-
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements appearing in the
Company's Annual Report are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1998 and 1997.
Consolidated Statements of Operations for each of the two
years in the period ended June 30, 1998, the six months ended
June 30, 1996, and for the year ended December 31, 1995.
Consolidated Statements of Stockholders' Equity for each of
the two years in the period ended June 30, 1998, the six
months ended June 30, 1996, and for year ended December 31,
1995.
Consolidated Statements of Cash Flows for each of the two
years in the period ended June 30, 1998, the six months ended
June 30, 1996, and for the year ended December 31, 1995.
Notes to the Consolidated Financial Statements.
(2) The following financial statement schedule is included in
this Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements contained in the Annual Report.
Schedule II -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
2(a) Asset Purchase Agreement, dated as of July 1, 1997,
among CheckFree Corporation, Servantis Systems
Holdings, Inc., Servantis Systems, Inc., London
Bridge Software Holdings plc, and LBSS, Inc.
(Reference is made to Exhibit 2 to the Current Report
on Form 8-K, dated July 1, 1997, filed with the
Securities and Exchange Commission on July 3, 1997,
and incorporated herein by reference.)
2(b) Agreement and Plan of Merger, dated as of December
22, 1997, among the Company, CheckFree Corporation,
and CheckFree Merger Corporation. (Reference is made
to Exhibit 2 to the Current Report on Form 8-K, dated
December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and
incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the Company.
(Reference is made to Exhibit 3(a) to the Current
Report on Form 8-K, dated December 22, 1997, filed
with the Securities and Exchange Commission on
December 30, 1997, and incorporated herein by
reference.)
-28-
<PAGE> 29
3(b) By-Laws of the Company. (Reference is made to Exhibit
3(b) to the Current Report on Form 8-K, dated
December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and
incorporated herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to the Current Report on Form
8-K, dated December 22, 1997, filed with the
Securities and Exchange Commission on December 30,
1997, and incorporated herein by reference.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the
Company's By-Laws (contained in the Company's By-Laws
filed as Exhibit 3(b) hereto).
10(a) CheckFree Holdings Corporation Amended and Restated
Associate Stock Purchase Plan. (Reference is made to
Exhibit 4(a) to Post-Effective Amendment No. 1 to
Form S-8, as amended (Registration No. 333-21795),
filed with the Securities and Exchange Commission on
January 14, 1998, and incorporated herein by
reference.)
10(b) CheckFree Holdings Corporation Amended and Restated
1995 Stock Option Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98446), filed with
the Securities and Exchange Commission on January 9,
1998, and incorporated herein by reference.)
10(c) CheckFree Holdings Corporation Amended and Restated
1993 Stock Option Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98442), filed with
the Securities and Exchange Commission on January 9,
1998, and incorporated herein by reference.)
10(d) CheckFree Holdings Corporation Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 4(a) to Post-Effective Amendment No.
1 to Form S-8, as amended (Registration No.
33-98440), filed with the Securities and Exchange
Commission on January 9, 1998, and incorporated
herein by reference.)
10(e) CheckFree Holdings Corporation Second Amended and
Restated 1983 Incentive Stock Option Plan. (Reference
is made to Exhibit 4(a) to Post-Effective Amendment
No. 1 to Form S-8, as amended (Registration No.
33-98444), filed with the Securities and Exchange
Commission on January 9, 1998, and incorporated
herein by reference.)
10(f) Form of Indemnification Agreement. (Reference is made
to Exhibit 10(a) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(g) Schedule identifying material details of
Indemnification Agreements substantially identical to
Exhibit 10(f). (Reference is made to Exhibit 10(g) to
the Company's Form 10-K for the year ended June 30,
1997, filed with the Securities and Exchange
Commission on September 26, 1997, and incorporated
herein by reference.)
10(h) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Peter J. Kight and
the Company. (Reference is made to Exhibit 10(i) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(i) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Mark A. Johnson and
the Company. (Reference is made to Exhibit 10(j) to
Registration
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<PAGE> 30
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(j) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech, Inc.
(Reference is made to Exhibit 10(gg) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(k) Amendment to Bill Payment and Remote Banking Services
Agreement, dated July 1, 1995, between the Company
and FiTech, Inc. (Reference is made to Exhibit 10(hh)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
10(l) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(m) Merchant Processing Agreement, dated March 13, 1995,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(jj) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(n) Lease, dated August 1, 1993, between the Company and
The Director of Development of the State of Ohio.
(Reference is made to Exhibit 10(rr) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(o) Guaranty Agreement, dated August 1, 1993, between the
Company and The Provident Bank. (Reference is made to
Exhibit 10(ss) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(p) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(q) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(r) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company as
mortgagor and Society National Bank as mortgagee.
(Reference is made to Exhibit 10(vv) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(s) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
-30-
<PAGE> 31
10(t) Commercial Note Variable Rate, dated January 3, 1995,
of the Company. (Reference is made to Exhibit 10(xx)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(u) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference is
made to Exhibit 10(yy) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(v) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(w) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(x) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(y) Payment Services, Software Development and Marketing
Agreement, dated as of February 27, 1996, between the
Company and CyberCash. (Reference is made to Exhibit
10(a) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.) **
10(z) Executive Employment Agreement between the Company
and Peter J. Kight. (Reference is made to Exhibit
10(z) to the Company's Form 10-K for the year ended
June 30, 1997, filed with the Securities and Exchange
Commission on September 26, 1997, and incorporated
herein by reference.)
10(aa) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(bb) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(cc) Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996. (Reference is made to Exhibit 10(qqq) to the
Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
-31-
<PAGE> 32
10(dd) Loan and Security Agreement, dated as of May 13,
1997, among KeyBank National Association, the
Company, CheckFree Software Solutions, Inc.,
CheckFree Services Corporation, Security APL, Inc.,
Servantis Systems, Inc., and Servantis Services, Inc.
(Reference is made to Exhibit 10(ee) to the Company's
Form 10-K for the year ended June 30, 1997, filed
with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by
reference.)
10(ee) CheckFree Corporation Incentive Compensation Plan.
(Reference is made to Exhibit 10(ff) to the Company's
Form 10-K for the year ended June 30, 1997, filed
with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by
reference.)
13 * Portions of the Annual Report to Stockholders for the
year ended June 30, 1998.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Power of Attorney.
27 * Financial Data Schedule.
- - ----------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K
since March 31, 1998:
(i) Current Report on Form 8-K, dated March 24, 1998,
filed with the Securities and Exchange Commission on
April 3, 1998 (Items 5 and 7).
(ii) Current Report on Form 8-K, dated April 1, 1998,
filed with the Securities and Exchange Commission on
April 3, 1998 (Items 5 and 7).
(iii) Current Report on Form 8-K, dated April 28, 1998,
filed with the Securities and Exchange Commission on
May 4, 1998 (Items 5 and 7).
(c) EXHIBITS
The exhibits to this report follow the Consolidated Financial
Statements.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors'
report thereon are included on the pages following the Notes to the Consolidated
Financial Statements.
-32-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: September 25, 1998 By: /s/ Allen L. Shulman
--------------------------------
Allen L. Shulman, Executive Vice
President, Chief Financial Officer
and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on the 25th day of September, 1998.
Signature Title
<TABLE>
<S> <C>
*Peter J. Kight Chairman of the Board, President, and Chief Executive Officer
- - ------------------------------- (Principal Executive Officer)
Peter J. Kight
*Mark A. Johnson Vice Chairman - Corporate Development and Marketing and
- - ------------------------------- Director
Mark A. Johnson
/s/Allen L. Shulman Executive Vice President, Chief Financial Officer
- - ------------------------------- and General Counsel
Allen L. Shulman (Principal Financial Officer)
*Gary A. Luoma, Jr. Vice President and Chief Accounting Officer
- - ------------------------------- (Principal Accounting Officer)
Gary A. Luoma, Jr.
*William P. Boardman Director
- - -------------------------------
William P. Boardman
*George R. Manser Director
- - -------------------------------
George R. Manser
*Eugene F. Quinn Director
- - -------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- - -------------------------------
Jeffrey M. Wilkins
*By: /s/Curtis A. Loveland
---------------------------
Curtis A. Loveland, Attorney-in-Fact
</TABLE>
-33-
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
The selected consolidated financial data for the year ended June 30, 1998, 1997,
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been derived from the Company's financial statements included elsewhere in this
Annual Report which have been audited by Deloitte and Touche, LLP, independent
certified public accountants, whose report thereon is also included elsewhere in
this Annual Report. The selected consolidated financial data for the years ended
December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993, have been
derived from audited financial statements of the Company which are not included
in this Annual Report. To assist the reader in the analysis of results of
operations, unaudited results of operations for the twelve months ended June 30,
1996 and the six months ended June 30, 1995 are also provided. The selected
consolidated financial data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto elsewhere
in this Annual Report. The earnings-per-share amounts prior to fiscal year 1998
have been restated to comply with Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (SFAS 128) as required. For further discussion of
earnings per share and the impact of SFAS 128, see Note 1 to the consolidated
financial statements beginning on page 13-22. The financial information for the
periods presented below includes all adjustments necessary for a fair
presentation of results of operations.
<TABLE>
<CAPTION>
Six Months Six Months Twelve Months
Year Ended June 30, Ended Ended Ended Year Ended December 31,
-------------------- June 30, June 30, June 30, ----------------------------
1998 1997 1996 1995 1996 1995 1994 1993
-------- --------- --------- ------- --------- -------- ------- -------
STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Processing, servicing and merchant discount $159,255 $ 104,522 $ 33,305 $23,581 $ 59,053 $ 49,330 $38,282 $28,986
License fees 28,952 33,088 10,970 - 10,970 - - -
Maintenance Fees 25,848 22,567 1,978 - 1,978 - - -
Other 19,809 16,268 4,787 - 4,788 - 984 1,906
-------- --------- --------- ------- --------- -------- ------- -------
Total revenues 233,864 176,445 51,040 23,581 76,789 49,330 39,266 30,892
Expenses:
Cost of processing, servicing and support 129,924 102,721 35,438 14,461 51,236 30,258 24,212 18,387
Research and development 36,265 32,869 9,907 3,019 13,765 6,876 4,724 3,605
Sales and marketing 28,839 32,670 17,167 3,060 21,349 7,242 4,427 3,640
General and administrative 20,677 18,707 7,338 1,915 9,598 4,134 2,598 2,381
Depreciation and amortization 24,999 24,919 6,997 1,194 8,246 2,485 1,922 1,377
In-process research and development 719 140,000 122,358 - 122,358 - - -
Charge for stock warrants 32,827 - - - - - - -
Exclusivity amortization 2,963 5,958 - - - - - -
-------- --------- --------- ------- --------- -------- ------- -------
Total expenses 277,213 357,844 199,205 23,649 226,552 50,995 37,883 29,390
Net gain on dispositions of assets 36,173 6,250 - - - - - -
-------- --------- --------- ------- --------- -------- ------- -------
Income (loss) from operations (7,176) (175,149) (148,165) (68) (149,763) (1,665) 1,383 1,502
Interest:
Income 3,464 2,153 1,659 535 3,104 2,135 298 165
Expense (632) (834) (325) (330) (484) (645) (795) (279)
-------- --------- --------- ------- --------- -------- ------- -------
Income (loss) before income taxes (4,344) (173,830) (146,831) 137 (147,143) (175) 886 1,388
Income tax expense (benefit) (641) (12,017) (8,628) 62 (8,650) 40 400 368
-------- --------- --------- ------- --------- -------- ------- -------
Income (loss) before extraordinary item (3,703) (161,813) (138,203) 75 (138,493) (215) 486 1,020
Extraordinary item - - (364) - (364) - - -
-------- --------- --------- ------- --------- -------- ------- -------
Net income (loss) $ (3,703) $(161,813) $(138,567) $ 75 $(138,857) $ (215) $ 486 $ 1,020
======== ========= ========= ======= ========= ======== ======= =======
Diluted income (loss) per common share before
extraordinary item $ (0.07) $ (3.44) $ (3.69) $ - $ (4.14) $ (0.01) $ 0.02 $ 0.04
Diluted income (loss) per common share $ (0.07) $ (3.44) $ (3.70) $ - $ (4.15) $ (0.01) $ 0.02 $ 0.04
Equivalent number of shares outstanding 55,087 46,988 37,420 29,299 33,435 28,219 27,103 26,886
BALANCE SHEET DATA:
Working capital $ 78,238 $ 20,002 $ 45,496 $10,481 $ 45,496 $ 81,792 $11,399 $ 623
Total assets 250,112 223,836 196,230 31,696 196,230 115,642 30,512 17,669
Long-term obligations, less current portion 6,467 8,401 8,324 7,735 8,324 7,282 8,213 8,968
Total stockholder's equity 183,854 148,644 137,675 16,493 137,675 99,325 16,372 2,985
</TABLE>
13-1
<PAGE> 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 it 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, $.01
par value of CheckFree Corporation (the "Common Stock") 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,
receive electronic bills and on-line banking offerings, 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.
Electronic Commerce. Electronic Commerce services offered to financial
institutions and their customers include electronic bill payment, electronic
home banking, electronic bill presentment and business payments. The Company
generates bill payment and home banking revenues through contracts with
financial institutions which typically include an implementation fee, a base
monthly fee per customer account on services provided by the Company, plus a
variable per transaction fee which decreases based on the volume of processed
transactions. Contracts typically have three-to-five year terms and generally
provide for a monthly minimum fee if certain transaction volumes are not
achieved.
For businesses, the Company provides business payment and bill
presentment services, including business electronic bill payment, automated
balance transfer services, and automatic payment collection services to
companies in the health and fitness and various other service industries. The
Company generates revenues from transaction fees and implementation fees. The
Company generated revenue from credit card discount fees until March 1997 when
the automatic accounts receivable collection business was sold, generating a
gain on the sale of $6,250,000.
On January 27, 1997, the Company acquired Intuit Services Corporation
("ISC") for a total of $199.0 million, including 12.6 million shares of the
Company's Common Stock valued at $177.2 million and the present value of cash
payments due to Intuit, Inc. ("Intuit") under the Services and License Agreement
of $19.6 million. Pursuant to terms of the purchase agreement, in November 1997
the Company received a purchase price adjustment from Intuit in the amount of
$8.9 million. In addition to strengthening the Company's leading share of the
bill payment and home banking market, under the merger agreement, the Company
was the exclusive provider of bill payment and home-banking services for
Intuit's personal financial software product, Quicken, through October 1, 1997.
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions, businesses, and
their customers. Paper transactions impose significant costs that can be reduced
through electronic execution. The continuing penetration of personal computers
and modems into U.S. households, along with the growth in on-line interactive
services, are providing the technical infrastructure required to accelerate the
acceptance of electronic commerce. In addition, the Company believes the key
requirements that must be addressed to increase acceptance of electronic
commerce applications include: (1) maintenance of industry-wide quality levels
for security, accuracy, reliability, and convenience; (2) reduction in
transaction processing costs; (3) application of easy-
13-2
<PAGE> 3
to-use interfaces; and (4) development of seamless integration with the existing
financial infrastructure and existing relationships among all parties to a
financial transaction. As a result, the Company believes that the opportunity
exists to provide an integrated set of electronic services that further automate
financial transactions for financial institutions, businesses and their
customers. Today, a consumer can access his or her bank account through the
internet, receive a series of bills electronically through the financial
institution's web site, directly access the merchant's web site for further
details on the bill, then approve payment of the bill directly from their home
computer.
Software. The Company entered this segment with the acquisition of
Servantis Holdings, Inc. ("Servantis") on February 21, 1996. Servantis was
acquired for $165.1 million, primarily through the issuance of 5.7 million
shares of the Company's Common Stock valued at $20.00 per share and $42.5
million paid to retire Servantis' long-term debt.
The Company has been a leading provider of electronic commerce and
financial applications software and services for businesses and financial
institutions. The Company has designed, marketed, licensed and supported
software products for electronic corporate banking, financial lending,
regulatory compliance, and document imaging. In addition, the Company offers
software consulting and remote processing services.
The Company's software revenues are derived primarily from the sale of
software licenses and software maintenance fees. Software is sold under
perpetual licenses and maintenance fees are received through renewable
agreements. Software products licensed by the Company provide systems that range
from back-office operations to front-end interface with the clients of the
Company's customers. Applications include electronic funds transfer, electronic
wholesale banking, reconciliation, mortgage loan automation, and imaging
technologies, among others.
During fiscal 1998, the Company made the decision to divest itself of
those software applications that do not directly promote its stated strategic
direction. As a result, the following sales transactions have been completed:
(a) on August 29, 1997, the Company sold its recovery management business for
$33.5 million, which resulted in a gain on the sale of $28.2 million; (b) on
March 24, 1998, the Company sold its item processing business for $3.4 million,
which resulted in a gain on the sale of $3.2 million; (c) on April 20, 1998, the
Company sold its wire and electronic banking businesses for $18.3 million, which
resulted in a gain of the sale of $14.7 million. Subsequent to the year ended
June 30, 1998, on July 6, 1998, the Company paid $.6 million and agreed to
additional installments totaling $0.3 million to a third party that agreed to
assume its leasing business. In conjunction with the transaction, the Company
paid an additional $3.0 million to a customer to relieve itself from further
obligations under a consulting agreement. The sale and related transactions
resulted in a loss of $4.7 million which was provided for in the year ended June
30, 1998; and on September 11, 1998, the Company sold its mortgage business for
$21.1 million, which is subject to a working capital adjustment within 30 days
of closing. As part of the transaction, the Company retained responsibility for
certain customer obligations. The expected gain on this transaction is estimated
to be approximately $5.4 million.
The Company's imaging and safe box accounting applications remain
available for sale. Applications remaining in the Company's software portfolio
include its reconciliation and regulatory compliance offerings.
Management believes that the major factors affecting customer decisions
in this market, in addition to price, are product availability, flexibility, the
comprehensiveness of offered products, and the availability and quality of
product maintenance, customer support, and training. The Company's ability to
compete successfully also requires that it continue to develop and maintain
software products and respond to regulatory change and technological advances.
Investment Services. On May 9, 1996, the Company entered this business
segment with the Security APL acquisition for $53 million through the issuance
of 2.8 million shares of the Company's Common Stock. The Company offers
portfolio accounting and performance measurement to investment advisors,
brokerage firms, banks and insurance companies. Clients are able to leverage
their systems and
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<PAGE> 4
streamline operations. The Company designs custom solutions with clients,
allowing investment managers the kind of functionality that dramatically
increases productivity. The full range of portfolio management systems solutions
include date conversion, personnel training, trading systems, graphical client
reporting, performance measurement, technical network support, interface setup,
and DTC processing on behalf of clients.
The Company generates revenues based on the number of portfolios
managed, transaction fees, and implementation fees. Services are provided under
contracts with institutional investors through contracts with terms of
one-to-three years, which generally provide for minimum fees if certain
transaction volumes are not met.
RESULTS OF OPERATIONS
On April 19, 1996, the Company elected to change its fiscal year end
from December 31 to June 30. To assist in the analysis of the results of
operations, results from the unaudited periods for the year ended June 30, 1996
and the six months ended June 30, 1995 are also provided. The following table
sets forth percentages of revenue represented by certain consolidated statements
of operations data:
<TABLE>
<CAPTION>
Year ended June 30, Year Ended Six months ended June 30,
------------------------------- December 31, -------------------------
1998 1997 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 55.6 58.2 66.7 61.3 69.4 61.3
Research and development 15.5 18.6 17.9 13.9 19.4 12.8
Sales and marketing 12.3 18.5 27.8 14.7 33.6 13.0
General and administrative 8.8 10.6 12.5 8.4 14.4 8.1
Depreciation and amortization 10.7 14.1 10.7 5.0 13.7 5.1
In-process research and development 0.3 79.3 159.3 - 239.7 -
Charge for stock warrants 14.0 - - - - -
Exclusivity amortization 1.3 3.4 - - - -
----- ----- ------ ----- ------ -----
Total expenses 118.5 202.8 295.0 103.4 390.3 100.3
Net gain on dispositions of assets 15.4 3.5 - - - -
----- ----- ------ ----- ------ -----
Income (loss) from operations (3.1) (99.3) (195.0) (3.4) (290.3) (0.3)
Interest:
Income 1.5 1.2 4.0 4.3 3.3 2.3
Expense (0.3) (0.4) (0.6) (1.3) (0.6) (1.4)
----- ----- ------ ----- ------ -----
Income (loss) before income taxes (1.9) (98.5) (191.6) (0.4) (287.7) 0.6
Income tax expense (benefit) (0.3) (6.8) (11.3) 0.1 (16.9) 0.3
----- ----- ------ ----- ------ -----
Income (loss) before extraordinary item (1.6%) (91.7%) (180.4%) (0.4%) (270.8%) 0.3%
====== ====== ====== ====== ====== =====
</TABLE>
13-4
<PAGE> 5
YEAR ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenue increased by $57.5 million, or 32.6%, from
$176.4 million to $233.9 million for the years ended June 30, 1997 and 1998,
respectively. Estimated purchased profits in deferred revenues assumed in the
Servantis acquisition in February 1996 have been eliminated as a purchase
accounting adjustment, reducing 1997 revenue by approximately $7.8 million. On a
pro forma basis, total revenue increased 32.3% as a result of growth of 50% in
Electronic Commerce, 33% in Investment Services and 6% in Software. Pro forma
results are based on prior year results excluding the elimination of purchased
profits and adjusting for the ISC acquisition 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 recovery management business
which was sold in August 1997. Pro forma growth in the Electronic Commerce
business unit is driven primarily by an increase in subscribers from
approximately 1.7 million at June 30, 1997 (includes ISC subscribers) to over
2.4 million at June 30, 1998. Investment Services revenue growth is due
primarily to an increase in portfolios managed from approximately 350,000 at
June 30, 1997 to over 500,000 at June 30, 1998. Growth in Software is primarily
the result of license and related maintenance and services growth in the
reconciliation and compliance product lines on a year over year basis. It should
be noted that the rate of the Company's subscriber growth is primarily
determined by the direct marketing efforts of its financial institution clients.
Historical subscriber growth, therefore, may not be indicative of future growth.
For example, in the fourth quarter of fiscal 1998, many of the Company's
financial institution clients reduced marketing efforts to their customers to
convert from a PC based software front-end offering to a more efficient
web-based offering, which resulted in a decline in subscriber growth.
Processing and servicing revenue increased by $64.8 million, or 69%,
from $94.5 million to $159.3 million in the years ending June 30, 1997 and 1998,
respectively. On a pro forma basis, excluding the elimination of purchased
profits and the sale of the recovery management business, processing and
servicing revenue increased by 46% from $109.4 million to $159.3 million in the
years ending June 30, 1997 and 1998, respectively. This growth is due primarily
to the increase in subscribers in the Electronic Commerce business and the
increase in portfolios managed in the Investment Services business mentioned
above.
Merchant discount revenue decreased from $10.0 million to $0 from the
year ended June 30, 1997 to the same period in 1998 due to the sale of the
Company's credit card processing business in March 1997.
License fee revenue decreased by 12%, or $4.1 million, from $33.1
million for the twelve months ended June 30, 1997 to $29.0 million in the same
period in 1998. On a pro forma basis, adjusting for the sales of the Company's
securities and recovery management businesses, license revenue increased by $2.7
million, from $26.3 million to $29.0 million on a year over year basis.
Increases in pro forma license revenue are driven primarily by growth in
reconciliation and compliance software sales.
Maintenance revenue increased from $22.6 million to $25.8 million from
the year ended June 30, 1997 to the year ended June 30, 1998. On a pro forma
basis, excluding elimination of purchased profits and adjusting for the sales of
the securities and recovery management businesses, maintenance revenue increased
by 2.4%, from $25.2 million to $25.8 million for the same periods. Customer
retention rates in the mid to upper 80% range are offset by average maintenance
price increases of approximately 7%, as well as first year maintenance from new
license sales.
Other revenue, consisting mainly of consulting fees, increased by $3.5
million, or 21%, from $16.3 million to $19.8 million for the years ended June
30, 1997 and 1998, respectively. On a pro forma basis, excluding the elimination
of purchased profits and adjusting for the sales of the securities and recovery
management businesses, other revenue increased from $15.9 million to $19.8
million on a year over year basis. Year to date increases are due to increased
implementations in all business segments.
Cost of Processing, Servicing and Support. Processing, servicing, and
support costs consist primarily of data processing costs, customer care,
technical support, third party transaction fees and consulting delivery costs.
The cost of processing, servicing and support was $102.7 million and $129.9
13-5
<PAGE> 6
million or 58.2% and 55.6% of total revenue for the year ended June 30, 1997 and
1998, respectively. Cost of processing, servicing and support as a percentage of
servicing only revenue (all except license) and net of purchased profits of $6.5
million in the 1997 servicing only revenue, was 68.5% and 63.4% for the
respective twelve-month periods. The efficiency improvement year over year is
due primarily to the economies of scale and leverage inherent in the Company's
business model as well as an increase in the percentage of electronic
transaction processing versus paper processing, which resulted in lower customer
care and remittance costs per transaction. In June 1998, the Company processed
55% of payments electronically in the core processing business, an increase from
45% in June 1997. Electronic transactions for ISC operations have increased from
10% at June 1997 to 19% at June 1998.
Research and Development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel. Research and development costs were $32.9
million and $36.3 million, or 18.6% and 15.5% of total revenue for the years
ended June 30, 1997 and 1998, respectively. Excluding purchased profits,
research and development costs were 17.8% and 15.5% for the same twelve-month
periods. The absolute dollar increase of $3.4 million was due primarily to
additional resources supporting the Company's platform integration efforts
referred to as project Genesis and efforts associated with Year 2000 compliance
activities. There were no costs capitalized for Year 2000 activities or for
project Genesis in either fiscal year, however approximately $0.7 million was
capitalized in fiscal 1998 for initial phases of key customer care and bill
presentment initiatives. Management expects capitalization of development costs
to increase significantly in fiscal 1999 as key strategic initiatives continue
to progress.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales associates, public relations and advertising
costs, customer acquisition fees, and royalties paid to distribution partners.
Sales and marketing costs were $32.7 million and 18.5% of total revenues for the
year ended June 30, 1997 and $28.8 million and 12.3% of total revenues for the
same period in 1998. In conjunction with the purchase of ISC, the Company agreed
to pay a $1.0 million per month marketing charge to Intuit for six months
commencing in February 1997. Excluding purchased profits and five months of
Intuit marketing charges in fiscal 1997 and one month in fiscal 1998, sales and
marketing costs were 15.0% and 11.9% of total revenue for the years ended June
30, 1997 and 1998, respectively. Underlying costs as a percentage of revenue has
declined due to economies of scale and leverage inherent in the Company's
business model.
General and Administrative. General and administrative expenses consist
principally of salaries for administrative, executive, finance and human
resource employees. General and administrative expenses were $18.7 million and
$20.7 million, or 10.6% and 8.8% of total revenue for the year ended June 30,
1997 and 1998, respectively. Excluding purchased profits, general and
administrative expenses were 10.2% and 8.8% of total revenue for the same
respective periods. Overall, the Company's general and administrative costs have
decreased as a percentage 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. Depreciation and amortization expenses
have increased slightly from $24.9 million in fiscal year 1997 to $25.0 million
in fiscal year 1998. Decreased amortization related to reductions in tangible
and intangible assets resulting from the sales of the securities business in
October 1996, the recovery management business in August 1997, the item
processing business in March 1998 and the wire and electronic banking business
in April 1998 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 the ISC acquisition in the quarter
ended December 31, 1997, is offset by increases in depreciation and amortization
resulting from purchases of property, plant and equipment required for Genesis
development, data center centralization and in support of the general growth of
the business as well as tangible and intangible asset additions related to the
purchase of ISC in January 1997.
In-Process Research and Development. In-process research and
development of $140.0 million in 1997 was related to the purchase of ISC and $.7
million in 1998 was related to the purchase of Advanced Mortgage Technologies,
Inc. ("AMTI"). Amounts allocated to in-process research and development for
13-6
<PAGE> 7
each of the acquisitions were based on independent appraisals and were expensed
at the time of the related acquisition.
Charge for Stock Warrants. The $32.8 million charge for stock warrants
in the year ended June 30, 1998 resulted from two separate transactions. A $32.4
million charge resulted from the vesting of three million warrants in March 1998
related to a ten year processing agreement with a strategic partner announced by
the Company in October 1997. A $0.4 million charge resulted from the vesting of
25,000 warrants in June of 1998 related to a five year consulting agreement with
a third party. These non-cash charges are based on a Black-Scholes option
pricing model valuation of the warrants at the date of vesting. An additional
seven million warrants will vest incrementally upon achievement of a series of
certain strategic targets and each incremental vesting of warrants will result
in a future non-cash charge based on the fair market value of the Company's
Common Stock at the date of vesting.
Exclusivity Amortization. Exclusivity amortization expense in the years
ended June 30, 1997 and 1998 are the result of the exclusivity arrangement the
Company entered into with Intuit upon the purchase of ISC in January 1997.
Net Gain on Dispositions of Assets. The net gain on dispositions of
assets totaling $6.3 million in the year ended June 30, 1997 resulted from the
sale of the credit card business in March 1997. The June 30, 1998 figure of
$36.2 million is the net result of several transactions. The Company realized
gains on the sales of its recovery management, item processing, and electronic
banking / wire businesses of $28.2 million, $3.2 million and $14.7 million,
respectively. The gains were offset by an anticipated loss from the pending sale
of the leasing business of $4.7 million, expected losses on non-cancelable
contracts and related costs totaling $1.0 million resulting in the decision to
exit the Web Investor portion of the Investment Services segment and charges
totaling $4.2 million for certain equipment and other assets related primarily
to data center consolidations where the Company determined the book value of the
assets exceeded their net realizable value.
Interest. Interest income increased by 59%, or $1.3 million, from $2.2
million to $3.5 million for the years ended June 30, 1997 and 1998,
respectively. The increase is explained by an increase in average cash and
investments from $39.2 million to $49.3 million combined with an increase in
average yield.
Interest expense decreased from $0.8 million to $0.6 million for the
years ended June 30, 1997 June 30, 1998, respectively due to lower outstanding
notes payable and capital lease obligations on a year over year basis.
Income Taxes. The effective income tax benefit was 6.9% and 14.8% for
the years ended June 30, 1997 and 1998, respectively. For both years, the
difference between the effective rate and the statutory rate of 35% was due
primarily to non-deductible in-process research and development expenses,
non-deductible intangible amortization, and state and local taxes.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. Processing, servicing and merchant discount revenues
increased $9.7 million, or 41.2%, from $23.6 million for the six month period in
1995 to $33.3 million for the same period in 1996. The increase was due
primarily to $5.7 million of processing and servicing revenue recognized from
the acquisitions of Servantis, Security APL and Interactive Solutions
Corporation, a 20% increase in the number of bill payment and home banking
consumers (prior to consumers acquired from Servantis) and a 17% increase in the
number of transactions processed. In June 1995, the Company reduced its per
transaction prices to a major customer based on increased volume of transactions
attributable to such customer as part of the Company's monitoring of its pricing
structure in each of the markets in which it competes. In addition, license
fees, maintenance fees, and other revenue all increased as a result of the
business acquisitions.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses, as a percentage of servicing revenues (all revenues except
license fees) were 61.3% and 88.4% for the six
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<PAGE> 8
months ended June 30, 1995 and 1996, respectively. Excluding purchased profits
of $9.7 million in 1996, processing, servicing and support costs would have been
71.2% of servicing revenue for the six months ended June 30, 1996 versus 61.2%
in 1995. Processing, servicing and supports costs increased as a percentage of
servicing due primarily to two pricing changes: (a) in June 1995, the Company
reduced its per transaction pricing to a major business services customer based
on increased volume of transactions attributable to such customer as part of the
Company's monitoring of its pricing structure; and (b) in September 1995, the
Company introduced new service and pricing options, including a lower priced
bill payment only service to target new users.
Research and Development. Research and development expenses were $3.0
million and $9.9 million, or 12.8% and 19.4% of revenue during the six months
ended June 30, 1995 and 1996, respectively. The increase of $6.9 million was due
to $2.7 million of research and development incurred by the acquired companies,
plus development efforts on new and existing services and related products,
including Electronic Cash Disbursement for business, expanded home banking
offerings, enhanced payment processing systems and bill presentment.
Sales and Marketing. Sales and marketing costs were $3.1 million and
$17.2 million, or 13.0% and 33.6% of revenue for the six months ended June 30,
1995 and 1996, respectively. The significant increase of $14.1 million is due to
a $6.5 million direct consumer marketing campaign and $7.7 million of increased
sales and marketing expenses incurred by the acquired companies during the six
months period in 1996.
General and Administrative. General and administrative expenses were
$1.9 million and $7.3 million, or 8.1% and 14.4% of revenue for the six months
ended June 30, 1995 and 1996, respectively. This increase of $5.4 million was
due to $3.9 million of increased general and administrative expenses related to
the acquired companies, increased expenses related to becoming and being a
public company (such as legal fees and investor relations) and additional
management, finance and human resource associates.
Depreciation and Amortization. Depreciation and amortization expenses
were $1.2 million and $7.0 million or 5.1% and 13.7% of revenue for the six
months ended June 30, 1995 and 1996, respectively. The increase of $5.8 million
was due primarily to $5.5 million of increased depreciation and amortization
expenses related to the acquired companies and the resulting increase in
depreciation from $7.1 million of property additions (primarily computer
related) for the six months ended June 30, 1996 to support continued product
development and the growth of the Company.
In-Process Research and Development. The Company incurred $122.4
million of in-process research and development costs for the six months ended
June 30, 1996, in conjunction with the acquisitions of Servantis, Security APL
and Interactive Solutions Corporation ("IS"). The amounts allocated to
in-process research and development for each acquisition were based on
independent appraisals.
Interest. Interest income increased from $0.5 million for the six
months ended June 30, 1995 to $1.7 million for the six months ended June 30,
1996. The increase was due to the income from the investment proceeds of the
initial public offering in September 1995.
Interest expense of $0.3 million for the six months ended June 30, 1995
was comparable to the interest expense of $0.3 million for the six months ended
June 30, 1996.
Income Taxes. The effective income tax rate was 45.1% and (5.9%) or the
six months ended June 30, 1995 and 1996, respectively. For the six months ended
June 30, 1995, the effective tax rate was more than the statutory federal rate
of 35% due to state and local taxes and non-deductible intangible asset
amortization. For the six months ended June 30, 1996, the effective tax benefit
was less than the statutory rate due primarily to non-deductible in-process
research and development and intangible asset amortization.
13-8
<PAGE> 9
TWELVE MONTHS ENDED JUNE 30, 1996 AND DECEMBER 31, 1995
Revenues. Processing, servicing and merchant discount revenues
increased $9.7, million or 19.7%, from $49.3 million to $59.0 million for the
twelve-month periods ending December 31, 1995 and June 30, 1996, respectively.
The increase was due primarily to $5.7 million of processing and servicing
revenue recognized since the acquisitions of Servantis in February 1996, IS in
March 1996, and Security APL in May 1996 as well as an increase in the number of
bill payment and home banking consumers (prior to consumers acquired from
Servantis) and an increase in the number of transactions processed. In June
1995, the Company reduced its per transaction prices to a major customer based
on increased volume of transactions attributable to the customer as part of the
Company's on-going monitoring of its pricing structure in each of the markets in
which it competed. Additionally, the introduction of license fees, maintenance
fees, and other revenues are all attributable to the acquisitions noted above.
Cost of Processing, Servicing and Support. Processing, servicing and
support expenses, as a percentage of servicing only revenues (all revenues
except license fees) were 61.3% for the twelve months ended December 31, 1995
and 77.8% for the twelve months ended June 30, 1996. Processing, servicing and
supports costs increased as a percentage of servicing only revenue due primarily
to two pricing changes: (a) in June 1995, the Company reduced its per
transaction pricing to a major business services customer based on increased
volume of transactions attributable to such customer as part of the Company's
monitoring of its pricing structure; and (b) in September 1995, the Company
introduced new service and pricing options, including a lower priced bill
payment only service to target new users.
Research and Development. Research and development expenses were $6.9
million or 13.9% of revenue for the twelve months ended December 31, 1995 and
$13.8 million or 17.9% of revenue for the twelve months ended June 30, 1996. The
increase of $6.9 million was due to $2.7 million of research and development
incurred by the acquired companies, plus development efforts on new and existing
services and related products, including Electronic Cash Disbursement for
business, expanded home banking offerings, enhanced payment processing systems,
and bill presentment.
Sales and Marketing. Sales and marketing expenses were $7.2 million or
14.7% of revenue for the twelve months ended December 31, 1995 and $21.3 million
or 27.8% of revenue for the twelve months ended June 30, 1996. The increase of
$14.1 million is due to a $6.5 million direct consumer marketing campaign and
$7.7 million of increased sales and marketing expenses incurred by the acquired
companies during the second half of 1996.
General and Administrative. General and administrative expenses were
$4.1 million and $9.6 million, or 8.4% and 12.5% of revenue for the twelve
months ended December 31, 1995 and June 30, 1996, respectively. This increase of
$5.5 million was due to $3.9 million of increased general and administrative
expenses related to the acquired companies and increased expenses related to
becoming and being a public company (such as legal fees and investor relations).
Depreciation and Amortization. Depreciation and amortization expenses
were $2.5 million and $8.2 million or 5.0% and 10.7% of revenue for the six
months ended June 30, 1995 and 1996, respectively. The increase of $5.7 million
was due primarily to $5.5 million of increased depreciation and amortization
expenses related to the acquired companies and the resulting increase in
depreciation from property additions (primarily computer related) in the second
half of 1996 to support continued product development and the growth of the
Company.
In-Process Research and Development. The Company incurred $122.4
million of in-process research and development costs for the twelve months ended
June 30, 1996, in conjunction with the acquisitions of Servantis, Security APL
and IS. The amounts allocated to in-process research and development for each
acquisition were based on independent appraisals.
Interest. Interest income increased from $2.1 million for the twelve
months ended December 31, 1995 to $3.1 million for the twelve months ended June
30, 1996. The increase was due primarily to the income from the investment
proceeds of the initial public offering that took place in September 1995 which
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<PAGE> 10
provided three months of earnings in the twelve months ended December 31, 1995
and five months earnings in the twelve months ended June 30, 1996 prior to the
acquisitions mentioned above.
Income Taxes. In the twelve month period ended December 31, 1995, the
Company incurred a tax expense of $40,000 while incurring a pre-tax loss of
$175,000. The effective tax rate for the twelve month period ending June 30,
1996 was (5.9%). The difference in both years between the effective tax rate and
the statutory rate of 35% was due to non-deductible expenses including
intangible amortization in both 1995 and 1996 and additionally, in-process
research and development in 1996.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by industry segment for the periods noted (in thousands). Charges identified as
in-process research and development, charge for stock warrants, exclusivity and
net gain on dispositions of assets are separated from the operating results of
the segment for a better understanding of the underlying performance of each
segment. Explanations of these charges can be found in the Year ended June 30,
1998 and 1997 section of this report:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997
--------------- --------------
<S> <C> <C>
Operating Revenue:
Electronic Commerce $ 137,972 $ 85,926
Software 66,143 68,113
Investment Services 29,749 22,406
--------------- --------------
Total Operating Revenue $ 233,864 $ 176,445
=============== ==============
Operating Income (Loss):
Electronic Commerce $ (1,342) $ (20,487)
Software 8,393 4,324
Investment Services 6,225 2,171
Corporate (20,116) (21,449)
In Process Research and Development (719) (140,000)
Charge for Stock Warrants (32,827) -
Exclusivity (2,963) (5,958)
Net Gain on Dispositions of Assets 36,173 6,250
--------------- --------------
Total Operating Loss $ (7,176) $ (175,149)
=============== ==============
</TABLE>
Revenue in the Electronic Commerce business unit increased by $52.0
million, or 61%, from $85.9 million to $137.9 million for the years ended June
30, 1997 and 1998, respectively. On a pro forma basis, assuming twelve months of
ISC results are included in and the credit card processing business is excluded
from reported results, revenue increased 50% which was driven primarily by
growth in subscribers from approximately 1.7 million at June 30, 1997 to
approximately 2.4 million at June 30, 1998. The segment reported an operating
loss of $20.5 million for the year ended June 30, 1997 and an operating loss of
$1.3 million for the year ended June 30, 1998, a reported improvement of $19.2
million year over year. On a pro forma basis, operating results improved from a
loss of $31.4 million for the year ended June 30, 1997 to a loss of $1.3 million
for the same period in 1998. 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
ISC 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. It should be noted that the rate of the Company's subscriber growth
is primarily determined by the direct marketing efforts of its financial
institution clients. Historical subscriber growth, therefore, may not be
indicative of future growth. In the fourth quarter of fiscal 1998, many of the
Company's financial institution clients reduced marketing efforts toward new
subscribers to allow them time to convert from a PC based software front-end
offering to a more efficient web-based offering, which resulted in a decline in
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<PAGE> 11
quarter over quarter subscriber growth. While the Company believes this is a
short-term occurrence, there is no assurance that subscriber growth will return
to its previous double-digit quarterly growth rate.
Software revenue decreased from $68.1 million to $66.1 million for the
years ended June 30, 1997 and 1998, respectively, on a reported basis. 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 6% year over year. Revenue growth is primarily the result of
increased license sales driven by growth in the Company's reconciliation and
compliance products and related maintenance and services revenue generated from
new license sales in fiscal 1997 and 1998. Reported operating profits improved
from $4.3 million for the year ended June 30, 1997 to $8.4 million for the year
ended June 30, 1998. On a pro forma basis, operating income increased from $5.3
million to $8.3 million for the same periods, respectively. Gains on the sale of
divested businesses allowed the Company to release a deferred tax benefit
valuation allowance which in turn reduced goodwill and other intangible assets
related to the Servantis acquisition. Additionally, at the end of the third
quarter of fiscal 1998, when the Company announced intentions to divest software
units, related intangible assets were reclassified on the balance sheet as
assets held for sale and amortization on these intangibles ceased at that time.
The resulting decrease in intangible amortization in Software on a year over
year basis was approximately $3.7 million. Of the software products announced
for sale, item processing, electronic banking and wire sales took place in the
year ended June 30, 1998. Subsequent to year-end 1998, leasing was sold in July
1998 and mortgage in September 1998. This leaves only imaging and safe box
accounting to be disposed.
Revenue in Investment Services has increased by 33% from $22.4 million
to $29.7 million for the year ended June 30, 1997 and 1998, respectively. This
improvement is due primarily to an increase in the number of portfolios managed
from approximately 350,000 at June 30, 1997 to approximately 500,000 at June 30,
1998. Approximately 60,000 of the portfolio growth took place in the fourth
quarter of 1998 alone. Operating profits increased from $2.2 million to $6.2
million from fiscal 1997 to fiscal 1998. Improvements in operating results are
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
$21.4 million for the year ended June 30, 1997 to $20.1 million for the same
period in 1998. The improvements are due to successful efforts to assimilate the
various acquisitions and leverage the existing infrastructure in response to
overall growth in the business.
In-process research and development in the year ended June 30, 1997 is
related to the acquisition of ISC in January 1997 and in the year ended June 30,
1998 is related to the acquisition of AMTI in October 1997.
YEAR 2000
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. 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 (previously referred to as Genesis) 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
13-11
<PAGE> 12
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 explicit Year
2000 costs are not included in Genesis development costs. 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 costs to
complete include remediation, testing and independent verification but are
primarily budgeted to remedy any contingencies that have not heretofore been
anticipated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED JUNE 30,
COST TO ---------------------
BUSINESS SEGMENT COMPLETE 1998 1997 TOTAL
------------ ----- ------ -------
<S> <C> <C> <C> <C>
Electronic Commerce $ 1,400 $ 100 $ - $ 1,500
Software 500 500 - 1,000
Investment Services 701 375 - 1,076
Corporate 300 - - 300
------- ----- -------- -------
Total $ 2,901 $ 975 $ - $ 3,876
======= ===== ======== =======
</TABLE>
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 Fed 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 generate revenue per agreements with financial institution, merchant
and direct customers. This in turn could have a material impact on the conduct
of 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 year 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 compliance 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
The following table sets forth a summary of cash flow activity and
should be read in conjunction with statements regarding the Company's liquidity
and capital resources:
13-12
<PAGE> 13
<TABLE>
<CAPTION>
Summary of Cash Flows
---------------------------------------------------------------------
(in thousands) Six Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, December 31,
1998 1997 1996 1995
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash provided by (used in)
operating activities $ (11,673) $ (7,831) $ (6,646) $ 2,361
Cash flow provided by (used in)
investing activities 12,767 24,912 (37,132) (22,785)
Cash flow provided by (used in)
financing activities 3,355 (5,982) 925 82,055
--------------- -------------- -------------- ---------------
Net increase (decrease) in
cash and cash equivalents $ 4,449 $ 11,099 $ (42,853) $ 61,631
=============== ============== ============== ===============
</TABLE>
While the Company historically funded its business primarily through
cash flows generated from operations, the sale of equity securities and capital
lease financing, from the six months ended June 30, 1996 through the year ended
June 30, 1998, there have been several acquisitions and divestitures that have
had a significant impact on cash flow.
For the year ended June 30, 1998, the Company used $11.7 million of
cash flow in operating activities. During the year, $24.5 million in net
investments in trading securities were reflected as cash used in operations. In
previous periods, all investments were classified as available for sale and
therefore, related investment activities did not impact operating cash flow. The
change to trading securities is an effort to maximize yields within the
Company's conservative investment guidelines and not to significantly impact the
risk profile of the portfolio. From an investing perspective, the Company
generated $54.7 million of cash from the sale of the various software
businesses, $23.8 million from sales and maturities of available for sale
investments, $8.9 million from receipt of a purchase price adjustment related to
the ISC acquisition, and $0.3 million from the sales of other assets. Investing
receipts were offset by $27.9 million of investment in property additions,
primarily for computer and operational equipment and facilities related to
completion of the Norcross, Georgia processing center and in conjunction with
project Genesis; $20.3 million in the purchase of investments ($19.3 million of
available for sale and $1.0 million of trading); $14.9 of investment in a note
receivable in conjunction with the proposed purchase of a building in Columbus,
Ohio; $10.0 million as final payment of the purchase price of ISC; payment of
$1.0 million for the purchase of AMTI; and $0.7 million in capitalization of
software costs. From a financing perspective, $5.4 million of cash was provided
by stock option exercises, the employee stock purchase plan, and the Company's
401(k) matching contribution which was offset by payments of $1.1 million in
satisfaction of an outstanding note payable and $0.9 million in capital lease
obligations. In total, cash and cash equivalents increased by $4.4 million for
the year. As a result of the above, the Company's current ratio has improved
from 1.3 at June 30, 1997 to 2.3 at June 30 1998 and related working capital has
increased from $20.0 million to $78.2 million for the same periods. In the
coming year, the Company expects to earn a profit and believes that existing
cash and cash equivalents and expected cash from remaining software divestitures
early in fiscal 1999 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 are required, the Company has
access to an unused $20 million line of credit.
For the year ended June 30, 1997, the Company used $7.8 million for
operating activities. The sale of certain businesses generated proceeds of $28.9
million while $0.6 million was received from stock options exercised during the
year. The Company invested $11.4 million, net of cash acquired, for the
acquisition of ISC. Certain stockholders from the Security APL purchase
exercised options to sell back to the Company 276,469 of common shares at a
price of $19 per share. The company received proceeds of $16.5 million on net
maturities and sales of available for sale investments, $9.8 million was
invested in property and software additions, while $0.6 million was received on
the sale of property and equipment. Principal payments on capital leases totaled
$1.1 million, $50,000 was applied to the repayment of
13-13
<PAGE> 14
stockholder notes payable and an additional $68,750 was expended on repayment of
outstanding notes payable balances. Cash and cash equivalents increased by $11.1
million for the year.
During the six-month period ended June 30, 1996, the Company used $6.6
million for operating activities. The Company invested $39.4 million, net of
cash acquired, for the acquisitions of Servantis and Security APL. These
acquisitions were partially funded through $10.6 million of maturities and sales
of available for sale investments. $7.1 million of funds were invested in
property additions, $1.3 million on capitalization of software development
costs, $0.6 million on the repayment of notes payable and $.6 million was
applied to principal payments on capital lease obligations. The Company borrowed
$1.1 million under an unsecured loan and received $0.9 million from the exercise
of stock options. Cash and cash equivalents decreased by $42.9 million for the
period.
For the year ended December 31, 1995, the Company received proceeds of
$82.7 from the issuance of 4,975,310 shares of its common stock in the initial
public offering. An additional $2.3 million of cash was generated from operating
activities and $.4 million was received from the combination of stock options
exercised and payments on stockholder notes receivable. $16.4 million of funds
were invested in a net increase in short term U.S. Government securities, $3.4
million was invested in property additions, $3.0 million was invested in a
trademark license and $1.0 million was applied to principal payments on capital
lease obligations. Cash and cash equivalents increased by $61.6 million for the
period.
INFLATION
The Company believes the effects of inflation have not had a
significant impact on the Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. The Statement requires businesses to disclose comprehensive
income and its components in their general-purpose financial statements, with
reclassification of comparative (earlier period) financial statements. The
adoption of SFAS 130 is not expected to have a material impact on the Company's
financial statement disclosures.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The adoption of SFAS 131 is
not expected to have a material impact on the Company's financial statement
discosures.
In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition," which is effective for periods beginning after
December 15, 1997. The Statement provides guidance for recognizing revenue on
software transactions (superceding SOP 91-1, "Software Revenue Recognition").
The adoption of SOP 97-2 is not expected to have a material impact on the
Company's revenue recognition policies or financial statement disclosures.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for periods
beginning after December 15, 1998. The Statement distinguishes accounting for
the costs of computer software developed or obtained for internal use from
guidance under SFAS 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." The adoption of SOP 98-1 is not expected
to have a material impact on the Company's software capitalization policies or
financial statement disclosures.
13-14
<PAGE> 15
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this annual report 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 and Year 2000 issues. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, the factors set forth under the
caption "Business - Business Risks" in the Annual Report on Form 10-K for the
year ended June 30, 1998 and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission. One or more of
these factors have affected, and in the future could affect, the Company's
businesses and financial results in future periods and could cause actual
results to differ materially from plans and projections. 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 Annual Report 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
representation by the Company or any other person, that the objectives and plans
of the Company will be achieved. All forward-looking statements made in this
Annual Report are based on information presently available to the Company's
management. The Company assumes no obligation to update any forward-looking
statements.
13-15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CheckFree Holdings Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CheckFree
Holdings Corporation (the "Company") and its subsidiaries as of June 30, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
June 30, 1998 and 1997 and the results of their operations and their cash flows
for the years ended June 30, 1998 and 1997, the six months ended June 30, 1996,
and the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 11, 1998, except for Note 20 as to which
the date is September 11, 1998
13-16
<PAGE> 17
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 36,535 $ 32,086
Investments 24,533 4,431
Accounts receivable, net 32,960 44,507
Assets held for sale 15,881
Notes receivable 14,882
Prepaid expenses and other assets 4,678 2,197
Deferred income taxes 7,231 3,002
--------- ---------
Total current assets 136,700 86,223
PROPERTY AND EQUIPMENT - Net 50,920 44,027
OTHER ASSETS:
Capitalized software, net 11,387 26,644
Intangible assets, net 30,474 56,896
Investments 1,006 15
Deferred income taxes 12,889 3,063
Other noncurrent assets 6,736 6,968
--------- ---------
Total other assets 62,492 93,586
--------- ---------
$ 250,112 $ 223,836
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,536 $ 7,051
Accrued liabilities 24,738 31,056
Customer deposits 422 434
Current portion of long-term obligations 1,180 953
Deferred revenue 19,710 26,498
Income taxes payable 3,876 229
--------- ---------
Total current liabilities 58,462 66,221
ACCRUED RENT AND OTHER 1,329 570
LONG-TERM OBLIGATIONS - Less current portion:
Obligations under capital leases 6,467 7,301
Note payable to bank 1,100
--------- ---------
Total long-term obligations 6,467 8,401
COMMITMENTS (Notes 11, 12 and 13)
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 56,364,839 shares,
55,546,321 shares, respectively 564 555
Additional paid-in capital 492,109 454,850
Less:
Treasury stock - at cost, 963,295 shares, 1,041,552 shares, respectively (4,362) (6,007)
Accumulated deficit (304,457) (300,754)
--------- ---------
Total stockholders' equity 183,854 148,644
--------- ---------
$ 250,112 $ 223,836
========= =========
</TABLE>
See notes to consolidated financial statements.
13-17
<PAGE> 18
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED YEAR ENDED
---------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
REVENUES:
<S> <C> <C> <C> <C>
Processing and servicing $ 159,255 $ 94,528 $ 27,142 $ 39,536
Merchant discount 9,994 6,163 9,794
License fees 28,952 33,088 10,970
Maintenance fees 25,848 22,567 1,978
Other 19,809 16,268 4,787
------------ ------------ ------------ ------------
Total revenues 233,864 176,445 51,040 49,330
EXPENSES:
Cost of processing, servicing and support 129,924 102,721 35,438 30,258
Research and development 36,265 32,869 9,907 6,876
Sales and marketing 28,839 32,670 17,167 7,242
General and administrative 20,677 18,707 7,338 4,134
Depreciation and amortization 24,999 24,919 6,997 2,485
In-process research and development 719 140,000 122,358
Charge for stock warrants 32,827
Exclusivity amortization 2,963 5,958
------------ ------------ ------------ ------------
Total expenses 277,213 357,844 199,205 50,995
Net gain on dispositions of assets 36,173 6,250
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (7,176) (175,149) (148,165) (1,665)
OTHER:
Interest income 3,464 2,153 1,659 2,135
Interest expense (632) (834) (325) (645)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,344) (173,830) (146,831) (175)
INCOME TAX EXPENSE (BENEFIT) (641) (12,017) (8,628) 40
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (3,703) (161,813) (138,203) (215)
EXTRAORDINARY ITEM, EXTINGUISHMENT
OF DEBT - Net of tax (364)
------------ ------------ ------------ ------------
NET LOSS $ (3,703) $ (161,813) $ (138,567) $ (215)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ (0.07) $ (3.44) $ (3.69) $ (0.01)
Extraordinary item (0.01)
------------ ------------ ------------ ------------
Net Loss $ (0.07) $ (3.44) $ (3.70) $ (0.01)
============ ============ ============ ============
EQUIVALENT NUMBER OF SHARES 55,086,742 46,988,225 37,419,580 28,218,521
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
13-18
<PAGE> 19
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF COMMON ADDITIONAL SHARES OF TREASURY
COMMON STOCK AT PAID-IN TREASURY STOCK AT
STOCK PAR CAPITAL STOCK COST
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 27,619,193 $ 276 $ 17,210 (757,536) $ (629)
Net loss
Stock options exercised 270,262 3 172
Tax benefit associated with exercise of stock
options 57
Sale of common stock, net of expenses related
to public offering 4,975,310 50 82,694
Repayment of loans to stockholders
---------- ----- --------- -------- --------
BALANCE - December 31, 1995 32,864,765 329 100,133 (757,536) (629)
Net loss
Stock options exercised 874,195 9 862
Tax benefit associated with exercise of stock
options 1,100
Issuance of common stock and stock options
pursuant to acquisitions 8,535,840 85 174,727
Repayment of loans to stockholders
---------- ----- --------- -------- --------
BALANCE - June 30, 1996 42,274,800 423 276,822 (757,536) (629)
Net loss
Stock options exercised 636,309 6 591
Tax benefit associated with exercise of stock
options 887
Issuance of common stock and stock options
pursuant to acquisitions 12,635,212 126 176,550
Treasury stock acquired (284,016) (5,378)
---------- ----- --------- -------- --------
BALANCE - June 30, 1997 55,546,321 555 454,850 (1,041,552) (6,007)
Net loss
Stock options exercised 708,661 8 2,204 (47)
Employee stock purchases 109,857 1 1,572
401(k) match 78,257 1,692
Warrants issued 32,827
Tax benefit associated with exercise of stock
options 656
---------- ----- --------- -------- --------
BALANCE - June 30, 1998 56,364,839 $ 564 $ 492,109 (963,295) $ (4,362)
========== ===== ========= ======== ========
<CAPTION>
STOCKHOLDERS' TOTAL
NOTES ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (326) $ (159) $ 16,372
Net loss (215) (215)
Stock options exercised 175
Tax benefit associated with exercise of stock
options 57
Sale of common stock, net of expenses related
to public offering 82,744
Repayment of loans to stockholders 192 192
---- ---------- ---------
BALANCE - December 31, 1995 (134) (374) 99,325
Net loss (138,567) (138,567)
Stock options exercised 871
Tax benefit associated with exercise of stock
options 1,100
Issuance of common stock and stock options
pursuant to acquisitions 174,812
Repayment of loans to stockholders 134 134
---- ---------- ---------
BALANCE - June 30, 1996 - (138,941) 137,675
Net loss (161,813) (161,813)
Stock options exercised 597
Tax benefit associated with exercise of stock
options 887
Issuance of common stock and stock options
pursuant to acquisitions 176,676
Treasury stock acquired (5,378)
---- ---------- ---------
BALANCE - June 30, 1997 - (300,754) 148,644
Net loss (3,703) (3,703)
Stock options exercised 2,165
Employee stock purchases 1,573
401(k) match 1,692
Warrants issued 32,827
Tax benefit associated with exercise of stock
options 656
---- ---------- ---------
BALANCE - June 30, 1998 $ - $ (304,457) $ 183,854
==== ========== =========
</TABLE>
See notes to consolidated financial statements.
13-19
<PAGE> 20
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED YEAR ENDED
-------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,703) $ (161,813) $ (138,567) $ (215)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary item, extinguishment of debt, net of tax 364
Write-off of in-process research and development 719 140,000 122,358
Write-off of capitalized software 3,619
Issuance of warrants 32,827
Exclusivity amortization 2,963 4,938
Depreciation and amortization 24,999 24,919 6,997 2,485
Deferred income taxes (5,499) (13,101) (8,654) 79
Net gain on dispositions of assets (36,173) (6,250)
Loss on disposal of property and equipment 641 100 13
Purchases of investments - Trading (28,799)
Proceeds from maturities and sales of investments,
net - Trading 4,267
Accretion of investment discount - net (337)
Change in certain assets and liabilities (net of
acquisitions):
Accounts receivable (5,095) (10,952) (1,110) (1,500)
Prepaid expenses and other (1,834) (2,976) 821 (915)
Refundable income taxes (144)
Accounts payable 1,492 1,249 2,606 223
Accrued liabilities (555) 3,837 3,428 2,623
Customer deposits (13) 366 272 (26)
Deferred revenue 239 7,509 4,586 228
Income taxes payable 2,492 183 153 (153)
-------- ---------- ---------- ------
Net cash provided by (used in) operating activities (11,673) (7,831) (6,646) 2,361
INVESTING ACTIVITIES:
Property additions (27,939) (9,755) (7,090) (3,431)
Proceeds from the sale of property and equipment 340 588 29
Proceeds from the sale of assets 54,650 28,900
Purchase of note receivable (14,882)
Proceeds from purchase price adjustment 8,889
Capitalization of software development costs (731) (1,312)
Purchase of businesses, net of cash acquired (11,000) (11,363) (39,404)
Purchases of investments - Held-to-maturity (1,006) (3,000) (54,079)
Purchases of investments - Available-for-sale (19,311)
Proceeds from maturities and sales of investments,
net - Available-for-sale 23,757 19,542 10,645 37,725
Purchase of trademark license (3,000)
-------- ---------- ---------- ------
Net cash provided by (used in) investing activities 12,767 24,912 (37,132) (22,785)
</TABLE>
(Continued)
13-20
<PAGE> 21
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED YEAR ENDED
-------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from sale of common stock $ 82,744
Repayment of notes payable and other debt extinguishment $ (1,144) $ (69) $ (609) (75)
Proceeds from notes payable 1,100 225
Principal payments under capital lease obligations (931) (1,076) (571) (1,038)
Proceeds from stock options exercised 2,165 591 871 232
Proceeds from employee stock purchase plan 1,573
Proceeds from employee 401(k) plan 1,692
Purchase of treasury stock (5,378)
Receipts (payments) on stockholder notes (50) 134 (33)
--------- --------- --------- --------
Net cash provided by (used in) financing activities 3,355 (5,982) 925 82,055
--------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,449 11,099 (42,853) 61,631
CASH AND CASH EQUIVALENTS:
Beginning of period 32,086 20,987 63,840 2,209
--------- --------- --------- --------
End of period $ 36,535 $ 32,086 $ 20,987 $ 63,840
========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
13-21
<PAGE> 22
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1998 AND 1997,
THE SIX MONTHS ENDED JUNE 30, 1996,
AND THE YEAR ENDED DECEMBER 31, 1995
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - CheckFree Holdings Corporation (the "Company") is the
parent company of CheckFree Corporation ("CFC"), the principal operating
company of the business. CFC was organized in 1981 and is a leading
provider of transaction procession services, software and related products
to financial institutions and businesses and their customers throughout
the United States. See Note 18 for a description of the Company's business
segments. Following a number of acquisitions and divestitures, CFC
reorganized its corporate structure on December 22, 1997. In connection
with the restructuring, holders of common stock ("Common Stock") of CFC
became holders of an identical number of shares of Common Stock of the
Company. 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.
Principles of Consolidation and Change in Fiscal Year - The accompanying
consolidated financial statements include the results of operations of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Effective January 1, 1996, the Company changed its fiscal year-end from
December 31 to June 30. The following presents unaudited summarized
consolidated financial information for the six months ended June 30, 1995:
<TABLE>
<S> <C>
Total revenues $ 23,581,000
Loss from operations (68,000)
Income taxes 62,000
Net income 75,000
Net income per share (basic and diluted) Nil
</TABLE>
Processing Agreements - The Company has agreements with transaction
processors to provide origination and settlement services for the Company.
Under the agreements, the Company must fund service fees and returned
transactions when presented. These agreements expire at various dates
through June 1999.
Transaction Processing - In connection with the timing of the Company's
financial transaction processing, the Company is exposed to credit risk in
the event of nonperformance by other parties, such as
13-22
<PAGE> 23
returns and chargebacks. The Company utilizes credit analysis and other
controls to manage its credit risk exposure. The Company also maintains a
reserve for future returns and chargebacks.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments (primarily United States government agency obligations and
commercial paper) purchased with maturities of three months or less to be
cash equivalents. Substantially all cash and cash equivalents are on
deposit with six financial institutions.
Investments - The Company's investments consist primarily of United States
government, government agency or state obligations. The Company classifies
these investments as available-for-sale, trading or held-to-maturity
securities in accordance with Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities". Such investments are carried at amortized cost, which
approximates market value.
Property and Equipment - Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line and
accelerated methods over the estimated useful lives as follows: land
improvements, building and building improvements, 15 to 30 years; computer
equipment, software, and furniture, 3 to 7 years. Equipment under capital
leases is amortized using the straight-line method over the terms of the
leases. Leasehold improvements are amortized over the lesser of the
estimated useful lives or remaining lease periods.
Capitalized Software Costs - Software development costs incurred prior to
the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the technological feasibility of
the subject software product has been established are capitalized in
accordance with SFAS 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Capitalized software development
costs are amortized on a product-by-product basis using either the
estimated economic life of the product on a straight-line method or the
ratio of current year gross product revenue to current and anticipated
future gross product revenue, whichever is greater. Unamortized software
development costs in excess of estimated future net revenues from a
particular product are written down to estimated net realizable value.
Amortization of software costs totaled $5,198,000, $7,687,000, $2,521,000,
and $208,000 for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995, respectively.
Intangible Assets - The costs of identified intangible assets are
generally amortized on a straight-line basis over periods from 8 months to
15 years. Goodwill is amortized on a straight-line basis over 10 years. At
each balance sheet date, a determination is made by management to
ascertain whether the intangible assets have been impaired based on
several criteria, including, but not limited to, sales trends,
undiscounted operating cash flows, and other operating factors.
Capital Stock - On April 21, 1995, the Company's stockholders increased
the authorized number of shares of $.01 par value Common Stock to
25,000,000 and on August 8, 1995 increased the number of authorized shares
of $.01 par value Common Stock to 150,000,000. In addition, on August 8,
1995, the Company's stockholders authorized the Board of Directors to
issue up to 15,000,000 shares of $.01 par value preferred stock in one or
more series and to establish such relative voting, dividend, redemption,
liquidation, conversion and other powers, preferences, rights,
qualifications, limitations and restrictions as the Board of Directors may
determine without further stockholder approval. No preferred shares have
been issued.
13-23
<PAGE> 24
Advertising - The Company expenses advertising costs as incurred.
Advertising expenses were $4,275,000, $2,110,000, $7,159,000, and
$1,758,000 for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995, respectively.
Basic and Diluted Loss Per Share - On July 1, 1997, the Company adopted
the provisions of SFAS 128 "Earnings Per Share" and has restated per share
data for all prior periods where applicable. Basic loss per common share
is determined 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. Anti-dilution
provisions of SFAS 128 requires consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss
periods. For the periods reported, there were no differences between basic
and diluted earnings per share. The number of anti-dilutive equivalent
shares excluded from the per share calculations are 1,725,000, 1,218,000,
1,931,000, and 2,843,000 for the years ended June 30, 1998 and 1997, the
six months ended June 30, 1996, and the year ended December 31, 1995,
respectively. All share and per share information has been adjusted for
the five-for-one stock split on May 1, 1995 and the 5.2614-for-one split
on the effective date of the initial public offering (September 28, 1995).
Impairment of Long-Lived Assets - In accordance with SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of," the Company periodically assesses the likelihood of
recovering the cost of long-lived assets based on its expectations of
future profitability and undiscounted cash flows of the related business
operations. These factors, along with management's plans with respect to
the operations, are considered in assessing the recoverability of
property, equipment and purchased intangibles. During 1998, in conjunction
with the Company's platform integration efforts referred to as project
Genesis, the Company consolidated three processing centers from Chicago,
Illinois, Austin, Texas, and Columbus, Ohio, into one processing center
located in Norcross, Georgia. As a result of this consolidation and a
physical inventory of fixed assets at the related business units, all
identified assets which were determined to have no alternative use or
value were written off. Of the total write-off of $4.0 million, $3.0
million was recorded in the quarter ended September 30, 1997 and the
remaining $1.0 million in the quarter ended June 30, 1998.
Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997. The Statement requires businesses to disclose comprehensive income
and its components in their general-purpose financial statements, with
reclassification of comparative (earlier period) financial statements. The
adoption of SFAS 130 is not expected to have a material impact on the
Company's financial statement disclosures.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The adoption
of SFAS 131 is not expected to have a material impact on the Company's
financial statement disclosures.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," which is effective
for fiscal years beginning after December 15, 1997. The Statement provides
guidance for recognizing revenue on software transactions (superseding SOP
91-1, "Software Revenue Recognition"). The adoption of SOP 97-2 is not
expected to have a material impact on the Company's revenue recognition
policies or financial statement disclosures.
13-24
<PAGE> 25
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is
effective for fiscal years beginning after December 15, 1998. The
Statement distinguishes accounting for the costs of computer software
developed or obtained for internal use from guidance under SFAS 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." The adoption of SOP 98-1 is not expected to have a
material impact on the Company's software capitalization policies or
financial statement disclosures.
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1998 presentation.
REVENUE RECOGNITION
- Processing and Servicing - Processing and servicing revenues include
revenues from transaction processing, electronic funds transfer and
monthly service fees on consumer funds transfer services. The Company
recognizes revenue when the services are performed.
As part of processing certain types of transactions, the Company
earns interest from the time money is collected from its customers
until the time payment is made to the applicable merchants. These
revenues, which are generated from trust account balances not
included on the Company's balance sheet, are included in processing
and servicing and totaled $9,676,000, $3,228,000, $1,019,000, and
$1,623,000 for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995,
respectively.
- Merchant Discount - Merchant discount revenues are recognized when
the services are performed. Interchange fees incurred in the
settlement of merchant credit card transactions are included in
processing and servicing expenses.
- License Fees - Revenue from software license agreements is recognized
upon delivery of the software if there are no significant
postdelivery obligations in accordance with SOP 91-1. The revenue
related to significant postdelivery obligations is deferred and
recognized using the percentage-of-completion method.
- Maintenance Fees - Maintenance fee revenue is recognized ratably over
the term of the related contractual support period, generally 12
months.
- Other - Other revenue consists primarily of consulting and training
services. Consulting revenue is recognized principally on a
percentage-of-completion basis and training revenue is recognized
upon delivery of the related service.
EXPENSE CLASSIFICATION
- Processing, Servicing and Support- Processing, servicing and support
costs consist primarily of data processing costs, customer care and
technical support, and third party transaction fees, which consist
primarily of credit card interchange fees and ACH transaction fees.
- Research and Development - Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers
and business development personnel.
13-25
<PAGE> 26
- Sales and Marketing - Sales and marketing expenses consist primarily
of salaries and commissions of sales employees, public relations and
advertising costs, customer acquisition fees and royalties paid to
distribution partners.
- General and Administrative - General and administrative expenses
consist primarily of salaries for administrative, executive, finance,
and human resource employees.
- Depreciation and Amortization - Depreciation and amortization on
capitalized assets is recorded on a straight-line basis over the
appropriate useful lives.
- In-process Research and Development - In-process research and
development consists of charges resulting from acquisitions whereby
the purchase price allocated to in-process software development was
based on the determination that in-process research and development
had no alternative future use after taking into consideration the
potential for usage of the software in different products, resale of
the software, or other internal use.
- Charge for Stock Warrants - Charge for stock warrants consists of
noncash charges for vested warrants issued to third parties under
agreements whereby issued warrants vest upon achievement of certain
strategic objectives.
- Exclusivity Amortization - Exclusivity amortization consists of the
amortization of an intangible asset established in conjunction with a
marketing agreement with a strategic partner whereby the Company
retains certain exclusive rights to bill payment processing through
the partner's financial management software over a specific period of
time.
2. ACQUISITIONS AND DISPOSITIONS
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, $0.7 million was allocated to in-process
research and development, which was charged to operations at the time of
the acquisition.
On January 27, 1997, the Company acquired Intuit Services Corporation
("ISC") for a total of $199.0 million, including 12.6 million shares of
common stock valued at $177.2 million, the present value of cash payments
due to Intuit, Inc. under the Services and License Agreement of $19.6
million and acquisition costs of $2.2 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, $28.9 million was allocated to
goodwill. In addition, $140.0 million was allocated to in-process research
and development, which was charged to operations at the time of the
acquisition. $7.9 million was allocated to an exclusivity agreement with
Intuit, Inc. and is being amortized on a straight-line basis over the
contractual life of eight months. A further $3.5 million was allocated to
other identifiable intangible assets and $20.3 million allocated to
tangible assets. ISC's operations are included in the consolidated results
of operations from the date of the acquisition.
13-26
<PAGE> 27
On May 9, 1996, the Company acquired Security APL, Inc. ("Security APL")
for $53 million, including 2.8 million shares of common stock, valued at
$18.50 per share. 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, $10.9 million was allocated to goodwill, $9.0 million to other
identifiable intangible assets and $9.8 million to tangible assets.
Additionally, $28.8 million was allocated to in-process research and
development, which was charged to operations at the time of the
acquisition. Security APL's operations are included in the consolidated
results of operations from the date of the acquisition.
In March 1996, the Company acquired Interactive Solutions Corp. ("IS") for
$3.0 million, including 85,000 shares of common stock valued at $21.25 per
share. 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,
$3.0 million was allocated to in-process research and development, which
was charged to operations at the time of the acquisition. IS' operations
are included in the consolidated results of operations from the date of
the acquisition.
On February 21, 1996, the Company acquired Servantis Systems Holdings,
Inc. ("Servantis") for $165.1 million, including 5.7 million shares of
common stock, valued at $20.00 per share, the issuance of stock options
valued at $8.2 million and the retirement of certain debt of $42.5
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, $11.2 million was allocated to goodwill, $46.5 million to other
identifiable intangible assets and $55.2 million to tangible assets. In
addition, $90.6 million was allocated to in-process research and
development, which was charged to operations at the time of the
acquisition. Servantis' operations are included in the consolidated
results of operations from the date of the acquisition.
Consistent with the Company's policy for internally developed software,
the Company determined the amounts to be allocated to in-process research
and development based on whether technological feasibility had been
achieved and whether there was any alternative future use for the
technology. As of the date of the acquisitions, the Company concluded that
the in-process research and development had no alternative future use
after taking into consideration the potential for usage of the software in
different products, resale of the software and internal usage.
The unaudited pro forma results of operations of the Company for the year
ended June 30, 1997, the six months ended June 30, 1996, and the twelve
months ended June 30, 1996, assuming the acquisitions occurred at the
beginning of each period are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED 12 MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
1997 1996 1996
<S> <C> <C> <C>
Total revenues $ 194,354 $ 69,607 $ 131,815
Loss before extraordinary item (28,567) (34,290) (43,872)
Net loss (28,567) (34,655) (44,236)
Net loss per share (basic and diluted) $ (0.53) $ (0.65) $ (0.81)
Weighted average shares outstanding 54,272 53,630 54,529
</TABLE>
This information is presented to facilitate meaningful comparisons to
on-going operations and to other companies. The unaudited pro forma
amounts above do not include a charge for in-process research and
development of $122.4 million and $140.0 million arising from the
Servantis, Security APL and IS
13-27
<PAGE> 28
acquisitions in 1996 and the ISC acquisition in 1997, respectively.
Previous operations of AMTI were insignificant and therefore, require no
pro forma considerations. The unaudited pro forma information is not
necessarily indicative of the actual results of operations had the
transactions occurred at the beginning of the periods presented, nor
should it be used to project the Company's results of operations for any
future periods.
On April 20, 1998, the Company sold certain software and related assets of
its wire transfer and cash management businesses for cash of $18.25
million resulting in a net gain on the sale of $14.7 million.
On March 24, 1998, the Company sold certain software and related assets of
its item processing business for cash of $3.4 million resulting in a net
gain on the sale of $3.2 million.
On August 29, 1997, the Company sold certain software and related assets
of its recovery management business for cash of $33.5 million resulting in
a net gain on the sale of $28.2 million.
On March 26, 1997, the Company sold certain assets and certain contracts
and licensed certain proprietary software for processing automatic
accounts receivable through credit cards or the Automated Clearing House
resulting in a net gain on the sale of $6,250,000.
3. INVESTMENTS
Investments as of June 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
<S> <C> <C>
Available-for-Sale - U.S. Government and Government Agency
Obligations $ 4,446
Held-to-Maturity - State Obligations $ 1,006
Trading 24,533
-------- -------
Total $ 25,539 $ 4,446
======== =======
</TABLE>
Available-for-Sale - Gross unrealized gains and losses related to
available-for-sale investments at June 30, 1997 were insignificant. In
addition, sales of securities and related realized gains/losses, based on
the specific identification cost method, were insignificant for each of
the periods presented.
Held-to-Maturity - The difference between the amortized cost and the
aggregate fair value of held-to-maturity investment at June 30, 1998 was
insignificant.
Trading - Trading investments are classified as current assets and are
recorded at fair value.
Contractual maturities of debt securities classified as held-to-maturity
at June 30, 1998 are as follows:
Due after one year through five years $1,006
======
Expected maturities will differ from contractual maturities because debt
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
13-28
<PAGE> 29
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
<S> <C> <C>
Trade accounts receivable $22,739 $22,049
Unbilled trade accounts receivable 10,654 20,958
Other receivables 3,037 5,717
------- -------
36,430 48,724
Less allowance for doubtful accounts 3,470 4,217
------- -------
Total $32,960 $44,507
======= =======
</TABLE>
5. ASSETS HELD FOR SALE
In April 1998, the Company announced plans to divest several of its
software businesses through the sale of software and related assets.
Assets of the Company's mortgage, leasing, imaging, and safe box
accounting businesses totaling $15.9 million are comprised of trade,
unbilled, and other accounts receivable (net of an allowance for doubtful
accounts), property, and equipment dedicated to the businesses,
capitalized software, and other purchased intangible assets. Sales of all
businesses are expected to be completed by September 30, 1998 and the
assets are anticipated to be recovered from the proceeds of the sales.
6. NOTE RECEIVABLE
In May 1998, in anticipation of a tax-free exchange of property, the
Company loaned $14.9 million to a third party to purchase a building on
its behalf. Interest of 8% is earned monthly commencing in June 1998 and
the note is payable at the earlier of the sale of the Company's building
in Columbus, Ohio, or May 1999. The estimated fair value of the note
receivable approximates the carrying value based on currently available
instruments with similar interests rates and remaining maturities.
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. In
accordance with SFAS 109, deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Income tax expense (benefit) is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
13-29
<PAGE> 30
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED YEAR ENDED
-------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Current:
Federal $ 3,795 $ (123)
State and local 1,063 $ 1,084 $ 25 85
------ --------- -------- ----
Total current 4,858 1,084 25 (38)
Deferred federal and state taxes (5,499) (13,101) (8,653) 78
------ --------- -------- ----
Total income tax expense (benefit) $ (641) $ (12,017) $ (8,628) $ 40
====== ========= ======== ====
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 35 percent to income before income
taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED YEAR ENDED
-------------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $ (1,520) $ (60,844) $ (49,923) $ (60)
Nondeductible in-process research and
development of acquired businesses 252 49,000 41,602
Nondeductible intangible amortization 1,189 839 219 65
State and local taxes, net of federal income
tax benefit 21 (553) (626) 56
Other, net (583) (459) 100 (21)
------ --------- -------- ----
Total income tax expense (benefit) $ (641) $ (12,017) $ (8,628) $ 40
====== ========= ======== ====
</TABLE>
13-30
<PAGE> 31
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,155 $ 9,150
Intangible assets 1,870 5,117
Allowance for bad debts and returns 1,699 1,812
Accrued compensation and related items 1,731 339
Stock warrants 12,964
Reserve accruals 3,212 911
Property and equipment 55
Valuation allowance (6,000)
-------- --------
Total deferred tax assets 22,631 11,384
Deferred tax liabilities:
Capitalized software (1,926) (5,259)
Property and equipment (19)
Prepaid expenses (566) (60)
-------- --------
Total deferred tax liabilities (2,511) (5,319)
-------- --------
Net deferred tax asset $ 20,120 $ 6,065
======== ========
</TABLE>
At June 30, 1998, the Company has approximately $1,155,000 of state net
operating loss carryforwards available, expiring in 2009 to 2012. The
valuation allowance at June 30, 1997 reduced deferred tax assets to the
amount the Company believed more likely than not would be realized. During
the year ended June 30, 1998, gains resulted from the sale of certain
software operations enabled the Company to realize the full value of
deferred tax assets. The resulting elimination of the valuation allowance
reduced unamortized intangible assets resulting from the Servantis
acquisition.
8. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
<S> <C> <C>
Land and land improvements $ 3,146 $ 3,146
Building and building improvements 16,692 14,442
Computer equipment and software licenses 55,526 41,264
Furniture and equipment 9,002 7,107
------- -------
Total 84,366 65,959
Less accumulated depreciation and amortization 33,446 21,932
------- -------
Property - net $50,920 $44,027
======= =======
</TABLE>
13-31
<PAGE> 32
9. INTANGIBLE ASSETS
The components of intangible assets are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
<S> <C> <C>
Workforce $ 5,179 $ 8,370
Tradenames 815 4,150
Customer base 1,231 3,440
Goodwill 28,927 41,126
Exclusivity 7,900
------- -------
Total 36,152 64,986
Less accumulated amortization 5,678 8,090
------- -------
Intangible assets, net $30,474 $56,896
======= =======
</TABLE>
10. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
<S> <C> <C>
Salaries and related costs $ 9,374 $ 10,716
Services and license agreement accrual 9,887
Reserve for contract and other losses 5,655
Processing fees 2,335 2,658
Reserve for returns and chargebacks 1,944 1,224
Other 5,430 6,571
-------- --------
Total $ 24,738 $ 31,056
======== ========
</TABLE>
The reserve for contract and other losses at June 30, 1998 is comprised of
$4.7 million related to an estimated loss from the sale of the leasing
business that occurred on July 7, 1998 (see Note 20, "Subsequent Events")
and $1.0 million for accrued contract losses and related costs which
resulted in the decision to exit the Web Investor business.
11. LONG-TERM DEBT AND NOTE PAYABLE
In March 1996, the Company executed an unsecured note payable with a bank
for $1.1 million. The principal amount was due in July 1998, with interest
payable quarterly based on the LIBOR rate (total of 5.8% at June 30,
1997). In January of 1998, the note was paid in full.
The estimated fair value of the Company's note payable approximated its
carrying amounts as of June 30, 1997 based on currently available debt
with similar interest rates and remaining maturities.
During the six months ended June 30, 1996, the Company retired certain
debt in connection with a business acquisition, resulting in an
extraordinary loss of $364,000, net of income taxes of $205,000.
13-32
<PAGE> 33
In May, 1997 the Company obtained a working capital line-of-credit which
enables the Company to borrow up to $20 million, based on the collateral
of eligible accounts receivable. The line expires in October 1999, and
contains certain restrictive covenants, including defined quarterly
operating results, minimum tangible net worth requirements, and the
prohibition of dividend payments. No funds have been drawn against the
line through June 30, 1998.
12. OBLIGATIONS UNDER CAPITAL LEASES
During 1993, the Company entered into a 20-year lease with the Department
of Development of the State of Ohio for land and an office building
located in Columbus, Ohio. The Company has the option to purchase the land
and building for $1 at the termination of the lease and thus, the Company
has recorded the transaction as a capital lease. The lease payments are
secured by a $751,500 standby letter of credit agreement with a bank and
are partially guaranteed by an officer and principal stockholder of the
Company. The standby letter of credit is collateralized by a savings
account totaling $609,292 at June 30, 1998 and certain real estate
adjacent to the leased property. The lease contains certain covenants, the
most restrictive of which require the Company to maintain certain debt to
equity ratios and tangible net worth and working capital levels.
The Company also leases certain computer equipment, furniture and
telephone equipment under capital leases. The Company is required to pay
certain taxes, insurance and other expenses related to the leased
property.
The following is a summary of property under capital leases included in
the accompanying balance sheets (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
<S> <C> <C>
Land $ 3,146 $ 3,146
Building 4,526 4,526
Computer equipment 2,371 4,318
------- -------
Total 10,043 11,990
Less accumulated depreciation 2,017 3,081
------- -------
Property held under capital leases $ 8,026 $ 8,909
======= =======
</TABLE>
13-33
<PAGE> 34
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
<S> <C>
1999 $ 1,372
2000 1,332
2001 1,091
2002 976
2003 837
Thereafter 5,451
-------
Total future minimum lease payments 11,059
Less amount representing interest 3,681
-------
Net future minimum lease payments $ 7,378
=======
</TABLE>
13. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that
the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the
leases. Total expense under all operating lease agreements for the years
ended June 30, 1998 and 1997, the six months ended June 30, 1996, and the
year ended December 31, 1995 was $5,800,000, $5,882,000, $1,936,000, and
$665,000, respectively. Minimum future rental payments under these leases
are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
<S> <C>
1999 $ 6,289
2000 6,395
2001 5,427
2002 4,869
2003 3,769
Thereafter 6,800
--------
Total $ 33,549
========
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Retirement Plan - The Company has a defined contribution 401(k) retirement
plan covering substantially all of its employees. Under the plan eligible
employees may contribute a portion of their salary until retirement and
the Company, at its discretion, may match a portion of the employee's
contribution. Total expense under the plan amounted to $859,000,
$1,862,000 , $367,000, and $97,000 for the years ended June 30, 1998 and
1997, the six months ended June 30, 1996, and the year ended December 31,
1995, respectively.
13-34
<PAGE> 35
Group Medical Plan - The Company has a group medical self-insurance plan
covering certain of its employees. The Company has employed an
administrator to manage this plan. Under terms of this plan, both the
Company and eligible employees are required to make contributions to this
plan. The administrator reviews all claims filed and authorizes the
payment of benefits. The Company has stop-loss insurance coverage on all
individual claims exceeding $100,000. Total expense under this plan
amounted to $2,522,000, $3,458,000, $1,140,000, and $626,000 for the years
ended June 30, 1998 and 1997, the six months ended June 30, 1996, and the
year ended December 31, 1995, respectively. The Company expenses amounts
as claims are incurred and recognizes a liability for incurred but not
reported claims. At June 30, 1998 and June 30, 1997, the Company has
accrued $308,000 and $378,000, respectively, as a liability for costs
incurred but not paid under this plan.
15. COMMON STOCK
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan
(the "1993 Plan"). The options granted under the 1995 and 1993 Plans may
be either incentive stock options or non-statutory stock options. The
terms of the options granted under the 1995 and 1993 Plans are at the sole
discretion of a committee of members of the Company's Board of Directors,
not to exceed ten years. Generally, options vest at either 33% or 20% per
year from the date of grant. The 1995 Plan provides that the Company may
grant options for not more than 5,000,000 shares of common stock to
certain key employees, officers and directors. Options granted under the
1995 and 1993 Plans are exercisable according to the terms of each option,
however, in the event of a change in control or merger as defined, the
options shall become immediately exercisable. At June 30, 1998, 956,289
additional shares are available for grant in the aggregate for all Plans.
Previously, the Company had adopted the 1983 Incentive Stock Option Plan
and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983
Plans"), which provided that the Board of Directors may grant options for
shares of common stock to certain employees and directors. Under the terms
of the 1983 Plans, options are exercisable over a period up to ten years
from the grant date. In the event the Company is sold, options outstanding
under the 1983 Plans must be repurchased at a price calculated as if the
options had been fully exercised.
All options granted under the 1983 Plans, the 1993 Plan, and the 1995 Plan
were granted at exercise prices not less than the fair market value of the
underlying common stock at the date of grant. In the event that shares
purchased through the exercise of incentive stock options are sold within
one year of exercise, the Company is entitled to a tax deduction. The tax
benefit of the deduction is not reflected in the consolidated statements
of operations but is reflected as an increase in additional paid-in
capital.
13-35
<PAGE> 36
The following summarizes the stock option activity from January 1, 1995 to
June 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------ SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1995
----------------------- ----------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning
of period 4,441,461 $ 9.59 2,908,218 $ 4.58 2,901,782 $ 1.19 3,074,736 $ 0.82
Granted 137,334 25.60 2,282,056 14.32 459,289 21.79 160,746 7.12
Exercised (711,227) 3.17 (636,309) 1.01 (874,195) 0.99 (270,262) 0.65
Cancelled (742,006) 12.63 (112,504) 14.88 (22,020) 1.06 (63,438) 0.73
----------
Issued in conjunction
with Servantis
Acquisition 443,362 1.52
---------- ---------- ---------- ----------
Outstanding - End of
period 4,365,562 $ 15.23 4,441,461 $ 9.59 2,908,218 $ 4.58 2,901,782 $ 1.19
========== ========== ========== ========== ========== ========== ========== ==========
Options exercisable at
end of period 1,352,516 $ 6.81 1,218,341 $ 1.17 1,433,781 $ 1.16 1,732,206 $ 0.84
========== ========== ========== ========== ========== ========== ========== ==========
Weighted average per
share fair value of options
granted during the year $ 10.77 $ 6.68 $ 8.45 $ 2.92
========== ========== ========== ==========
</TABLE>
The following table summarizes information about options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
------------------------------- -----------------------------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
<S> <C> <C> <C> <C> <C>
$0.85 - $10.00 1,012,811 4.9 $ 1.13 823,408 $ 0.98
$10.00 - $15.00 1,257,191 8.6 13.74 302,259 14.05
$15.00 - $20.00 697,860 8.4 17.60 182,060 17.35
$20.00 - $25.00 214,089 8.9 23.16 44,789 22.21
$25.00 - $30.00 1,183,611 9.8 26.07
---------- ----------
4,365,562 $ 15.23 1,352,516 $ 6.81
========== ======= ========== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended June 30,
1998 and 1997, the six months ended June 30, 1996, and the year ended
December 31, 1995, respectively: dividend yield of 0% in all periods;
expected volatility of 48%, 47%, 40%, and 40%; risk-free interest rates
of 5.21%, 6.41%, 6.68% and 5.25%; and expected lives of 3-5 years.
Under the 1997 Associate Stock Purchase Plan, effective for the six-month
period beginning January 1, 1997, the Company is authorized to issue up to
one million shares of common stock to its full-time employees, nearly all
of whom are eligible to participate. Under the terms of the Plan,
employees can choose, every six months, to have up to 15% of their salary
withheld to purchase the Company's common stock. The purchase price of the
stock is 85% of the lower of its beginning-of-period or end-of-period
market price. Approximately 39% of eligible employees participated in the
Plan in the second half of the year ended June 30, 1997, approximately 32%
in the first half of 1998 and approximately 49% in the
13-36
<PAGE> 37
second half of 1998. Under the plan, 53,013 shares were issued in July of
1997, 56,844 in January of 1998 and 48,631 in July of 1998 from employees'
salary withholdings from the respective previous six-month period.
Following is a summary of the weighted average fair market value of this
look-back option estimated on the grant date using the Black-Scholes
option pricing model, and the related assumptions used:
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
----------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
<S> <C> <C> <C>
Fair value of options $ 9.68 $ 14.10 $ 3.93
Assumptions:
Risk-free interest rate 5.0% 5.0% 5.1%
Expected life 3 months 3 months 3 months
Volatility 48.0% 48.0% 47.0%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock option
plans and employee stock purchase plan. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans in accordance with
the provisions of SFAS 123, "Accounting for Stock-Based Compensation," the
Company's net loss and net loss per share, net of related income tax
effects, would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED YEAR ENDED
------------------------- JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Pro forma net loss $ (9,521) $ (164,089) $ (138,797) $ (245)
========== ========== ========== ==========
Pro forma net loss per share,
(basic and diluted) $ (0.17) $ (3.49) $ (3.71) $ (0.01)
========== ========== ========== ==========
</TABLE>
The pro forma amounts are not representative of the effects on reported
net income (loss) for future years.
In January 1997 the Board of Directors approved an amendment to the
Company's 401(k) plan which authorized up to 1,000,000 shares of Common
Stock for the Company's matching contribution. In September 1997, 78,257
shares were issued out of treasury stock to fund the Company's match that
accrued during the year ended June 30, 1997.
As described below, the Company has issued certain stock warrants to third
parties and has accounted for the issuance of such warrants in accordance
with the provisions of EITF 96-18 "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
In January 1998 the Company entered into a 10-year processing agreement
with a strategic partner. Under the terms of the agreement, the 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 related processing outsourcing agreement on March 9, 1998
which resulted in the Company recording a non-cash charge of $32.4
million. The charge was based on a Black-Scholes option model valuation of
$10.80 per vested share using the following assumptions: risk-free rate of
5.7%, expected life of 10
13-37
<PAGE> 38
years, and volatility rate of 56.4%. The remaining seven million warrants
are to vest upon achievement of specific performance targets set forth in
the agreement. Any shares acquired by the strategic partner under the
terms of this agreement are subject to certain transfer and other
restrictions. In March 1997 the Company entered into a consulting
agreement with a third party. Under the terms of the agreement the
consultant acquired 5-year options exercisable at $13.00 for up to 50,000
shares of the Company's Common Stock. In June of 1998, upon the execution
of a processing agreement with a key customer, 25,000 of the options
vested which resulted in the Company recording a non-cash charge of
$418,000. The charge was based on a Black-Scholes option pricing model
valuation of $16.73 per vested share using the following assumptions:
risk-free rate of 5.6%, expected life of 4 years, and volatility rate of
56.4%. The remaining 25,000 options are to vest upon achievement of
specific performance targets by the key customer set forth in the
agreement. Any shares acquired by the consultant under the terms of the
agreement are subject to certain transfer restrictions. In accordance with
the terms of a joint marketing agreement, a strategic partner has warrants
to purchase up to 650,000 shares of common stock at $20 per share should
the partner attain certain customer acquisition targets.
In September 1998 the Company offered an option repricing program to its
employees. Under the terms of the offer, employees had one week to decide
whether to cancel any outstanding option grant in its entirety and replace
it on a share-for-share basis with an option grant with an exercise price
equal to the fair market value of the Company's stock at the new grant
date. Only those cancellations received within one day after the
designated grant date were accepted and any vested options in such
canceled grants were forfeited. The lives of canceled historical grants
typically ranged from three to five years with straight line vesting
beginning one year from the original grant date. All newly issued option
grants have a life of five years and vesting occurs at 40% beginning two
years from the new grant date and 20% for each year thereafter. A total of
1,333,903 options were returned and had the offer taken place at June 30,
1998, the options exercisable would have reduced by 95,614 to 1,256,902.
As of June 30, 1996 certain stockholders had an option to sell up to
280,565 shares of common stock to the Company at $19 per share which
expired on September 30, 1996. Of the eligible shares, 276,469 were sold
to the Company and were recorded as treasury stock.
16. PREFERRED STOCK
In January 1997, the Company's Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights to protect its
stockholders in the event of an unsolicited attempt to acquire the
Company. On February 14, 1997, the Rights were issued to the Company's
stockholders of record, with an expiration date of 10 years. Until a
person or group acquires 15% or more of the Company's Common Stock, the
Rights will automatically trade with the shares of Common Stock. Only when
a person or group has acquired 15% or more of the Company's Common Stock,
will the Rights become exercisable and separate certificates issued. Prior
to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's Common Stock, the Rights are redeemable for $.001
per Right at the option of the Board of Directors.
13-38
<PAGE> 39
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS YEAR ENDED
------------------------ ENDED JUNE 30, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Interest paid $ 632 $ 585 $ 321 $ 645
======= ======== ======== =====
Income taxes paid $ 1,434 $ 1,147 $ 468 $ 211
======= ======== ======== =====
Supplemental disclosure of non-cash
investing and financing activities:
Capital lease additions and purchase of other
long-term assets $ 650 $ 1,914 $ 501 $ 262
======= ======== ======== =====
Purchase price of business acquisitions $ 1,000 $200,997 $265,239
Less: Issuance of common stock and stock
options pursuant to acquisitions 177,188 174,812
Liabilities assumed 145 1,619 44,065
Net present value of future payment due 9,610
Cash acquired in acquisitions 1,217 6,958
------- -------- --------
Net cash paid $ 855 $ 11,363 $ 39,404
======= ======== ========
</TABLE>
18. BUSINESS SEGMENTS
Prior to 1996, the Company operated in one segment - Electronic Commerce.
With the acquisition of Servantis in February 1996 and Security APL in May
1996, the Company now also operates in the Software and Institutional
Investment Services segments. The net revenues of each segment are
principally domestic, and no single customer accounted for 10% or more of
consolidated revenues for the years ended June 30, 1998 and 1997 or the
six months ended June 30, 1996. Approximately 13% of the Company's
revenues for the year ended December 31, 1995, were from a single
customer. A further description of each business segment follows:
- Electronic Commerce - Electronic commerce includes electronic home
banking, electronic bill payment and business payments. These
services are primarily directed to financial institutions and
businesses and their customers.
- Software - Software services includes end-to-end software products
for ACH processing, account reconciliation, wire transfer, mortgage
loan origination and servicing, lease accounting and debt recovery.
These products and services are primarily directed to financial
institutions and large corporations.
- Investment Services - Investment services includes investment
portfolio management services and investment trading and reporting
services. These products and services are primarily directed to
institutional investment managers.
13-39
<PAGE> 40
The following sets forth certain financial information attributable to the
Company's business segments for the years ended June 30, 1998 and 1997 and
the six months ended June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED ENDED
-------------------------- -----------------
1998 1997 JUNE 30, 1996
<S> <C> <C> <C>
Revenues:
Electronic Commerce $ 137,972 $ 85,926 $ 29,783
Software 66,143 68,113 18,271
Investment Services 29,749 22,406 2,986
--------- --------- ---------
Total $ 233,864 $ 176,445 $ 51,040
========= ========= =========
Operating income (loss):
Electronic commerce, including charge for
acquired in-process research and development
of $140,000 in 1997 $ (39,423) $(160,195) $ (92,160)
Software, including charge for acquired
in-process research and development
of $719 in 1998 48,854 4,324 (24,675)
Investment Services 5,040 2,171 (28,629)
Corporate (21,647) (21,449) (2,701)
--------- --------- ---------
Total $ (7,176) $(175,149) $(148,165)
========= ========= =========
Identifiable assets:
Electronic Commerce $ 70,192 $ 59,265 $ 29,425
Software 39,346 61,701 96,844
Investment Services 21,187 23,187 25,099
Corporate 119,387 79,683 44,862
--------- --------- ---------
Total $ 250,112 $ 223,836 $ 196,230
========= ========= =========
Capital expenditures:
Electronic Commerce $ 19,532 $ 3,182 $ 4,651
Software 2,197 1,171 1,087
Investment Services 895 1,973 686
Corporate 5,315 3,429 666
--------- --------- ---------
Total $ 27,939 $ 9,755 $ 7,090
========= ========= =========
Depreciation and amortization:
Electronic Commerce $ 9,964 $ 2,094 $ 1,698
Software 6,051 10,501 4,345
Investment Services 4,558 4,379 632
Corporate 4,426 7,945 322
--------- --------- ---------
Total $ 24,999 $ 24,919 $ 6,997
========= ========= =========
</TABLE>
13-40
<PAGE> 41
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended June 30,
1998 and 1997 includes all adjustments necessary for a fair presentation
of quarterly results of operations:
(In thousands except share and per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
<S> <C> <C> <C> <C>
FISCAL 1998
Total revenue $ 52,087 $ 56,515 $ 61,750 $ 63,512
Income (loss) from operations 17,187 (2,771) (29,323) 7,731
Net income (loss) 9,771 (1,692) (17,540) 5,758
Earnings (loss) per share
(basic and diluted) $ 0.17 $ (0.03) $ (0.32) $ 0.10
============ ============ ============ ============
Basic equivalent number of shares 56,702,917 55,028,174 55,281,335 55,375,715
============ ============ ============ ============
Dilutive equivalent number of shares 56,919,685 55,028,174 55,281,335 55,735,090
============ ============ ============ ============
FISCAL 1997
Total revenue $ 32,662 $ 38,505 $ 50,188 $ 55,089
Loss from operations (12,263) (8,695) (144,957) (9,235)
Net loss (7,730) (5,321) (142,856) (5,905)
Loss per share (basic and diluted) $ (0.19) $ (0.13) $ (2.83) $ (0.11)
============ ============ ============ ============
Basic and diluted equivalent
number of shares 41,620,174 41,533,981 50,499,173 5,446,762
============ ============ ============ ============
</TABLE>
The sum of quarterly earnings (loss) per share does not equal the
year-to-date earnings (loss) per share for the respective fiscal periods
due to changes in number of shares outstanding at each quarter end.
Significant Fourth Quarter Adjustments - In the fourth quarter of 1998 the
Company recorded adjustments to reduce its 401(k) match accrual by $2.4
million and its management incentive bonus accrual by $1.7 million. Both
incentive amounts had been provided for ratably over the year in
anticipation of achievement of financial results that would have resulted
in distribution of the amounts accrued in accordance with related plan
provisions.
20. SUBSEQUENT EVENTS
On July 6, 1998 the Company divested itself of certain software related to
its leasing line of business. The Company paid the acquiring party
$639,000 in cash and agreed to five additional quarterly installments of
$60,000 each. Additionally, in conjunction with this transaction, the
Company agreed to pay $3.0 million to a customer to relieve the Company
and acquiring party of further obligations relating to a product related
consulting agreement. The expected loss of $4.7 million was recorded as an
accrued liability in the fourth quarter of the year ended June 30, 1998
and is included in the Net Gain on Dispositions of Assets in the Company's
Statement of Operations.
13-41
<PAGE> 42
On September 11, 1998 the Company sold certain software and other assets
related to its mortgage line of business for $21.1 million. 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 relating to retained customer obligations. The
estimated gain on the sale transaction of approximately $5.4 million will
be recorded in the first quarter of fiscal 1999.
13-42
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CheckFree Holdings Corporation and Subsidiaries:
We have audited the consolidated financial statements of CheckFree
Holdings Corporation and subsidiaries as of June 30, 1998 and 1997, and for the
years ended June 30, 1998 and 1997, and for the six months ended June 30, 1996
and for the year ended December 31, 1995, and have issued our report thereon
dated August 11, 1998, except for Note 20 as to which the date is September 11,
1998; such financial statements and report are included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of CheckFree
Holdings Corporation and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
----------------------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 11, 1998
VALUATION AND QUALIFYING ACCOUNTS
For the year ended December 31, 1995, the six
months ended June 30, 1996 and the fiscal years
ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
BALANCE AMOUNT
AS OF ASSUMED IN CHARGES TO CHARGES TO BALANCE
BEGINNING OF BUSINESS COSTS AND OTHER AS OF END
PERIOD COMBINATION EXPENSES DEDUCTIONS DEDUCTIONS OF PERIOD
------ ----------- -------- ---------- ---------- ---------
Allowance for Doubtful
Accounts
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $ 27 $ - $ 18 $ - $ 12 $ 33
1996 33 1,861 915 - 529 2,280
1997 2,280 1,000 9,196 - 8,259 4,217
1998 4,217 - 3,441 - 4,188 3,470
Reserve for Returns and
Chargebacks
1995 275 - 370 - 255 390
1996 390 - 251 - 98 543
1997 543 - 1,920 - 1,237 1,226
1998 $1,226 $ - $2,080 $ - $1,362 $1,944
</TABLE>
13-43
<PAGE> 1
Exhibit 21
Subsidiaries of the Company:
CheckFree Corporation, a Delaware corporation;
CheckFree Investment Corporation, a Delaware corporation; and
RCM Systems, Inc., a Wisconsin corporation.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-98440, 33-98444, 33-98442, 33-98446, 333-21799 and 333-21795) on Form
S-8 and the Registration Statement (No. 333-20479) on Form S-3 of CheckFree
Holdings Corporation of our reports dated August 11, 1998, except for Note 20 to
the consolidated financial statements as to which the date is September 11,
1998, appearing in the Annual Report on Form 10-K of CheckFree Holdings
Corporation for the year ended June 30, 1998.
/s/ DELOITTE & TOUCHE LLP
- - -------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
September 25, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
Each director and/or officer of CheckFree Holdings Corporation (the
"Corporation") whose signature appears below hereby appoints Peter J. Kight,
Mark A. Johnson, and Curtis A. Loveland as the undersigned's attorneys or any of
them individually as the undersigned's attorney, to sign, in the undersigned's
name and behalf and in any and all capacities stated below, and to cause to be
filed with the Securities and Exchange Commission (the "Commission"), the
Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year
ended June 30, 1998, and likewise to sign and file with the Commission any and
all amendments to the Form 10-K, and the Corporation hereby also appoints such
persons as its attorneys-in-fact and each of them as its attorney-in-fact with
like authority to sign and file the Form 10-K and any amendments thereto
granting to each such attorney-in-fact full power of substitution and
revocation, and hereby ratifying all that any such attorney-in-fact or the
undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 31th day of
August, 1998.
Signature Title
/s/ Peter J. Kight Chairman of the Board of Directors,
- - ------------------------------ President, and Chief Executive Officer
Peter J. Kight
/s/ Mark A. Johnson Vice Chairman, Corporate Development and
- - ------------------------------ Marketing, Director
Mark A. Johnson
/s/ Allen L. Shulman Executive Vice President, Chief
- - ------------------------------ Financial Officer and General Counsel
Allen L. Shulman
/s/ Gary A. Luoma, Jr. Vice President, Chief Accounting Officer
- - ------------------------------ and Assistant Secretary
Gary A. Luoma, Jr.
/s/ William P. Boardman Director
- - ------------------------------
William P. Boardman
/s/ George R. Manser Director
- - ------------------------------
George R. Manser
/s/ Eugene F. Quinn Director
- - ------------------------------
Eugene F. Quinn
/s/ Jeffrey M. Wilkins Director
- - ------------------------------
Jeffrey M. Wilkins
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