<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER: 0-26802
CHECKFREE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA 30092
(Address of principal executive offices, including zip code)
(678) 375-3387
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 51,727,613 shares of
Common Stock, $.01 par value, were outstanding at May 10, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated Balance Sheets June
30, 1998 and March 31, 1999........................... 2
Unaudited Condensed Consolidated Statements of
Operations For the Three and the Nine Months Ended
March 31, 1998 and 1999............................... 3
Unaudited Condensed Consolidated Statements of Cash
Flows For the Nine Months Ended March 31, 1998 and
1999.................................................. 4
Notes to Interim Unaudited Condensed Consolidated
Financial Statements For the Nine Months Ended March
31, 1998 and 1999..................................... 5-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11-21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities....................................... N/A
Item 3. Defaults Upon Senior Securities............................. N/A
Item 4. Submission of Matters to a Vote of Security Holders......... N/A
Item 5. Other Information........................................... N/A
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures........................................................... 23
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,535 $ 16,199
Investments............................................... 24,533 9,425
Accounts receivable, net.................................. 32,960 45,695
Assets held for sale...................................... 15,881 --
Notes receivable.......................................... 14,882 15,390
Prepaid expenses.......................................... 4,678 6,461
Deferred income taxes..................................... 7,231 10,160
--------- ---------
Total current assets.............................. 136,700 103,330
Property and equipment, net............................... 50,920 58,087
Capitalized software, net................................. 11,387 17,955
Intangible assets, net.................................... 30,474 47,173
Investments............................................... 1,006 --
Deferred income taxes..................................... 12,889 17,505
Other noncurrent assets................................... 6,736 6,640
--------- ---------
Total............................................. $ 250,112 $ 250,690
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,536 $ 7,704
Accrued liabilities and other............................. 30,365 26,373
Current portion of long-term obligations.................. 1,180 1,072
Deferred revenue.......................................... 19,710 23,708
--------- ---------
Total current liabilities......................... 59,791 58,857
Long-term obligations -- less current portion............. 6,467 6,616
--------- ---------
Total liabilities................................. 66,258 65,473
Commitments and contingencies
Stockholders' equity:
Preferred stock -- 15,000,000 authorized shares, $.01 par
value; no shares issued or outstanding................. -- --
Common stock -- 150,000,000 authorized shares, $.01 par
value; issued 56,364,839 shares, 57,219,744 shares;
outstanding 56,364,839 shares, 51,670,363 shares....... 564 517
Additional paid-in capital................................ 492,109 479,558
Treasury stock -- at cost, 963,295 shares, no shares...... (4,362) --
Accumulated deficit....................................... (304,457) (294,858)
--------- ---------
Total stockholders' equity........................ 183,854 185,217
--------- ---------
Total............................................. $ 250,112 $ 250,690
========= =========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
2
<PAGE> 4
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
1998 1999 1998 1999
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing............................. $ 42,147 $51,893 $115,093 $145,468
License.............................................. 8,116 3,593 21,411 10,005
Maintenance.......................................... 6,644 4,112 19,904 13,314
Other................................................ 4,843 3,362 13,945 10,592
-------- ------- -------- --------
Total revenues............................... 61,750 62,960 170,353 179,379
Expenses:
Cost of processing, servicing and support............ 34,213 36,115 94,332 107,572
Research and development............................. 9,360 4,382 26,157 16,539
Sales and marketing.................................. 6,692 6,713 22,002 21,945
General and administrative........................... 5,215 7,198 15,748 21,556
Depreciation and amortization........................ 6,264 6,002 19,380 18,001
In-process research and development.................. -- 2,201 719 2,201
Charge for stock warrants............................ 32,409 -- 32,409 --
Exclusivity amortization............................. -- -- 2,963 --
-------- ------- -------- --------
Total expenses............................... 94,153 62,611 213,710 187,814
Net gain on dispositions of assets..................... 3,080 -- 28,449 3,914
-------- ------- -------- --------
Income (loss) from operations.......................... (29,323) 349 (14,908) (4,521)
Interest, net.......................................... 752 479 1,866 1,698
-------- ------- -------- --------
Income (loss) before income taxes...................... (28,571) 828 (13,042) (2,823)
Income tax expense (benefit)........................... (11,031) 1,136 (3,581) (12,422)
-------- ------- -------- --------
Net income (loss)...................................... $(17,540) $ (308) $ (9,461) $ 9,599
======== ======= ======== ========
Basic earnings per share:
Net income (loss) per common share................... $ (0.32) $ (0.01) $ (0.17) $ 0.18
======== ======= ======== ========
Equivalent number of shares.......................... 55,281 51,218 54,989 52,696
======== ======= ======== ========
Diluted earnings per share:
Net income (loss) per common share................... $ (0.32) $ (0.01) $ (0.17) $ 0.17
======== ======= ======== ========
Equivalent number of shares.......................... 55,281 51,218 54,989 56,117
======== ======= ======== ========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements
3
<PAGE> 5
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1999
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................ $ (9,461) $ 9,599
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Charge for stock warrants............................. 32,409 --
Depreciation and amortization......................... 19,380 18,001
Exclusivity amortization.............................. 2,963 --
Deferred income taxes (net of acquisitions)........... (4,082) (10,418)
Net gain on dispositions of assets.................... (28,449) (3,914)
Write-off of in-process research and development...... 719 2,201
Loss on disposal of property and equipment............ 506 202
Proceeds from maturities and sales of
investments-trading................................. -- 18,169
Purchases of investments-trading...................... -- (3,061)
Changes in operating assets and liabilities (net of
acquisitions):
Accounts receivable, net............................ (6,228) (6,401)
Prepaid expenses and other.......................... (1,408) 1,570
Accounts payable.................................... (2,222) (943)
Accrued liabilities and customer deposits........... 2,725 (1,012)
Deferred revenues................................... 2,019 5,257
Income taxes payable................................ 30 (4,541)
------------------- -------------------
Net cash provided by operating activities........ 8,901 24,709
Cash Flows From Investing Activities:
Purchase of property and software........................ (17,183) (21,581)
Capitalization of software development costs............. -- (5,111)
Proceeds from the sale of property and equipment......... 344 --
Purchase of business, net of cash acquired............... (11,000) (125)
Proceeds from purchase price adjustment.................. 8,889 --
Proceeds from the sale of assets......................... 36,900 11,421
Purchase of investments.................................. (7,941) --
Proceeds from maturities and sales of investments, net... 12,372 1,006
------------------- -------------------
Net cash provided by (used in) investing
activities..................................... 22,381 (14,390)
Cash Flows From Financing Activities:
Repayment of notes payable............................... (1,144) (752)
Principal payments under capital lease obligations....... (549) (822)
Purchase of treasury stock............................... -- (31,335)
Proceeds from exercise of stock options including related
tax benefits.......................................... 1,544 1,184
Proceeds from employee stock purchase plan............... 754 1,070
------------------- -------------------
Net cash provided by (used in) financing
activities..................................... 605 (30,655)
------------------- -------------------
Net Increase (Decrease) In Cash And Cash Equivalents....... 31,887 (20,336)
Cash And Cash Equivalents At Beginning Of Period........... 32,086 36,535
------------------- -------------------
Cash And Cash Equivalents At End Of Period................. $ 63,973 $ 16,199
=================== ===================
Supplemental Disclosure of Cash Flow Information
Interest paid............................................ $ 401 $ 491
=================== ===================
Income taxes paid........................................ $ 1,587 $ 2,392
=================== ===================
Capital lease additions.................................. $ -- $ 1,583
=================== ===================
Stock funding of 401(k) match............................ $ 1,692 $ 1,932
=================== ===================
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements
4
<PAGE> 6
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1999
1. The accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the nine months
ended March 31, 1998 and 1999 are not necessarily indicative of the results for
the full year.
These financial statements should be read in conjunction with the financial
statements, accounting policies and financial notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair representation of
financial results for the interim periods presented.
2. Basic earnings (loss) per common share amounts were computed by dividing
income (loss) available to stockholders by the weighted average number of shares
outstanding. Diluted per-common-share amounts assume the issuance of common
stock for all potentially dilutive equivalent shares outstanding except in loss
periods when such an adjustment would be anti-dilutive. The following table
reconciles differences in income and shares outstanding between basic and
dilutive for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, 1998 MARCH 31, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available
to common
shareholders.......... $(9,461) 54,989 $(0.17) $9,599 52,696 $0.18
====== =====
Effect of dilutive
securities stock
options.................. 0 0 0 3,421
------- ------ ------ ------
Diluted EPS
Income (loss) available
to stockholders and
assumed conversions... $(9,461) 54,989 $(0.17) $9,599 56,117 $0.17
======= ====== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, 1998 MARCH 31, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available
to common
shareholders.......... $(17,540) 55,281 $(0.32) $ (308) 51,218 $(0.01)
====== ======
Effect of dilutive
securities stock
options.................. 0 0 0 0
-------- ------ ------ ------
Diluted EPS
Income (loss) available
to stockholders and
assumed conversions... $(17,540) 55,281 $(0.32) $ (308) 51,218 $(0.01)
======== ====== ====== ====== ====== ======
</TABLE>
5
<PAGE> 7
Options to purchase shares of common stock at various prices outstanding at
March 31, 1998 and 1999, that were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares during the period were as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Nine Month Period Ended..................................... 232,384 587,083
======= =======
Three Month Period Ended.................................... 188,678 45,053
======= =======
</TABLE>
3. In the quarter ended September 30, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement requires disclosure of total non-shareowner changes in equity in
interim periods and additional disclosures of the components of non-shareowner
changes in equity on an annual basis. Total non-shareowner changes in equity
includes all changes in equity during a period except those resulting from
investments by and distributions to shareowners. The only component of other
comprehensive income applicable to the Company would be unrealized gains or
losses on the Company's available-for-sale securities. There were no
available-for-sale securities held during the nine month period ended March 31,
1999 and the carrying value of available-for-sale securities held during the
nine month period ended March 31, 1998 approximated market value. As a result,
there were no reported unrealized gains or losses reported on available-for-sale
securities in either period.
4. In the quarter ended September 30, 1998, the Company adopted Statement
of Position ("SOP") 97-2, "Software Revenue Recognition." The Statement provides
guidance for recognizing revenue on software transactions and supercedes SOP
91-1, "Software Revenue Recognition." The adoption of the Statement did not
result in a material impact on reported results.
5. In the quarter ended September 30, 1998, the Company issued 74,981
shares of common stock out of treasury to fund its 401(k) match, the cost of
which was accrued during the year ended June 30, 1998. Additionally, during the
quarter ended September 30, 1998, the Company issued 48,631 shares of common
stock out of treasury in conjunction with the employee stock purchase plan,
which was funded through employee payroll deductions accumulated in the
immediately preceding six-month period. During the quarter ended March 31, 1999,
the Company issued an additional 48,748 shares of common stock in conjunction
with the employee stock purchase plan, covering the immediately preceding
six-month period.
6. During the quarter ended September 30, 1998, the Company purchased
575,000 shares of its common stock and recorded them as treasury shares. During
the quarter ended December 31, 1998, the Company purchased an additional
4,130,341 shares of its common stock and recorded them as treasury shares. At
March 31, 1999, the Company had retired all shares of its treasury stock.
7. On September 11, 1998, the Company sold certain software and other
assets related to its mortgage line of business for $19.1 million, net of a
working capital adjustment. As part of the sales agreement, the Company retained
responsibility for certain customer obligations and agreed to subcontract with
the acquiring company to perform consulting services at retail hourly rates for
these retained obligations. The Company received cash of $15 million, net of
$4.0 million of prepaid subcontract services due the acquiring company. The net
gain on the sale of $6.4 million is included in the Net Gain on Dispositions of
Assets in the Company's Statement of Operations. Certain assets of this business
were acquired in the October 1997 acquisition of Advanced Mortgage Technologies,
Inc. ("AMTI"), and in connection with the acquisition, the Company acquired
certain in-process research and development assets (valued at $719,000) which
were written off at the time of the acquisition. Such research and development
projects continued to be developed as planned by the Company, and are included
in the software and other assets sold on September 11, 1998.
8. On October 1, 1998, the Company sold certain software and other assets
related to its imaging line of business for $0.8 million consisting of a note
receivable of $0.5 million and future services of $0.3 million. The estimated
loss on the sale of $2.4 million was recorded in the quarter ended September 30,
1998 and is included in the Net Gain on Dispositions of Assets in the Company's
Statement of Operations.
6
<PAGE> 8
9. In the quarter ended December 31, 1998, a special purpose subsidiary was
created to administer the Company's employee medical benefits program. The
Company owns a controlling interest in the subsidiary and, therefore, the
accompanying condensed consolidated financial statements include the
subsidiary's results of operations.
10. In the quarter ended December 31, 1998, the Company reported a one-time
tax benefit of approximately $12.2 million arising out of the creation of the
special purpose subsidiary described above. In addition, the Company's annual
effective tax rate, exclusive of the impact of the one-time tax benefit,
decreased from approximately 45% to approximately 38%, on a year to date basis,
primarily due to state job tax credits, and increased tax-exempt interest.
11. On March 8, 1999, the Company acquired Mobius Group, Inc. ("Mobius
Group") for a total of $19.1 million, consisting of 537,314 shares of common
stock valued at $18 million, $0.2 million of acquisition costs, and $0.9 million
of assumed debt. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based on
their preliminary fair values at the date of the acquisition. The values
ascribed to acquired intangible assets and their respective useful lives are as
follows:
<TABLE>
<CAPTION>
INTANGIBLE USEFUL
ASSET LIFE
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $10,392 15
Customer base............................................... 4,429 15
Tradenames.................................................. 3,709 10
Existing product technology................................. 1,864 5
Workforce................................................... 940 5
</TABLE>
Amortization of intangible assets is on a straight line basis over the
assets' respective useful life. Mobius Group's operations are included in the
condensed consolidated statements of operations from the date of acquisition.
At the acquisition date, Mobius Group had four products under development
that had not demonstrated technological or commercial feasibility. These
products included M-Plan Retirement & Estate Planning Modules, M-Plan Cash Flow,
Tax and Education Planning Modules, a new version of M-Search and a new version
of M-Vest. The in-process technology has no alternative use in the event that
the proposed products do not prove to be feasible. These development efforts
fall within the definition of In-Process Research and Development ("IPR&D")
contained in Statement of Financial Accounting Standards ("SFAS") No. 2.
M-Plan Integrated Financial Planning System. M-Plan will be a Windows
based integrated financial planning system for retirement and estate planning,
cash flow, tax and educational planning and capital needs analysis. It will
produce over 100 reports for retirement, new investments, estate planning, and
other analysis, as well as provide historical returns and standard deviations
for various asset allocations integrated with extensive modeling to provide
detailed and usable analysis. M-Plan's wizards will give users the ability to
produce and to analyze alternative scenarios quickly. M-Plan will consist of
five main disciplines: Retirement and Estate Planning, Cash Flow, Tax and
Education modules. M-Plan Retirement and Estate Planning are the core
disciplines; a user must own one of these two in order to add future
disciplines.
- M-Plan Retirement & Estate Planning Modules. Significant development is
required to convert trust and gift tax calculations from formulas to C++
programming language. Additionally, work must be performed to create
necessary database fields to capture a variety of user scenario analyses.
These modules will be used by sophisticated financial planners that will
be expected to produce reports for a variety of individuals with specific
circumstances and therefore, calculations must produce results under all
possible scenarios. In addition, there are over 100 reports to be
programmed and customized into usable and readable format and Mobius
Group does not currently have the ability to insert data into all of the
reports. Finally, developed technology is not in a modular format and, as
M-Plan will be sold in modules, additional work must be performed to
divide code into modules.
7
<PAGE> 9
- Cash Flow, Tax and Education Planning Modules. Reports for the Cash Flow
Planning module have not yet been developed. Mobius Group had not yet
determined how it would integrate tax tables into its tax calculations, as
only tax rate calculations are currently available in the Tax Planning
module and significant work remains to complete reports and database
fields. There has been no significant data gathering for the Education
Planning module and therefore the code had not yet been written for the
calculations, the database fields and the reports.
The technology utilized in the M-Plan is based entirely on new technology.
Although the Company has been selling another comprehensive financial planning
program, it operated on a DOS platform and the new programs are being developed
in C++ for Windows.
M-Search Revision. M-Search is Mobius Group's Investment Manager Database
System, containing comprehensive qualitative and quantitative data on over 1,300
investment management firms and 5,000 composites. In-process development is
designed to allow the user to customize reports based on selection criteria,
which the current version does not offer. This effort requires a rewrite of a
significant portion of the source code. Based on software engineers' estimates
of the percentage of reuse of developed technology within particular components
of the product, 25% of its value is attributable to core technology.
M-Vest Revision. M-Vest is Mobius Group's 16-bit asset allocation system
that is under development to port the entire program over to 32-bit. This
development effort requires significant changes to the user interface, a
revision of most of the reports and changes to core algorithms. Management
estimates that it would have taken six man months to recreate the code from the
beginning and the entire porting would take 12 man months and as a result, 30%
of its value is attributable to core technology.
The following table presents information regarding the status of various
in-process research and development projects acquired in connection with the
Mobius Group acquisition:
<TABLE>
<CAPTION>
ESTIMATED STAGE EXPECTED EXPECTED COST
OF COMPLETION RELEASE TO COMPLETE VALUATION
--------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
M-Plan:
Retirement and Estate Planning
Module............................. 92% May 1999 $ 49 $ 693
Cash Flow, Tax and Education Module... 64% December 1999 208 183
M-Search Revision....................... 56% September 1999 176 1,218
M-Vest Revision......................... 20% September 1999 220 107
---- ------
Total......................... $653 $2,201
==== ======
</TABLE>
The method used to allocate the purchase consideration to IPR&D was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPR&D projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
- Analysis of the stage of completion of each project;
- Exclusion of value related to research and development yet-to-be
completed as part of the on-going IPR&D projects; and
- The contribution of existing products/technologies.
The projected revenues used in the income approach are based upon the
incremental revenues associated with a portion of the project related to Mobius
Group's technology likely to be generated upon completion of the project and the
beginning of commercial sales, as estimated by the Company's management. The
projections assume that the product will be successful and the products'
development and commercialization are as set forth by management. The discount
rate used in this analysis is an after-tax rate of 20%.
8
<PAGE> 10
Certain risks and uncertainties are associated with the completion of the
development with a reasonable projected period of time. These risks include:
- The Retirement and Estate Planning module has been sent to a development
partner for testing and identification of errors. Due to the nature of
the product and the necessity that all calculations work correctly in
order for the product to be commercially viable and to function as
designed, this testing is considered a significant part of the
development effort.
- The cash flow module reports have not been developed. As the reports are
the only output seen by the end user, this represents a major development
effort.
- The Company has not yet determined how it will integrate tax tables into
its tax calculation in the tax module. Significant work remains to
complete reports and database fields.
- For the education module, significant data gathering had not occurred
and, therefore, the code had not yet been written for the calculations,
the database fields, and the reports.
- Significant risks still exist related to the completion and reintegration
of the M-Plan Modules (Retirement and Estate Planning and Cash Flow, Tax,
and Education Modules). For example, a user who borrows for education
purposes from his retirement fund should see his retirement decrease (in
the Retirement Module) and education investment increase (in the
Education Module).
- The M-Plan Modules are based entirely on new technology, since they are
written in C++ for a windows platform and utilize no existing technology.
- M-Vest is Mobius Group's current asset allocation system. There is an
on-going development program to migrate this program to run on 32-bit
hardware. This effort requires significant changes to interfaces, to
reports and some core algorithms.
- Each of the acquired IPR&D projects have not demonstrated their
technological or commercial feasibility as of the valuation date.
Significant risks exist because of uncertainties the Company may face in
the form of time and costs necessary to produce technologically feasible
products.
- If the proposed products fail to become viable, there is uncertainty that
the Company would be able to realize any value from the sale of the
technology to another party.
Consistent with the Company's policy for internally developed software, the
Company determined the amounts to be allocated to IPR&D 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 acquisition,
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 following unaudited proforma information presents the results of
operations of the Company as if the acquisition had taken place on July 1, 1997,
and excludes the write-off of purchased research and development of $2.2
million:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Revenues.................................................. $174,710 $184,550
Net income (loss)......................................... $ (9,226) $ 12,175
Basic earnings per share:
Net income (loss) per common share...................... $ (0.17) $ 0.23
Equivalent number of shares............................. 55,526 53,188
Diluted earnings per share:
Net income (loss) per common share...................... $ (0.17) $ 0.22
Equivalent number of shares............................. 55,526 56,609
</TABLE>
9
<PAGE> 11
12. During the quarter ended March 31, 1999, the Company established a
deferred compensation plan (the "DCP") covering highly-compensated employees.
Under the plan, eligible employees may contribute a portion of their salary on a
pre-tax basis. The DCP is a non-qualified plan, therefore the associated
liabilities are included in the condensed consolidated balance sheets. In
addition, the Company is establishing a rabbi trust to finance obligations under
the DCP with corporate-owned life insurance policies on participants. The cash
surrender value of such policies is also included in the condensed consolidated
balance sheets.
13. During the week of April 26, 1999, the Company experienced a system
error that led some users of its electronic billing and payment service to
experience intermittent problems accessing and using the system. The Company
believes that reserves established for service level agreements are sufficient
to cover contractually determined penalties due to financial institution
customers resulting from this error.
14. On March 2, 1999, Intuit Inc. filed a lawsuit against the Company in
the Superior Court of Santa Clara County, California. In the lawsuit, Intuit
alleges that the Company threatened to violate the terms of an April 1998 bill
presentment services contract and requests the court to provide equitable relief
and other remedies. The parties to the lawsuit have agreed that the outcome of
the case would be determined by arbitration. The arbitration has commenced and
proceedings are currently being held to determine the outcome of the dispute.
The net financial impact on the Company of the arbitration is not possible to
determine at this time given the outstanding issues. The ultimate outcome is not
expected to have a material adverse effect on the Company's business, financial
condition or results of operations.
15. In June 1997, the Financial Accounting Statements Board ("FASB") issued
SFAS No. 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
disclosures of certain financial and description 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 June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require that all derivative
financial instruments be recognized as either assets or liabilities in the
balance sheet. SFAS No. 133 will be effective for the Company's first quarter of
fiscal 2000. The Company is in the process of evaluating the effects of this new
statement.
In March 1998, the Accounting Standards Executive Committee ("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.
16. Certain amounts in the June 30, 1998 balance sheet have been
reclassified to conform with the March 31, 1999 presentation. In addition,
certain amounts in the condensed consolidated statements of operations for the
nine months ended March 31, 1998 have been reclassified to conform with the
March 31, 1999 presentation.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is the leading provider of electronic billing and payment
services. The Company provides services that allow users to:
- Receive electronic bills through the Internet;
- Pay any bill -- electronic or paper -- to anyone; and
- Perform customary banking transactions, including balance inquiries,
transfers between accounts and on-line statement reconciliations.
The Company currently provides services for approximately 2.8 million
consumers through over 350 financial institutions, Internet portals like
Quicken.com and personal financial management software like Microsoft Money,
Managing Your Money and Quicken. The Company has developed relationships with
over 1,100 merchants nationwide that enable it to effect more than 50% of all
bill payments electronically. In March 1997, the Company introduced electronic
billing -- "E-Bill" -- which enables merchants to interactively deliver billing
as well as marketing material to their customers over the Internet. To date, the
Company has signed E-Bill contracts with 49 of the country's largest billers,
who together deliver more than a half-billion bills each month. During the month
of March 1999, the Company had distributed and paid more than 10,000 electronic
bills through 20 financial institutions and Internet portal electronic billing
and payment web sites, double the number of bills delivered and paid the
previous month.
The Company remains focused on quality enhancement combined with efficiency
improvement in anticipation of overall market growth. As competitors strive to
bring their own product offerings to market, the Company has a window of
opportunity to extend its lead in the electronic bill payment marketplace and
intends to capitalize on the opportunity. The Company believes that three
factors are critical to maintaining a lead in the electronic bill payment
market: the widest consumer distribution possible, through bank, credit union,
brokerage, and Internet portal distribution channels; high percentage
penetration of the largest billing categories, such as telecommunications; and
an integrated electronic billing and payment platform that enables distribution,
tracking, audit, payment and customer care in a highly efficient form.
Management will focus near term efforts in this regard. In the longer term, the
Company is driving to improve the profitability of the business through efforts
to facilitate revenue growth in all business segments and improve cost
efficiency primarily in remittance, customer care and data processing.
From a revenue perspective, the Company is taking several steps to promote
growth. In the Electronic Commerce segment, the Company is currently reliant
upon its financial institution customers to promote its electronic bill payment,
banking and billing and payment product offerings. The Company continues to
support financial institutions' efforts to convert from a personal computer
based software front-end offering to a more efficient web-based offering. As
financial institutions complete their web-based offerings and revitalize
marketing efforts toward electronic bill payment and electronic banking, the
Company believes this will result in enhanced subscriber growth. An important
variable in the anticipated subscriber growth is the timing of the rollout of
these web-based offerings. Also, during the quarter ended March 31, 1999, the
Company announced the execution of a material Internet distribution contract
designed to make electronic billing and universal "pay anyone" electronic
payment an integral part of the average Internet user's experience. This
initiative has the potential to encourage significant subscriber growth.
Additionally, the Company's efforts to rapidly enroll significant national
merchants in electronic bill presentment programs, which will be integrated with
financial institutions' electronic bill payment and banking offerings, will
allow consumers complete electronic "round trip" payment capabilities. The
growth in bill presentment is expected to drive growth in bill payment revenue
through a more complete electronic offering, more so than providing a new stand
alone revenue stream.
Efforts are also underway to provide enhanced product offerings in both the
Software and Investment Services business segments, which are expected to
further enhance revenue growth opportunities in these segments as well. From an
expense efficiency perspective, as a result of integration of the various
acquisitions, the completion of the data center consolidation in Norcross,
Georgia and the continued rollout of Genesis
11
<PAGE> 13
Project (which is designed to provide a single, state of the art processing
platform and to promote customer care efficiency), economies of scale and
leverage are inherent in the Company's business model. Improvements in
remittance and customer care cost efficiency and quality will primarily be
driven by an increased percentage of electronic versus paper transaction
processing and the design and implementation of electronic customer self help
offerings. Improvements in data processing costs and quality are addressed by
the Genesis project, which will also contribute to an increased percentage of
electronic versus paper transactions.
The Company expects that these efforts will allow it to defend and extend
its leading position in the rapidly growing electronic commerce market. Barring
any unforeseen circumstances, this trend is expected to continue in the
foreseeable future. There can be no assurance, however, that the Company will be
able to successfully compete against current or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results, and financial condition.
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating revenues,
certain consolidated statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------- --------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Total Revenues:..................................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support......... 55.4 57.4 55.4 60.0
Research and development.......................... 15.2 7.0 15.4 9.2
Sales and marketing............................... 10.8 10.7 12.9 12.2
General and administrative........................ 8.4 11.4 9.2 12.0
Depreciation and amortization..................... 10.1 9.5 11.4 10.0
In process research and development............... 0.0 3.5 0.4 1.2
Charge for stock warrants......................... 52.5 0.0 19.0 0.0
Exclusivity amortization.......................... 0.0 0.0 1.7 0.0
----- ----- ----- -----
Total Expenses............................ 152.5 99.4 125.5 104.7
Net gain on disposition of assets................... 5.0 0.0 16.7 2.2
----- ----- ----- -----
Income (loss) from operations....................... (47.5) 0.6 (8.8) (2.5)
Interest, net....................................... 1.2 0.8 1.1 (0.9)
----- ----- ----- -----
Income (loss) before income taxes................... (46.3) 1.3 (7.7) (1.6)
Income tax expense (benefit)........................ (17.9) 1.8 (2.1) (6.9)
----- ----- ----- -----
Net income (loss)................................... (28.4)% (0.5)% (5.6)% 5.4%
===== ===== ===== =====
</TABLE>
Reported revenue increased 2%, from $61.8 million to $63.0 million, for the
three months ended March 31, 1998 and 1999, respectively, and by 5%, from $170.4
million to $179.4 million on a year over year basis. The increases in quarter to
quarter and year over year revenue are due primarily to internal growth in the
Electronic Commerce and Investment Services segments, offset by a reduction in
the Software segment. Decreased Software segment revenue is primarily the result
of product line divestitures over the past twelve months. Divestitures included
the Company's recovery management business in August 1997, its item processing
business in March 1998, its wire and electronic banking business in April 1998,
its leasing business in July 1998, its mortgage business in September 1998 and
its imaging business in October 1998. On a pro forma basis, excluding the impact
of the divested software businesses and the discontinuance of the web investor
business in the Electronic Commerce segment in June 1998, revenue increased 20%,
from $52.6 million to $63.0 million, for the three months ended March 31, 1998
and 1999, respectively, and by 22% from $146.2 million to $179.4 million on a
year over year basis. The quarter to quarter pro forma increase of 20% was
driven by increases of 21% in the Electronic Commerce segment, 27% in the
Investment Services segment and 8% in the Software segment. The year over year
pro forma revenue increase of 23% was driven by
12
<PAGE> 14
increases of 25% in Electronic Commerce, 25% in Investment Services and 13% in
Software. Growth in Electronic Commerce revenue is driven primarily by an
increase in subscribers from approximately 2.4 million at March 31, 1998 to over
2.8 million at March 31, 1999. In the Software segment, the current year revenue
of $29.5 million includes $1.7 million of revenue from businesses divested in
the current year. Therefore, comparative revenue grew by 7% on a year over year
basis. In spite of dampened demand caused by customer focus on Year 2000
projects, the Software segment has seen growth, primarily in implementations of
its ACH product line. Growth in Investment Services revenue is driven primarily
by an increase in portfolios managed from approximately 447,000 at March 31,
1998 to approximately 630,000 at March 31, 1999.
Processing and servicing revenue increased by 23%, from $42.1 million to
$51.9 million, for the three months ended March 31, 1998 and 1999, respectively,
and by 26%, from $115.1 million to $145.5 million, on a year over year basis.
Quarter to quarter and year over year growth is primarily the result of the
previously mentioned increase in subscribers in the Electronic Commerce segment
and portfolios managed in the Investment Services segment. In January 1999, the
Company announced a material Internet distribution agreement. Although there are
no guarantees in the timing or extent of its success, the Company believes this
agreement has the potential to provide significant increases in subscribers over
the next year and beyond. Initial pricing has not been announced, but
contribution to earnings from this channel for the balance of the current fiscal
year is not expected to be material.
Reported license revenue declined by $4.5 million, from $8.1 million to
$3.6 million, for the quarters ended March 31, 1998 and 1999, respectively, and
by $11.4 million, from $21.4 million to $10.0 million, on a year over year
basis. This decline is due primarily to the previously mentioned software
business divestitures. On a pro forma basis, excluding the impact of the
divested software businesses, license fee revenue increased by $0.2 million,
from $3.4 million to $3.6 million, for the quarters ended March 31, 1998 and
1999, respectively, and decreased by $1.7 million, from $11.7 million to $10.0
million, on a year over year basis. The pro forma decline is due primarily to
softness in software sales resulting from purchasing moratoriums imposed by
potential customers preparing for Year 2000.
Reported maintenance revenue declined by $2.5 million, from $6.6 million to
$4.1 million, for the quarters ended March 31, 1998 and 1999, respectively, and
by $6.6 million, from $19.9 million to $13.3 million, on a year over year basis.
This decline is due primarily to the previously mentioned software divestitures.
On a pro forma basis, excluding the impact of the divested software businesses,
maintenance revenue decreased by $0.3 million, from $4.4 million to $4.1
million, for the quarters ended March 31, 1998 and 1999, respectively, and
increased by $1.4 million, from $11.9 million to $13.3 million, on a year over
year basis. Increased pro forma maintenance revenue is due primarily to first
year maintenance revenue related to new software sales generated in the second
half of fiscal 1998 combined with high retention rates and moderate price
increases related to renewal maintenance streams.
Reported other revenue, consisting mainly of consulting fees, declined by
$1.4 million, from $4.8 million to $3.4 million, for the quarters ended March
31, 1998 and 1999, respectively, and by $3.3 million, from $13.9 million to
$10.6 million, on a year over year basis. This decline is due primarily to the
previously mentioned software divestitures. On a pro forma basis, excluding the
impact of the divested software businesses and the discontinuance of the web
investor business in the Electronic Commerce segment in June 1998, other revenue
increased by $0.6 million, from $2.8 million to $3.4 million, for the quarters
ended March 31, 1998 and 1999, respectively, and by $2.3 million from $8.3
million to $10.6 million on a year over year basis. The increase is due to
implementations related to new software sales in the second half of fiscal 1998
and early fiscal 1999 and implementations related to new business in the
Investment Services segment.
The cost of processing, servicing and support was $ 34.2 million and $36.1
million or 55.4% and 57.4% of total revenue for the quarters ended March 31,
1998 and 1999, respectively. These same costs were $94.3 million and $107.6
million or 55.4% and 60.0% of total revenue for the nine months ended March 31,
1998 and 1999, respectively. Cost of processing, servicing and support as a
percentage of servicing only revenue (all revenue except license) was 63.8% and
60.8% for the three months ended March 31, 1998 and 1999, respectively, and
63.3% and 63.5% for the nine months ended March 31, 1998 and 1999, respectively.
Revenue growth in the Electronic Commerce segment has slowed as financial
institutions convert to a web-based front-
13
<PAGE> 15
end into the electronic bill payment and billing and payment offerings. During
this period, although the Company continues to enjoy variable cost savings due
to successful efforts to increase the percentage of electronic versus paper
based bill payment transactions, the Company is continuing to invest in customer
care resources in anticipation of expected revenue growth when more web-based
conversions are completed and financial institutions reinstate related marketing
efforts toward subscriber growth. Additionally, the Company is incurring the
costs of electronic billing and payment or E-Bill implementations with
inadequate current revenue to offset the costs. Finally, the previously
mentioned Internet distribution agreement has resulted in increased operating
expenses in the quarter ended March 31, 1999. These incremental costs for
professional services programs to support timely and effective electronic
billing and payment offerings by billers; investments in hardware, software and
technical staff to deliver dial-tone quality to up to 1.0 million additional
subscribers; and additional customer care staff and related training, totaling
up to $4.0 million, will continue throughout the next quarter and into fiscal
2000.
Research and development costs were $9.4 million and $4.4 million or 15.2%
and 7.0% of total revenue for the quarters ended March 31, 1998 and 1999,
respectively. Research and development was $26.2 million and $16.5 million or
15.4% and 9.2% of total revenue for the nine months ended March 31, 1998 and
1999, respectively. The divested software businesses incurred research and
development costs of $2.1 million and $6.9 million in the three and nine months
ended March 31, 1998, respectively. Additionally, upon completion of the base
Genesis Platform in late fiscal 1998 and the transition of resources from Year
2000 related projects that may not be capitalized for GAAP purposes, the Company
capitalized development costs of $2.3 million and $5.1 million in the three and
nine month periods ended March 31, 1999, respectively. As a result, total
research and development expenditures (capitalized and expensed) decreased by
$0.5 million, from $7.3 million to $6.7 million, for the three months ended
March 31, 1998 and 1999, respectively, and increased by $2.5 million, from $19.2
million to $21.7 million, for the nine months ended March 31, 1998 and 1999,
respectively. The Company is continuing to invest significantly in research and
development, particularly in the Electronic Commerce and Investment Services
segments in anticipation and support of revenue growth, quality improvement and
efficiency enhancement opportunities.
Sales and marketing costs were $6.7 million and $6.7 million or 10.8% and
10.7% of total revenue for the quarters ended March 31, 1998 and 1999,
respectively. These same costs were $22.0 million and $21.9 million or 12.9% and
12.2% of total revenue for the nine months ended March 31, 1998 and 1999,
respectively. Sales and marketing expenses have remained consistent year over
year. Reduced sales and marketing expenses resulting from the divested software
businesses have been replaced by increased sales expenses related to activities
in the Company's bill presentment area, as well as funding for the creation and
launch of a new trade group, the Electronic Banking Association, which is
intended to increase the general population's awareness of and interest in the
electronic banking industry. Marketing expenses are expected to increase upon
the launch of products related to the announced agreement between the Company
and a significant Internet distribution company.
General and administrative expenses were $5.2 million and $7.2 million or
8.4% and 11.4% of total revenue for the quarters ended March 31, 1998 and 1999,
respectively. General and administrative expenses were $15.7 million and $21.6
million or 9.2% and 12.0% of total revenue for the nine months ended March 31,
1998 and 1999, respectively. The Company incurred one-time real estate expenses
of $0.3 and $0.9 million related to the move of its main Investment Services
office to a facility better suited for its needs in the three and nine month
periods ended March 31, 1999, respectively. Additionally, in the second quarter
of fiscal 1999, approximately $0.6 million was expended in the establishment of
a benefits company intended to better manage future benefit expenses in
anticipation of growth in the Company's headcount. Historical growth in
infrastructure expenses has remained below the rate of revenue growth. The
divestiture of the various software businesses has not resulted in a
corresponding reduction in existing infrastructure as business specific systems
and administrative functions must remain to support retained software
businesses, as well as the growing Electronic Commerce and Investment Services
segments. As anticipated revenue growth materializes, management expects general
and administrative expenses to decline as a percentage of revenue from its
current levels to be more in line with historical experience.
14
<PAGE> 16
Depreciation and amortization expenses were $6.3 million and $6.0 million
for the three months ended March 31, 1998 and 1999, respectively. Depreciation
and amortization was $19.4 million and $18.0 million for the nine months ended
March 31, 1998 and 1999, respectively. Significant reductions in depreciation
and amortization from the elimination of tangible and intangible assets
resulting from the divested software businesses have been somewhat replaced by
depreciation resulting from significant capital expenditures throughout fiscal
1998 and 1999 primarily in support of the data center migration to Norcross,
Georgia and the development of the Genesis Project.
In-process research and development charges of $2.2 million in the three
months ended March 31, 1999 resulted from the Company's acquisition of the
Mobius Group on March 8, 1999. Please refer to Note 11 to the Interim Unaudited
Condensed Financial statements contained herein for a more detailed discussion.
IPR&D charges of $0.7 million in the nine months ended March 31, 1998
resulted from the Company's acquisition of AMTI on October 3, 1997. Such
research and development projects continued to be developed as planned by the
Company until which time the software and assets of the mortgage product line,
including these projects, were sold on September 11, 1998.
The $32.4 million charge for stock warrants in the three and nine month
periods ended March 31, 1998 resulted from the vesting of three million warrants
in March 1998 related to a ten year processing agreement with Integrion,
announced by the Company in October 1997. The non-cash charge was based on a
Black-Scholes option pricing model valuation of the warrants at the date of
vesting.
Exclusivity amortization of $2.9 million in the nine months ended March 31,
1998 was the final amortization expense related to the exclusivity arrangement
the Company entered into with Intuit Inc. ("Intuit") in conjunction with the
purchase of Intuit Services Corporation in January 1997.
The net gain on dispositions of assets is the result of various
transactions in the nine month periods ended March 31, 1998 and 1999. In the
quarter ended March 31, 1998, the Company incurred a gain of $3.2 million on the
sale of its item processing business in March 1998 which was offset by a working
capital adjustment related to the sale of its credit management business in
August 1997. The gain of $3.9 million in the nine month period ended March 31,
1999 is the net result of the gain on the sale of the mortgage business of
approximately $6.4 million and the loss on the sale of the imaging business of
approximately $2.5 million. The gain of $28.4 million in the nine month period
ended March 31, 1998 is the net result of the gain on the sale of the credit
management business of $28.2 million from August 1997, a gain on the sale of the
item processing business of $3.2 million in March 1998 and a charge of
approximately $3.0 million from the quarter ended September 30, 1997 related to
certain equipment and capitalized costs where the Company determined that the
book value of the assets exceeded their net realizable value.
Net interest income decreased from $0.8 million to $0.5 million for the
quarters ended March 31, 1998 and 1999, respectively. Net interest income
decreased from $1.9 million to $1.7 million for the nine month periods ended
March 31, 1998 and 1999, respectively. In the quarter to quarter comparison, net
interest income was lower in 1999 primarily due to the share repurchase totaling
$31.2 million at the beginning of the quarter ended December 31, 1998 which
significantly reduced average invested assets for the period. On a year over
year basis, the cash utilized for the share repurchase was offset by cash
proceeds from divested software businesses in the nine months ended March 31,
1999. Average invested assets net of average outstanding obligations were
relatively consistent, as were net yields, therefore the net investment income
remained stable year to year.
The Company recorded an income tax benefit of $11.0 million which resulted
in an effective rate of 39% for the quarter ended March 31, 1998 versus an
income tax expense of $1.1 million which resulted in an effective rate of 137%
for the quarter ended March 31, 1999. The unusual effective rate in the 1999
period resulted from the IPR&D charge of $2.2 million in the quarter, which is
non-deductible for income tax purposes. Net of the tax effect of this
non-deductible item, the quarterly effective rate for the quarter ended March
31, 1999 would be 38%. During the nine months ended March 31, 1999, the Company
recorded a one-time tax benefit of approximately $12.2 million arising out of
the medical benefits management subsidiary. On a year over year basis, the
effective rate was 27% for the nine-months ended March 31, 1998 and 38% (net of
15
<PAGE> 17
the one-time benefit of $12.2 million and the non-deductible in-process research
and development charge) for the nine months ended March 31, 1999. These rates
differ from the blended statutory rate of 40% due to goodwill amortization and
other non-deductible expenses in both periods.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income by
industry segment for the periods noted (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
1998 1999 1998 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenue:
Electronic Commerce.................................. $ 36,080 $43,530 $ 99,046 $122,915
Software............................................. 18,081 9,768 49,737 29,498
Investment Services.................................. 7,589 9,662 21,570 26,966
-------- ------- -------- --------
Total Operating Revenue...................... $ 61,750 $62,960 $170,353 $179,379
======== ======= ======== ========
Operating Income (Loss):
Operating Income (Loss)
excluding specific items:
Electronic Commerce............................. $ 587 $ 1,484 $ (515) $ (3,904)
Software........................................ 2,454 3,778 4,497 8,713
Investment Services............................. 1,699 2,452 4,147 5,142
Corporate....................................... (4,734) (5,164) (15,395) (16,185)
Specific items:
Exclusivity Amortization........................ -- -- (2,963) --
In Process Research and Development............. -- (2,201) (719) (2,201)
Charge for Stock Warrants....................... (32,409) -- (32,409) --
Net Gain on Disposition of Assets............... 3,080 -- 28,449 3,914
-------- ------- -------- --------
Total Operating Income (Loss)................ $(29,323) $ 349 $(14,908) $ (4,521)
======== ======= ======== ========
</TABLE>
Revenue in the Electronic Commerce segment increased by $7.4 million or 20%
from $36.1 million to $43.5 million for the three months ended March 31, 1998
and 1999, respectively, and by $23.9 million or 24% from $99.0 million to $122.9
million for the nine months ended March 31, 1998 and 1999, respectively. On a
pro forma basis excluding the web investor business which was discontinued in
fiscal 1998, revenue increased $7.6 million or 21% for the quarter to quarter
period and by $24.4 million or 25% on a year over year basis. This increase in
revenue is due primarily to an increase in subscribers from approximately 2.4
million at March 31, 1998 to approximately 2.8 million at March 31, 1999.
Operating income in the Electronic Commerce segment increased from $0.6 million
to $1.5 million for the three months ended March 31, 1998 and 1999,
respectively. On a year to date basis, the loss in the Electronic Commerce
segment increased from $0.5 million through the nine month period ended March
31, 1998 to $3.9 million for the same period in 1999. On a pro forma basis, the
operating income increased from $0.8 million to $1.5 million for the three
months ended March 31, 1998 and 1999, respectively and from $0.1 million to a
loss of $3.9 million for the nine months ended March 31, 1998 and 1999,
respectively. As previously mentioned, revenue growth has flattened temporarily
as financial institutions convert their personal computer software-based
front-end interfaces to the Company's electronic bill payment and banking
processes to more efficient web-based front-end interfaces. During this time the
Company has continued to commit resources directed toward quality and efficiency
improvement in anticipation of the revenue growth expected when financial
institutions complete their technology conversions and refocus marketing efforts
toward subscriber growth, and when Internet portals offer the service. These
investments include additional customer care resources directed toward improved
quality and significant E-Bill implementation costs, which are not offset by
significant revenue in the near term. The Company has implemented 21 billers for
the E-Bill product offering, an additional 19 billers are actively engaged in
the implementation process and another nine billers are awaiting implementation.
E-Bill
16
<PAGE> 18
implementations are expected to drive additional bill payment revenue as opposed
to providing a significant new revenue stream to the Company. While the Company
expects revenue to grow at an increasing rate, such growth is dependent upon
financial institutions completing their technology conversion and implementing
planned marketing programs in a timely fashion. As an indication that this may
be taking place, of the overall subscriber growth rate of 6% in the quarter
ended March 31, 1999, growth in web-based subscribers exceeded 20%. While this
growth is within a small portion of the overall subscriber base, this could be
confirmation of the Company's belief that, once financial institutions go to
market with a web solution, subscribers will sign on at an increasing rate. In
January 1999, the Company announced a material Internet distribution agreement
designed to promote online bill payment, bill presentment and banking
opportunities to general users of the Internet. Additional up front investments
(both operating and capital) resulting from this agreement will place near term
downward pressure on margins, however these costs will prepare the Company for
up to one million additional subscribers. The incremental operating costs are
estimated at approximately $4.0 million, a portion of which was invested in the
quarter ended March 31, 1999. These investments will allow the Company to
establish a professional services staff to support the timely and effective
deployment of electronic billing and payment offerings by billers, additional
customer care staff and related training activities as well as sales, marketing
and communication program expansion. As indicated previously, the Company
believes that efforts directed toward expansion of the subscriber base are most
critical at this time and appropriate investments will be made to achieve this
goal.
During the week of April 26, 1999, the Company experienced a system error
that led some users of its electronic bill payment service to experience
intermittent problems accessing and using the system. The Company believes that
reserves it previously established for service level agreements are sufficient
to cover contractually determined penalties due to financial institution
customers resulting from this error. Should management decide to provide
additional service fee discounts for the period in question, a portion of these
discounts could impact the Company's results of operations for the quarter ended
June 30, 1999.
Reported Software segment revenue declined from $18.1 million to $9.8
million for the three months ended March 31, 1998 and 1999, respectively, and
from $49.7 million to $29.5 million for the nine months ended March 31, 1998 and
1999, respectively. On a pro forma basis, net of the impact of divested software
businesses in fiscal 1998, revenue increased by $0.8 million or 8% from $9.0
million to $9.8 million for the three months ended March 31, 1998 and 1999,
respectively and by $3.4 million or 13% from $26.1 million to $29.5 million for
the nine months ended March 31, 1998 and 1999, respectively. The three months
ended September 30, 1998 included $1.8 million of revenue from divested
businesses, therefore the appropriate comparison of retained businesses is
revenue growth of $1.6 million or 6% from $26.1 million to $27.7 million, year
over year. License sales have been lower than anticipated in the current fiscal
year due primarily to purchasing moratoriums imposed by potential customers who
are preparing internally for the Year 2000. The slowdown in license sales has
been offset by consulting revenues earned on implementations of software
licenses sold in the second half of fiscal 1998. This slowdown is expected to
continue until potential customers complete their Year 2000 initiatives.
Reported operating income increased from $2.5 million to $3.8 million for the
three months ended March 31, 1998 and 1999, respectively, and from $4.5 million
to $8.7 million for the nine months ended March 31, 1998 and 1999, respectively.
On a pro forma basis, net of the impact of the divested businesses, operating
income has increased from $2.3 million to $3.8 million for the three months
ended March 31, 1998 and 1999, respectively, and from $6.6 million to $8.7
million for the nine months ended March 31, 1998 and 1999, respectively.
Retained businesses, net of $1.6 million of operating losses in divested
businesses in the quarter ended September 30, 1998, achieved operating profit
growth from $6.6 million to $10.3 million for the six months ended March 31,
1998 and 1999, respectively. The increase in retained business profit is a
reporting anomaly related to allocated corporate fixed costs in the 1998
periods. The prior year pro forma results are carrying a full burden of fixed
overhead from the Software segment to avoid unreasonably impacting other
segments on a restated pro forma basis. When the effects of allocations are
ignored, underlying operating profit margins in the Software segment are fairly
consistent from year to year.
Revenue in the Investment Services segment has increased by $2.1 million or
27% from $7.6 million to $9.7 million for the three months ended March 31, 1998
and 1999, respectively, and by $5.4 million or 25% from $21.6 million to $27.0
million for the nine months ended March 31, 1998 and 1999, respectively.
17
<PAGE> 19
Increases in revenue are due primarily to an increase in portfolios managed from
approximately 447,000 at March 31, 1998 to approximately 630,000 at March 31,
1999. Additionally, some of the focus of this division has been directed toward
managing retail portfolios on behalf of several large brokerage firms. Offerings
to these customers provide more narrow functionality and therefore a
commensurately lower price. Operating income increased from $1.7 million to $2.5
million for the three months ended March 31, 1998 and 1999, respectively, and
increased from $4.1 million to $5.1 million for the nine months ended March 31,
1998 and 1999, respectively. In spite of absorbing charges totaling
approximately $0.9 million related to the move of the segment's main office in
the nine months ended March 31, 1999, the business unit has been able to
maintain a consistent operating margin. Adjusting for the one-time charges, the
year over year increase in margin is the result of leveraging the unit's
infrastructure in light of increased portfolio growth. On March 8, 1999, the
Company acquired the Mobius Group to augment the current product line in the
Investment Services segment. Investment consultants and asset managers may now
use Mobius' M-Vest service to determine the ideal asset allocation for their
clients; use M-Search to determine the ideal investment manager candidates; use
CheckFree APL and APL Wrap products to provide investment management platform
and trading tools; and use either M-Watch or CheckFree APL for their investment
oversight and reporting to the end client. The acquisition had minimal impact on
operations in the quarter ended March 31, 1999. Amortization of acquired
intangible assets are expected to have a dilutive effect in quarter four of
fiscal 1999 and through fiscal 2000. The acquisition should become acretive in
fiscal 2001 as expected incremental operating profits more than offset the added
intangible amortization.
The Corporate segment represents charges for the human resources, legal,
accounting and various other of the Company's unallocated overhead charges.
Corporate incurred operating costs of $5.2 million in the quarter ended March
31, 1999 versus $4.7 million in the same period in 1998 and costs of $16.2
million for the nine months ended March 31, 1999 versus $15.4 million in the
same period in 1998. One-time charges of $0.6 million were incurred in the
formation of a special purpose subsidiary created to administer the Company's
employee medical benefits program. Net of these one-time charges unallocated
Corporate charges were $15.6 million for the nine months ended March 31, 1999.
The relative stability of these unallocated costs are due to successful efforts
to leverage these resources within the growth of the other operating segments
over the past year.
Exclusivity amortization of $2.9 million in the nine months ended March 31,
1998 was the final amortization expense related to the exclusivity arrangement
the Company entered into with Intuit in conjunction with the purchase of ISC in
January 1997.
In-process research and development charges of $2.2 million in the three
months ended March 31, 1999 resulted from the Company's acquisition of the
Mobius Group on March 8, 1999. Please refer to Note 11 to the Interim Unaudited
Condensed Consolidated Financial Statements contained herein for a more detailed
discussion. The $0.7 million charge in the nine months ended March 31, 1998
resulted from the acquisition of AMTI in October 1997.
The $32.4 million charge for stock warrants in the three and nine month
periods ended March 31, 1998 resulted from the vesting of three million warrants
in March 1998 related to a ten year processing agreement with Integrion,
announced by the Company in October 1997. The non-cash charge was based on a
Black-Scholes option pricing model valuation of the warrants at the date of
vesting.
The net gain on dispositions of assets is the result of various
transactions in the nine month periods ended March 31, 1998 and 1999. In the
quarter ended March 31, 1998, the Company incurred a gain of $3.2 million on the
sale of its item processing business in March 1998 which was offset by a working
capital adjustment related to the sale of its credit management business in
August 1997. The gain of $3.9 million in the nine-month period ended March 31,
1999 is the net result of the gain on the sale of the mortgage business of
approximately $6.4 million and the loss on the sale of the imaging business of
approximately $2.5 million. The gain of $28.4 million in the nine-month period
ended March 31, 1998 is the net result of the gain on the sale of the credit
management business of $28.2 million from August 1997, a gain on the sale of the
item processing business of $3.2 million in March 1998 and a charge of
approximately $3.0 million from the quarter ended September 30, 1997 related to
certain equipment and capitalized costs where the Company determined that the
book value of the assets exceeded their net realizable value.
18
<PAGE> 20
YEAR 2000 READINESS
The following statements are "Year 2000 Readiness Disclosures" in
conformance with the Year 2000 Information and Readiness Disclosure Act (15
U.S.C. 1) enacted on October 19, 1998.
The goal of the Company is to ensure that all systems and products will be
ready for any date-based processing related to the millennium. The following
readiness disclosure is presented for each of the Company's business segments;
Electronic Commerce, Software and Investment Services.
State of Readiness: The Company is moving all of its Electronic Commerce
segment 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. 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 Genesis Platform followed by applicable testing on that system to be
completed by September 30, 1999. In anticipation of limited customer migration
from the Austin system to Genesis before January 1, 2000, the Austin system has
been made Year 2000 ready and testing with financial institutions is
substantially complete. The Electronic Commerce processing systems are subject
to regulation by the Office of the Comptroller of the Currency ("OCC") and are
required to meet OCC's Year 2000 readiness requirements by June 30, 1999. All
Software segment products have been made Year 2000 ready and only minor efforts
necessary to remediate internal support systems remain. Prior to the acquisition
of Mobius Group, all Investment Services customer-related processing systems had
been made Year 2000 ready and only customer testing and final remediation of
internal systems at Mobius Group remain. Final corporate initiatives require
resources to complete installation of date related "patches" to related
infrastructure hardware and software applications. All remaining remediation
efforts are scheduled to be completed during the quarter ended September 30,
1999.
An inventory of all information technology and non-information technology
systems is maintained and periodically updated. The Company solicited most of
its third party vendors to determine the status of their Year 2000 readiness and
those functions that are likely to have a material effect on Company business
have been identified and assessed. The Company has received responses from all
of its critical vendors and over half of its other vendors. Validation is based
on third party representations and/or internal testing. To date, in excess of
75% of the Company's mission critical applications are deemed to be Year
2000-ready. Based on a review of third party representations, the Company is not
currently aware of any third party issue applicable to the Year 2000 that is
likely to have a material impact on the conduct of business, the results of
operations or the financial condition of the Company. The Company has not
performed its own tests on many of these third party systems and no assurance
can be given at this time that these systems are Year 2000 ready.
Costs to Address the Company's Year 2000 Issues: Although the development
of the Genesis Platform has taken into account relevant Year 2000 issues, the
planned conversion was not accelerated due to Year 2000 issues and Year 2000
costs are not included in development for the Genesis Platform. The following
chart reflects the Company's Year 2000 specific costs. The fiscal year 1998
costs were attributed to remediation of legacy systems and applications. The
cost to complete includes remediation, testing and verification, but is
primarily budgeted to remedy any Year 2000 related situations that management
has not yet anticipated. The Company believes that associated costs are
adequately budgeted for in its fiscal 1999 buying plans.
<TABLE>
<CAPTION>
YEAR TO
COST TO DATE FISCAL FISCAL FISCAL
BUSINESS SEGMENT COMPLETE 1999 1998 1997 TOTAL
- ---------------- -------- ----------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Electronic commerce................................... $ 441 $959 $100 $-- $1,500
Software.............................................. 100 500 500 -- 1,100
Investment services................................... 359 878 375 -- 1,612
Corporate............................................. 177 208 -- -- 385
------ ------ ---- -- ------
Total....................................... $1,077 $2,545 $975 $-- $4,597
====== ====== ==== == ======
</TABLE>
19
<PAGE> 21
Risks of the Company's Year 2000 Issues: In order to accurately process
transactions, the Company must rely on technology supported by its customers and
suppliers. Transaction processing relies on transmissions of data from consumer
personal computers, through financial institution and merchant web servers and
the Internet, over third party data and voice communication lines, and through
the Federal Funds System. Failure by the Company, its customers or suppliers to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to process transactions and can have a direct impact on its
ability to generate revenue per agreements with financial institution, portfolio
management companies, merchant and direct customers. This in turn could have a
material impact on the conduct of the business, the results of operations and
the financial condition of the Company. Accordingly, the Company plans to
address all Year 2000 issues before problems materialize. The Company believes
that associated costs are adequately budgeted for in its fiscal 1999 business
plans. 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 components for Year 2000
readiness. Contingency plans are in place to address mission critical customer
related processes such as back-up communication plans for incoming customer
payment and portfolio transactions, paper based payment transaction processing
in the event of the failure of electronic payment systems and alternative power
supply in the event of prolonged power outages. Additional Year 2000
considerations have been and will continue to be incorporated into the Company's
business contingency plans.
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
During the quarters ended September 30, 1998 and December 31, 1998, the
Company expended approximately $31.2 million to repurchase shares of its own
stock. In spite of these expenditures, the Company has retained in excess of $25
million in cash, cash equivalents and short-term investments as of March 31,
1999. Additionally, the March 31, 1999 balance sheet reflects a current ratio of
1.76. Over the remainder of the fiscal year, the Company expects to generate
positive cash flow from operations. Additionally, in conjunction with the
purchase of a new building in Dublin, Ohio, the Company is evaluating various
financing strategies. The Company believes that existing cash, cash equivalents
and investments combined with projected positive operating cash flow, will be
more than sufficient to meet presently anticipated requirements for the
foreseeable future. To the extent that additional capital resources may be
needed, the Company has access to an untapped line of credit totaling $20
million.
INFLATION
The Company believes the effects of inflation have not had a significant
impact on the Company's results of operations.
20
<PAGE> 22
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include certain forward looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including the Annual Report on Form 10-K for
the year ended June 30, 1998. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a presentation by the Company or any other person that
the objectives and plans of the Company will be achieved.
21
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 2, 1999, Intuit filed a lawsuit against the Company in the
Superior Court of Santa Clara County, California. In the lawsuit, Inuit alleges
that the Company threatened to violate the terms of an April 1998 bill
presentment services contract and requests the court to provide equitable relief
and other remedies. The parties to the lawsuit have agreed that the outcome of
the case would be determined by arbitration. The arbitration has commenced and
proceedings are currently being held to determine the outcome of the dispute.
The net financial impact on the Company of the arbitration is not possible to
determine at this time given the outstanding issues. The ultimate outcome is not
expected to have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1* -- First Amendment to Loan and Security Agreement by and
between KeyBank National Association, as Lender, and
CheckFree Corporation, as Borrower, dated as of December 9,
1998.
27* -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed with this report.
(b) Reports on Form 8-K.
The Registrant filed the following Current Report on Form 8-K with the
Securities and Exchange Commission:
(i) A current report on Form 8-K, dated February 5, 1999, was filed
with the Securities and Exchange Commission on February 16, 1999
(Items 5 and 7).
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
CHECKFREE HOLDINGS CORPORATION
Date: May 17, 1999 By: /s/ ALLEN L. SHULMAN
----------------------------------------------------
Allen L. Shulman
Executive Vice President, Chief Financial Officer, and
General Counsel* (Principal Financial Officer)
Date: May 17, 1999 By: /s/ GARY A. LUOMA, JR.
----------------------------------------------------
Gary A. Luoma, Jr.
Vice President, Chief Accounting Officer, and Assistant
Secretary (Principal Accounting Officer)
</TABLE>
* In his capacity as Executive Vice President, Chief Financial Officer and
General Counsel, Mr. Shulman is duly authorized to sign this report on behalf
of the Registrant.
23
<PAGE> 25
CHECKFREE HOLDINGS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.1* -- First Amendment to Loan and Security Agreement by and
between KeyBank National Association, as Lender, and
CheckFree Corporation, as Borrower, dated as of December 9,
1998.
27* -- Financial Data Schedule. (for SEC use only)
</TABLE>
- ---------------
* Filed with this report.
24
<PAGE> 1
Exhibit 10.1
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
BY AND BETWEEN KEYBANK NATIONAL ASSOCIATION, AS LENDER, AND
CHECKFREE CORPORATION, AS BORROWER
This First Amendment to Loan and Security Agreement (this "Amendment")
is made to be effective as of December 9, 1998, by and between Checkfree
Corporation, a Delaware corporation, as borrower (the "Borrower"), and Keybank
National Association, a national banking association, as lender (the "Lender").
Background Information
A. The Borrower and the Lender are parties to a Loan and Security
Agreement made to be effective as of May 13, 1997 (the "Loan Agreement"), which
also has as parties thereto the following co-borrowers: Checkfree Software
Solutions, Inc., a Georgia corporation, Checkfree Services Corporation, a
Delaware corporation, Security APL, Inc., an Illinois corporation, Servantis
Systems, Inc., a Georgia corporation, and Servantis Services, Inc., a Georgia
corporation (collectively, the "Co-Borrowers").
B. On December 22, 1997, the Borrower became the operating
subsidiary to, and Checkfree Investment Corporation, a Delaware corporation
("Investment"), became the investment subsidiary to, Checkfree Holdings
Corporation, a Delaware corporation ("Holdings"), each pursuant to a plan of
reorganization approved by the Board of Directors of the Borrower and approved
by the Lender by a letter addressed to the Borrower dated December 22, 1997;
and, effective February 19, 1998, Holdings merged into the Borrower, among
other subsidiaries of the Borrower, all of the CoBorrowers (these events,
collectively, the "Restructuring").
C. The Borrower and the Lender desire to amend the Loan Agreement,
among other matters, (i) to reflect the Restructuring by requiring Holdings and
Investment each to be a guarantor under the Loan Agreement and by requiring
Holdings to be fully subject to all of the covenants contained therein, and
(ii) by revising certain covenants.
AGREEMENT
1. The Loan Agreement is hereby amended by deleting each and every
reference to the "Borrowers", including without limitation all references to
"all of the Borrowers", "any of the Borrowers", "any or all of the Borrowers"
and "each of the Borrowers", and replacing each reference with "the Borrower".
2. The Loan Agreement is hereby amended by deleting "consolidated"
in each and every instance that it appears.
<PAGE> 2
3. The Loan Agreement is hereby amended by deleting each and every
reference to "joint and several" and "jointly and severally".
4. Subsection 1.1, Defined Terms, is hereby amended by deleting in
its entirety the definition of "Net Worth."
5. Subsection 1.1, Defined Terms, is hereby amended by inserting,
immediately after the definition of Capital Expenditures, the following
definitions:
"Capitalization" means, as to the Borrowers on a
particular date, the sum of (a) Stockholders' Equity, plus (b)
the aggregate amount of all outstanding Funded Debt.
"Checkfree Holdings" shall mean Checkfree Holdings
Corporation, a Delaware corporation, of which Checkfree
Corporation is the fully owned operating subsidiary.
"Checkfree Investment" shall mean Checkfree
Investment Corporation, a Delaware corporation and the fully
owned investment subsidiary of Checkfree Holdings.
"Guaranties" (individually, the "Guaranty") shall
mean the guaranties of the Indebtedness evidenced by this
Agreement and by all documents contemplated by this Agreement
including without limitation the Note, as this Agreement and
such documents including without limitation the Note may be
amended or restated from time to time, which guaranties are
substantially in the form of Exhibit D attached to this
Agreement, as executed by each of Checkfree Holdings and
Checkfree Investment in favor of the Lender.
6. Subsection 1.1, Defined Terms, definition of "Permitted
Indebtedness", is hereby amended by adding "and" after the semicolon at the end
of clause (d), by deleting clause (e) in its entirety and by relettering clause
"(f)" as clause (e)
7. Subsection 1.1, Defined Terms, definition of "Subsidiaries", is
hereby amended by deleting the clause ", as to Checkfree, the Subsidiaries as
defined in recital paragraph A hereof, and as to any other Persons," in its
entirety.
8. Subsection 1.2, Other Definitional Provisions" is hereby amended
by deleting paragraph (a) in its entirety and relettering paragraphs (b)
through (h) as paragraphs (a) through (g), respectively.
9. Subsection 3.3, Conditions to Revolving Loans, is hereby amended
by deleting subsection (a), Subsidiary Matters, in its entirety and relettering
paragraphs (b) through (e) as paragraphs (a) through (d), respectively.
2
<PAGE> 3
10. Section 5, Representations and Warranties, is hereby amended by
deleting therefrom "each of the Borrowers" in each and every instance that it
appears and replacing each reference with "each of the Borrower and each of the
Guarantors."
11. Subsection 5.16, Location Information, is hereby amended by
deleting the entire second sentence, which begins "Notwithstanding the
foregoing" and ends "to which this sentence is, applicable."
12. Section 6, Affirmative Covenants, is hereby amended by deleting
from lines one and five, respectively, of the preamble references to "each of
the Borrowers" and "the Borrowers" and replacing each reference with "each of
the Borrower and Checkfree Holdings."
13. Subsection 6.2, Certificates; Other Information, is hereby
amended by deleting from paragraph (d) the clause ", or of all of the Borrowers
on a consolidated basis,".
14. Section 7, Negative Covenants, is hereby amended by deleting
from line one of the preamble the reference to "each of the Borrowers" and
replacing it with "each of the Borrower and Checkfree Holdings."
15. Subsection 7.3, Limitation on Contingent Obligations, is hereby
amended by deleting clause (b) in its entirety, by relettering clauses (c) and
(d) as clauses (b) and (c), respectively, and by deleting from the last line of
subsection 7.3 the clause "on a consolidated basis".
16. Subsection 7.4, Limitation on Fundamental Changes, is hereby
amended by deleting the clause, beginning in the fifth line, "other than any of
the Borrowers with any other Borrowers", and the clause, beginning in the
eighth line, "other than any of the Borrowers with any other Borrowers."
17. Subsection 7.9, Limitation on Redemptions, is hereby amended by
deleting it in its entirety and replacing it with the following subsection 7.9:
7.9 Limitation on Redemptions. Purchase, buy
back, acquire or otherwise redeem any or all of the issued and
outstanding shares of its Capital Stock; provided, however, that
the Borrower and Checkfree Holdings may purchase, buy back,
acquire or otherwise redeem shares of its respective Capital
Stock if (a) at the time of such purchase, buy back, acquisition
or redemption, no Event of Default exists on the part of either
the Borrower or Checkfree Holdings with respect to subsections
6.1, 6.2, 6.3, 6.8, 6.11, 7.1, 7.2, 7.3, 7.5, 7.6, 7.7, 7.8,
7.10, 7.11, 7.12, or 7.13 of this Agreement (which the parties
agree are all of the financial covenants of this Agreement), and
(b) such purchase, buy back, acquisition or redemption would not
cause an Event of Default to occur.
3
<PAGE> 4
18. Subsection 7.12, Funded Debt to Net Worth Ratio, is hereby
amended by (a) deleting, in the first line, the heading "Funded Debt to Net
Worth Ratio" and replacing such heading with "Funded Debt to Capitalization"
and (b) replacing, in the last line, "3.33 to 1.0" with "0.30 to 1.00."
19. Subsection 9.2, Notices, is hereby amended by changing "Vorys,
Sater, Seymour and Pease" to Vorys, Sater, Seymour and Pease LLP" and by
deleting the last paragraph, which begins "All notices" and ends "as set forth
herein."
20. Subsection 9.7, Setoff, is hereby amended by deleting, beginning
in line 29, the clause "(by means of a single notice to Checkfree)".
21. Section 9, Miscellaneous, is hereby amended by deleting
subsection 9.18, Joint and Several Obligations, in its entirety.
22. Exhibit A, Form of Revolving Loans Cognovit Promissory Note, is
hereby amended by deleting it in its entirety and replacing it with Exhibit A,
Form of Replacement Revolving Loans Cognovit Promissory Note, attached hereto
and incorporated by this reference into the Loan Agreement.
23. The Loan Agreement is hereby amended by attaching thereto and
incorporating by this reference therein Exhibit D, Unconditional Guaranty,
which Exhibit D is attached hereto.
24. The obligation of the Lender to make any Revolving Loans to the
Borrower under the Loan Agreement as amended by this Amendment is subject to
the full satisfaction, in the Good Faith opinion of the Lender, of the
following conditions precedent no later than the effective date hereof:
(a) Note. The Lender shall have received the
Replacement Revolving Loans Cognovit Promissory Note (the
"Replacement Note"), with such Replacement Note conforming to
the requirements of the Loan Agreement as amended by this
Amendment and duly executed and delivered by a Responsible
Officer of the Borrower.
(b) Legal Opinion of Counsel. The Lender shall
have received an executed legal opinion of Porter, Wright,
Morris & Arthur, counsel for the Borrower, Checkfree Holdings
and Checkfree Investment, favorably addressing the subjects
enumerated in Exhibit B attached hereto (the "Subjects of
Opinion"), addressed specifically to the Lender and otherwise in
form and substance satisfactory to the Lender and covering such
other matters incident to the transactions contemplated by the
Loan Agreement as amended by this Amendment as the Lender or its
counsel may reasonably require.
4
<PAGE> 5
(c) Proceedings of the Borrower. The Lender
shall have received a copy of the resolutions, in form and
substance satisfactory to the Lender of the Board of Directors
of the Borrower authorizing (i) the execution, delivery and
performance of this Amendment and the Note, (ii) the
consummation of the transactions contemplated by the Loan
Agreement as amended by this Amendment, and (iii) the borrowings
provided for in the Loan Agreement as amended by this Amendment,
all certified by the secretary of the Borrower. Such certificate
shall state that the resolutions set forth therein have not been
amended, modified, revoked or rescinded as of the date of such
certificate.
(d) Incumbency Certificate of the Borrower. The
Lender shall have received a certificate of the secretary of the
Borrower as to the incumbency and signature of the officer(s) of
the Borrower executing this Amendment and the Note, and any
certificate or other documents to be delivered pursuant to the
Loan Agreement as amended by this Amendment, together with
evidence of the incumbency of such secretary.
(e) Proceedings of Holdings and Investment. The
Lender shall have received a copy of the resolutions, in form
and substance satisfactory to the Lender, of the Board of
Directors of each of Holdings and Investment authorizing the
execution, delivery and performance of its respective Guaranty,
certified by its respective secretary. Each such certificate
shall state that the resolutions set forth therein have not been
amended, modified, revoked or rescinded as of the date hereof.
(f) Incumbency Certificates of Holdings, and
Investment. The Lender shall have received a certificate of the
secretary of each of Holdings and Investment as to the
incumbency and signature of its officer(s) executing its
respective Guaranty and any certificate or other documents to be
delivered pursuant to the Loan Agreement as amended by this
Amendment, together with evidence of the incumbency of such
secretary.
25. In order to induce the Lender to enter into this Amendment and
to make the Revolving Loans provided for in the Loan Agreement as amended by
this Amendment, the Borrower hereby represents and warrants to the Lender that
each of the Borrower, Holdings and Investment (a) is duly organized, validly
existing and in good standing under the laws of the State of Delaware, (b) has
the corporate power and authority to conduct the business in which its is
currently engaged, (c) is not required to be qualified as a foreign corporation
under the laws of any jurisdiction where, if it is not so qualified, the
failure to so qualify would have a material adverse effect on its business; (d)
has the corporate power and authority (i) with respect to the Borrower, to
make, deliver and perform each of this Amendment and the Note and to borrow
under the Loan Agreement as amended by this Amendment, and (ii) with respect to
each of Holdings and Investment, to make, deliver and perform its respective
Guaranty; and (e) has taken all corporate action necessary to be taken by it
(i) with respect to the Borrower, to authorize the
5
<PAGE> 6
Revolving Loans on the terms and conditions of the Loan Agreement as amended by
this Amendment and to authorize the execution, delivery and performance of the
Loan Agreement and the Note, each as amended by this Amendment, and (ii) with
respect to each of Holdings and Investment, to make, deliver and perform its
respective Guaranty.
26. The Borrower hereby agrees to pay, perform and observe all of
the terms of the Loan Agreement, as the same is modified and amended hereby.
Except as modified and amended by this Amendment, the Loan Agreement remains
unchanged and in full force and effect as written. The Borrower hereby ratifies
and confirms in all respects each and every promise, covenant, agreement,
condition, term and provision of the Loan Agreement, and all of the Borrower's
duties and obligations under and pursuant to the Loan Agreement, as the same is
modified and amended hereby.
27. As consideration for the Lender's agreement to enter into this
Amendment, and as a condition precedent to the effectiveness of the covenants
and agreements contained herein, the Borrower has agreed to pay all of the
costs and expenses incurred by the Lender in connection with this Amendment and
all of the transactions contemplated hereby, including without limitation all
attorneys' fees and expenses, on the date this Amendment is executed and
delivered by the Borrower to the Lender.
28. This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
29. This Amendment and the Note, each as amended by this Amendment,
and the Unconditional Guaranty shall be governed by, and construed and
interpreted in accordance with, the local laws of the State of Ohio, except and
only to the extent precluded by other laws of mandatory application.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
BORROWER:
CHECKFREE CORPORATION, a Delaware
corporation
By: /s/ Keven Madsen
---------------------------------------
Printed Name: Keven Madsen
-----------------------------
Title: V.P. & Treasurer
------------------------------------
6
<PAGE> 7
LENDER:
KEYBANK NATIONAL ASSOCIATION, a
national banking association
By: /s/ Sui Zgon
---------------------------------------
Printed Name: Sui Zgon
-----------------------------
Title: V.P.
------------------------------------
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHECKFREE HOLDINGS CORPORATION FOR THE NINE MONTH PERIOD
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 16,199
<SECURITIES> 9,425
<RECEIVABLES> 49,791
<ALLOWANCES> (4,096)
<INVENTORY> 0
<CURRENT-ASSETS> 103,330
<PP&E> 104,167
<DEPRECIATION> (46,080)
<TOTAL-ASSETS> 250,690
<CURRENT-LIABILITIES> 58,857
<BONDS> 0
0
0
<COMMON> 517
<OTHER-SE> 184,700
<TOTAL-LIABILITY-AND-EQUITY> 250,690
<SALES> 0
<TOTAL-REVENUES> 179,379
<CGS> 0
<TOTAL-COSTS> 187,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> (2,823)
<INCOME-TAX> (12,422)
<INCOME-CONTINUING> 9,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,599
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
