<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number: 0-26802
CHECKFREE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA 30092
(Address of principal executive offices, including zip code)
(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: 52,211,714 shares
of Common Stock, $.01 par value, were outstanding at November 10, 1999.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
September 30, 1999 and June 30, 1998
Condensed Consolidated Statements of 4
Operations For the Three Months Ended
September 30, 1999 and 1998
Condensed Consolidated Statements of 5
Cash Flows For the Three Months Ended
September 30, 1999 and 1998
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three Months
Ended September 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities and Use of Proceeds. 15
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. 15
Signatures. 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1999
--------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 12,446 $ 6,439
Investments........................................................... 10,266 8,956
Accounts receivable, net.............................................. 45,660 51,758
Prepaid expenses and other assets..................................... 7,800 7,624
Deferred income taxes................................................. 6,513 5,997
--------- ---------
Total current assets.............................................. 82,685 80,774
Property and equipment, net................................................ 69,823 73,400
Capitalized software, net.................................................. 20,059 21,287
Intangible assets, net..................................................... 45,875 44,691
Investments................................................................ 1,875 1,875
Deferred income taxes...................................................... 21,920 24,831
Other noncurrent assets.................................................... 10,524 9,924
--------- ---------
Total........................................................ $ 252,761 $ 256,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 9,634 $ 10,184
Accrued liabilities................................................... 26,971 26,643
Current portion of long-term obligations.............................. 1,640 1,640
Deferred revenue...................................................... 20,195 24,750
--------- ---------
Total current liabilities......................................... 58,440 63,217
Accrued rent and other..................................................... 3,536 3,596
Obligations under capital leases - less current portion.................... 3,882 3,814
Commitments and contingencies..............................................
Stockholders' equity:
Preferred stock- 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding.................................. -- --
Common stock- 150,000,000 authorized shares, $.01 par value; issued
57,305,659 and 57,508,759 shares, respectively;
outstanding 51,756,278 and 51,958,405 shares, respectively........ 518 520
Additional paid-in-capital............................................ 480,385 483,890
Other................................................................. -- (319)
Accumulated deficit................................................... (294,000) (297,936)
--------- ---------
Total stockholders' equity........................................ 186,903 186,155
--------- ---------
Total........................................................ $ 252,761 $ 256,782
========= =========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
3
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Revenues:
Processing and servicing..................... $ 45,054 $ 58,304
License Fees................................. 2,971 2,996
Maintenance Fees............................. 4,964 4,438
Other........................................ 3,825 3,282
-------- --------
Total revenues........................... 56,814 69,020
Expenses:
Cost of processing, servicing and support.... 37,089 42,993
Research and development..................... 6,578 6,824
Sales and marketing.......................... 7,824 8,668
General and administrative................... 6,733 9,924
Depreciation and amortization................ 5,966 6,976
-------- --------
Total expenses........................... 64,190 75,385
Net gain on dispositions of assets................ 3,914 --
-------- --------
Loss from operations.............................. (3,462) (6,365)
Interest, net..................................... 793 245
-------- --------
Loss before income taxes.......................... (2,669) (6,120)
Income tax benefit................................ (1,201) (2,184)
-------- --------
Net loss.......................................... $ (1,468) $ (3,936)
======== ========
Basic earnings (loss) per share:
Net income (loss) per common share........... $ (0.03) $ (0.08)
======== ========
Equivalent number of shares.................. 55,510 51,848
======== ========
Diluted earnings (loss) per share:
Net income (loss) per common share........... $ (0.03) $ (0.08)
======== ========
Equivalent number of shares.................. 55,510 51,848
======== ========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
4
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (1,468) $ (3,936)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 5,966 6,976
Deferred income tax provision........................................... (1,201) (2,184)
Net gain on dispositions of assets...................................... (3,914) --
Purchases of investments- Trading....................................... -- (8,037)
Proceeds from maturities and sales of investments, net- Trading......... -- 9,347
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable................................................. 937 (6,098)
Prepaid expenses and other.......................................... 675 176
Other noncurrent assets............................................. -- 600
Accounts payable.................................................... (3,768) 550
Accrued liabilities................................................. 1,654 853
Deferred revenue.................................................... (2,325) 4,555
Income tax accounts................................................. (1,430) (211)
Accrued rent and other.............................................. -- 60
-------- --------
Net cash provided by (used in) operating activities............ (4,874) 2,651
Cash flows from investing activities:
Purchase of property and software....................................... (10,444) (8,631)
Proceeds from sale of assets............................................ 11,421 --
Capitalization of software development costs............................ (1,241) (1,897)
-------- --------
Net cash provided by (used in) investing activities............ (264) (10,528)
Cash flows from financing activities:
Principal payments under capital lease obligations...................... (175) (68)
Proceeds from stock options exercised, including related tax
benefits.............................................................. 388 1,153
Proceeds from employee stock purchase plan.............................. 1,070 785
Purchase of treasury stock.............................................. (2,066) --
-------- --------
Net cash provided by (used in) financing activities............ (783) 1,870
-------- --------
Net decrease in cash and cash equivalents.................................... (5,921) (6,007)
Cash and cash equivalents:
Beginning of period..................................................... 36,535 12,446
-------- --------
End of period........................................................... $ 30,614 $ 6,439
======== ========
Supplemental disclosure of cash flow information:
Interest paid........................................................... $ 128 $ 27
======== ========
Income taxes paid....................................................... $ 1,624 $ 188
======== ========
Capital lease additions................................................. $ 1,583 $ --
======== ========
Unsettled portion of treasury share purchase............................ $ 3,757 $ --
======== ========
Stock funding of 401(k) match........................................... $ 963 $ 1,059
======== ========
</TABLE>
5
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 three months
ended September 30, 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 filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. Basic earnings (loss) per common share amounts were computed by
dividing income (loss) available to shareholders by the weighted average number
of shares outstanding. Diluted per-common-share amounts assume the issuance of
common stock for all potentially dilutive equivalent shares outstanding except
in loss periods when such an adjustment would be anti-dilutive. For the periods
reported herein, there were no differences between basic and diluted earnings
per share. The number of anti-dilutive equivalent shares excluded from the per
share calculations are 5,765,718 and 5,502,093 for the three months ended
September 30, 1998 and 1999, respectively.
3. In the quarter ended September 30, 1999, the Company adopted
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Statement distinguishes
accounting for costs of computer software developed or obtained for internal use
from guidance under Statement of Financial Accounting Standards ("SFAS") 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." The adoption of SOP 98-1 did not result in a material impact on
reported results.
4. In the quarter ended September 30, 1999, the Company issued 36,226
shares of common stock to fund its 401(k) match, the cost of which was accrued
during the year ended June 30, 1999.
5. In the quarter ended September 30, 1999, the Company issued 46,819
shares of common stock in conjunction with the employee stock purchase plan,
which was funded through employee payroll deductions accumulated in the
immediately preceding six-month period.
6. In the quarter ended September 30, 1999, the Company issued 13,000
shares of restricted stock to certain key employees. Shares issued were recorded
at their fair market value on the date of the grant with a corresponding charge
to stockholders' equity. The unearned portion is being amortized as compensation
expense on a straight-line basis over the related vesting periods. Sale of these
shares is restricted prior to the date of vesting.
7. In October 1999, the Company announced a new agreement with one of
its customers. Under the terms of the agreement, the customer purchased 250,000
shares of the Company's stock, was issued warrants to purchase 1 million shares,
and has the ability to earn warrants on up to 2 million additional shares upon
achievement of specific performance targets. None of the warrants can vest and
become exercisable prior to September 2002. Shares of stock acquired by the
customer under the terms of this agreement are subject to certain transfer and
other restrictions.
8. On October 25, 1999, the Company executed an amendment to its
working capital line-of-credit agreement. The amendment extends the term of the
line through December 30, 1999, and changes certain financial covenants
contained in the agreement.
9. In June 1998, the Financial Accounting Standards Board issued SFAS
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 133 will be effective for the
Company's first quarter of fiscal 2001. The Company is in the process of
evaluating the effects of this new statement.
10. Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are the leading provider of electronic billing and payment services.
Our Electronic Commerce business provides services that allow customers 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.
We currently provide electronic billing and payment services for
approximately 3 million consumers. Our services are available through over 350
sources, including:
- 23 of the 25 largest U.S. banks;
- 8 of the top 10 U.S. brokerage firms;
- The Internet portal Yahoo!;
- WingspanBank.com, a leading Internet-based full-service bank;
- Internet financial sites such as Quicken.com; and
- Personal financial management software such as Quicken and
Microsoft Money
We have developed relationships with over 1,100 merchants nationwide
that enable us to remit in excess of 50% of all of our bill payments
electronically. During the three months ended September 30, 1999, we processed
an average of nearly 13 million transactions per month, and for the twelve
months ended June 30, 1999 we processed more than 125 million transactions.
In March 1997, we introduced electronic billing - "E-Bill" - which
enables merchants to deliver billing as well as marketing materials
interactively to their customers over the Internet. As of September 30, 1999, we
have signed contracts for E-Bill services with 77 of the country's largest
billers. During the month of September 1999, we presented more than 20,000
electronic bills, which is more than double the number of bills presented
through E-bill Services in March of 1999. Additionally, 53 CheckFree
distribution points are live with Internet billing and payment.
We are also a leading provider of portfolio management and information
services and financial applications software. Our Investment Services business
offers portfolio management and information services for fee-based money
managers and financial planners within investment advisory firms, brokerage
firms, banks and insurance companies. Our fee-based money manager clients are
typically sponsors or managers of wrap money management products or traditional
money managers, managing investments of institutions and high net worth
individuals. Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support software products for automated
clearinghouse, or ACH, processing, reconciliation and regulatory compliance.
During the fiscal year ended June 30, 1999, Electronic Commerce
accounted for 68% of our revenues and Investment Services and Software each
accounted for 16% of our revenues.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997 and Mobius Group, Inc. in March 1999.
During fiscal 1998, we made the decision to sell some of our software
businesses that did not directly promote our strategic direction. These
divestitures included the sale of our recovery management business in August
1997, our item processing business in March 1998, our wire and electronic
banking businesses in April 1998, our leasing business in July 1998, our
mortgage business in September 1998 and our imaging business in October 1998.
While we have no pending agreements to dispose of our remaining software
businesses, we do receive offers for them from time to time.
7
<PAGE> 8
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating
revenues, certain consolidated statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1999
------------- --------------
<S> <C> <C>
Total revenues: 100.0% 100.0%
Expenses:
Cost of processing, servicing and support........ 65.3% 62.3%
Research and development......................... 11.6% 9.9%
Sales and marketing.............................. 13.8% 12.6%
General and administrative....................... 11.9% 14.4%
Depreciation and amortization.................... 10.5% 10.1%
------------- --------------
Total expenses............................... 113.0% 109.2%
Net gain on dispositions of assets................... 6.9% -
------------- --------------
Loss from operations................................. (6.1)% (9.2)%
Interest, net........................................ 1.4% 0.4%
------------- --------------
Loss before income taxes............................. (4.7)% (8.9)%
Income tax benefit................................... (2.1)% (3.2)%
------------- --------------
Net loss............................................. (2.6)% (5.7)%
============= ==============
</TABLE>
Reported revenue increased 21%, from $56.8 million for the three months
ended September 30, 1998 to $69.0 million for the three months ended September
30, 1999. The overall increase is due to internal growth in our Electronic
Commerce and Investment Services businesses offset by a decrease in our Software
business. The increase in Investment Services is partially due to the
acquisition of Mobius Group in March 1999. The reduction in our reported
Software revenue was due primarily to divestitures of our mortgage business in
September 1998 and our imaging business in October 1998. On a pro forma basis,
net of the divestiture of the Software businesses previously mentioned and
adjusting for the acquisition of Mobius Group, revenue increased 22%, from $56.7
million for the three months ended September 30, 1998 to $69.0 million for the
three months ended September 30, 1999. In our Electronic Commerce business,
revenue grew by 25%, driven primarily by a 20% increase in subscribers from
approximately 2.5 million at September 30, 1998 to approximately 3.0 million at
September 30, 1999. Pro forma revenue in our Investment Services business grew
by 20%, primarily due to an increase in portfolios managed from 546,000 at
September 30, 1998 to 767,000 at September 30, 1999. Pro forma revenue, net of
divested businesses, in our Software business grew by 7%, in spite of a general
slowdown in the market resulting from Year 2000 purchasing moratoriums.
Reported processing and servicing revenue increased $13.2 million, or
29%, from $45.1 million for the three months ended September 30, 1998 to $58.3
million for the three months ended September 30, 1999. On a pro forma basis,
adjusting for the acquisition of Mobius Group, processing and servicing revenue
increased $11.7 million, or 25%, from $46.6 million for the three months ended
September 30, 1998 to $58.3 million for the three months ended September 30,
1999. Pro forma growth was due primarily to the increase in subscribers in our
Electronic Commerce business and the increase in portfolios managed in our
Investment Services business mentioned previously.
Reported license revenue increased by $0.2 million, or 7%, from $2.8
million for the three months ended September 30, 1998 to $3.0 million for the
three months ended September 30, 1999. On a pro forma basis,
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<PAGE> 9
excluding the impact of divested software businesses, license revenue increased
$0.3 million, or 11%, from $2.7 million for the three months ended September 30,
1998 to $3.0 million for the three months ended September 30, 1999. The
relatively low license performance in both periods is due to typically low
seasonal license sales in the first fiscal quarter in the Software business.
Reported maintenance revenue declined by $0.6 million, or 12%, from
$5.0 million for the three months ended September 30, 1998 to $4.4 million for
the three months ended September 30, 1999. On a pro forma basis, excluding the
impact of divested software businesses, maintenance revenue increased by $0.3
million, or 7%, from $4.1 million for the three months ended September 30, 1998
to $4.4 million for the three months ended September 30, 1999. This increase is
due to new maintenance paying customers added during fiscal 1999 offset slightly
by retention rates in the upper 80% range for the core maintenance base in our
Software business.
Reported other revenue, consisting mostly of consulting fees, decreased
by $0.5 million, or 13%, from $3.8 million for the three months ended September
30, 1998 to $3.3 million for the three months ended September 30, 1999. On a pro
forma basis, excluding the impact of divested software businesses and the
acquisition of Mobius Group, other revenue remained constant at $3.3 million for
the three months ended September 30, 1998 and 1999. Implementation fees have
remained relatively consistent in all three businesses, Electronic Commerce,
Software and Investment Services.
Our cost of processing, servicing and support was $37.1 million or
65.3% of total revenue for the three months ended September 30, 1998 and $43.0
million or 62.3% of total revenue for the three months ended September 30, 1999.
Cost of processing as a percentage of servicing only revenue (total revenue less
license revenue) was 68.9% for the three months ended September 30, 1998 and
65.1% for the three months ended September 30, 1999. Improvement in this area is
due to a year over year increase in the percentage of electronic versus paper
payments and inherent leverage resulting from the conversion of over two-thirds
of our subscribers from legacy processing systems to the new Genesis processing
system throughout the fiscal year ended June 30, 1999 and into fiscal 2000.
Our research and development costs were $6.6 million, or 11.6% of
revenue for the three months ended September 30, 1998 and $6.8 million, or 9.9%
of total revenue for the three months ended September 30, 1999. Adjusted for
capitalized development costs of $1.2 million for the three months ended
September 30, 1998 and $1.9 million for the three months ended September 30,
1999, gross research and development costs were $7.8 million, or 13.7% of total
revenue for the quarter ended September 30, 1998 and $8.7 million, or 12.6% of
total revenue for the quarter ended September 30, 1999. We continue to invest a
significant portion of our revenue into research and development activities in
all business segments in anticipation and support of revenue growth, quality
improvement and efficiency enhancement opportunities.
Sales and marketing costs were $7.8 million, or 13.8% of total revenue
for the three months ended September 30, 1998 and $8.7 million, or 12.6% of
total revenue for the three months ended September 30, 1999. We have increased
our sales staff to sign additional billers in support of our electronic billing
product offerings and have increased program management staff in support of new
non-subscriber based products designed to leverage our existing electronic
payment infrastructure. We expect to incur increased promotional expenses in
support of the rollout of electronic billing and payment offerings through
Internet portals such as Yahoo! and other partners such as WingspanBank.com in
an effort to accelerate the growth of subscribers in our Electronic Commerce
segment.
General and administrative expenses were $6.7 million, or 11.9% of
total revenue for the three months ended September 30, 1998 and $9.9 million, or
14.4% of total revenue for the three months ended September 30, 1999. The
increase in general and administrative expenses is due principally to an
increase in facilities costs resulting from new facilities in Dublin, Ohio and
Jersey City, New Jersey; an increase in administrative staff required to manage
growth in all areas of the company; and an increase in our reserve for estimated
doubtful accounts.
Depreciation and amortization costs increased from $6.0 million for the
three months ended September 30, 1998 to $7.0 million for the three months ended
September 30, 1999. Reductions in depreciation and amortization expense
resulting from the divestiture of the previously mentioned software businesses
have been offset by
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amortization of intangible assets resulting from the purchase of Mobius Group
and increased depreciation expense resulting from capital spending in support of
anticipated growth.
The net gain on dispositions of assets of $3.9 million in the three
months ended September 30, 1998 is the net result of the gain on the sale of the
mortgage business of approximately $6.3 million offset by the anticipated loss
on the sale of the imaging business of approximately $2.4 million.
Net interest income decreased from $0.8 million for the three months
ended September 30, 1998 to $0.2 million for the three months ended September
30, 1999. While investment yields have improved slightly from year to year, the
reduction in net interest income was due primarily to a drop in average cash,
cash equivalents and investments from $74.2 million for the three months ended
September 30, 1998 to $20.9 million for the three months ended September 30,
1999. Approximately $31.0 million of the cash on hand at September 1998,
resulting from various software business divestitures, was used in October 1998
to repurchase shares of our stock when market conditions favored such an action
and the remaining decrease in invested cash was due primarily to capital
investments in support of expected growth.
We reported an income tax benefit of $1.2 million, or an effective tax
rate of 45.0% for the three months ended September 30, 1998 and an income tax
benefit of $2.2 million, or an effective tax rate of 35.7% for the three months
ended September 30, 1999. The reported effective tax rates differ from the
blended statutory rate of 40% due primarily to goodwill amortization and other
non-deductible costs we incurred 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
SEPTEMBER 30,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Operating Revenue:
Electronic Commerce.................... $ 38,087 $ 47,781
Software............................... 10,195 8,984
Investment Services.................... 8,532 12,255
-------- --------
Total Operating Revenue............ $ 56,814 $ 69,020
======== ========
Operating Income (Loss):
Electronic Commerce.................... $ (4,610) $ (5,750)
Software............................... 1,215 2,483
Investment Services.................... 1,795 2,365
Corporate.............................. (5,776) (5,463)
Net Gain on Dispositions of Assets..... 3,914 --
-------- --------
Total Operating Income (Loss)...... $ (3,462) $ (6,365)
======== ========
</TABLE>
Revenue in the Electronic Commerce segment increased by $9.7 million,
or 25% from $38.1 million for the three months ended September 30, 1998 to $47.8
million, for the three months ended September 30, 1999. This increase is due
primarily to an increase in subscribers from approximately 2.5 million at
September 30, 1998 to approximately 3.0 million at September 30, 1999.
During the quarter ended September 30, 1999, underlying subscriber
growth was consistent with recent periods and new Internet based subscribers
continued to grow in excess of 20%. However, we experienced an anomalous removal
of approximately 200,000 subscribers, which caused our net subscriber growth to
approximate only one percent over the quarter ended June 30, 1999. Approximately
half of the deleted subscribers were removed by banks that no longer promote
certain legacy personal financial manager software and who chose this quarter to
delete related inactive subscribers from their systems. The remaining deletions
resulted from a single financial institution that removed inactive accounts on
its own proprietary PC-based offering. This particular financial institution,
which uses our services only for remittance processing, introduced a web-based
solution to replace its proprietary PC solution. The combined 200,000 removed
subscribers came from financial institutions with older
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<PAGE> 11
contracts with specialized pricing provisions. Their removal had little impact
on revenue in the quarter and will have little impact on revenue for the full
year. Unrelated to the above, we expect an additional 200,000 subscribers to be
deleted in the quarter ending December 31, 1999 as our financial institution
partners remove subscribers using personal financial management software that is
not Year 2000 compliant. We are assisting our partners in actively soliciting
these subscribers to upgrade to Year 2000 compliant software and we will work
with our partners to remove remaining non-compliant subscribers from our systems
in December of this year. These deletions will not have a negative impact on our
expected earnings for the remainder of the fiscal year.
We jointly announced our processing agreement with Yahoo! during the
quarter ended September 30, 1999. The agreement allows for a free three-month
trial period for new subscribers who enroll through Yahoo! Because these
subscribers are not generating revenue for us at this time, we do not count them
in our active subscriber base.
Operating losses in the Electronic Commerce segment increased from $4.6
million for the three months ended September 30, 1998 to $5.8 million for the
three months ended September 30, 1999. As explained in previous quarters, we are
investing in the areas of sales and marketing, professional services and
customer care within this segment in anticipation of expected subscriber growth
resulting from the rollout of initial programs related to distribution
agreements with Internet portals and other new partners. We are also investing
in a program focused on further enhancing the quality of our electronic commerce
service offerings. Additionally, as subscribers sign up for electronic bill
payment offerings through portals and other sponsors that offer free trial
periods, we will incur the variable costs associated with these subscribers with
no revenue to offset the costs. These combined factors will place downward
pressure on operating margins in this business segment for the remainder of the
fiscal year.
Revenue in our Software segment declined from $10.2 million for the
three months ended September 30, 1998 to $9.0 million for the three months ended
September 30, 1999. This decline is the result of the divestiture of our
mortgage and imaging businesses in the prior year. On a pro forma basis, net of
divestitures, revenue increased from $8.4 million for the three months ended
September 30, 1998 to $9.0 million for the three months ended September 30,
1999. In spite of purchasing moratoriums related to the Year 2000, we have been
able to achieve marginal increases in both license and maintenance revenue that
are driving the pro forma revenue growth of 7%.
Operating income in our Software segment increased from $1.2 million
for the three months ended September 30, 1998 to $2.5 million for the three
months ended September 30, 1999. On a pro forma basis, net of divested
businesses, operating income decreased from $2.8 million for the three months
ended September 30, 1998 to $2.5 million for the three months ended September
30, 1999. The marginal decline in operating income is due to resources that were
added to build, launch and support new products in the Compliance and Financial
Applications group and resources assigned to our new ACH alliance program that
carries a profit margin that is inherently lower that our traditional product
offerings in this area.
Revenue in our Investment Services segment increased from $8.5 million
for the three months ended September 30, 1998 to $12.3 million for the three
months ended September 30, 1999. This increase is partially due to our
acquisition of Mobius Group in March 1999. On a pro forma basis, adjusted for
the impact of the Mobius acquisition, revenue increased from $10.2 million for
the three months ended September 30, 1998 to $12.3 million for the three months
ended September 30, 1999. This 21% growth in pro forma revenue is due primarily
to an increase in portfolios managed from 546,000 at September 30, 1998 to
767,000 at September 30, 1999. A major portion of portfolio growth over the past
year has occurred in retail versus institutional accounts that carry a lower
unit price.
Operating income in our Investment Services segment has increased from
$1.8 million for the three months ended September 30, 1998 to $2.4 million for
the three months ended September 30, 1999. On a pro forma basis, adjusted for
the acquisition of Mobius Group, operating income increased from $2.0 million
for the three months ended September 30, 1998 to $2.4 million for the three
months ended September 30, 1999. The increase was due to the marginal profit
from increases in portfolios managed and synergies realized in the integration
of Mobius Group into the operations of the business segment.
The Corporate segment represents charges for the legal, human
resources, accounting and finance and various other of our unallocated overhead
charges. Our Corporate segment incurred an operating loss of $5.8 million for
the three months ended September 30, 1998 and an operating loss of $5.5 million
for the three months
11
<PAGE> 12
ended September 30, 1999. The unallocated portion of our expenses have remained
fairly consistent in light of total revenue growth due to our ability to
leverage these resources through a period of revenue growth.
The net gain on dispositions of assets of $3.9 million in the three
months ended September 30, 1998 is the net result of the gain on the sale of the
mortgage business of approximately $6.3 million offset by the anticipated loss
on the sale of the imaging business of approximately $2.4 million.
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.
Our goal 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 all of our business segments; Electronic Commerce,
Software and Investment Services.
State of Readiness. We have moved all of our Electronic Commerce
segment processing to Year 2000-ready environments and are making satisfactory
progress to ensure that all of our 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 included the migration of
customers from our Chicago and Columbus systems to the Year 2000-ready Genesis
Platform, which was followed by applicable testing on that system which was
completed by September 30, 1999. In anticipation of limited customer migration
from our Austin system to Genesis before January 1, 2000, we have made the
Austin system Year 2000 ready and testing with financial institutions is
substantially complete. Our Electronic Commerce processing systems are subject
to regulation by the Office of the Comptroller of the Currency and were required
to meet their Year 2000 readiness requirements by June 30, 1999 and we are
substantially complete in these requirements. 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. We believe that we are over 99% compliant on all business critical
applications at this time and all remaining remediation efforts are on target to
be completed by November 30, 1999.
We maintain and periodically update an inventory of all information
technology and non-information technology systems. We have solicited most of our
third party vendors to determine the status of their Year 2000 readiness and
those functions that are likely to have a material effect on us have been
identified and assessed. We have received responses from all of our critical
vendors and over half of our other vendors. Validation is based on third party
representations and/or internal testing. To date, in excess of 99% of our
mission critical applications are deemed to be Year 2000-ready. Based on a
review of third party representations, we are 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 our business, the results of our operations or our financial
condition. We have not performed our own tests on many of these third party
systems and no assurances can be given that these systems are Year 2000 ready.
Costs to Address Our 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 related
costs in the development of the Genesis Platform are therefore not included in
our costs below. The following chart reflects our Year 2000 specific costs. The
fiscal year 1999 and prior costs were attributed to remediation of legacy
systems and applications. The cost to complete includes minor remediation and
remaining testing and verification, but is primarily budgeted for additional
support we are providing our financial institution customers in their testing
requirements and our decision to perform a complete revalidation of our own
testing. We believe that associated costs are adequately budgeted and provided
for in our operating plans.
12
<PAGE> 13
<TABLE>
<CAPTION>
YTD
FISCAL FISCAL FISCAL FISCAL COST TO
BUSINESS SEGMENT 1997 1998 1999 2000 COMPLETE TOTAL
- --------------------------- -------- --------- --------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Electronic Commerce........ $ 0 $ 100 $ 1,360 $ 374 $ 426 $ 2,260
Software................... - 500 525 25 75 1,125
Investment Services........ - 375 937 27 262 1,601
Corporate.................. - - 270 29 50 349
---- ------ ------- ------- ------ --------
Total................... $ 0 $ 975 $ 3,092 $ 455 $ 813 $ 5,335
==== ====== ======= ======= ====== ========
</TABLE>
Risks of Our Year 2000 Issues. In order to accurately process
transactions, we must rely on technology supported by our 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 us, our customers, or our suppliers to
adequately address the Year 2000 issues in a timely manner could impede our
ability to process transactions and can have a direct impact on our ability to
generate revenue per our agreements with financial institution, portfolio
management, merchant and direct customers. This in turn could have a material
impact on the conduct of our business, the results of our operations and our
financial condition. Accordingly, we plan to address all Year 2000 issues before
problems materialize. We believe that associated costs are adequately budgeted
to handle any remaining issues. Should our efforts or the efforts of our
customers and suppliers fail to adequately address relevant Year 2000 issues,
the most likely worst case scenario would be a total loss of revenue.
Our Contingency Plans. We are 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 communications plans for incoming customer payment and
portfolio transactions, paper-based payment transaction processing in the event
of failure of electronic payment systems and alternative power supply in the
event of prolonged power outages. We will continue to incorporate additional
Year 2000 considerations into our business contingency plans as necessary.
We cannot guarantee that our 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
As of September 30, 1999, we have cash, cash equivalents and short term
investment on hand totaling $15.4 million and an additional $1.9 million of long
term investments available. Our balance sheet reflects working capital of $17.6
million and our current ratio stands at 1.3.
In October 1999, a strategic partner directly purchased 250,000 new
shares of our stock, which generated additional cash of $9.8 million. Although
we expect to generate a net loss for the fiscal year ended June 30, 2000, we
expect to generate positive cash flow from operations and expect EBITDA to be
breakeven or slightly positive for the year. We are currently negotiating a
significant lease line of credit designed to finance future capital needs in
support of expected growth. We have extended the term of our existing $20
million working capital line of credit through December 30, 1999 as we negotiate
an expansion of this credit facility. We believe that existing cash, cash
equivalents, short-term investments and available financing alternatives will be
sufficient to meet our presently anticipated requirements for the foreseeable
future. Should unforeseen circumstances arise, we have various other
alternatives available to us, including, but not limited to, further
capitalization of the Company.
INFLATION
We believe the effects of inflation have not had a significant impact
on our results of operations.
13
<PAGE> 14
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our Form 10-Q include certain forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding our and management's intent, belief and
expectations, such as statements concerning our future profitability, our
operating and growth strategy, and Year 2000 issues. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, the factors set forth under the caption "Business --
Business Risks" in the Annual Report on Form 10-K for the year ended June 30,
1999 and other factors detailed from time to time in our filings with the
Securities and Exchange Commission. One or more of these factors have affected,
and in the future could affect, our businesses and financial results in the
future and could cause actual results to differ materially from plans and
projections. Although we believe 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 representation by us or any other person that our objectives and
plans will be achieved. All forward-looking statements made in this Form 10-Q
are based on information presently available to our management. We assume no
obligation to update any forward-looking statements.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) On August 5, 1999, we granted Peter F. Sinisgalli, our President
and Chief Operating Officer, 12,000 restricted shares of our common stock. The
grant was made pursuant to a Restricted Stock Agreement entered into between Mr.
Sinisgalli and us. Additionally, on August 5, 1999, we granted John Frech,
CheckFree Corporation's Senior Vice President, Computer Operations, 1,000
restricted shares of our common stock. The grant was made pursuant to a
Restricted Stock Agreement entered into between Mr. Frech and us. Both of the
grants were made under the exemption from registration provided by Section 4(1)
of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
27* Financial Data Schedule.
- ----------
* Filed with this report.
(b) REPORTS ON FORM 8-K.
We did not file any Current Reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 30, 1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: November 12, 1999 By: /s/ Allen L. Shulman
--------------------------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer, and General
Counsel* (Principal Financial Officer)
Date: November 12, 1999 By: /s/ Gary A. Luoma, Jr.
--------------------------------------------
Gary A. Luoma, Jr., Vice President, Chief
Accounting Officer, and Assistant
Secretary(Principal Accounting Officer)
* 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.
16
<PAGE> 17
CHECKFREE HOLDINGS
CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
EXHIBIT INDEX
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27* Financial Data Schedule.
- ----------
* Filed with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,439
<SECURITIES> 8,956
<RECEIVABLES> 56,685
<ALLOWANCES> (4,927)
<INVENTORY> 0
<CURRENT-ASSETS> 80,774
<PP&E> 127,740
<DEPRECIATION> (54,340)
<TOTAL-ASSETS> 256,782
<CURRENT-LIABILITIES> 63,217
<BONDS> 0
0
0
<COMMON> 520
<OTHER-SE> 185,635
<TOTAL-LIABILITY-AND-EQUITY> 256,782
<SALES> 0
<TOTAL-REVENUES> 69,020
<CGS> 0
<TOTAL-COSTS> 75,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (6,120)
<INCOME-TAX> (2,184)
<INCOME-CONTINUING> (3,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,936)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
