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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended June 30, 1999
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)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
Preferred Stock Purchase Rights
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of our Common Stock held by our
non-affiliates was approximately $1,483,923,000 on September 20, 1999.
There were 51,954,360 shares of our Common Stock outstanding on
September 20, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Annual Report to Stockholders for the fiscal year ended
June 30, 1999 are incorporated by reference in Part II.
Portions of our Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
Signatures 33
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PART I
ITEM 1. BUSINESS.
All references to "we," "us," "our," "CheckFree" or the "Company" in
this Annual Report on Form 10-K mean CheckFree Holdings Corporation and all
entities owned or controlled by CheckFree Holdings Corporation, except where it
is made clear that the term only means the parent company.
OVERVIEW
We are the leading provider of electronic billing and payment services.
Our Electronic Commerce business provides services that allow consumers 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 services for nearly 3 million consumers through
over 350 financial institutions, Internet financial sites like Quicken.com and
personal financial management software like Quicken, Microsoft Money and
Managing Your Money. As part of our strategy to broaden availability of our
electronic billing and payment services on the Internet, we recently entered
into a distribution contract with Yahoo! Additionally, we recently extended a
processing agreement with Bank One Corporation to provide services, including
electronic billing and payment, to WingspanBank.com. We are currently in
discussions with other Internet portals, including Excite@Home to whom we expect
to begin providing our billing and payment services by December 31, 1999. We
plan to undertake significant marketing initiatives with Yahoo!,
WingspanBank.com and other Internet portals to dramatically accelerate the
adoption of our services by consumers. We have developed relationships with over
1,100 merchants nationwide that enable us to remit more than 50% of all of our
bill payments electronically. During the three-month period ended June 30, 1999,
we processed an average of more than 12 million transactions per month and, for
the year 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. We have signed contracts for
E-Bill services with 64 of the country's largest billers, who together deliver
more than 500 million bills each month. During the month of June 1999, we
presented more than 13,000 electronic bills through more than 25 financial
institutions and Internet portals, which is a more than 30% increase since March
1999 and more than double the number of bills presented through E-Bill services
in February 1999.
We also are a leading provider of institutional portfolio management
and information services and financial application 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 business 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 Software and Investment Services each
accounted for 16% of our revenues.
ELECTRONIC COMMERCE INDUSTRY BACKGROUND
The vast majority of today's financial transactions are completed using
traditional paper-based methods. Many traditional financial transactions,
however, can now be completed electronically due to the emergence of new
communications, computing and security technologies. Many financial institutions
and businesses have invested in these technologies and are creating the
infrastructure for recording, reporting and executing electronic transactions.
We believe the broad impact of the Internet will increase the use of electronic
methods to execute financial transactions.
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Persistence of Traditional Financial Transaction Processes
Many traditional methods of completing financial transactions still
persist, including:
- Paper Checks. It is estimated that 67 billion checks were
written in the U.S. in 1997. The use of checks imposes
significant costs on financial institutions, businesses and
their customers. These costs include the writing, mailing,
recording and manual processing of checks.
- Paper Billing. It is estimated that over 18 billion paper
bills are produced each year, with the cost of submitting a
paper bill, including printing, postage and billing inserts,
as high as $3.00 per bill.
- Conventional Banking. Many financial transactions are
conducted in person at banks. Banks incur substantial expenses
in providing personnel and physical locations, while bank
customers incur transportation costs and personal
inconvenience when traveling to a bank facility. Over 90% of
the 80 million banking households in the U.S. are still
conducting most of their financial transactions using
conventional banking methods.
- Business to Business Payments. While consumers bear costs and
inconvenience receiving and paying paper bills, businesses
experience an even higher level of cost and inefficiency when
receiving and paying paper bills. For businesses, issues like
discounts for prompt payment, returns, allowances, disputed
charges and other adjustments, as well as reconciliation to
the business' own records, increase the costs of payment.
The Internet's Role in Driving Electronic Commerce
We believe the broad impact of the Internet is driving financial
institutions, businesses and consumers to adopt practices of electronic billing
and payment, banking and business to business payments. We expect that the
growth in these electronic commerce activities will increase the need for
services that support secure, reliable and cost-effective financial transactions
between and among these market participants. We believe the combination of the
following trends is driving adoption of electronic commerce:
- Expanding PC Ownership. Declining prices for PCs and rapid
growth in the number of computer-literate consumers are
driving increased penetration of PCs in U.S. homes. The Yankee
Group estimates that by 1998 the percentage of U.S. consumer
households owning a PC grew to 44% and expects this number to
increase to 54% by the year 2001.
- Increasing Internet Accessibility. Reduced communications
costs, improved web browsers and faster connection speeds have
made the Internet increasingly accessible to consumers and to
businesses offering products and services on-line.
International Data Corporation, or IDC, estimates that there
were 52 million Internet users in the U.S. at the end of 1998
and that this figure will grow to 136 million by the end of
2002.
- Increasing Acceptance of Electronic Commerce. Consumers have
grown increasingly comfortable with the security of electronic
commerce and are willing to conduct large transactions
on-line. IDC estimates that the total value of goods and
services purchased over the Internet in the U.S. will increase
from approximately $26 billion in 1998 to over $269 billion in
2002.
- Emergence of New Industry Participants. New businesses have
emerged which use the broad adoption of the Internet to
compete with traditional businesses. Traditional financial
institutions now compete with Internet-based banks, brokerages
and other financial services companies. These companies do not
offer consumers the possibility of traditional, manual
financial transactions and are driving further adoption of
electronic commerce.
THE ELECTRONIC SOLUTION
We believe that consumers will move their financial transactions from
traditional paper-based to electronic transactions if they have an
easy-to-access, easy-to-use, compelling, secure and cost-effective solution for
receiving and paying their bills electronically. We believe that these solutions
should allow consumers at their access point of choice to:
- Receive electronic bills through the Internet;
- Pay any bill -- electronic or paper -- to anyone; and
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- Perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
We also believe that these functionalities must be delivered on a
platform that:
- Is fully supported by end-to-end customer care;
- Is available 24 hours a day, 7 days a week; and
- Provides the highest level of security, availability and
privacy.
Over the past fifteen years, we have developed market leading expertise
and technological capability to provide electronic commerce solutions with these
functionalities.
THE CHECKFREE ADVANTAGE
Our experience as a leading provider of electronic billing and payment
and banking services has facilitated the building of a state of the art
infrastructure. We have leveraged this infrastructure by developing a full suite
of electronic commerce services, all of which we offer in an integrated fashion
through multiple distribution channels.
Infrastructure
Our infrastructure allows consumers to receive and pay both
conventional and electronically presented bills and handle traditional banking
transactions electronically. The key components of our infrastructure are:
- Connectivity with Merchants. We have established electronic
connectivity to over 1,100 merchants which allows us to remit
over 50% of all of our bill payments electronically.
Electronic remittance may be accomplished at a lower cost than
remittances using the traditional paper-based method. In
addition, electronic remittance significantly reduces payment
exceptions and related costs associated with customer care.
- Scalable Genesis Platform. Our Genesis Platform, completed in
1998, is a fully integrated data processing system that was
designed by our in-house engineers. The Genesis Platform was
designed to be scaled to handle more than 30 million
consumers. We have made significant investments in processes
and technologies around our Genesis Platform to ensure that
transactions are executed with the highest level of security,
reliability and efficiency.
- Connectivity to Billers. We believe that our ability to
provide consumers with access to electronic bills will
substantially spur adoption of the electronic solution. By
targeting the largest billers in key industries and in
selected population centers, we believe we can quickly provide
a significant number of bills to most consumers at their
access point of choice. We have contracts with 64 billers,
which represent the opportunity to deliver over 500 million
bills per month, representing over 70% of the telecom bills,
24% of the utility bills, 22% of the mortgage bills and 28% of
the credit card bills in the U.S. Our goal is to distribute
bills from over 90 billers by the end of fiscal 2000. To
encourage billers to utilize our services, we anticipate
funding a portion of some billers' set-up costs.
- Experienced Customer Care Staff. We have over 600 trained,
experienced customer care and merchant services staff who
offer seamless end-to-end customer care. We believe that
customer care that provides answers to all the questions that
consumers may have about their transactions is a critical
component of providing a compelling, easy-to-use solution that
consumers will ultimately adopt.
Distribution
We believe that consumers are most attracted to an electronic solution
that enables them to receive and pay all of their bills at a single site. For
many consumers, the site they choose will be their financial institution's web
site, while others will prefer Internet portals or sites operated by individual
merchants. Through relationships with over 350 banks, brokerage houses, credit
unions, Internet portals and financial services sites, we are able to distribute
our services to whichever access and aggregation site the consumer prefers.
Significant among these relationships are our agreements with:
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- 23 of the 25 largest U.S. banks;
- 8 of the top 10 U.S. brokerage firms;
- Quicken.com;
- Yahoo!; and
- WingspanBank.com.
OUR BUSINESS STRATEGY
Our business strategy is to provide an expanding range of convenient,
secure and cost-effective electronic commerce services and related products to
financial institutions, businesses and their customers. We have designed our
services and products to take advantage of opportunities we perceive in light of
current trends and our fundamental strategy. The key elements of our business
strategy are to:
- Drive increased adoption of electronic commerce services by
consumers. We believe that consumers will move their financial
transactions from traditional paper-based methods to
electronic transactions if they have an easy-to-access,
easy-to-use, secure, compelling and cost-effective method for
receiving and paying their bills electronically. We intend to
use the broad adoption of the Internet by consumers to
encourage the use of our web-based electronic commerce
services by our financial institution customers. To further
drive demand, we are also providing our services through
Internet portals. This strategy should provide consumers with
ready access to easy-to-use, cost-effective applications for
receiving and paying their bills electronically. Part of our
strategy to drive consumer adoption is partnering with
Internet portals to offer our services to consumers on a
free-trial basis. Initially, this strategy will result in
foregone revenues, but we anticipate converting a majority of
these new customers to fee-based services at the end of the
trial period. As consumers continue to adopt electronic
commerce services, financial institutions and billers will see
greater efficiencies from providing electronic billing and
payment services to their customers. Additionally, we believe
that financial institutions and Internet portals that offer
electronic banking will experience increased customer
retention, have a superior marketing channel, and be able to
offer enhanced customer service.
- Continue to distribute electronic commerce services through
multiple channels. We maintain alliances with market-leading
companies to achieve deeper market penetration and have begun
an initiative to offer our electronic commerce services
through Internet portals. To better reach smaller financial
institutions, we have entered into distribution agreements
with some independent firms that we believe can more
efficiently address the needs of this industry segment.
Additionally, by making services available to users of PFM
software, like Quicken, Microsoft Money and Managing Your
Money and of business management software, like QuickBooks, we
expand public access to, and awareness of, our services.
- Focus on customer care and technical support. We believe that
providing superior quality and accessible and reliable
customer care is essential to establishing and maintaining
successful relationships with our customers. We support and
service customers through numerous activities, including
technical and non-technical support, through help desk, e-mail
and facsimile, as well as through service implementation and
training. We are enhancing our support of our services through
advanced Internet-based communications technologies that
enable us to efficiently respond to billing and payment
inquiries made by financial institutions, billers and their
customers. In anticipation of greater adoption of our
electronic commerce services, we are increasing the number of
our customer care personnel and focusing on our efficiency in
handling customer care inquiries. Additionally, we have
finalized plans to establish a third operational center to
house customer care and check printing and distribution
functions.
- Continue to improve operational efficiency and effectiveness.
We believe that as our business grows and the number of
transactions we process increases, we will be able to take
advantage of operating efficiencies associated with increased
volumes, thereby reducing our unit costs. Additionally, we
expect to derive further operational efficiency and
effectiveness by increasing our electronic links with billers,
enabling a larger percentage of our consumer transactions to
be processed electronically.
- Drive new forms of electronic commerce services. Our
electronic commerce services are currently applied to banking,
billing and payment and brokerage transactions. We believe
that new applications will be developed as a result of the
growth in electronic commerce generally, and
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Internet-based commerce specifically. We intend to leverage
our infrastructure and distribution to address the
requirements of consumers and businesses in these new
applications. For example, we plan to leverage our core
payment and processing network to accomplish person-to-person
and small business payments.
PRODUCTS AND SERVICES
Electronic Commerce
Our electronic commerce services are primarily targeted to consumers
through financial institutions and Internet portals. We believe that our
services offer significant benefits to financial institutions and Internet
portals, including an enhanced electronic relationship with their consumers
under which they can market other products and services and, for financial
institutions, a lower cost of providing traditional banking and bill payment
services. We are continually developing new electronic commerce services and
enhancing our existing services for each of our target markets.
We have arrangements with more than 350 financial institutions through
which electronic payment services are provided to their customers. Some of the
financial institutions we serve include:
- Bank of America; - KeyCorp;
- Bank One; - Merrill Lynch & Co.;
- Charles Schwab & Co.; - NationsBank;
- Chase Manhattan Bank; - Wells Fargo;
- First Union; - U.S. Bancorp;
Bill Payment and Banking. Our bill payment services enable financial
institution customers and direct consumer subscribers to pay bills
electronically using a variety of devices such as PCs and touch-tone telephones.
Bills paid by consumers using our bill payment services typically include credit
card, monthly mortgage and utility bills, but a cornerstone of our services is
that we can facilitate electronic payment by consumers to anyone, regardless of
whether payment is ultimately made through an electronic or traditional paper
method. Consumers can use our services to electronically make any payment from
any checking account at any financial institution in the U.S. Recurring bills
such as mortgages can be paid automatically and scheduled in advance, as
specified by the consumer. As of June 30, 1999, we had nearly 3 million
consumers using our bill payment and home banking services.
We support home electronic banking services for financial institutions
and their customers. Among these are balance inquiries, fund transfers, customer
service, customer billing and marketing. Our service facilitates on-line
reconciliation to PC and web-based account registers, matching cleared items
with previously entered transactions.
Revenues are generated through contracts with individual financial
institutions. We typically negotiate with the financial institution an
implementation fee, a base monthly fee per customer account on the service
provided, and in some cases, a variable per transaction fee which may decrease
based on the volume of transactions. Contracts typically have three to five year
terms and generally provide for minimum fees if transaction volumes are not met.
We utilize direct sales and distribution alliances to market to financial
institutions and have the ability to customize services for each institution.
Billing and Payment. Our electronic billing and payment service permits
billers to deliver full-color electronic bills to their customers, together with
detailed information and electronic promotional inserts. We also offer the
opportunity to market interactively, and to use one-to-one marketing techniques.
The recipients can use the service to electronically make the payment. We are
marketing the service to be incorporated into our electronic banking and bill
payment services. We have entered into a variety of arrangements with financial
institutions, Internet portals and billers to provide such services and, in some
cases, will share revenue derived from billers with the financial institutions
and the Internet portals. In the near term, we will offer free trial periods for
our electronic billing and payment services to accelerate the rate of adoption
of our services. We believe that billers could eventually achieve substantial
savings by utilizing our billing and payment service, but we believe that an
even stronger incentive for billers to present bills electronically is the
opportunity our system offers for more effective marketing to customers.
Business Payments. We facilitate electronic payments for businesses
through our offerings of business bill payment and banking and electronic
accounts receivable processing services. As we do for consumers, we enable
businesses to make payments to anyone. We employ a direct sales force to market
the service through banks and others. Our electronic accounts receivable
collections for businesses are provided to health and fitness and various other
industries, enabling these businesses to collect monthly fees through electronic
funds transfer or credit cards. Services are typically provided under contracts
for three years with automatic renewals. For providing collection services,
businesses pay us implementation fees, transaction fees and credit card discount
fees.
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Investment Services
We offer 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, who manage investments of institutions and high net
worth individuals.
Our full range of portfolio management services provides our clients
with portfolio management tools, tax lot reporting, trade modeling, performance
measurement and reconciliation. Our information services and software allow
traditional money managers and consultants to allocate client assets, select and
benchmark performance of money managers and report on manager performance. Each
of these features allows our clients to avoid spending time on these functions
and focus on their key business.
Revenues in our portfolio management services are generated through
multiple year agreements which provide for monthly revenue on a volume basis.
Revenue from our information services and software is typically generated
through annual agreements.
Our integrated outsourced solution utilizes a Unix platform. The system
is highly scalable, making us the system of choice for firms managing a large
number of portfolios.
Software
We are a leading provider of electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support software products for ACH processing,
reconciliation and regulatory compliance. In addition, we offer software
consulting and training services.
Our financial application software revenues are derived primarily from
the sale of software licenses and software maintenance fees. Our software is
sold under perpetual licenses, and maintenance fees are received through
renewable agreements.
In April 1998, we announced our intention to divest ourselves of many
of our software products and businesses. By September 1998, we sold our item
processing, wire transfer and cash management, leasing, mortgage, and imaging
software products and businesses.
Our retained software products provide systems that range from back
office operations to front-end interface with the clients of our customers.
Applications include ACH origination and processing reconciliation, regulatory
compliance and safe deposit box accounting. While we have no pending agreements
to dispose of our remaining software businesses, we do receive offers for them
from time to time.
ACH. The ACH network was developed in the 1970s to permit the
electronic transfer of funds, curtailing the growth in the number of paper
checks in circulation. The ACH network acts as the clearing facility for routing
electronic funds transfer entries between financial institutions. All ACH
transfers are handled in a standard format established through the National
Automated Clearing House Association. More than 15,000 financial institutions
participate in the ACH system. There are 31 Automated Clearinghouses, which
geographically coincide with the twelve Federal Reserve Banks, their branches
and processing centers. Our electronic funds transfer products are interrelated
and may be used by either businesses or financial institutions depending on the
services they offer their customers and employees.
We developed the Paperless Entry Processing System Plus, or PEP+, the
most widely used, comprehensive ACH processing system in the United States. PEP+
is an on-line, real-time system providing an operational interface for
originating and receiving electronic payments through the ACH.
Reconciliation. Our reconciliation products provide U.S. banks,
international banks and corporate treasury operations with automated check and
non-check reconciliations in high volume, multi-location environments. These
systems are often tailored so that banks and multi-bank holding companies may
deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. Services provided by our reconciliation products
include:
- Automated deposit verification;
- Consolidated bank account reconciliations and cash mobilization;
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- Immediate and accurate funds availability data; and
- Improved cash control.
In 1995, we introduced RECON-PLUS for Windows, a client/server based
reconciliation system. RECON-PLUS for Windows is most frequently used for
internal reconciliation by large businesses, financial service firms, and
utilities, including the reconciliation of debit and credit card transactions,
checks, ATM transactions, ACH transfers and securities transactions.
Our Account Reconciliation Package, or ARP, is one of the most widely
used account reconciliation systems in the U.S. banking industry. The
ARP/Service Management System, or ARP/SMS, developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that enables banks to immediately process their customer transactions to
produce accurate, timely reconciliations while streamlining back-office
processes. ARP/SMS also groups accounts across banks within bank holding
companies and allows banks to streamline their operations by reconciling their
intra-bank transactions.
Other Software Products. We also offer software products and services
dealing with safe box accounting and compliance with government regulations.
Licenses. We generally grant non-exclusive, non-transferable perpetual
licenses to use our application software at a single site. Our standard license
agreements contain provisions designed to prevent disclosure and unauthorized
use of our software. License fees vary according to a number of factors,
including the types and levels of services we provide. Multiple site licenses
are available for an additional fee. In our license agreements, we generally
warrant that our products will function in accordance with the specifications
set forth in our product documentation. A significant portion of the license fee
payable under our standard license agreement is due upon the delivery of the
product documentation and software to the customer, with the balance of the
license fee due upon installation. The standard license fee for most products
covers the installation of our software and maintenance for the first three to
twelve months.
Maintenance and Support. Maintenance includes enhancements to our
software. Customers who obtain maintenance generally retain maintenance service
from year to year. To complement customer support, we frequently participate in
user groups with our customers. These groups exchange ideas and techniques for
using our products and provide a forum for customers to make suggestions for
product acquisition, development and enhancement.
COMPETITION
Electronic Commerce
Portions of the electronic commerce market are becoming increasingly
competitive. We face significant competition in all of our customer markets. A
number of banks have developed, and others may in the future develop, home
banking services in-house. For example, Chase Manhattan Corporation, First Union
Corporation and Wells Fargo & Co. recently announced the formation of a new
venture called Spectrum that will allow individuals and businesses to receive
and pay bills electronically. A number of relatively small companies, such as
Travelers Express, recently acquired by Marshall & Ilsley Bank Inc., compete
with us in electronic bill payment. Additionally, TransPoint LLC, a joint
venture among Microsoft Corporation, First Data Corporation and Citibank N.A.,
competes aggressively with us in the area of electronic billing and payment.
TransPoint has announced its own agreements with financial institutions to offer
on-line home banking and electronic billing and payment to consumers. We also
compete for business bill payment customers with ACI and Deluxe Data, which
provide ACH processing. We believe that our competitors, however, are a long way
from being able to offer electronic commerce services comparable to the services
we currently offer to our customers through multiple distribution channels.
Because the electronic commerce industry is expected to grow
substantially in the coming years, we anticipate continued strong competition,
but we believe that the increased attention and credibility such competition
will bring to the industry may broaden the market and increase the percentage of
financial transactions which are effected by electronic means.
Investment Services
Competition for portfolio services includes two main segments. We
compete with providers of portfolio accounting software, including Advent
Software, and PORTIA (a division of Thomson Financial). We also compete with
service bureau providers such as Shaw Data (a SunGard Company) and FMC Service
Bureau.
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Software
The computer application software industry is highly competitive. In
the financial applications software market, we compete directly or indirectly
with a number of firms, including large diversified computer software service
companies and independent suppliers of software products. We believe there is at
least one direct competitor for most of our software products, but no competitor
competes with us in all of our software product areas.
Our product lines also have numerous competitors. The RECON-PLUS
product competes with Chesapeake, Driscoll and Geac.
We believe that the major factors affecting customer decisions in our
market, in addition to price, are product availability, flexibility, the
comprehensiveness of offered products, and the availability and quality of
product maintenance, customer support and training. Our ability to compete
successfully also requires that we continue to develop and maintain software
products and respond to regulatory change and technological advances. We believe
that we currently compete favorably in the marketplace with respect to these
criteria. See "Business -- Business Risks (Competitive pressures we face may
have a material adverse effect on us)."
SALES, MARKETING AND DISTRIBUTION
Our sales, marketing and distribution efforts are designed to maximize
access to potential customers. We market and support our services both directly
and indirectly through a direct sales and technical sales support force of over
100 employees and, to achieve deeper market penetration, through select
distribution alliances with companies which are involved in our target customer
markets. In order to foster a better understanding of the needs of our larger
bank customers, and to help us respond to identified needs, we employ a number
of account managers assigned to specific banks. We solicit billers for our
electronic billing and payment services through a regionally assigned sales
force.
In the electronic commerce segment, we offer our services and related
products to the nation's largest financial institutions directly through our
sales force, and market to smaller institutions through strategic alliances with
companies such as EDS, Fiserv, Alltel and Equifax. We currently offer
substantially all of our services and related products only to the domestic
marketplace.
Recently, we announced our initiative to offer our electronic commerce
services through Internet portals. We believe that these Internet portals will
enhance and speed up the rate of adoption of electronic commerce services by
consumers. Part of this strategy contemplates partnering with Internet portals
to offer our services to consumers on a free-trial basis. Initially, this
strategy will result in foregone revenue, but we anticipate converting a
majority of these new customers to fee-based services at the end of the trial
period. Additionally, the distribution of electronic home banking and electronic
consumer and business billing and payment services is widened though inclusion
or access through front-end personal financial management software, such as
Quicken, Microsoft Money and Managing Your Money.
We market investment services through our direct sales force. We
generate new customers through direct solicitation, user groups and
advertisements. We also participate in trade shows and sponsor industry seminars
for distribution alliances.
We market financial application software products through our direct
sales force and through indirect sales through Alltel banking services.
Salespersons have specific product responsibility and receive support from
technical personnel as needed. We generate new customers through direct
solicitations, user groups, advertisements, direct mail campaigns and strategic
alliances. We also participate in trade shows and sponsor industry technology
seminars for prospective customers. Existing customers are often candidates for
sales of additional products or for enhancements to products they have already
purchased.
An element of our strategy is the creation and maintenance of
distribution alliances that maximize access to potential customers for our
electronic commerce services and related products. We believe that these
partnerships enable us to offer services and related products to a larger
customer base than can be reached through stand-alone marketing efforts. We seek
distribution alliance partners who have maximum penetration and leading
reputations for quality with our target customers. To date, we have entered into
or are negotiating distribution alliances with several companies, including
AT&T, Alltel, EDS, Fiserv, Five Paces, and Home Financial Network. We also have
arrangements with MicroBank for RECON-PLUS for Windows. On October 29, 1997, we
entered into a 10-year processing partnership with Integrion Financial Network,
L.L.C. to provide financial institutions with a fully integrated, end-to-end,
cost effective electronic billing and payment processing service employing
Integrion's Gold Message Standard for Electronic Commerce, its Interactive
Financial Services platform and our processing infrastructure. For more detailed
information concerning the Integrion partnership, please refer to our Form 8-K
filed on November 12, 1997.
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One of the ramifications of this strategy is that we do not, for the
most part, have a direct relationship with the end-users of our products. See
"Business -- Business Risks (We rely on third parties to distribute our
electronic commerce services, which may not result in widespread adoption)."
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of our strategy in each business segment. To
meet customers' needs most efficiently, our customer care staff is organized
into vertical teams that support each of our business segments. These teams,
however, share common resources, training and orientation to ensure cost
efficiency and consistency of quality standards and measures. From an
accessibility standpoint, all customer care teams provide service by phone,
e-mail and facsimile. Through advanced communications technology, we have a
virtual call center enabling incoming calls to be transparently routed to
various physical support sites as volume demands dictate. An important driver of
our profit margins is the percentage of transactions we complete electronically.
Experience has shown that the demand on customer care resources reduces
substantially as the percentage of electronic remittances grows. We have long
been a leader in electronic remittance, and our merchant systems group
continually establishes and maintains electronic links directly to the internal
systems of payees.
The level and types of services we provide vary by customer market. The
customer care group, consisting of more than 600 employees, supports payment
inquiry, customer service and technical support and interfaces with the merchant
systems group to improve posting efficiencies. Representatives in our business
customer care group are individually assigned to business customers in order to
provide high level customer service and technical support. Our consumer care
group provides various levels of support that depend upon the customer's
requirements. This includes providing direct customer care on a private label
basis as well as research and support.
In order to maintain the ability to provide quality customer service as
our subscriber base increases, we have finalized plans to establish a third
operational center to house customer care, check printing and distribution
functions. This center will be based in Phoenix, Arizona, and, when fully
staffed, will house up to 800 associates focused on customer care services.
To maintain our customer care standards, we employ extensive internal
monitoring systems and conduct ongoing customer surveys. The feedback from these
sources is used to identify areas of strength and opportunities for improvement
in customer care and to aid in adjusting resources to a level commensurate with
efficient response.
REMITTANCES
Payment Systems. Across our various electronic commerce service
offerings, we utilize the Federal Reserve's ACH for electronic funds transfers,
and the conventional paper check clearing systems for settlement of payments by
check or draft. Like other users of these payment clearance systems, we access
these systems through contractual arrangements with processing banks. For access
to conventional paper check clearing systems, we do not need a special
contractual relationship, except for contractual relationships with the
processing bank and its customers. Such users are subject to applicable federal
and state laws and regulations, Federal Reserve Bank operating letters, and the
National Automated Clearing House Association Operating Rules. There are risks
typically faced by companies utilizing each of these payment clearance systems,
and we have our own set of operating procedures and proprietary risk management
systems and practices to mitigate credit-related risks. See "Business --
Business Risks (The transactions we process expose us to credit risks)" and
"Business -- Business Risks (Our business could become subject to increased
government regulation, which could make our business more expensive to
operate)."
ACH. The ACH is used by banks, corporations and governmental entities
for electronic settlement of transactions, direct deposits of payroll and
government benefits and payment of bills like mortgages, utility payments and
loans. We use the ACH to execute some of our customers' payment instructions.
Like other users of the ACH, we bear credit risk resulting from returned
transactions caused by insufficient funds, stop payment orders, closed accounts,
frozen accounts, unauthorized use, disputes, theft or fraud. See "Business --
Business Risks (The transactions we process expose us to credit risks)" and
"Business -- Business Risks (Our business could become subject to increased
government regulation, which could make our business more expensive to
operate)."
Paper Drafts. We use conventional check clearance methods for paper
drafts to execute some customers' payment instructions. We bear no credit risk
with paper drafts written on a customer's checking account returned for
insufficient funds, stop payment orders, closed accounts or frozen accounts.
Nonetheless, we may bear other risks for theft or fraud associated with paper
drafts due to unauthorized use of our services. When a customer instructs us to
pay a bill, we have the ability to process the payment either by electronic
funds transfer or by paper draft, drawn on the customer's checking account, on
which the customer's pre-authorized signature is laser imprinted. We manage the
risk we assume by adjusting the mix of electronic and paper draft transactions
in individual cases and overall. Regardless
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of whether we use paper drafts or electronic funds transfers, we retain all
risks associated with transmission errors when we are unable to have erroneously
transmitted funds returned by an unintended recipient.
Other Clearance Systems. While we presently utilize the two principal
payment clearance systems, we intend to use other clearance systems such as ATM
networks to provide balance inquiry and fund transfers functions, and other
clearance systems that may develop in the future.
Risk Mitigation. Our patented bill payment processing system (U.S.
Letters Patent No. 5,383,113, issued on January 17, 1995) determines the
preferred method of payment to balance processing costs, operational
efficiencies and risk of loss. We manage our risks associated with the use of
the various payment clearance systems through risk management systems, internal
controls and system security. We also maintain a reserve for such risks, which
reserve was $0.6 million at June 30, 1999, and we have not incurred losses in
excess of 0.76% of our revenues in any of the past five years. As further
protection against losses due to transmission errors, we maintain errors and
omissions insurance. See "Business -- Business Risks (The transactions we
process expose us to credit risks)" and "Business --Business Risks (We may be
unable to protect our proprietary technology, permitting competitors to
duplicate our products and services)."
TECHNOLOGY
Our historical approach to technology has been to utilize a combination
of hardware, networks, proprietary software and databases to solve our customer
needs and to meet the varying requirements of the electronic commerce market.
Electronic Commerce. Our core technology capabilities were developed to
handle settlement services, merchant database services and on-line inquiry
services on a traditional mainframe system with direct bi-synchronous
communications to businesses.
We have implemented a logical, nationwide client-server system.
Consumer, business and financial institution customers all act as clients
communicating across dial-up telephone lines, private leased lines, a private
X.25 network, a frame relay network or the Internet to our computing complex in
Norcross, Georgia. Within this complex, there is a wide variety of application
servers which capture transactions and route them to our back-end banking,
billing and payment applications for processing. The back-end applications are
run on either IBM mainframes, Tandems or Unix servers.
We have developed proprietary databases within our client-server
system, including a financial institution file that allows accurate editing and
origination of ACH and paper transactions to financial institutions. We have
also developed a merchant information file consisting of over one million
companies that allows accurate editing and initiation of payments to billers.
These databases have been constructed over the past 15 years as a result of our
transaction processing experience.
Platform Integration: The Genesis Project. In 1998, we integrated the
existing legacy data processing sites and platforms operated in Columbus, Ohio,
Aurora, Illinois, and Austin, Texas, into our central processing site at our
headquarters in Norcross, Georgia. We recently completed the planned migrations
of our customers to the new Genesis Platform from our Aurora, Illinois and
Columbus, Ohio platforms. We have designated this integration the Genesis
Project. The integration has required the acquisition of, and investment in,
extensive hardware and in operating and system software, as well as extensive
communications links and systems. The Genesis Project requires substantial
engineering and development of proprietary software. Redundancy, anomaly
monitoring, and off-site backup and recovery systems are planned as a part of
the project. See "Business -- Business Risks (We may experience breakdowns in
our payment processing system that could damage customer relations and expose us
to liability)."
The Austin platform was designated to host subscribers using a
particular personal financial management product that is not expected to be
supported indefinitely. We expect that these financial institutions will migrate
such subscribers to different software, which will prompt further migrations to
Genesis.
Significant numbers of high-level employees have been and will be hired
to facilitate the accomplishment of the Genesis Project, and to manage the
integrated site. We intend to operate the legacy platforms without substantial
disruption until all of our customers have been migrated to the Genesis
Platform. To date, over 2 million of our nearly 3 million customers have been
migrated to the Genesis Platform.
Redundancy and Back-up Systems. We believe that we have implemented
appropriate back-up and recovery procedures to ensure against any loss of data
on any platform. To maximize availability, we have redundant computer systems to
ensure that financial transaction requests can always be honored. Archival
storage is kept on site as well as off site in fireproof facilities. Diesel
generators provide power to the computing facilities in the event of a power
disruption.
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Our operations are dependent on our ability to protect our computer
equipment against damage from fire, earthquake, power loss, telecommunications
failure or similar event. Although we have contracted for the emergency
provision of an alternate site to aid in disaster recovery, this measure will
not eliminate the significant risk to our operations from a natural disaster or
system failure. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, operating
results and financial condition. Our property and business interruption
insurance may not be adequate to compensate us for all losses that may occur.
See "Business -- Business Risks (We may experience breakdowns in our payment
processing system that could damage customer relations and expose us to
liability)."
Financial Application Software. Our financial application suite of
software products offers a wide range of software addressing both end user
access and back room operational systems located in the customer data centers.
Every effort is taken to insure that each system is targeted for the appropriate
platform to optimize the characteristics of available technology with the
business requirements of each application and its market.
Investment Services. Investment Services employs advanced technology
for its portfolio management services and utilizes IBM RS/6000's to process the
portfolio management software. Services are provided primarily as a service
bureau offering with the data center residing at our Chicago office. This data
center functions seven days a week, twenty-four hours a day. Clients can obtain
access from their PCs either through a dedicated circuit or through dial-up
applications. The Chicago data center is the communication center for more than
70 dedicated links together with four concentration hub sites located in New
Jersey, New York, Boston and San Diego. Each of these hub sites supports the
concentration of local dedicated links plus dial-up access. In addition to the
dedicated private network, clients use frame relay services from several
companies to access services.
RESEARCH AND DEVELOPMENT
We maintain a research and development group with a long-term
perspective of planning and developing new services and related products for the
electronic commerce, financial application software and investment services
markets. We have established the following guidelines for pursuing the
development of new services:
- Distinctive benefits to customers;
- Ability to establish a leadership position in the market served;
- Sustainable technological advantages; and
- First to market.
We believe that in the emerging electronic commerce market it will be
critical to rapidly develop, test and offer new services and enhancements. To
that end, our goal for the time period from conceptualization to commercial
availability of new services is less than one year. As of June 30, 1999, our
research and development group consisted of approximately 250 employees.
Additionally, we use independent third party software development contractors as
needed. We spent 19.4% of revenues during the six-month transition period ended
June 30, 1996, 18.6% of revenues during the fiscal year ended June 30, 1997,
15.5% of revenues during the fiscal year ended June 30, 1998, and 8.4% of
revenues during the fiscal year ended June 30, 1999 on research and development.
These research and development expenses have been reduced for capitalized
software development costs of $1.3 million in the six-month transition period
ended June 30, 1996, none in the fiscal year ended June 30, 1997, $0.7 million
in the fiscal year ended June 30, 1998 and $7.4 million in the fiscal year ended
June 30, 1999. We anticipate that we will continue to commit substantial
resources to research and development activities for the foreseeable future.
GOVERNMENT REGULATION
We believe that we are not required to be licensed by the OCC, the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. The
OCC, however, periodically audits us, since we are a supplier of products and
services to financial institutions. There can be no assurance that a federal or
state agency will not attempt to regulate us, which could impede our ability to
do business in the regulator's jurisdiction. A number of states have legislation
regulating or licensing check sellers, money transmitters or service providers
to banks, and we have registered under such legislation in specific instances.
We do not believe that any state or federal legislation of this type materially
affects us. In addition, through our processing agreements, we agree to comply
with the data, recordkeeping, processing, and other requirements of applicable
federal and state laws and regulations, Federal Reserve Bank operating letters,
and the National Automated Clearing House Association Operating Rules imposed on
our processing banks. We may be subject to audit or examination under any of
these requirements. Violations of these requirements could limit or further
restrict our access to the payment clearance systems or our ability to obtain
access to such systems from banks. Further, the Federal Reserve rules
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provide that we can only access the Federal Reserve's ACH through a bank. If the
Federal Reserve rules were to change to further restrict our access to the ACH
or limit our ability to provide ACH transaction processing services, our
business could be materially adversely affected.
In conducting various aspects of our business, we are subject to laws
and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code, and are also subject to the electronic funds transfer
rules embodied in Regulation E, promulgated by the Federal Reserve Board. The
Federal Reserve's Regulation E implements the Electronic Fund Transfer Act,
which was enacted in 1978. Regulation E protects consumers engaging in
electronic transfers, and sets forth basic rights, liabilities, and
responsibilities of consumers who use electronic money transfer services and of
financial institutions that offer these services. For us, Regulation E sets
forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. Such
limitations on the consumer's liability may result in liability to us.
Given the expansion of the electronic commerce market, it is possible
that the Federal Reserve might revise Regulation E or adopt new rules for
electronic funds transfer affecting users other than consumers. Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating the electronic commerce market. If enacted,
such laws, rules, and regulations could be imposed on our business and industry
and could have a material adverse effect on our business, operating results and
financial condition.
PROPRIETARY RIGHTS
We own the following federally registered trademarks and service marks:
- CHECKFREE(R); - MWATCH(R);
- CHECKFREE and Design(R); - MOBILEPAY(R);
- CHECKFREE (Stylized Letters)(R); - MOBIUS GROUP and Design(R);
- CHECKFREE EASY(R); - MOE(R);
- CHECKFREE EXTRA(R); - MPREPS(R);
- CHECKFREE MANAGER(R); - M-SEARCH(R);
- CHECKFREE WALLET(R); - MSEARCH(R);
- CHECKFREE-BILL and Design(R); - OMNI(R);
- CHECKFREE FREES YOU FROM - ORBS(R);
CHECKS(R); - PAWWS(R);
- CLAS(R); - PAWTRACKS(R);
- CLRS(R); - PEP+(R);
- CLUB HOOCH(R); - PEP PAPERLESS ENTRY
- CPIM(R); PROCESSING(R);
- CSSII(R); - PODIUM(R);
- DASH(R); - PTT(R);
- DECISION MANAGER(R); - QUICKILL(R);
- DISC and Design(R); - SBA(R);
- DISC CHECKBOOK-PLUS(R); - SERVANTIS SYSTEMS(R);
- DISC WORLD$NET(R); - SERVANTIS WORLD$NET(R);
- ECP(R); - SUPRRB(R);
- EPOCH(R); - TCM THE CONTROL MACHINE(R);
- FASTOCK PC(R); - THE SECONDARY MARKETER(R);
- FMS(R); - THE WAY MONEY MOVES and
- INTEGRATED DECISION Design(R);
MANAGER(R); - TRS(R);
- MAX(R); - TST(R); and
- M-WATCH(R); - VAULT(R).
Additionally, we have applied to federally register the following service
marks:
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- CEC CENTER FOR ELECTRONIC - MPLAN(SM);
COMMERCE and Design(SM); - M-PREPS(TM);
- CHECKFREE CHARITY NET(TM); - M-VEST(TM);
- CHECKFREE(SM); - MY-BILLS.COM(SM);
- CHECKFREE CONNECT(SM); - RCM 2001...THE NEXT
- CHECKFREE E-BILL(SM); GENERATION(TM);.
- CHECKFREE ELECTRIC MONEY(SM); - RECOVERY MANAGEMENT
- CHECKFREE RECON SELECT(TM); SYSTEM(TM);
- CHECKFREE YES/PC(TM); - SSI(TM);
- DEFAULT NAVIGATOR(TM); - SSI and Design(TM); and
- ECX(SM); - STYLE ANALYIS PLUS(TM).
- M-PLAN(TM);
We are awaiting further information to file applications for the
following marks:
- CHECKFREE and Design(SM); - CHECKFREE RRS(TM);
- CHECKFREE APECS; - CHECKFREE RECON(TM);
- CHECKFREE A.R.M.(TM); - CHECKFREE RECON-PLUS(TM);
- CHECKFREE ARP; - CHECKFREE TRADE RECON(TM);
- CHECKFREE ARP/SMS; - CHECKFREE RPS(TM);
- CHECKFREE DIRECTCOLLECT; - CHECKFREE WEB RECON(TM); and
- CHECKFREE IRS(TM); - REVOLUTIONIZING THE WAY
- CHECKFREE IRS/SRS(TM); MONEY MOVES(SM).
- CHECKFREE LCR(TM);
We are also the owner of a multitude of domain name registrations,
including:
- billdelivery.com; - ficare.com;
- billercare.com; - getbills.com;
- billme.com; - mybills.com;
- check-free.com; - paybills.org;
- checkfree.com; - paymybills.org;
- checkfree-ecx.com; - paythebill.com;
- checkfreeva.com; - rcm2001.com;
- custcare.com; - stockcontrol.com; and
- ebills.com; - cfree.com.
We regard our financial transaction services and related products such
as our software as proprietary and rely on a combination of patent, copyright,
trademark and trade secret laws, employee and third party nondisclosure
agreements, and other intellectual property protection methods to protect our
services and related products. Although we believe our consumer financial
software to be proprietary, we do not depend on our software to compete, but
rather on our services to which the software provides access.
We also copyright certain of our programs and software documentation
and trademarks certain product names. Our management believes that these actions
provide appropriate legal protection for our intellectual property rights in our
software products. Furthermore, our management believes that the competitive
position for some of our products depends primarily on the technical competence
and creative ability of our personnel and that our business is not materially
dependent on copyright protection or trademarks. See "Business -- Business Risks
(We may be unable to protect our proprietary technology, permitting competitors
to duplicate our products and services)."
Our United States Letters Patent No. 5,383,113, issued on January 17,
1995, relates to our system and method for electronically providing services
including payment of bills and financial analysis. Incorporating the system
described in the patent, we can pay any bill from any checking account at any
financial institution in the United States on the consumer's behalf by selecting
a preferred means of payment from various options described above. See "Business
- -- Payment Clearance Systems." Our patent expires on January 17, 2012. See
"Business -- Competition," "Business -- Business Risks (Competitive pressures we
face may have a material adverse effect on us)" and "Business -- Business Risks
(We may be unable to protect our proprietary technology, permitting competitors
to duplicate our products and services)."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy our services and
related products or to reverse engineer or obtain and use information we regard
as proprietary. There can be no assurance that our competitors will not
independently develop services and related
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products that are substantially equivalent or superior to ours. As the
technology we use evolves, however, our dependence upon the patented technology
continues to decrease.
EMPLOYEES
As of August 31, 1999, we employed approximately 1,850 full-time
employees, including approximately 450 in systems and development (including
software development), over 600 in customer care, and approximately 125 in
administration, financial control, corporate services, and human resources. We
are not a party to any collective bargaining agreement and are not aware of any
efforts to unionize our employees. We believe that our relations with our
employees are good. We believe our future success and growth will depend in
large measure upon our ability to attract and retain qualified technical,
management, marketing, business development and sales personnel.
BUSINESS RISKS
We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Many of the following
important factors discussed below have been discussed in our prior filings with
the Securities and Exchange Commission. In addition to the other information in
this report, readers should carefully consider that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual consolidated results of
operations for the fiscal year ended June 30, 1999, and beyond, to differ
materially from those expressed in any forward-looking statements made by us, or
on our behalf.
THE MARKET FOR OUR ELECTRONIC COMMERCE SERVICES IS EVOLVING AND MAY NOT CONTINUE
TO DEVELOP OR GROW RAPIDLY ENOUGH FOR US TO REMAIN CONSISTENTLY PROFITABLE.
The electronic commerce market is still evolving and currently growing
at a rapid rate. We believe future growth in the electronic commerce market will
be driven by the cost, ease-of-use and quality of products and services offered
to consumers and businesses. In order to consistently increase and maintain our
profitability, consumers and businesses must continue to adopt our services. If
the number of electronic commerce transactions does not continue to grow or if
consumers or businesses do not continue to adopt our services, it could have a
material adverse effect on our business, financial condition and results of
operations.
OUR FUTURE PROFITABILITY IS DEPENDENT UPON OUR ABILITY TO SUCCESSFULLY IMPLEMENT
OUR STRATEGY TO INCREASE ADOPTION OF ELECTRONIC BILLING AND PAYMENT METHODS.
Our future profitability will depend, in part, on our ability to
successfully implement our strategy to increase adoption of electronic billing
and payment methods. Our strategy includes substantial investments in programs
designed to:
- Drive consumer awareness of electronic billing and payment;
- Encourage consumers to enroll for electronic billing and
payment with our distribution partners;
- Build our infrastructure to handle seamless processing of
transactions;
- Continue to develop state of the art, easy-to-use technology;
and
- Increase the number of billers whose bills we can present and
pay electronically.
Our investment in these programs will have a negative impact on our
short-term profitability. Additionally, our failure to successfully implement
these programs or to substantially increase adoption of electronic commerce
billing and payment methods by consumers who pay for the services could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY BE UNABLE TO REMAIN CONSISTENTLY PROFITABLE.
We have not consistently operated profitably to date. We incurred a
loss from operations of $7.2 million and a net loss of $3.7 million in the
fiscal year ended June 30, 1998, and had a loss from operations of $3.7 million
and net income of $10.5 million for the fiscal year ended June 30, 1999. We
intend to continue to make significant investments in our research and
development, sales and marketing and customer care operations. As a result, we
anticipate having a net loss from operations in fiscal 2000 and may experience
net losses and may not be able to sustain or increase our profitability in the
future.
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SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS MAY DAMAGE CUSTOMER
RELATIONS AND INHIBIT OUR GROWTH.
If we are unable to protect the security and privacy of our electronic
transactions, our growth and the growth of the electronic commerce market in
general could be materially adversely affected. A security or privacy breach
may:
- Cause our customers to lose confidence in our services;
- Deter consumers from using our services;
- Harm our reputation;
- Expose us to liability;
- Increase our expenses from potential remediation costs; and
- Decrease market acceptance of electronic commerce
transactions.
While we believe that we utilize proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that our use of these applications will be sufficient to
address changing market conditions or the security and privacy concerns of
existing and potential subscribers. Any failures in our security and privacy
measures could have a material adverse effect on our business, financial
condition and results of operations.
WE RELY ON THIRD PARTIES TO DISTRIBUTE OUR ELECTRONIC COMMERCE SERVICES, WHICH
MAY NOT RESULT IN WIDESPREAD ADOPTION.
We rely on our relationships with financial institutions, businesses,
billers, Internet portals and other third parties like Intuit Inc. to provide
branding for our electronic commerce services and to market our services to
their customers. These relationships are an important source of the growth in
demand for our electronic commerce services. If any of these parties abandons,
curtails or insufficiently increases its marketing efforts, it could have a
material adverse effect on our business, financial condition and results of
operations.
CONSOLIDATION IN THE BANKING INDUSTRY MAY ADVERSELY AFFECT OUR ABILITY TO SELL
OUR ELECTRONIC COMMERCE SERVICES, INVESTMENT SERVICES AND SOFTWARE.
Mergers, acquisitions and personnel changes at key financial
institutions have the potential to adversely affect our business, financial
condition and results of operations. Currently, the banking industry is
undergoing large-scale consolidation, causing the number of financial
institutions to decline. This consolidation could cause us to lose:
- Current and potential customers;
- Market share if the combined financial institution determines
that it is more efficient to develop in-house home banking
services similar to ours or offer our competitors' products or
services; and
- Revenue if the combined financial institution is able to
negotiate a greater volume discount for, or discontinues the
use of, our products and services.
WE ARE DEPENDENT UPON A SMALL NUMBER OF FINANCIAL INSTITUTION CUSTOMERS FOR A
SIGNIFICANT PERCENTAGE OF OUR SUBSCRIBERS.
We rely on our relationships with three key financial institutions for
a substantial portion of our subscriber base and the volume of electronic
transactions that we process. As of June 30, 1999, these three financial
institutions accounted for approximately 1.4 million subscribers, or
approximately 50% of our total subscriber base. However, no single customer
accounts for more than 10% of our revenues. The loss of the relationship with
any of these key financial institutions or a significant decline in the number
of transactions processed through them could have a material adverse effect on
our business, financial condition and results of operations.
IF WE DO NOT SUCCESSFULLY RENEW OR RENEGOTIATE OUR AGREEMENTS WITH OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER.
Our agreements for electronic commerce services with financial
institutions generally provide for terms of three to five years. These
agreements are renegotiated from time to time when financial institutions
migrate from our PC-based platform to our web-based platform. If we are not able
to renew or renegotiate these agreements on favorable terms, it could have a
material adverse effect on our business, financial condition and results of
operations.
The profitability of our Software business depends, to a substantial
degree, upon our software customers electing to periodically renew their
maintenance agreements. In the event that a substantial number of our software
customers declined to renew these agreements, our revenues and profits in this
business segment would be materially adversely affected.
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COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
The electronic commerce market is new and evolving rapidly, resulting
in a dynamic competitive environment. We face significant competition in all of
our customer markets. Increased competition or other competitive pressures may
result in price reductions, reduced margins or loss of market share, any of
which could have a material adverse effect on our business, financial condition
and results of operations. Further, we expect competition to persist, intensify
and increase in the future. A number of financial institutions have developed,
and others in the future may develop, in-house home banking services similar to
ours. For example, Chase Manhattan Corporation, First Union Corporation and
Wells Fargo & Co. recently announced the formation of a new venture called
Spectrum that will allow individuals and businesses to receive and pay bills
electronically. Additionally, TransPoint LLC, a joint venture among Microsoft
Corporation, First Data Corporation and Citibank N.A., has announced its own
agreements with financial institutions to offer on-line home banking and
electronic billing and payment services to consumers. We cannot assure you that
we will be able to compete effectively against financial institutions, Spectrum,
TransPoint or other current and future electronic commerce competitors.
The markets for our investment services and software products are also
highly competitive. In Investment Services, our competition comes from service
bureaus and providers of portfolio accounting software. In Software, our
competition comes from several different market segments, including large
diversified computer software and service companies and independent suppliers of
software products. Because there are relatively low barriers to entry, we expect
competition in the software market to increase significantly in the future. We
cannot assure you that we will be able to compete effectively against current
and future competitors in these markets.
Across all of our market segments, many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical, marketing, customer service and other resources, greater name
recognition and a larger installed base of customers than we do. As a result,
these competitors may be able to respond to new or emerging technologies and
changes in customer requirements faster and more effectively than we can, or to
devote greater resources to the development, promotion and sale of products than
we can. If these competitors were to acquire significant market share, it could
have a material adverse effect on our business, financial condition and results
of operations.
OUR FUTURE PROFITABILITY IS DEPENDENT UPON AN INCREASE IN THE PROPORTION OF
TRANSACTIONS WE PROCESS ELECTRONICALLY.
Our future profitability will depend, in part, on our ability to
increase the percentage of transactions we process electronically. Compared with
conventional paper-based transactions, electronic transactions:
- Cost much less to complete;
- Give rise to far fewer errors, which are costly to resolve;
and
- Generate far fewer subscriber inquiries and, therefore,
consume far fewer customer care resources.
Accordingly, if we are unable to increase the percentage of transactions
that we process electronically, our margins could decrease, which could have a
material adverse effect on our business, financial condition and results of
operations.
THE TRANSACTIONS WE PROCESS EXPOSE US TO CREDIT RISKS.
The electronic and conventional paper-based transactions we process
expose us to credit risks. These credits risks include risks arising from
returned transactions caused by:
- Insufficient funds;
- Unauthorized use;
- Stop payment orders;
- Payment disputes;
- Closed accounts;
- Theft;
- Frozen accounts; and
- Fraud.
We are also exposed to credit risk from merchant fraud and erroneous
transmissions. We attempt to manage all of these risks through our sophisticated
risk management systems, which include our patented billing and payment
processing system and agreements with some customers to guarantee our losses or
to grant us reversal rights. There can be no assurance, however, that these
efforts will be successful. Any losses resulting from returned transactions,
merchant fraud or erroneous transmissions could result in liability to financial
institutions,
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<PAGE> 19
merchants or subscribers, which could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY EXPERIENCE BREAKDOWNS IN OUR PAYMENT PROCESSING SYSTEM THAT COULD DAMAGE
CUSTOMER RELATIONS AND EXPOSE US TO LIABILITY.
A system outage or data loss could have a material adverse effect on
our business, financial condition and results of operations. To successfully
operate our business, we must be able to protect our payment processing and
other systems from interruption by events that are beyond our control. Events
that could cause system interruptions include:
- Fire;
- Natural disaster;
- Power loss;
- Telecommunications failure;
- Unauthorized entry; and
- Computer viruses.
We are currently migrating subscribers from our pre-existing data
processing platforms to a new system which we call the Genesis Platform. Our
main processing facility is located in Norcross, Georgia, and we have other
processing facilities located in Ohio, Illinois and Texas. During the transition
from the pre-existing platforms to the Genesis Platform, we may be exposed to
loss of data or unavailability of systems due to inadequate back-ups, reduced or
eliminated redundancy, or both. Although we regularly back-up data from our
operations and take other measures to protect against data loss and system
failures, there is still some risk that we may lose critical data or experience
system failures. As a precautionary measure, we have entered into disaster
recovery agreements for the processing systems at all our sites, and we conduct
business resumption tests on a scheduled basis. Our property and business
interruption insurance may not be adequate to compensate us for all losses or
failures that may occur.
WE MAY EXPERIENCE SOFTWARE DEFECTS AND DEVELOPMENT DELAYS, DAMAGING CUSTOMER
RELATIONS, DECREASING UR POTENTIAL PROFITABILITY AND EXPOSING US TO LIABILITY.
Our electronic commerce services and our software products are based on
sophisticated software and computing systems which often encounter development
delays, and the underlying software may contain undetected errors or defects.
Defects in our software products and errors or delays in our processing of
electronic transactions could result in:
- Additional development costs;
- Diversion of technical and other resources from our other
development efforts;
- Loss of credibility with current or potential customers;
- Harm to our reputation; or
- Exposure to liability claims.
In addition, we rely on technologies supplied to us by third parties that may
also contain undetected errors or defects which could have a material adverse
effect on our business, financial condition and results of operations. Although
we attempt to limit our potential liability for warranty claims through
disclaimers in our software documentation and limitation-of-liability provisions
in our license and customer agreements, there can be no assurance that these
measures will be successful in limiting our liability.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND MAY NOT ACCURATELY PREDICT OUR
FUTURE PERFORMANCE.
Our quarterly results of operations have varied significantly and
probably will continue to do so in the future as a result of a variety of
factors, many of which are outside our control. These factors include:
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<PAGE> 20
- Changes in our pricing policies or those of our competitors;
- Relative rates of acquisition of new customers;
- Seasonal patterns;
- Delays in the introduction of new or enhanced
services, software and related products by us or
our competitors or market acceptance of these products and
services; and
- Other changes in operating expenses, personnel and general
economic conditions.
As a result, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and you should not rely on them as an
indication of our future performance. In addition, our operating results in a
future quarter or quarters may fall below expectations of securities analysts or
investors and, as a result, the price of our common stock may fluctuate.
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING
RESULTS TO FLUCTUATE.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. If our net sales are below the
expectations of securities analysts and investors due to seasonal fluctuations,
our stock price could decrease unexpectedly. Our growth in new electronic
commerce subscribers is affected by seasonal factors such as holiday-based
personal computer sales. These seasonal factors may impact our operating results
by concentrating subscriber acquisition and set-up costs, which may not be
immediately offset by revenue increases primarily due to introductory service
price discounts. Additionally, on-line interactive service subscribers generally
tend to be less active users during the summer months, resulting in lower
revenue during this period.
Our software sales also have historically displayed seasonal
variability, with sales and earnings generally stronger in the quarters ended
December 31 and June 30 of each year and generally weaker in the quarters ended
September 30 and March 31 of each year. The seasonality in software sales is
due, in part, to calendar year-end buying patterns of financial institution
customers and our software sales compensation structure, which measures sales
performance at our June 30 fiscal year end.
THE YEAR 2000 ISSUE MAY ADVERSELY AFFECT OUR INFORMATION TECHNOLOGY SYSTEMS OR
CAUSE OUR CURRENT OR POTENTIAL CUSTOMERS TO DELAY IMPLEMENTING OUR PRODUCTS AND
SERVICES.
If our efforts, or the efforts of our customers and suppliers, fail to
adequately address the Year 2000 issue, we would likely incur a substantial loss
of revenue and suffer irreparable harm to our reputation. We use computer
software, operating systems and embedded micro-processors containing
date-related programs in the development and delivery of our products and
services and in our own internal information technology systems. In order to
accurately process transactions, we also rely on technologies provided by our
customers and suppliers. Transaction processing relies on transmissions of data
from PCs, through financial institutions and business web servers and the
Internet, over third-party data and voice communication lines and through the
Federal Funds System. The software we use in our products and in the delivery of
our services contains, in addition to code written by our programmers, some
software that we license from third parties.
We are in the process of testing our internal management information
and other critical business systems to identify any Year 2000 issues. We also
have inquired of our resellers, vendors and key suppliers about their Year 2000
readiness. To date, we are not aware of any significant resellers, vendors or
key suppliers with Year 2000 issues that would materially adversely affect us.
We cannot guarantee, however, that our information technology systems or those
of other companies on which we rely will successfully address the Year 2000
issue. Any failure by us or other third parties on which we rely to address the
Year 2000 issue could have a material adverse effect on our business, financial
condition and results of operations.
We believe that the adoption of our products and services by existing
and potential customers and subscribers may be adversely affected by the Year
2000 issue. As companies expend significant resources to correct or upgrade
their current software systems for Year 2000 compliance, they may delay or
cancel decisions to adopt our products and services. If this occurs, it could
have a material adverse effect on our business, financial condition and results
of operations.
A significant number of subscribers to our electronic bill payment
service use personal financial management software which is not, or may not be,
suitable for further use due to the Year 2000 issue. Although steps are being
taken by the software publisher, and by our customers, to encourage upgrading to
a Year 2000 compliant version of the software, in some cases, the subscriber
will not upgrade and will instead have his account deleted. These circumstances
will result in some loss of subscriber count and of revenue to us, and may also
subject us to claims by subscribers whose access to the service is interrupted.
We estimate that many of our subscribers are currently using software that was
not originally Year 2000 compliant, and that about 200,000 of our subscribers
may not upgrade their software and would subsequently be deleted as accounts. If
these deleted subscriber accounts do
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<PAGE> 21
not reapply for service, we would lose their associated revenue, which could
have a material adverse effect on our business, financial condition and results
of operations.
OUR INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
We have experienced rapid growth in our revenues, from $76.8 million in
the twelve months ended June 30, 1996 to $250.1 million in the fiscal year ended
June 30, 1999, and we intend to continue to grow our business significantly. To
support our growth plans, we will have to significantly expand our existing
management, operational, financial and human resources and management
information systems and controls. If we are not able to manage our growth
successfully, we will not grow as planned which could have a material adverse
effect on our business, financial condition and results of operations.
IF WE ARE UNABLE TO RECRUIT AND RETAIN ADDITIONAL SKILLED PERSONNEL, OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
Our future success depends upon our ability to attract, train,
assimilate and retain additional skilled personnel. Competition for qualified
employees in all of our business segments is intense. A significant increase in
our customer base would necessitate the hiring of a significant number of
additional customer care and technical support personnel, as well as software
developers and technicians, qualified candidates for which are currently in
short supply. We cannot assure you that we will be able to retain our key
employees or that we can attract, train, assimilate or retain other skilled
personnel in the future.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE OR CHANGES IN INDUSTRY
STANDARDS, OUR SERVICES COULD BECOME OBSOLETE AND WE COULD LOSE OUR CUSTOMERS.
The electronic commerce industry is changing rapidly. To remain
competitive, we must continue to enhance and improve the functionality and
features of our products, services and technologies. For example, we are
currently migrating our products and services from a PC-based platform to a
web-based platform. If competitors introduce new products and services embodying
new technologies, or if new industry standards and practices emerge, our
existing product and service offerings, proprietary technology and systems may
become obsolete. Further, if we fail to adopt or develop new technologies or to
adapt our products and services to emerging industry standards, we may lose
current and future customers, which could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, PERMITTING COMPETITORS
TO DUPLICATE OUR PRODUCTS AND SERVICES.
Our success and ability to compete in our markets are dependent, in
part, upon our proprietary technology. We rely primarily on patent, copyright,
trade secret and trademark laws to protect our technology. In addition, we have
been granted a patent for some features of our electronic billing and payment
processing system, which we believe provides some measure of security for our
technologies. If challenged, we cannot assure you that our patent will prove to
be valid or provide the protection that we need. Further, the source code for
our proprietary software is protected both as a trade secret and as a
copyrighted work. We generally enter into confidentiality and assignment
agreements with our employees, consultants and vendors, and generally control
access to and distribution of our software, documentation and other proprietary
information.
Because our means of protecting our proprietary rights may not be
adequate, it may be possible for a third party to copy or otherwise obtain and
use our technology without authorization. In addition, the laws of some
countries in which we sell our products do not protect software and intellectual
property rights to the same extent as the laws of the U.S. Unauthorized copying,
use or reverse engineering of our products could have a material adverse effect
on our business, financial condition and results of operations.
A third party could also claim that our technology infringes its
proprietary rights. As the number of software products in our target markets
increases and the functionality of these products overlap, we believe that
software developers may increasingly face infringement claims. These claims,
even if without merit, can be time-consuming and expensive to defend. A third
party asserting infringement claims against us in the future may require us to
enter into costly royalty arrangements or litigation.
OUR COMMON STOCK PRICE IS VOLATILE.
The market price of our common stock has been volatile in the past and
may change rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:
- Actual or anticipated fluctuations in our operating results;
- Announcements by us, our competitors or our customers;
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<PAGE> 22
- Announcements of the introduction of new or enhanced products
and services by us or our competitors;
- Announcements of joint development efforts or corporate
partnerships in the electronic commerce market;
- Market conditions in the banking, telecommunications,
technology and other emerging growth sectors;
- Rumors relating to our competitors or us; and
- General market or economic conditions.
In addition, the stock market has experienced significant price and
volume fluctuations, which have particularly affected the trading prices of
equity securities of many technology companies. These price and volume
fluctuations often have been unrelated to the operating performance of the
affected companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against that company. This type of litigation, regardless of the
outcome, could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on our
business, financial condition and results of operations.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF COMMON STOCK FOR SALE IN THE FUTURE COULD
ADVERSELY AFFECT OUR STOCK PRICE.
The availability for future sale of a substantial number of shares of
our common stock in the public market, or issuance of common stock upon the
exercise of stock options, warrants or otherwise could adversely affect the
market price for our common stock. As of September 1, 1999, we had outstanding
51,885,635 shares of common stock, of which 33,995,495 shares of our issued and
outstanding common stock were held by nonaffiliates and the holders of the
remaining 17,890,140 shares were entitled to resell them only pursuant to a
registration statement under the Securities Act of 1933 or an applicable
exemption from registration thereunder such as an exemption provided by Rule
144, Rule 145 or Rule 701 under the Securities Act of 1933. As of September 1,
1999, we had outstanding options to purchase 5,175,794 shares of our common
stock, of which options for 1,400,465 shares were fully vested and exercisable
at an average weighted exercise price of approximately $9.00 per share. As of
September 1, 1999, we had issued warrants to purchase 10,700,000 shares of our
common stock, of which warrants for 3,025,000 shares were fully vested and
exercisable at a weighted exercise price of approximately $20.87 per share. In
addition, our employees are entitled to purchase up to 745,945 shares under our
Associate Stock Purchase Plan and receive up to 810,537 shares under our 401(k)
Plan. Any shares purchased thereunder will be eligible for future sale following
the expiration of applicable holding periods.
Intuit Inc., which holds 10,175,000 shares of our common stock, and
Integrion Financial Network, L.L.C., its members and former members, which
collectively hold warrants to purchase up to 10,000,000 shares of our common
stock, of which warrants for 3,000,000 shares are fully vested and exercisable,
are entitled to "piggy-back" and demand registration rights subject to specified
conditions and restrictions. If Intuit or Integrion, by exercising their
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales may have an adverse effect on the market price of
our common stock.
THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant degree upon the continued
contributions of our key management, including:
- Peter J. Kight, our founder, Chairman and Chief Executive
Officer;
- Mark A. Johnson, our Vice Chairman, Corporate Development;
- Peter F. Sinisgalli, our President; and
- Ravi Ganesan, our Executive Vice President and Chief
Technology Officer.
If for any reason any of these officers ceased to be active in our
management, it could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS AND, EVEN IF WE ARE, RISKS
ARISING FROM THOSE ACQUISITIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We have expanded, and plan to continue to expand, our operations
through the acquisition of additional businesses that complement our core skills
and have the potential to increase our overall value. We may not be able to
identify and acquire compatible businesses. Acquisitions involve many risks,
which could have a material adverse effect on our business, financial condition
and results of operations, including:
- Acquired businesses may not achieve anticipated revenues,
earnings or cash flow;
- Integration of acquired businesses and technologies may not
be successful and we may not realize
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<PAGE> 23
anticipated economic, operational and other benefits in a
timely manner, particularly if we acquire a business in a
market in which we have limited or no current expertise or
with a corporate culture different from our own;
- Financing of future acquisitions may require issuing common
stock or debt for some or all of the purchase price, which
could result in dilution of the ownership interests of our
stockholders or recognizing amortization expense related to
goodwill and other intangible assets;
- Competing with other companies, many of which have greater
financial and other resources, to acquire attractive
companies makes it more difficult to acquire suitable
companies on acceptable terms; and
- Disruption of our existing business, distraction of
management and other resources and difficulty in maintaining
our current business standards, controls and procedures.
WE ARE SUBJECT TO SIGNIFICANT INFLUENCE BY SOME STOCKHOLDERS THAT MAY HAVE THE
EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL.
At September 1, 1999, our directors, executive officers and principal
stockholders and their affiliates collectively owned approximately 34% of the
outstanding shares of our common stock. As a result, these stockholders are able
to exercise significant influence over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying or
preventing a change in control.
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE
ANY CHANGE IN CONTROL MORE DIFFICULT.
Our certificate of incorporation and by-laws contain provisions that
may have the effect of delaying or preventing a change in control, may
discourage bids at a premium over the market price of our common stock and may
adversely affect the market price of our common stock and the voting and other
rights of the holders of our common stock. These provisions include:
- Division of our board of directors into three classes serving
staggered three-year terms;
- Removal of our directors by the stockholders only for cause
upon 80% stockholder approval;
- Prohibiting our stockholders from calling a special meeting
of stockholders;
- Ability to issue additional shares of our common stock or
preferred stock without stockholder approval;
- Prohibiting our stockholders from unilaterally amending our
certificate of incorporation or by-laws except with 80%
stockholder approval; and
- Advance notice requirements for raising business or making
nominations at stockholders' meetings.
We have also adopted a stockholder rights plan that allows us to issue
preferred stock with rights senior to those of our common stock without any
further vote or action by our stockholders. The issuance of our preferred stock
under the stockholder rights plan could decrease the amount of earnings and
assets available for distribution to the holders of our common stock or could
adversely affect the rights and powers, including voting rights, of the holders
of our common stock. In some circumstances, the issuance of preferred stock
could have the effect of decreasing the market price of our common stock.
We are also subject to provisions of the Delaware corporation law that,
in general, prohibit any business combination with a beneficial owner of 15% or
more of our common stock for five years unless the holder's acquisition of our
stock was approved in advance by our board of directors.
OUR BUSINESS COULD BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, WHICH
COULD MAKE OUR BUSINESS MORE EXPENSIVE TO OPERATE.
We believe that we are not required to be licensed by the Office of the
Comptroller of the Currency, or OCC, the Federal Reserve Board or other federal
agencies that regulate or monitor banks or other types of providers of
electronic commerce services. A number of states have legislation regulating or
licensing check sellers, money transmitters or service providers to banks, and
we have registered under this legislation in specific instances. Because
electronic commerce in general, and most of our products and services in
particular, are so new, the application of many of these laws and regulations is
uncertain and difficult to interpret. The entities responsible for interpreting
and enforcing these laws and regulations could amend those laws or regulations
or issue new interpretations of existing laws or regulations. Any of these
changes could lead to increased operating costs and reduce the convenience and
functionality of our products or services, possibly resulting in reduced market
acceptance. It is also possible that new laws and regulations may be enacted
with respect to the Internet. The adoption of any of these laws or regulations
may decrease the growth of the Internet, which could in turn decrease
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<PAGE> 24
the demand for our products or services, increase our cost of doing business or
could otherwise have a material adverse effect on our business, financial
condition and results of operations.
The Federal Reserve rules provide that we can only access the Federal
Reserve's ACH through a bank. If the Federal Reserve rules were to change to
further restrict our access to the ACH or limit our ability to provide ACH
transaction processing services, it could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO IMPLEMENT OUR GROWTH
STRATEGY.
Successful implementation of our growth strategy will likely require
continued access to capital. If we do not generate sufficient cash from
operations, our growth could be limited unless we are able to obtain capital
through additional debt or equity financings. We cannot assure you that debt or
equity financings will be available as required for acquisitions or other needs.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then current stockholders may be reduced. In
addition, we may issue equity securities that have rights, preferences or
privileges senior to those of the holders of our common stock. Even if financing
is available, it may not be on terms that are favorable to us or sufficient for
our needs. If we are unable to obtain sufficient financing, we may be unable to
fully implement our growth strategy.
ITEM 2. PROPERTIES.
We lease the following office facilities:
- Approximately 229,000 square feet in Norcross, Georgia;
- Approximately 100,000 square feet in Phoenix, Arizona;
- Approximately 51,000 square feet in Aurora, Illinois;
- Approximately 30,000 square feet in Owings Mills, Maryland;
- Approximately 32,000 square feet in Austin, Texas;
- Approximately 17,000 square feet in Jersey City, New Jersey;
- Approximately 14,000 square feet in Downers' Grove, Illinois;
- Approximately 10,000 square feet in Chicago, Illinois;
- Approximately 3,000 square feet in San Diego, California;
- Approximately 3,000 square feet in Ashburn, Virginia;
- Approximately 2,000 square feet in Boston, Massachusetts; and
- Approximately 1,000 square feet in Houston, Texas.
We own a 51,000 square foot conference center in Norcross, Georgia that includes
lodging, training, and fitness facilities for our customers and employees.
Although we own the building, it is on land that is leased through June 30,
2021. We believe that our facilities are adequate for current and near-term
growth and that additional space is available to provide for anticipated growth.
Additionally, on May 8, 1998, we purchased an office building in
Dublin, Ohio comprising 149,961 square feet, for a price of $14,288,600. We
completed the relocation of our Columbus, Ohio personnel and equipment from our
space located in Worthington, Ohio to the Dublin, Ohio facility at the end of
1998. In June 1999, we sold our Worthington, Ohio property and escrowed funds to
pay off the State of Ohio of State Economic Development Revenue Bonds associated
with that property
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against us.
On May 24, 1999, we announced that we had reached an amicable
resolution to the issues that led to Intuit Inc.'s lawsuit filed in March 1999
and the subsequent arbitration proceedings.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the Nasdaq National Market under the
symbol "CKFR." The following table sets forth the high and low sales prices of
our common stock for the periods indicated as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE
-----
FISCAL PERIOD HIGH LOW
- ------------- ---- ---
<S> <C> <C>
FISCAL 1998
First Quarter....................................................................... $23.13 $16.50
Second Quarter...................................................................... $31.44 $20.25
Third Quarter....................................................................... $28.50 $20.00
Fourth Quarter...................................................................... $30.63 $20.44
FISCAL 1999
First Quarter....................................................................... $31.50 $ 8.25
Second Quarter...................................................................... $23.44 $ 5.75
Third Quarter....................................................................... $46.00 $20.63
Fourth Quarter...................................................................... $69.13 $24.50
FISCAL 2000
First Quarter (through September 20, 1999).......................................... $44.25 $29.00
</TABLE>
On September 20, 1999, the last reported bid price for our common stock
on the Nasdaq National Market was $43.56 per share. As of September 20, 1999,
there were approximately 548 holders of record of our common stock.
We currently anticipate that all of our future earnings will be
retained for the development of our business and do not anticipate paying cash
dividends on our common stock for the foreseeable future. In addition, our line
of credit restricts the payment of dividends on our common stock. Our board of
directors will determine future dividend policy based on our results of
operations, financial condition, capital requirements and other circumstances.
During the last ten years, we have not paid cash dividends.
During the past fiscal year, we have issued the following unregistered
securities and repurchased the following shares of our common stock:
<TABLE>
<CAPTION>
- ---------------- ------------ -------------- -------------------- ------------- ---------
TYPE OF NUMBER OF UNDERWRITER / EXEMPTION
DATE SECURITIES SHARES PURCHASER CONSIDERATION CLAIMED
- ---------------- ------------ -------------- -------------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
September 22, 1998 Common Stock 25,000 CheckFree 263,438 Section 4(1)
September 23, 1998 Common Stock 25,000 CheckFree 274,375 Section 4(1)
September 24, 1998 Common Stock 100,000 CheckFree 1,029,380 Section 4(1)
September 25, 1998 Common Stock 50,000 CheckFree 498,750 Section 4(1)
September 28, 1998 Common Stock 60,000 CheckFree 611,250 Section 4(1)
September 29, 1998 Common Stock 100,000 CheckFree 1,021,215 Section 4(1)
September 30, 1998 Common Stock 215,000 CheckFree 2,123,125 Section 4(1)
October 1, 1998 Common Stock 220,000 CheckFree 2,099,372 Section 4(1)
October 2, 1998 Common Stock 145,000 CheckFree 1,373,745 Section 4(1)
October 3, 1998 Common Stock 60,000 CheckFree 560,628 Section 4(1)
October 8, 1998 Common Stock 3,706,341 CheckFree 21,305,711 Section 4(1)
March 8, 1999 Common Stock 537,314 Former stockholders All outstanding Section 3(a)(10)
of Mobius Group, Inc. shares of Mobius
Group, Inc.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included under the caption
"SELECTED FINANCIAL DATA" in our Annual Report and is incorporated herein by
reference.
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included under the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" in our Annual Report and is incorporated herein by reference.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our Annual Report on Form 10-K include certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 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" included elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K are based on information presently available to
our management. We assume no obligation to update any forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of June 30, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 30, 1999, 1998 and 1997 and the notes to the
financial statements, together with the independent auditors' report thereon
appear in our Annual Report and are incorporated herein by reference.
Our Financial Statement Schedule and Independent Auditors' Report on
Financial Statement Schedule are included in response to Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-26-
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in our Proxy relating to our 1999 Annual Meeting
of Stockholders to be held on November 4, 1999, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE BOARD OF DIRECTORS" and "EXECUTIVE COMPENSATION" in
our Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS" and "OWNERSHIP
OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" in our Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in our Proxy Statement and is incorporated
herein by reference.
-27-
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements appearing in our Annual
Report are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1999 and 1998.
Consolidated Statements of Operations for each of the three
years in the period ended June 30, 1999.
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended June 30, 1999.
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1999.
Notes to the Consolidated Financial Statements.
(2) The following financial statement schedule is included in
this Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements contained in the Annual Report.
Schedule II -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
2(a) Agreement and Plan of Merger, dated as of December
22, 1997, among the Company, CheckFree Corporation,
and CheckFree Merger Corporation. (Reference is made
to Exhibit 2 to the Current Report on Form 8-K, dated
December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and
incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of the Company.
(Reference is made to Exhibit 3(a) to the Current
Report on Form 8-K, dated December 22, 1997, filed
with the Securities and Exchange Commission on
December 30, 1997, and incorporated herein by
reference.)
3(b) By-Laws of the Company. (Reference is made to Exhibit
3(b) to the Current Report on Form 8-K, dated
December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and
incorporated herein by reference.)
3(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) to the Current Report on Form
8-K, dated December 22, 1997, filed with the
Securities and Exchange Commission on December 30,
1997, and incorporated herein by reference.)
4(a) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's Restated
Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the
Company's By-Laws (contained in the Company's By-Laws
filed as Exhibit 3(b) hereto).
-28-
<PAGE> 29
4(b) Rights Agreement, dated as of December 16, 1997, by
and between the Company and The Fifth Third Bank, as
Rights Agent. (Reference is made to Exhibit 4.1 to
Amendment No. 1 to Registration Statement on Form
8-A, filed with the Securities and Exchange
Commission on May 12, 1999, and incorporated herein
by reference.)
10(a) CheckFree Holdings Corporation Amended and Restated
Associate Stock Purchase Plan. (Reference is made to
Exhibit 4(a) to Post-Effective Amendment No. 1 to
Form S-8, as amended (Registration No. 333-21795),
filed with the Securities and Exchange Commission on
January 14, 1998, and incorporated herein by
reference.)
10(b) CheckFree Holdings Corporation Amended and Restated
1995 Stock Option Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98446), filed with
the Securities and Exchange Commission on January 9,
1998, and incorporated herein by reference.)
10(c) CheckFree Holdings Corporation Amended and Restated
1993 Stock Option Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98442), filed with
the Securities and Exchange Commission on January 9,
1998, and incorporated herein by reference.)
10(d) CheckFree Holdings Corporation Amended and Restated
1983 Non-Statutory Stock Option Plan. (Reference is
made to Exhibit 4(a) to Post-Effective Amendment No.
1 to Form S-8, as amended (Registration No.
33-98440), filed with the Securities and Exchange
Commission on January 9, 1998, and incorporated
herein by reference.)
10(e) CheckFree Holdings Corporation Second Amended and
Restated 1983 Incentive Stock Option Plan. (Reference
is made to Exhibit 4(a) to Post-Effective Amendment
No. 1 to Form S-8, as amended (Registration No.
33-98444), filed with the Securities and Exchange
Commission on January 9, 1998, and incorporated
herein by reference.)
10(f) Form of Indemnification Agreement. (Reference is made
to Exhibit 10(a) to Registration Statement on Form
S-1, as amended (Registration No. 33-95738), filed
with the Securities and Exchange Commission on August
14, 1995, and incorporated herein by reference.)
10(g) Schedule identifying material details of
Indemnification Agreements substantially identical to
Exhibit 10(f). (Reference is made to Exhibit 10(g) to
the Company's Form 10-K for the year ended June 30,
1997, filed with the Securities and Exchange
Commission on September 26, 1997, and incorporated
herein by reference.)
10(h) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Peter J. Kight and
the Company. (Reference is made to Exhibit 10(i) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(i) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Mark A. Johnson and
the Company. (Reference is made to Exhibit 10(j) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(j) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech, Inc.
(Reference is made to Exhibit 10(gg) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)**
10(k) Amendment to Bill Payment and Remote Banking Services
Agreement, dated July 1, 1995, between the Company
and FiTech, Inc. (Reference is made to Exhibit 10(hh)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)**
-29-
<PAGE> 30
10(l) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(m) Merchant Processing Agreement, dated March 13, 1995,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(jj) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(n) Lease, dated August 1, 1993, between the Company and
the Director of Development of the State of Ohio.
(Reference is made to Exhibit 10(rr) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(o) Guaranty Agreement, dated August 1, 1993, between the
Company and The Provident Bank. (Reference is made to
Exhibit 10(ss) to Registration Statement on Form S-1,
as amended (Registration No. 33-95738), filed with
the Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(p) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) to
Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(q) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(r) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company as
mortgagor and Society National Bank as mortgagee.
(Reference is made to Exhibit 10(vv) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(s) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) to Registration
Statement on Form S-1, as amended (Registration No.
33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated
herein by reference.)
10(t) Commercial Note Variable Rate, dated January 3, 1995,
of the Company. (Reference is made to Exhibit 10(xx)
to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the
Securities and Exchange Commission on August 14,
1995, and incorporated herein by reference.)
10(u) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference is
made to Exhibit 10(yy) to Registration Statement on
Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on
August 14, 1995, and incorporated herein by
reference.)
10(v) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(w) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
-30-
<PAGE> 31
10(x) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(y) Payment Services, Software Development and Marketing
Agreement, dated as of February 27, 1996, between the
Company and CyberCash. (Reference is made to Exhibit
10(a) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.) **
10(z) Executive Employment Agreement between the Company
and Peter J. Kight. (Reference is made to Exhibit
10(z) to the Company's Form 10-K for the year ended
June 30, 1997, filed with the Securities and Exchange
Commission on September 26, 1997, and incorporated
herein by reference.)
10(aa) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(bb) Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996. (Reference is made to Exhibit 10(qqq) to the
Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(cc) Loan and Security Agreement, dated as of May 13,
1997, among KeyBank National Association, the
Company, CheckFree Software Solutions, Inc.,
CheckFree Services Corporation, Security APL, Inc.,
Servantis Systems, Inc., and Servantis Services, Inc.
(Reference is made to Exhibit 10(ee) to the Company's
Form 10-K for the year ended June 30, 1997, filed
with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by
reference.)
10(dd) 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. (Reference is made to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended
March 31, 1999, filed with the Securities and
Exchange Commission on May 17, 1999, and incorporated
herein by reference.)
10(ee) CheckFree Corporation Incentive Compensation Plan.
(Reference is made to Exhibit 10(ff) to the Company's
Form 10-K for the year ended June 30, 1997, filed
with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by
reference.)
13 * Portions of the Annual Report to Stockholders for the
year ended June 30, 1999.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Power of Attorney.
27 * Financial Data Schedule.
99 * Financial Statement Schedule and Independent
Auditors' Report.
- ----------------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K.
We filed the following Current Reports on Form 8-K since March
31, 1999:
(i) Current Report on Form 8-K, dated May 24, 1999, filed
with the Securities and Exchange Commission on May
24, 1999 (Items 5 and 7).
-31-
<PAGE> 32
(ii) Current Report on Form 8-K, dated June 15, 1999,
filed with the Securities and Exchange Commission on
June 15, 1999 (Items 5 and 7).
(iii) Current Report on Form 8-K, dated June 24, 1999,
filed with the Securities and Exchange Commission on
June 24, 1999 (Items 5 and 7).
(c) EXHIBITS.
The exhibits to this report follow the Signature Page.
(d) FINANCIAL STATEMENT SCHEDULES.
The financial statement schedule and the independent auditors'
report thereon are included in Exhibit 99 to this Annual Report on Form 10-K.
-32-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: September 24, 1999 By: /s/Allen L. Shulman
-------------------------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on our behalf and in
the capacities indicated on the 24th day of September, 1999.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*Peter J. Kight Chairman of the Board and Chief Executive Officer
- ------------------------------------------ (Principal Executive Officer)
Peter J. Kight
*Mark A. Johnson Vice Chairman - Corporate Development and Marketing and
- ------------------------------------------ Director
Mark A. Johnson
*Allen L. Shulman Executive Vice President, Chief Financial Officer
- ------------------------------------------ and General Counsel
Allen L. Shulman (Principal Financial Officer)
*Gary A. Luoma, Jr. Vice President and Chief Accounting Officer
- ------------------------------------------ (Principal Accounting Officer)
Gary A. Luoma, Jr.
*William P. Boardman Director
- ------------------------------------------
William P. Boardman
*George R. Manser Director
- ------------------------------------------
George R. Manser
*Eugene F. Quinn Director
- ------------------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- ------------------------------------------
Jeffrey M. Wilkins
*By: /s/Curtis A. Loveland
--------------------------------------
Curtis A. Loveland,
Attorney-in-Fact
</TABLE>
-33-
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
Our selected consolidated financial data as of and for the fiscal years ended
June 30, 1997, 1998 and 1999 have been derived from our consolidated financial
statements included elsewhere in this Annual Report, which have been audited by
Deloitte and Touche, LLP, independent auditors, whose report thereon is also
included elsewhere in this Annual Report. Our selected consolidated financial
data as of and for the six-months ended June 30, 1996 and the years ended
December 31, 1994 and 1995 have been derived from our audited consolidated
financial statements, which are not included in this Annual Report. The selected
consolidated financial data as of and for the six-months ended June 30, 1995 and
the twelve months ended June 30, 1996 are derived from unaudited consolidated
financial statements, which, in the opinion of management, reflect all
adjustments necessary for a fair representation of the respective periods. The
selected consolidated financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto elsewhere in this Annual Report. The earnings per share amounts prior to
fiscal year 1998 have been restated to comply with Statement of Financial
Accounting Standards 128 "Earnings per Share" (SFAS 128) as required. For
further discussion of earnings per share and the impact of SFAS 128, see Note 1
to the consolidated financial statements.
<TABLE>
<CAPTION>
TWELVE
YEAR ENDED MONTHS SIX MONTHS ENDED
DECEMBER 31, ENDED JUNE 30, YEAR ENDED JUNE 30,
---------------------- JUNE 30, ---------------------- ----------------------------------
1994 1995 1996 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and
merchant discount ...... $ 38,282 $ 49,330 $ 59,053 $ 23,581 $ 33,305 $ 104,522 $ 159,255 $ 201,059
License fees ............. -- -- 10,970 -- 10,970 33,088 28,952 15,975
Maintenance fees ......... -- -- 1,978 -- 1,978 22,567 25,848 17,746
Other .................... 984 -- 4,788 -- 4,787 16,268 19,809 15,351
--------- --------- --------- --------- --------- --------- --------- --------
Total revenues . 39,266 49,330 76,789 23,581 51,040 176,445 233,864 250,131
Expenses
Cost of processing,
servicing and support ... 24,212 30,258 51,236 14,461 35,438 102,721 129,924 146,704
Research and development . 4,724 6,876 13,765 3,019 9,907 32,869 36,265 21,085
Sales and marketing ...... 4,427 7,242 21,349 3,060 17,167 32,670 28,839 32,354
General and administrative 2,598 4,134 9,598 1,915 7,338 18,707 20,677 31,466
Depreciation and
amortization ............ 1,922 2,485 8,246 1,194 6,997 24,919 24,999 24,630
In-process research and
development ............. -- -- 122,358 -- 122,358 140,000 719 2,201
Charge for stock warrants -- -- -- -- -- -- 32,827 --
Exclusivity amortization . -- -- -- -- -- 5,958 2,963 --
--------- --------- --------- --------- --------- --------- --------- --------
Total expenses . 37,883 50,995 226,552 23,649 199,205 357,844 277,213 258,440
Net gain on dispositions
of assets ............... -- -- -- -- -- 6,250 36,173 4,576
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) from
operations .............. 1,383 (1,665) (149,763) (68) (148,165) (175,149) (7,176) (3,733)
Interest:
Income ................. 298 2,135 3,104 535 1,659 2,153 3,464 2,799
Expense ................ (795) (645) (484) (330) (325) (834) (632) (618)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) before
income tax .............. 886 (175) (147,143) 137 (146,831) (173,830) (4,344) (1,552)
Income tax expense
(benefit) ............... 400 40 (8,650) 62 (8,628) (12,017) (641) (12,009)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) before
extraordinary item ...... 486 (215) (138,493) 75 (138,203) (161,813) (3,703) 10,457
Extraordinary item ....... -- -- (364) -- (364) -- -- --
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss) ........ $ 486 $ 215 $(138,857) $ 75 $(138,567) $(161,813) $ (3,703) $ 10,457
========= ========= ========= ========= ========= ========= ========= =========
Diluted income (loss) per
common share before
extraordinary item........ $ 0.02 $ (0.01) $ (4.14) $ -- $ (3.69) $ (3.44) $ (0.07) $ 0.18
Diluted income (loss) per
common share ............ $ 0.02 $ (0.01) $ (4.15) $ -- $ (3.70) $ (3.44) $ (0.07) $ 0.18
Equivalent number of shares
outstanding ............. 27,103 28,219 33,435 29,299 37,420 46,988 55,087 56,529
BALANCE SHEET DATA:
Working capital .......... $ 11,399 $ 81,792 $ 45,496 $ 10,481 $ 45,496 $ 20,002 $ 78,238 $ 24,245
Total assets ............. 30,512 115,642 196,230 31,696 196,230 223,836 250,112 252,761
Long-term obligations,
less current portion .... 8,213 7,282 8,324 7,735 8,324 8,401 6,467 3,882
Total stockholder's equity 16,372 99,325 137,675 16,493 137,675 148,644 183,854 186,903
</TABLE>
13-1
<PAGE> 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 services for nearly 3 million consumers
through over 350 financial institutions, Internet financial sites like
Quicken.com and personal financial management software like Quicken, Microsoft
Money and Managing Your Money. As part of our strategy to broaden availability
of our electronic billing and payment services on the Internet, we recently
entered into a distribution contract with Yahoo! Additionally, we recently
extended a processing agreement with Bank One Corporation to provide services,
including electronic billing and payment, to WingspanBank.com. We are currently
in discussions with other Internet portals, including Excite@Home, to whom we
expect to begin providing our billing and payment services by December 31, 1999.
We plan to undertake significant marketing initiatives with Yahoo!,
WinspanBank.com and other Internet portals to dramatically accelerate the
adoption of our services by consumers. We have developed relationships with over
1,100 merchants nationwide that enable us to remit approximately 50% of all of
our bill payments electronically. During the three-month period ended June 30,
1999, we processed an average of more than 12 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 June 30, 1999, we have
signed contracts for E-Bill services with 64 of the country's largest billers,
who together deliver more than 500 million bills each month. During the month of
June 1999, we presented and paid more than 13,000 electronic bills through 20
financial institutions and Internet portals, which is a more than 30% increase
since March 1999 and more than double the number of bills presented through
E-Bill services in February 1999.
We are also a leading provider of portfolio management and information
services and financial applications software. During the fiscal year ended June
30, 1999, Electronic Commerce accounted for 68% of our revenues, Software
accounted for 16% of our revenues, and Investment Services accounted for another
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 complimentary 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.
13-2
<PAGE> 3
RESULTS OF OPERATIONS
The following table sets forth percentages of revenue represented by
certain consolidated statements of operations data:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total revenues ............................. 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 58.2 55.6 58.7
Research and development ................ 18.6 15.5 8.4
Sales and marketing ..................... 18.5 12.3 12.9
General and administrative .............. 10.6 8.8 12.6
Depreciation and amortization ........... 14.1 10.7 9.8
In-process research and development ..... 79.3 0.3 0.9
Charge for stock warrants ............... -- 14.0 --
Exclusivity amortization ................ 3.4 1.3 --
-------- -------- --------
Total expenses ............. 202.8 118.5 103.3
Net gain on dispositions of assets ...... 3.5 15.4 1.8
-------- -------- --------
Loss from operations .................... (99.3) (3.1) (1.5)
Interest:
Income ............................... 1.2 1.5 1.1
Expense .............................. (0.4) (0.3) (0.2)
-------- -------- --------
Loss before income taxes ................ (98.5) (1.9) (0.6)
Income tax benefit ...................... (6.8) (0.3) (4.8)
-------- -------- --------
Net income (loss) ....................... (91.7)% (1.6)% 4.2%
======== ======== ========
</TABLE>
YEARS ENDED JUNE 30, 1998 AND 1999
Revenues. Our total reported revenue increased by $16.2 million, or 7%,
from $233.9 for the year ended June 30, 1998 to $250.1 million for the year
ended June 30, 1999. This increase in revenue was due to growth in our
Electronic Commerce and Investment Services segments, offset by a decrease in
our Software segment. The decrease in our Software segment revenue was the
result of our divestitures of certain of our software businesses. We divested
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.
On a pro forma basis, excluding the impact of our divested software
businesses, the discontinuance of our web investor business in our Electronic
Commerce segment in June 1998, and revenue from the Mobius Group acquisition in
our Investment Services segment in March 1999, our total revenue increased 21%,
from $204.4 million for the year ended June 30, 1998 to $246.4 million for the
year ended June 30, 1999. The increase in our pro forma revenue from fiscal 1998
to fiscal 1999 was driven by increases of 23% in our Electronic Commerce
segment, 26% in our Investment Services segment and 6% in our Software segment.
Our growth in pro forma Electronic Commerce revenue was driven primarily by
subscriber growth from approximately 2.4 million at June 30, 1998 to nearly 3.0
million at June 30, 1999. Our growth in pro forma Investment Services revenue
was driven primarily by an increase in portfolios managed from approximately
500,000 at June 30, 1998 to approximately 700,000 at June 30, 1999, offset by
lower average revenue per portfolio, as marketing efforts have shifted the mix
of new business toward retail versus institutional portfolios. Although demand
has been somewhat dampened due to customer focus on Year 2000 projects, in our
Software segment we had moderate pro forma revenue growth, primarily due to
increased implementations in our ACH product line.
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<PAGE> 4
Our reported processing and servicing revenue increased by $41.8
million, or 26%, from $159.3 million for the year ended June 30, 1998 to $201.1
million for the year ended June 30, 1999. On a pro forma basis, adjusted for
revenue contributed by our acquisition of Mobius Group in March 1999 and the
discontinuance of our web investor business in our Electronic Commerce segment
in June 1998, revenue increased by 26% from $158.4 million for the year ended
June 30, 1998 to $199.2 million for the year ended June 30, 1999. This growth
was primarily the result of increases in our subscribers in our Electronic
Commerce segment and the number of portfolios managed in our Investment Services
segment as discussed in the foregoing paragraph. In January 1999, we announced
the signing of a material Internet distribution agreement with Yahoo!. Although
there are no guarantees in the timing or extent of its success, we believe this
agreement has the potential to provide significant increases in the number of
our subscribers over the next year and beyond. Due to introductory promotional
pricing incentives, we do not expect significant incremental revenue from this
channel in fiscal year 2000. Longer term, our per subscriber revenue
contribution from the portal channel is expected to be comparable to our
existing financial institution channel.
Our reported license revenue declined by $13.0 million, from $29.0
million for the year ended June 30, 1998 to $16.0 million for the year ended
June 30, 1999. This decline was primarily due to our divestitures of certain of
our software business previously described. On a pro forma basis, excluding the
impact of the divested software businesses, our license fee revenue declined by
$1.3 million, from $17.0 million for the year ended June 30, 1998 to $15.7
million for the year ended June 30, 1998. The pro forma decline in license fee
revenue was primarily due to softness in our software sales resulting from
purchasing moratoriums imposed by customers and potential customers focusing on
their Year 2000 issues.
Our reported maintenance revenue declined by $8.1 million, from $25.8
million for the year ended June 30, 1998 to $17.7 million for the year ended
June 30, 1999. On a pro forma basis, excluding the impact of our divestitures of
certain of our software businesses, previously mentioned, our maintenance fee
revenue increased by $0.7 million, from $16.1 million for the year ended June
30, 1998 to $16.8 million for the year ended June 30, 1999. The increase in our
pro forma maintenance revenue was primarily due 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 revenues.
Our reported other revenue, consisting mainly of consulting fees,
declined by $4.4 million from $19.8 million for the year ended June 30, 1998 to
$15.4 million for the year ended June 30, 1999. On a pro forma basis, excluding
the impact of our divested software businesses, our other revenue increased by
$1.8 million, from $12.9 million for the year ended June 30, 1998 to $14.7
million for the year ended June 30, 1999. The increase was primarily due to
implementations related to new software sales in the second half of fiscal 1998
and early fiscal 1999 and consulting projects related to implementations and
client requested Year 2000 contract-based assistance in our Investment Services
segment.
Cost of Processing, Servicing and Support. Our processing, servicing
and support costs consist primarily of data processing costs, customer care,
technical support, third party transaction fees and consulting delivery costs.
The cost of processing, servicing and support was $129.9 million or 55.6% of
total revenue for the year ended June 30, 1998 and $146.7 million or 58.7% of
total revenue for the year ended June 30, 1999. Our processing, servicing and
support cost as a percentage of servicing only revenue (which includes all
revenue except license revenue) was 63.4% for the year ended June 30, 1998 and
62.7% for the year ended June 30, 1999.
Our revenue growth in our Electronic Commerce segment slowed as
financial institutions have been focusing on converting our electronic billing
and payment offerings from a PC software-based to a web-based product. Although
we continued to realize cost savings as a result of our successful efforts to
increase the percentage of our bill payment transactions processed
electronically versus paper, during this period, we continued to invest in added
capacity in anticipation of expected revenue growth as our customers complete
their web-based conversions and refocus their efforts on marketing these
products to achieve higher subscriber growth. While subscriber growth during the
third and fourth quarters of fiscal 1999 was approximately 6%, Internet-based
subscriber growth in the same quarters exceeded 20%, which
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may indicate that web-based offerings will spur consumer adoption. Additionally,
we are incurring the costs of implementing customers for electronic billing and
payment for E-Bill without receiving adequate revenue to fully offset the costs.
Finally, our Yahoo! distribution agreement has resulted in an increase in our
operating expenses during the second half of fiscal 1999. These additional
operating costs for professional service 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 one
million additional subscribers and additional customer care staff and related
training, will continue into fiscal year 2000.
Research and Development. Our research and development costs consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel and were stated net of capitalized software
development costs. Our research and development costs were $36.3 million or
15.5% of total revenue for the year ended June 30, 1998 and $21.1 million or
8.4% of total revenue for the year ended June 30, 1999. The divested software
businesses incurred research and development costs of $8.5 million in the year
ended June 30, 1998. 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, we capitalized software
development costs of $0.7 million for the year ended June 30, 1998 and $7.4
million in the year ended June 30, 1999. As a result, on an absolute dollar
basis and net of divested business units, our total research and development
expenditures and capitalized software development costs remained constant at
$28.5 million for the years ended June 30, 1998 and 1999. We are continuing to
invest significantly in research and development in all three of our business
segments in anticipation and support of expected revenue growth, quality
improvement and efficiency enhancement opportunities.
Sales and Marketing. Our sales and marketing expenses consist primarily
of salaries and commissions of sales and product marketing associates, public
relations and advertising costs, customer acquisition fees, and royalties paid
to distribution partners. Our sales and marketing costs were $28.8 million or
12.3% of total revenue for the year ended June 30, 1998 and $32.4 million or
12.9% of total revenue for the year ended June 30, 1999. Reduced sales and
marketing expenses resulting from our divested software businesses have been
replaced by increased sales expenses related to activities in our electronic
billing area and funding for the creation and launch of a new trade group, the
Electronic Banking Association, which is expected to increase the general
population's awareness of, and interest in, the electronic banking industry.
Additionally, during the fourth quarter of fiscal 1999, we experienced a system
error that led some users of our electronic bill payment service to experience
intermittent problems accessing and using the system. In response to this
situation, we provided service fee credits of approximately $1.9 million, over
and above contractually determined penalties, to our financial institution
customers. Our sales and marketing expenses are expected to increase in fiscal
2000 upon the launch of products related to our Yahoo! distribution agreement.
General and Administrative. Our general and administrative expenses
consist primarily of salaries for administrative, executive, accounting and
finance, and human resource employees. Our general and administrative expenses
were $20.7 million or 8.8% of total revenue for the year ended June 30, 1998 and
$31.5 million or 12.6% of total revenue for the year ended June 30, 1999. During
the year ended June 30, 1999 we recognized several non-recurring charges
including: $1.3 million in real estate expenses related to the sale of a
facility in Columbus, Ohio and a separate move to a new facility in Jersey City,
New Jersey, $0.9 million in charges related to an uncompleted follow-on stock
offering in June 1999, $0.6 million in charges related to the establishment of a
benefits company intended to better manage future benefit expenses in
anticipation of growth in associates, and charges to third parties to support
various other tax and legal related matters. The divestiture of our various
software businesses has not resulted in a corresponding reduction in existing
infrastructure since business specific systems and administrative functions must
remain to support our retained software businesses and our growing Electronic
Commerce and Investment Services segments. As anticipated revenue growth
materializes, we expect general and administrative expenses to decline as a
percentage of revenue from its current level and return to levels more in line
with our historical experience.
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<PAGE> 6
Depreciation and Amortization. Our depreciation and amortization
expenses were $25.0 million for the year ended June 30, 1998 and $24.6 million
for the year ended June 30, 1999. Our divestiture of several software businesses
resulted in a significant reduction in depreciation and amortization from the
elimination of both tangible and intangible assets. These reductions have been
offset by incremental depreciation resulting from significant capital
investments throughout fiscal 1998 and 1999 in support of the data center
migration to our Norcross, Georgia facility, the development of the Genesis
project and the support of new business initiatives such as preparation for the
release of products related to our Yahoo! distribution agreement.
In-Process Research and Development. The in-process research and
development charge of $2.2 million incurred in fiscal 1999 resulted from our
purchase of the Mobius Group in March 1999. Please refer to the Notes to
Consolidated Financial Statements included herein for a detailed discussion of
this charge. Since the Mobius acquisition, the M-Plan Retirement and Estate
Planning Module was delivered on schedule in May 1999 and the M-Search Revision,
M-Vest Revision and M-Plan Cash Flow, Tax and Education modules are all expected
to be delivered as planned on the expected release dates as outlined in the
footnote referred to above. The in-process research and development charge of
$0.7 million in fiscal 1998 resulted from our acquisition of Advanced Mortgage
Technology, Inc. in October 1997. The related development projects from the AMTI
acquisition continued as planned until the time the software and assets of the
mortgage product line, including these projects, were sold in September 1998.
Charge for Stock Warrants. The $32.8 million charge for stock warrants
in the year ended June 30, 1998 resulted from two separate transactions. A $32.4
million charge resulted from the vesting of three million warrants in March 1998
related to a ten year processing agreement with a strategic partner that we
announced in October 1997. A $0.4 million charge resulted from the vesting of
25,000 warrants in June of 1998 related to a five year consulting agreement with
a third party. These non-cash charges were based on a Black-Scholes option
pricing model valuation of the warrants at the date of vesting. An additional
seven million warrants will vest incrementally upon achievement of a series of
certain strategic targets and each incremental vesting will result in a future
non-cash charge based on the fair market value of warrants and our common stock
at the date of vesting.
Exclusivity Amortization. The exclusivity amortization of $3.0 million
in the year ended June 30, 1998 was the final amortization related to an
exclusivity arrangement we entered into with Intuit, Inc. in conjunction with
our purchase of Intuit Services Corporation in January 1997.
Net Gain on Dispositions of Assets. The net gain of $36.2 million in
the year ended June 30, 1998 was the result of several transactions. We recorded
gains on the sales of our recovery management business of $28.2 million, our
item processing business of $3.2 million and our wire and electronic banking
businesses of $ 14.7 million. The gains in 1998 were offset by a loss on the
sale of our leasing business of $4.7 million, expected losses on non-cancelable
contracts and related costs totaling $1.0 million resulting from the decision to
exit the web investor portion of our Electronic Commerce segment and charges
totaling $4.2 million for certain equipment and other assets related primarily
to data center consolidations where we determined that the book value of the
assets exceeded their net realizable value. The net gain of $4.6 million in the
year ended June 30, 1999 was also the result of several transactions. We
recorded gains on the sale of our mortgage business of $6.4 million and the sale
of a building in Columbus, Ohio of $1.1 million and offset these gains with a
loss on the sale of our imaging business of $2.9 million.
Interest. Our interest income decreased from $3.5 million for the year
ended June 30, 1998 to $2.8 million for the year ended June 30, 1999. The
reduction was primarily due to a decrease in average cash and investments from
$49.3 million for the year ended June 30, 1998 to $43.3 million for the year
ended June 30, 1999. Cash proceeds from the various software divestitures in
fiscal 1998 and early in fiscal 1999 were significantly offset by a share
repurchase in the first and second quarters of fiscal 1999.
Our interest expense remained constant at $0.6 million for the years
ended June 30, 1998 and 1999. At the end of fiscal 1999 we paid off
approximately $2.5 million in debt related to the sale of our building in
Columbus, Ohio. We expect leasing activities to increase in fiscal 2000 that
will more than offset interest expense savings resulting from the debt
reduction.
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<PAGE> 7
Income Taxes. Our effective tax rate was 14.8% for the year ended June
30, 1998 and was not meaningful in the year ended June 30, 1999. The difference
in our effective rate and our statutory rate of 35% in fiscal 1998 was primarily
due to non-deductible in-process research and development expenses,
non-deductible intangible amortization and state and local taxes. In fiscal
1999, we recorded a one-time tax benefit of approximately $12.2 million arising
out of the medical benefits management subsidiary. Net of this one-time benefit,
the resulting tax expense would have been $0.2 million against a pre-tax loss of
$1.6 million. The difference between this adjusted number and the statutory rate
of 35% is primarily due to non-deductible in-process research and development
expenses, non-deductible intangible amortization and state and local taxes.
YEARS ENDED JUNE 30, 1997 AND 1998
Revenues. Our total revenue increased by $57.5 million, or 32.6%, from
$176.4 million for the year ended June 30, 1997 to $233.9 million for the year
ended June 30, 1998. We eliminated estimated purchased profits in deferred
revenues assumed in our Servantis acquisition in February 1996 as a purchase
accounting adjustment, reducing 1997 revenue by approximately $7.8 million.
On a pro forma basis, our total revenue increased 32.3% as a result of
growth of 50% in our Electronic Commerce segment, 33% in our Investment Services
segment and 6% in our Software segment. The pro forma results are defined as
prior year results excluding the elimination of purchased profits and adjusting
for our Intuit Services Corporation acquisition and divestitures of our
securities business which was sold in October 1996, our credit card processing
business which was sold in March 1997, and our recovery management business
which was sold in August 1997. Our pro forma growth in our Electronic Commerce
segment was driven primarily by an increase in subscribers from approximately
1.7 million at June 30, 1997 (which number includes the Intuit Services
Corporation subscribers acquired in January 1997) to approximately 2.4 million
at June 30, 1998. Our Investment Services revenue growth was primarily due to an
increase in portfolios managed from approximately 350,000 at June 30, 1997 to
over 500,000 at June 30, 1998. Growth in our Software segment was primarily the
result of license and related maintenance and services growth in the
reconciliation and compliance product lines from fiscal 1997 to fiscal 1998. It
should be noted that the rate of our subscriber growth is primarily determined
by the direct marketing efforts of our financial institution clients. Historical
subscriber growth, therefore, may not be indicative of future growth. For
example, in the fourth quarter of fiscal 1998, many of our financial institution
clients reduced marketing efforts to their customers to convert from a PC-based
software offering to a more efficient web-based offering, which resulted in a
lower rate of subscriber growth that continued throughout fiscal 1999.
Our reported processing and servicing revenue increased from $94.5
million for the year ended June 30, 1997 to $159.3 million for the year ended
June 30, 1998. On a pro forma basis, excluding the elimination of purchased
profits and the sale of our recovery management business, processing and
servicing revenue increased by 46% from $109.4 million for the year ended June
30, 1997 to $159.3 million for the year ended June 30, 1998. This growth was due
primarily to the increase in subscribers in our Electronic Commerce segment and
the increase in portfolios managed in our Investment Services segment previously
discussed.
Our reported merchant discount revenue decreased from $10.0 million for
the year ended June 30, 1997 to $0 for the year ended June 30, 1998 due to the
sale of our credit card processing business in March 1997.
Our reported license fee revenue decreased from $33.1 million for the
year ended June 30, 1997 to $29.0 for the year ended June 30, 1998. On a pro
forma basis, adjusting for the sales of our securities and recovery management
businesses, license revenue increased from $26.3 million in fiscal 1997 to $29.0
million in fiscal 1998. Increases in our pro forma license revenue were driven
primarily by growth in reconciliation and compliance software sales.
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Our reported maintenance revenue increased from $22.6 million for the
year ended June 30, 1997 to $25.8 million for the year ended June 30, 1998. On a
pro forma basis, excluding elimination of purchased profits and adjusting for
the sales of our securities and recovery management businesses, our maintenance
revenue increased from $25.2 million for the year ended June 30, 1997 to $25.8
million for the year ended June 30, 1998. Increases from maintenance price
increases of approximately 7% and first year maintenance from new license sales
were offset by customer retention rates in the mid-to-upper 80% range.
Our reported other revenue, consisting mainly of consulting fees,
increased from $16.3 million for the year ended June 30, 1997 to $19.8 million
for the year ended June 30, 1998. On a pro forma basis, excluding the
elimination of purchased profits and adjusting for the sales of our securities
and recovery management businesses, other revenue increased from $15.9 million
for fiscal 1997 to $19.8 million for fiscal 1998. Year to date increases were
due to increased implementations in all of our business segments.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $102.7 million or 58.2% of total revenue for the year
ended June 30, 1997 and $129.9 million or 55.6% of total revenue for the year
ended June 30, 1998. Our cost of processing, servicing and support as a
percentage of servicing only revenue (which includes all revenue except license
revenue) and net of purchased profits of $6.5 million in the 1997 servicing only
revenue, was 68.5% for the year ended June 30, 1997 and 63.4% for the year ended
June 30, 1998. The efficiency improvement from fiscal 1997 to fiscal 1998 was
due primarily to the economies of scale and leverage inherent in our business
model as well as an increase in the percentage of electronic transaction
processing versus paper processing, which resulted in lower customer care and
remittance costs per transaction. For the year ended June 30, 1998, we added 10%
to the rate of payments processed electronically. Electronic transactions for
Intuit Services Corporation operations alone increased from 10% at June 1997 to
19% at June 1998.
Research and Development. Our research and development costs were $32.9
million or 18.6% of total revenue for the year ended June 30, 1997 and $36.3
million or 15.5% of total revenue for the year ended June 30, 1998. Excluding
purchased profits, research and development costs were 17.8% of total revenue
for the year ended June 30, 1997 and 15.5% of total revenue for the year ended
June 30, 1998. The absolute dollar increase of $3.4 million was primarily due to
additional resources supporting our platform integration efforts referred to as
project Genesis and efforts associated with Year 2000 compliance activities.
There were no software development costs capitalized for Year 2000 activities or
for project Genesis in either fiscal year, however approximately $0.7 million of
software development cost was capitalized in fiscal 1998 for initial phases of
key customer care and electronic billing initiatives.
Sales and Marketing. Our sales and marketing costs were $32.7 million
or 18.5% of total revenues for the year ended June 30, 1997 and $28.8 million
or 12.3% of total revenues for the year ended June 30, 1998. In conjunction with
our purchase of Intuit Services Corporation, we agreed to pay a $1.0 million per
month marketing charge to Intuit, Inc. for six months commencing in February
1997. Excluding purchased profits and five months of Intuit, Inc. marketing
charges in fiscal 1997 and one month in fiscal 1998, our sales and marketing
costs were 15.0% of total revenue for the year ended June 30, 1997 and 11.9% of
total revenue for the years ended June 30, 1998. Underlying costs as a
percentage of revenue has declined due to economies of scale and leverage
inherent in our business model.
General and Administrative. Our general and administrative expenses
were $18.7 million or 10.6% of total revenue for the year ended June 30, 1997
and $20.7 million or 8.8% of total revenue for the year ended June 30, 1998.
Excluding purchased profits, our general and administrative expenses were 10.2%
of total revenue for the year ended June 30, 1997 and 8.8% of total revenue for
the year ended June 30, 1998. Overall, our general and administrative costs
decreased as a percentage of revenue from fiscal 1997 to fiscal 1998 due to our
ability to leverage corporate support services as revenue continues to grow.
Depreciation and Amortization. Our depreciation and amortization
expenses increased slightly from $24.9 million for the year ended June 30, 1997
to $25.0 million for the year ended June 30, 1998. Amortization declined due to
the sales of our securities business in October 1996, our recovery management
business in August 1997, our item processing business in March 1998 and our wire
and
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electronic banking businesses in April 1998, reductions in intangible assets
related to the release of a deferred tax benefit valuation allowance in the
quarter ended September 30, 1997 and a purchase price adjustment related to our
Intuit Services Corporation acquisition in the quarter ended December 31, 1997.
These reductions were offset by depreciation and amortization resulting from
purchases of property, plant and equipment required for Genesis development,
data center centralization and in support of growth of the business and tangible
and intangible asset additions related to our purchase of Intuit Services
Corporation in January 1997.
In-Process Research and Development. The in-process research and
development charge of $140.0 million in 1997 was related to our purchase of
Intuit Services Corporation and $0.7 million in 1998 was related to our purchase
of Advanced Mortgage Technologies, Inc. Amounts allocated to in-process research
and development for each of the acquisitions were based on independent
appraisals and were expensed at the time of the related acquisition.
Charge for Stock Warrants. The $32.8 million charge for stock warrants
in the year ended June 30, 1998 resulted from two separate transactions. A $32.4
million charge resulted from the vesting of three million warrants in March 1998
related to a ten-year processing agreement that we announced in October 1997
with a strategic partner. A $0.4 million charge resulted from the vesting of
25,000 warrants in June of 1998 related to a five-year consulting agreement with
a third party. These non-cash charges were based on a Black-Scholes option
pricing model valuation of the warrants at the date of vesting. An additional
seven million warrants will vest incrementally upon achievement of a series of
certain strategic targets and each incremental vesting of warrants will result
in a future non-cash charge based on the fair market value of our warrants and
our common stock at the date of vesting.
Exclusivity Amortization. The exclusivity amortization expense in the
years ended June 30, 1997 and 1998 were the result of the exclusivity
arrangement we entered into with Intuit, Inc. in connection with our purchase of
Intuit Services Corporation in January 1997.
Net Gain on Dispositions of Assets. The net gain on dispositions of
assets totaling $6.3 million in the year ended June 30, 1997 resulted from the
sale of the credit card business in March 1997. The gain of $36.2 million in
fiscal 1998 was the net result of several transactions. We realized gains on the
sales of our recovery management business of $28.2 million, our item processing
business of $3.2 million, and electronic banking and wire businesses of $14.7
million. These gains were offset by an anticipated loss from the pending sale of
the leasing business of $4.7 million, expected losses on non-cancelable
contracts and related costs totaling $1.0 million resulting in the decision to
exit the web investor portion of our Investment Services segment and charges
totaling $4.2 million for certain equipment and other assets related primarily
to data center consolidations where we determined the book value of the assets
exceeded their net realizable value.
Interest. Our interest income increased by $1.3 million or 59%, from
$2.2 million for the year ended June 30, 1997 to $3.5 million for the year ended
June 30, 1998. This increase was the result of an increase in average cash and
investments from $39.2 million to $49.3 million combined with an increase in
average yield.
Our interest expense decreased from $0.8 million for the year ended
June 30, 1997 to $0.6 million for the years ended June 30, 1998 due to lower
outstanding notes payable and capital lease obligations from fiscal 1997 to
fiscal 1998.
Income Taxes. Our effective income tax benefit was 6.9% for the year
ended June 30, 1997 and 14.8% for the year ended June 30, 1998. For both years,
the difference between our effective rate and the statutory rate of 35% was due
primarily to non-deductible in-process research and development expenses,
non-deductible intangible amortization, and state and local taxes.
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SEGMENT INFORMATION
The following table sets forth our operating revenue and operating
income by industry segment for the periods noted. Charges identified as
exclusivity amortization, in-process research and development, charge for stock
warrants, and net gain on dispositions of assets were separated from the
operating results of the segment for a better understanding of the underlying
performance of each segment. Explanations of these charges can be found in the
discussions above:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Operating Revenue:
Electronic Commerce ............................. $ 85,926 $ 137,972 $ 169,443
Software ........................................ 68,113 66,143 41,384
Investment Services ............................. 22,406 29,749 39,304
---------- ---------- ----------
Total Operating Revenue ................ $ 176,445 $ 233,864 $ 250,131
========== ========== ==========
Operating Income (Loss):
Operating Income (Loss) Excluding Specific Items:
Electronic Commerce .......................... $ (20,487) $ (1,342) $ (5,490)
Software ..................................... 4,324 8,393 14,637
Investment Services .......................... 2,171 6,225 8,093
Corporate .................................... (21,449) (20,116) (23,348)
Specific Items:
Exclusivity Amortization ..................... (5,958) (2,963) --
In-Process Research and Development .......... (140,000) (719) (2,201)
Charge for Stock Warrants .................... -- (32,827) --
Net Gain on Dispositions of Assets ........... 6,250 36,173 4,576
---------- ---------- ----------
Total Operating Income (Loss) .......... $ (175,149) $ (7,176) $ (3,733)
========== ========== ==========
</TABLE>
YEARS ENDED JUNE 30, 1998 AND 1999
Revenue in our Electronic Commerce segment increased by 23%, or $31.4
million, from $138.0 million for the year ended June 30, 1998, to $169.4 million
for the year ended June 30, 1999. This increase was primarily due to an increase
in subscribers from approximately 2.4 million at June 30, 1998 to approximately
3.0 million at June 30, 1999.
Our operating loss in our Electronic Commerce segment increased from a
loss of $1.3 million for the year ended June 30, 1998 to a loss of $5.5 million
for the year ended June 30, 1999. This increase in our operating loss was due to
the temporary slowing of revenue growth caused by financial institutions
converting their PC-based systems to our new web-based platform. At the same
time, we continued to invest in our payment processing infrastructure to enhance
our future quality and efficiency in anticipation of the revenue growth expected
when financial institutions complete their technology conversions and refocus
their marketing efforts on new subscriber growth. These investments include
additional customer care resources geared toward improved quality and
significant E-Bill implementation costs, which were not offset by additional
revenue during the year ended June 30, 1999.
As of June 30, 1999, we had activated 29 billers for our E-Bill product
offering, had an additional 21 billers actively engaged in the implementation
process and had another 14 awaiting implementation. We believe that as we
continue to activate additional billers for our electronic billing and payment
product offerings, the number of users will continue to increase, which should
drive revenue and operating income growth in the future.
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In January 1999, we announced a distribution agreement with Yahoo!
designed to promote on-line billing, payment and electronic banking to Internet
users. Our planned investments related to this agreement has placed downward
pressure on margins in the second half of fiscal 1999, however, these costs will
prepare us for up to one million additional subscribers for our services. These
investments have allowed us to grow our professional services and customer care
staff to support anticipated greater deployment of electronic billing and
payment services by billers, as well as expand our sales and marketing and
related training activities.
In April 1999, we experienced a system error that led some users of our
electronic bill payment service to experience intermittent problems accessing
and using the system. As a result of this outage, we recorded charges totaling
$2.7 million. Net of this charge, the operating loss in our Electronic Commerce
segment would have been $2.8 million in the year ended June 30, 1999.
Revenues in our Software segment declined by $24.7 million or 37%, from
$66.1 million for the year ended June 30, 1998 to $41.4 million for the year
ended June 30, 1999. This decline reflects the impact of the divestiture of
several of our software businesses. Excluding the effects of the divestitures,
revenue in our Software segment rose by $2.2 million or 6%, from $37.4 million
in the year ended June 30, 1998 to $39.6 million for the year ended June 30,
1999. Despite this increase, our license revenue was lower than anticipated due
primarily to purchasing moratoriums imposed by potential customers who deferred
new software purchases as a result of addressing their internal Year 2000
issues. This slowdown in license sales was offset by greater maintenance and
consulting revenue resulting from prior sales of software licenses.
Operating income in our Software segment increased from $8.4 million
for the year ended June 30, 1998 to $14.6 million for the year ended June 30,
1999. Excluding the effects of the divestitures, operating income increased from
$10.7 million for the year ended June 30, 1998 to $16.4 million for the year
ended June 30, 1999. Of the increase in retained business operating income of
$5.7 million, $2.2 million was a result of the revenue growth previously
described and approximately $2.4 million was a reporting anomaly related to
allocated corporate fixed costs in the fiscal 1998 results. Our pro forma
operating income in the year ended June 30, 1998 was carrying a full burden of
allocated overhead from our 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 our Software segment
remained fairly consistent from year to year.
Revenues in our Investment Services segment increased by $9.6 million,
or 32%, from $29.7 million for the year ended June 30, 1998 to $39.3 million for
the year ended June 30, 1999. On March 8, 1999, we acquired Mobius Group to
augment the product line of this segment. Investment consultants and asset
managers may now use Mobius Group's 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 platform and trading tools; and use either M-Watch or CheckFree APL
for their investment oversight and reporting to the end client. Excluding the
effects of the acquisition, revenue increased by $7.6 million, or 26%, from
$29.7 million for the year ended June 30, 1998 to $37.4 million for the years
ended June 30, 1999. The increase was due primarily to an increase in the number
of institutional portfolios managed from approximately 500,000 at June 30, 1998
to approximately 715,000 at June 30, 1999, offset somewhat by an increase in the
number of retail brokerage accounts managed which carry a lower unit price.
Operating income in our Investment Services segment increased from $6.2
million for the year ended June 30, 1998 to $8.1 million for the year ended June
30, 1999. Excluding the effects of the acquisition of Mobius Group, operating
income increased from $6.2 million for the year ended June 30, 1998 to $8.7
million for the year ended June 30, 1999. This increase was due to the greater
number of portfolios managed, offset somewhat by costs of approximately $0.9
related to the moving of the segment's main office in fiscal 1999.
Expenses in our Corporate segment represent charges for human
resources, legal, finance and various other unallocated overhead charges. The
Corporate segment charges were $20.1 million and $23.3
13-11
<PAGE> 12
million for the years ended June 30, 1998 and 1999, respectively. The fiscal
1999 results included one-time charges of $0.6 million incurred in December 1998
for the formation of a special-purpose subsidiary created to administer our
employee medical benefits program; $0.4 million in real estate related charges
incurred in the sale of a building in Columbus, Ohio in June of 1998; and $0.9
million in charges incurred in the preparation of a follow-on stock offering
that was terminated in June 1998. Net of these one-time charges, our corporate
charges remained relatively consistent at 8.6% of total revenue in both years.
YEARS ENDED JUNE 30, 1997 AND 1998
Revenue in our Electronic Commerce business unit increased by $52.0
million, or 61%, from $85.9 million for the year ended June 30, 1997 to $137.9
million for the year ended June 30, 1998. On a pro forma basis, assuming twelve
months of Intuit Services Corporation results are included in and the credit
card processing business is excluded from reported results, our revenue
increased 50%. This growth was driven primarily by growth in subscribers from
approximately 1.7 million at June 30, 1997 to approximately 2.4 million at June
30, 1998.
Operating losses in our Electronic Commerce segment improved from $20.5
million for the year ended June 30, 1997 to $1.3 million for the year ended June
30, 1998. On a pro forma basis, operating results improved from a loss of $31.4
million for the year ended June 30, 1997 to a loss of $1.3 million for the year
ended June 30, 1998. Favorable operating results are primarily due to continued
revenue growth as well as continued efficiency improvements in remittance and
customer care costs, reduction in costs from the integration of Intuit Services
Corporation and significant economies of scale and leverage inherent in the
segment's business model. Cost improvements in customer care and remittance are
primarily the result of growth in the percentage of electronic versus paper
payments, year over year. In the fourth quarter of fiscal 1998, many of our
financial institution clients reduced marketing efforts toward new subscribers
to allow them time to convert from a PC based software front-end offering to a
more efficient web-based offering. This resulted in a decline in quarter over
quarter subscriber growth and had a dampening effect on subscriber growth going
forward.
Revenue in our Software segment decreased from $68.1 million for the
year ended June 30, 1997 to $66.1 million for the year ended June 30, 1998. On
a pro forma basis, adjusting the prior year to exclude the effect of purchased
profits and to eliminate results of the divested credit management business,
revenue increased by 6% year over year. Revenue growth was primarily the result
of increased license sales driven by growth in our reconciliation and compliance
products and related maintenance and services revenue generated from new license
sales in fiscal 1997 and 1998.
Operating profits in our Software segment improved from $4.3 million
for the year ended June 30, 1997 to $8.4 million for the year ended June 30,
1998. On a pro forma basis, operating income increased from $5.3 million to $8.3
million for the same periods, respectively. Gains on the sale of divested
businesses allowed us to release a deferred tax benefit valuation allowance
which in turn reduced goodwill and other intangible assets resulting from our
Servantis acquisition. Additionally, at the end of the third quarter of fiscal
1998, when we announced intentions to divest software units, related intangible
assets were reclassified on the balance sheet as assets held for sale and we
discontinued amortization on these assets at that time. The resulting decrease
in intangible amortization in our Software segment on a year over year basis was
approximately $3.7 million, which was the primary reason for the improvement.
Revenue in our Investment Services segment increased from $22.4 million
for the year ended June 30, 1997 to $29.7 million for the year ended June 30,
1998. This improvement is due primarily to an increase in portfolios managed
from approximately 350,000 at June 30, 1997 to approximately 500,000 at June 30,
1998.
Operating profits in our Investment Services segment increased from
$2.2 million for the year ended June 30, 1997 to $6.2 million in the year ended
June 30, 1998. Improvements in operating results were due to revenue growth and
the leverage and economies of scale inherent in the segment's business model.
13-12
<PAGE> 13
Our Corporate segment incurred expenses of $21.4 million for the year
ended June 30, 1997 and $20.1 million for the year ended June 30, 1998. The
improvement was due to successful efforts to assimilate the various acquisitions
and leverage the existing infrastructure in response to overall growth in the
business.
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 are moving 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 includes the migration of
customers from our Chicago and Columbus systems to the Year 2000-ready Genesis
Platform followed by applicable testing on that system which will be 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 are 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. All remaining remediation efforts are on target to be completed
during the quarter ended September 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 95% 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 not 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 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 we have not yet anticipated. The estimate of total cost has
increased by $0.7 million since our last estimate at March 31, 1999 due to
additional support we are providing our financial institution customers in their
testing requirements and our decision to perform a complete revalidation of our
testing. We believe that associated costs are adequately budgeted and provided
for in our operating plans.
13-13
<PAGE> 14
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL COST TO
BUSINESS SEGMENT 1997 1998 1999 COMPLETE TOTAL
- ------------------- --------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Electronic Commerce $ 0 $ 100 $ 1,360 $ 800 $ 2,260
Software .......... -- 500 525 100 1,125
Investment Services -- 375 937 239 1,551
Corporate ......... -- -- 270 100 370
--------------- --------------- --------------- --------------- ---------------
Total ....... $ 0 $ 975 $ 3,092 $ 1,239 $ 5,306
=============== =============== =============== =============== ===============
</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
The following table sets forth a summary of cash flow activity and
should be referred to in conjunction with statements regarding our liquidity and
capital resources:
<TABLE>
<CAPTION>
SUMMARY OF CASH FLOWS FOR
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow provided by (used in) operating activities ............ $ (8,472) $(11,673) $ 25,571
Cash flow provided by (used in) investing activities ............ 25,553 12,767 (16,217)
Cash flow provided by (used in) financing activities ............ (5,982) 3,355 (33,443)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...... $ 11,099 $ 4,449 $(24,089)
======== ======== ========
</TABLE>
During the quarters ended September 30, 1998 and December 31, 1998, we
expended approximately $31.2 million to repurchase shares of our own stock. In
spite of this expenditure, we retained approximately $23.0 million in cash, cash
equivalents and short-term investments as of June 30, 1999. Our June 30, 1999
balance sheet reflects a current ratio of 1.41 and working capital of $24.2
million.
13-14
<PAGE> 15
Over the next fiscal year, we expect to generate positive cash flow from our
operations. Additionally, we are negotiating a significant lease line of credit
to finance future equipment needs in support of expected growth. We believe that
existing cash, cash equivalents, short-term investments and available financing
alternatives will be more than sufficient to meet our presently anticipated
requirements for the foreseeable future. To the extent that additional capital
resources are required, we have access to an untapped $20.0 million line of
credit and are in the process of expanding this credit facility as well.
For the year ended June 30, 1999, we generated $25.6 million of cash
flow from operations. Of this amount, $14.3 million represented net proceeds
from trading securities transactions, which GAAP requires us to reflect in cash
flow from operations.
From an investing perspective we used $40.4 million for the purchase of
property and software, of which approximately $14.9 million was for the purchase
of land and a building in Dublin, Ohio and another $6.4 million in leasehold
improvements to ready the building for occupancy. The remaining $19.1 million
was used for computer equipment and software and leasehold improvements in
support of initiatives to grow the business and improve quality. We received
$18.4 million from the net sale of the various software business divestitures
during the fiscal year and the sale of a building in Columbus, Ohio and $14.9
million from the repayment of a note receivable established in fiscal 1998
related to the purchase of the Dublin, Ohio facility. We capitalized $8.0
million in software development costs related to new business initiatives in all
three of our business segments. Additionally, we spent approximately $0.2
million in cash in connection with the acquisition of Mobius Group, purchased
$1.9 million in held-to-maturity securities and received $1.0 million in
proceeds from the sale of held-to-maturity securities.
From a financing perspective, we used $31.3 million in the purchase of
approximately 4.7 million shares of treasury stock for an average price of
approximately $6.65 per share. We used $3.3 million in cash for principal
payments under capital leases and another $3.6 million to fund an escrow account
to release our obligation for bonds with the Department of Economic Development
of the State of Ohio to facilitate the sale of land and a building in Columbus,
Ohio. We received $2.9 million in proceeds from the exercise of options under
the employee stock option plan and $1.9 million from the purchase of shares
under the employee stock purchase plan.
For the year ended June 30, 1998, we used $11.7 million of cash flow in
operating activities. During this year, $24.5 million in net investments in
trading securities were reflected as cash used in operations. In previous
periods, all of our investments were classified as available for sale, and,
therefore, related investment activities did not impact operating cash flow. The
change to trading securities reflects efforts to maximize yields within our
conservative investment guidelines and not to significantly impact the risk
profile of our portfolio. From an investing perspective, we generated $54.9
million of cash from the sale of various software businesses, $24 million from
sales and maturities of available-for-sale investments, $8.9 million from
receipt of a purchase price adjustment related to our Intuit Services
Corporation acquisition and $0.3 from the sales of other assets. Investing
receipts were offset by $27.9 million in investment in property additions,
primarily for computer and operational equipment and facilities related to
completion of the Genesis Platform, $20.3 million in the purchase of
investments, $14.9 million of investment in a note receivable in conjunction
with the proposed purchase of a building in Dublin, Ohio, $10.0 million as final
payment on the purchase of Intuit Services Corporation; payment of $1.0 million
for the purchase of Advanced Mortgage Technology, Inc., and $0.7 million in
capitalization of software development costs. From a financing perspective, $5.4
million of cash was provided by stock option exercises under our Stock Option
Plans, stock purchases under our Associate Stock Purchase Plan and our matching
contributions under our 401(k) Plan, which was offset by payments of $1.1
million in satisfaction of an outstanding note payable and $0.9 million in
capital lease obligations. As a result of the above, our current ratio improved
from 1.3 at June 30, 1997 to 2.3 at June 30, 1998 and related working capital
increased from $20.0 million at June 30, 1997 to $78.2 million at June 30, 1998.
For the year ended June 30, 1997, we used $8.5 million for operating
activities. The sale of businesses generated proceeds of $29.5 million while
$0.6 million was received from the exercise of stock options during the year. We
invested $11.4 million, net of cash acquired, for the purchase of Intuit
Services Corporation. Some stockholders from the Security APL acquisition
exercised options to sell
13-15
<PAGE> 16
276,469 common shares back to us at a price of $19.00 per share. We received
proceeds of $19.5 million on net maturities and sales of available-for-sale
investments and we invested $9.1 million in property and software additions.
Principal payments on capital leases totaled $1.1 million.
INFLATION
We believe the effects of inflation have not had a significant impact
on our results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In June 1998, the FASB 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our annual report 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 Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Annual Report are based on information presently available to our
management. We assume no obligation to update any forward-looking statements.
13-16
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CheckFree Holdings Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CheckFree
Holdings Corporation (the "Company") and its subsidiaries as of June 30, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1997, 1998, and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
June 30, 1998 and 1999, and the results of their operations and their cash flows
for the years ended June 30, 1997, 1998, and 1999 in conformity with generally
accepted accounting principles.
Atlanta, Georgia
August 9, 1999
13-17
<PAGE> 18
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 36,535 $ 12,446
Investments ....................................................... 24,533 10,266
Accounts receivable, net .......................................... 32,960 45,660
Assets held for sale .............................................. 15,881 --
Note receivable ................................................... 14,882 --
Prepaid expenses and other assets ................................. 4,678 7,800
Deferred income taxes ............................................. 7,231 6,513
--------- ---------
Total current assets ............................... 136,700 82,685
PROPERTY AND EQUIPMENT, Net ............................................ 50,920 69,823
OTHER ASSETS:
Capitalized software, net ......................................... 11,387 20,059
Intangible assets, net ............................................ 30,474 45,875
Investments ....................................................... 1,006 1,875
Deferred income taxes ............................................. 12,889 21,920
Other noncurrent assets ........................................... 6,736 10,524
--------- ---------
Total other assets ................................. 62,492 100,253
--------- ---------
$ 250,112 $ 252,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 8,536 $ 9,634
Accrued liabilities ............................................... 25,160 26,971
Current portion of long-term obligations .......................... 1,180 1,640
Deferred revenue .................................................. 19,710 20,195
Income taxes payable .............................................. 3,876 --
--------- ---------
Total current liabilities .......................... 58,462 58,440
ACCRUED RENT AND OTHER ................................................. 1,329 3,536
OBLIGATIONS UNDER CAPITAL LEASES- Less current portion ................. 6,467 3,882
COMMITMENTS (Note 21)
STOCKHOLDERS' EQUITY:
Preferred stock- 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding ............................... -- --
Common stock- 150,000,000 authorized shares, $.01 par value;
issued 56,364,839 and 57,305,659 shares, respectively;
outstanding 56,364,839 and 51,756,278 shares, respectively ..... 564 518
Additional paid-in-capital ........................................ 492,109 480,385
Less:
Treasury stock- at cost; 963,295 shares, no shares, respectively (4,362) --
Accumulated deficit ............................................ (304,457) (294,000)
--------- ---------
Total stockholders' equity ......................... 183,854 186,903
--------- ---------
$ 250,112 $ 252,761
========= =========
</TABLE>
See notes to consolidated financial statements
13-18
<PAGE> 19
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Processing and servicing ................ $ 94,528 $ 159,255 $ 201,059
Merchant discount ....................... 9,994 -- --
License fees ............................ 33,088 28,952 15,975
Maintenance fees ........................ 22,567 25,848 17,746
Other ................................... 16,268 19,809 15,351
------------ ------------ ------------
Total revenues ........... 176,445 233,864 250,131
EXPENSES:
Cost of processing, servicing and support 102,721 129,924 146,704
Research and development ................ 32,869 36,265 21,085
Sales and marketing ..................... 32,670 28,839 32,354
General and administrative .............. 18,707 20,677 31,466
Depreciation and amortization ........... 24,919 24,999 24,630
In-process research and development ..... 140,000 719 2,201
Charge for stock warrants ............... -- 32,827 --
Exclusivity amortization ................ 5,958 2,963 --
------------ ------------ ------------
Total expenses ........... 357,844 277,213 258,440
Net gain on dispositions of assets ...... 6,250 36,173 4,576
------------ ------------ ------------
LOSS FROM OPERATIONS ......................... (175,149) (7,176) (3,733)
OTHER:
Interest income ......................... 2,153 3,464 2,799
Interest expense ........................ (834) (632) (618)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES ..................... (173,830) (4,344) (1,552)
INCOME TAX BENEFIT ........................... (12,017) (641) (12,009)
------------ ------------ ------------
NET INCOME (LOSS) ............................ $ (161,813) $ (3,703) $ 10,457
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ...... $ (3.44) $ (0.07) $ 0.20
============ ============ ============
Equivalent number of shares ............. 46,988,225 55,086,742 52,444,375
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ...... $ (3.44) $ (0.07) $ 0.18
============ ============ ============
Equivalent number of shares ............. 46,988,225 55,086,742 56,529,165
============ ============ ============
</TABLE>
See notes to consolidated financial statements
13-19
<PAGE> 20
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL NUMBER OF
SHARES OF STOCK AT PAID-IN SHARES OF
COMMON STOCK PAR CAPITAL TREASURY STOCK
------------ ------------ ----------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE- JUNE 30, 1996 ................... 42,274,800 $ 423 $ 276,822 (757,536)
Net loss ............................ -- -- -- --
Stock options exercised ............. 636,309 6 591 --
Tax benefit associated with exercise
of stock options ............... -- -- 887 --
Issuance of common stock and stock
options pursuant to acquisitions 12,635,212 126 176,550 --
Treasury stock acquired ............. -- -- -- (284,016)
------------ ------ --------- ----------
BALANCE- JUNE 30, 1997 ................... 55,546,321 555 454,850 (1,041,552)
Net loss ............................ -- -- -- --
Stock options exercised ............. 708,661 8 2,204 --
Employee stock purchases ............ 109,857 1 1,572 --
401(k) match ........................ -- -- -- 78,257
Warrants issued ..................... -- -- 32,827 --
Tax benefit associated with exercise
of stock options ............... -- -- 656 --
------------ ------ --------- ----------
BALANCE- JUNE 30, 1998 ................... 56,364,839 564 492,109 (963,295)
Net income .......................... -- -- -- --
Stock options exercised ............. 354,758 3 1,605 --
Employee stock purchases ............ 48,748 1 968 48,631
401(k) match ........................ -- -- -- 74,981
Treasury stock acquired ............. -- -- -- (4,709,698)
Treasury stock retired .............. (5,549,381) (55) (33,610) 5,549,381
Issuance of common stock pursuant to
acquisition .................... 537,314 5 17,995 --
Tax benefit associated with exercise
of stock options ............... -- -- 1,318 --
------------ ------ --------- ----------
BALANCE- JUNE 30, 1999.................... 51,756,278 $ 518 $ 480,385 --
============ ====== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY TOTAL
STOCK AT ACCUMULATED STOCKHOLDERS'
COST DEFICIT EQUITY
------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE- JUNE 30, 1996 .................. $ (629) $ (138,941) $ 137,675
Net loss ............................ -- (161,813) (161,813)
Stock options exercised ............. -- -- 597
Tax benefit associated with exercise
of stock options ............... -- -- 887
Issuance of common stock and stock
options pursuant to acquisitions -- -- 176,676
Treasury stock acquired ............. (5,378) (5,378) (5,378)
------------- ------------- ----------
BALANCE- JUNE 30, 1997 ................... (6,007) (300,754) 148,644
Net loss ............................ -- (3,703) (3,703)
Stock options exercised ............. (47) -- 2,165
Employee stock purchases ............ -- -- 1,573
401(k) match ........................ 1,692 -- 1,692
Warrants issued ..................... -- -- 32,827
Tax benefit associated with exercise
of stock options ............... -- -- 656
------------- ------------- ----------
BALANCE- JUNE 30, 1998 ................... (4,362) (304,457) 183,854
Net income .......................... -- 10,457 10,457
Stock options exercised ............. -- -- 1,608
Employee stock purchases ............ 1,070 -- 2,039
401(k) match ....................... 963 -- 963
Treasury stock acquired ............. (31,336) -- (31,336)
Treasury stock retired .............. 33,665 -- --
Issuance of common stock pursuant to
acquisition .................... -- -- 18,000
Tax benefit associated with exercise
of stock options ............... -- -- 1,318
------------- ------------- ----------
BALANCE- JUNE 30, 1999.................... $ -- $ (294,000) $ 186,903
============= ============= ==========
</TABLE>
See notes to consolidated financial statements
13-20
<PAGE> 21
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................................. $ (161,813) $ (3,703) $ 10,457
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Write off of in-process research and development ................... 140,000 719 2,201
Write off of capitalized software .................................. 3,619 -- --
Issuance of warrants ............................................... -- 32,827 --
Exclusivity amortization ........................................... 4,938 2,963 --
Depreciation and amortization ...................................... 24,919 24,999 24,630
Deferred income tax provision ...................................... (13,101) (5,499) 854
Net gain on dispositions of assets ................................. (6,250) (36,173) (4,576)
Purchases of investments- Trading .................................. -- (28,799) (10,416)
Proceeds from maturities and sales of investments, net- Trading .... -- 4,267 24,683
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable ........................................... (10,952) (5,095) (6,976)
Prepaid expenses and other .................................... (2,976) (1,834) 1,434
Accounts payable .............................................. 1,249 1,492 988
Accrued liabilities ........................................... 4,203 (568) (2,194)
Deferred revenue .............................................. 7,509 239 1,739
Income tax accounts ........................................... 183 2,492 (17,253)
------------ ------------ ------------
Net cash provided by (used in) operating activities . (8,472) (11,673) 25,571
INVESTING ACTIVITIES:
Purchase of property and software .................................. (9,114) (27,939) (40,444)
Proceeds from sale of assets ....................................... 29,488 54,990 18,435
Purchase of note receivable ........................................ -- (14,882) --
Proceeds from repayment of note receivable ......................... -- -- 14,882
Proceeds from purchase price adjustment ............................ -- 8,889 --
Capitalization of software development costs ....................... -- (731) (8,031)
Purchase of business, net of cash acquired ......................... (11,363) (11,000) (190)
Purchases of investments- Held to maturity ......................... (3,000) (1,006) (1,875)
Proceeds from maturities and sales of investments- Held to maturity -- -- 1,006
Purchases of investments- Available for sale ....................... -- (19,311) --
Proceeds from maturities and sales of investments- Available
for sale ...................................................... 19,542 23,757 --
------------ ------------ ------------
Net cash provided by (used in) investing activities . 25,553 12,767 (16,217)
FINANCING ACTIVITIES:
Repayment of notes payable and other debt extinguishment ........... (69) (1,144) --
Principal payments under capital lease obligations ................. (1,082) (931) (3,327)
Escrow deposit associated with capital lease obligation ............ -- -- (3,637)
Proceeds from stock options exercised, including related tax benefits 597 2,165 2,926
Proceeds from employee stock purchase plan .......................... -- 1,573 1,931
Proceeds from employee 401(k)plan ................................... -- 1,692 --
Purchase of treasury stock .......................................... (5,378) -- (31,336)
Payments on stockholder notes ....................................... (50) -- --
------------ ------------ -------------
Net cash provided by (used in) financing activities .. (5,982) 3,355 (33,443)
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................................... 11,099 4,449 (24,089)
CASH AND CASH EQUIVALENTS:
Beginning of period ................................................. 20,987 32,086 36,535
------------ ------------ -------------
End of period ....................................................... $ 32,086 $ 36,535 $ 12,446
============ ============ =============
</TABLE>
See notes to consolidated financial statements
13-21
<PAGE> 22
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - CheckFree Holdings Corporation (the "Company") is the
parent company of CheckFree Corporation ("CFC"), the principal operating
company of the business. CFC was organized in 1981 and is a leading
provider of transaction processing services, software and related products
to financial institutions and businesses and their customers throughout
the United States. See Note 19 for a description of the Company's business
segments. Following a number of acquisitions and divestitures, CFC
reorganized its corporate structure on December 22, 1997. In connection
with the reorganization, holders of common stock ("Common Stock") of CFC
became holders of an identical number of shares of Common Stock of the
Company. The restructuring was effected by a merger conducted pursuant to
Section 251(g) of the Delaware General Corporation Law, which provides for
the formation of a holding company structure without a vote of the
stockholders of the Company.
Principles of Consolidation - The accompanying consolidated financial
statements include the results of operations of the Company, its
wholly-owned subsidiaries, and CheckFree Management Corporation, of which
the Company is the majority owner. All significant intercompany
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Processing Agreements - The Company has agreements with transaction
processors to provide origination and settlement services for the Company.
Under the agreements, the Company must fund service fees and returned
transactions when presented. These agreements expire at various dates.
Transaction Processing - In connection with the timing of the Company's
financial transaction processing, the Company is exposed to credit risk in
the event of nonperformance by other parties, such as returns and
chargebacks. The Company utilizes credit analysis and other controls to
manage its credit risk exposure. The Company also maintains a reserve for
future returns and chargebacks.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments (primarily United States government agency obligations and
commercial paper) purchased with maturities of three months or less to be
cash equivalents. Substantially all cash and cash equivalents are on
deposit with six financial institutions.
Investments - The Company's investments consist primarily of United States
government, government agency or state obligations. The Company classifies
these investments as available-for-sale, trading or held-to-maturity
securities in accordance with Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities". Investments classified as available-for-sale are carried at
fair value, with unrealized holding gains and losses reported as a
separate component of stockholders' equity. Trading securities are carried
at market value and unrealized holding gains and losses are included in
income. Held-to-maturity securities are carried at amortized cost.
Property and Equipment - Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line method over
the estimated useful lives as follows: land improvements, building and
building improvements, 15 to 30 years; computer equipment, software, and
furniture, 3 to 7 years. Equipment under capital leases are amortized
using the straight-line method over the lesser of their estimated useful
lives or the terms of the leases. Leasehold improvements are amortized
over the lesser of the estimated useful lives or remaining lease periods.
13-22
<PAGE> 23
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capitalized Software Costs - Software development costs incurred prior to
the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the technological feasibility of
the subject software product has been established are capitalized in
accordance with SFAS 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Capitalized software development
costs are amortized on a product-by-product basis using either the
estimated economic life of the product on a straight-line method over
three to five years, or the ratio of current year gross product revenue to
current and anticipated future gross product revenue, whichever is
greater. Unamortized software development costs in excess of estimated
future net revenues from a particular product are written down to
estimated net realizable value.
Amortization of software costs totaled $7,687,000, $5,198,000 and
$2,567,000, for the years ended June 30, 1997, 1998 and 1999,
respectively.
Intangible Assets - The costs of identified intangible assets are
generally amortized on a straight-line basis over periods from 8 months to
15 years. Goodwill is amortized on a straight-line basis over 10 to 15
years. At each balance sheet date, a determination is made by management
to ascertain whether the intangible assets have been impaired based on
several criteria, including, but not limited to, sales trends,
undiscounted operating cash flows, and other operating factors.
Capital Stock - The Company is authorized to issue up to 150,000,000
shares of $.01 par value Common Stock. In addition, the Company is
authorized to issue up to 15,000,000 shares of $.01 par value preferred
stock in one or more series and to establish such relative voting,
dividend, redemption, liquidation, conversion and other powers,
preferences, rights, qualifications, limitations and restrictions as the
Board of Directors may determine without further stockholder approval. No
preferred shares have been issued.
Basic and Diluted Earnings (Loss) Per Share -The Company reports Basic and
Diluted Earnings (Loss) Per Share in accordance with the provisions of
SFAS 128 "Earnings Per Share". Basic earnings (loss) per common share is
determined by dividing income (loss) available to common shareholders by
the weighted average number of common shares outstanding. Diluted
per-common-share amounts assume the issuance of common stock for all
potentially dilutive equivalent shares outstanding.
Impairment of Long-Lived Assets - In accordance with SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," the Company periodically assesses the likelihood of
recovering the cost of long-lived assets based on its expectations of
future profitability and undiscounted cash flows of the related business
operations. These factors, along with management's plans with respect to
the operations, are considered in assessing the recoverability of
property, equipment and purchased intangibles. During 1998, in conjunction
with the Company's platform integration efforts referred to as project
Genesis, the Company consolidated three processing centers from Chicago,
Illinois, Austin, Texas, and Columbus, Ohio, into one processing center
located in Norcross, Georgia. As a result of this consolidation and a
physical inventory of fixed assets at the related business units, all
identified assets which were determined to have no alternative use or
value were written off. Of the total write-off of $4.0 million, $3.0
million was recorded in the quarter ended September 30, 1997 and the
remaining $1.0 million in the quarter ended June 30, 1998.
Comprehensive Income - On July 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." The Statement requires disclosure of
total non-shareowner changes in equity and its components. 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 holding gains or losses on the
Company's available-for-sale securities. There were no available-for-sale
securities held during the year ended June 30, 1999 and the carrying value
of available-for-sale securities held during the years ended June 30, 1998
and 1997 approximated market value. As a result, there were no reported
unrealized gains or losses on available-for-sale securities during the
years ending June 30, 1997, 1998 and 1999.
13-23
<PAGE> 24
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Business Segments - On July 1, 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement defines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a
company's operating segments. The adoption of SFAS 131 did not have a
material impact on the Company's financial statement disclosures.
Recent Accounting Pronouncements - In March 1998, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("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.
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.
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the 1999 presentation.
REVENUE RECOGNITION
- Processing and Servicing - Processing and servicing revenues include
revenues from transaction processing, electronic funds transfer and
monthly service fees on consumer funds transfer services. The Company
recognizes revenue when the services are performed.
As part of processing certain types of transactions, the Company
earns interest from the time money is collected from its customers
until the time payment is made to the applicable merchants. These
revenues, which are generated from trust account balances not
included on the Company's balance sheet, are included in processing
and servicing and totaled $3,228,000, $9,676,000 and $11,846,000, for
the years ended June 30, 1997, 1998 and 1999, respectively.
- Merchant Discount - Merchant discount revenues are recognized when
the services are performed. Interchange fees incurred in the
settlement of merchant credit card transactions are included in
processing and servicing expenses.
- License Fees - On July 1, 1998, the Company adopted SOP 97-2,
"Software Revenue Recognition". The Statement provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1,
"Software Revenue Recognition". In accordance with the provisions of
SOP 97-2, the Company recognizes revenue from software license
agreements when there is persuasive evidence that an arrangement
exists, the fee is fixed and determinable, collectibility is probable
and the software has been shipped, provided that no significant
obligation remains under the contract.
- Maintenance Fees - Maintenance fee revenue is recognized ratably
over the term of the related contractual support period, generally 12
months.
- Other - Other revenue consists primarily of consulting and training
services. Consulting revenue is recognized principally on a
percentage-of-completion basis and training revenue is recognized
upon delivery of the related service.
13-24
<PAGE> 25
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
EXPENSE CLASSIFICATION
- Processing, Servicing and Support - Processing, servicing and
support costs consist primarily of data processing costs, customer
care and technical support, and third party transaction fees, which
consist primarily of ACH transaction fees.
- Research and Development - Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers
and business development personnel, and are reported net of
applicable capitalized development costs.
- Sales and Marketing - Sales and marketing expenses consist primarily
of salaries and commissions of sales employees, public relations and
advertising costs, customer acquisition fees and royalties paid to
distribution partners.
- General and Administrative - General and administrative expenses
consist primarily of salaries for administrative, executive, finance,
and human resource employees.
- Depreciation and Amortization - Depreciation and amortization on
capitalized assets is recorded on a straight-line basis over the
appropriate useful lives.
- In-process Research and Development - In-process research and
development consists of charges resulting from acquisitions whereby
the purchase price allocated to in-process software development was
based on the determination that in-process research and development
had no alternative future use after taking into consideration the
potential for usage of the software in different products, resale of
the software, or other internal use.
- Charge for Stock Warrants - Charge for stock warrants consists of
noncash charges for vested warrants issued to third parties under
agreements whereby issued warrants vest upon achievement of certain
strategic objectives.
- Exclusivity Amortization - Exclusivity amortization consists of the
amortization of an intangible asset established in conjunction with a
marketing agreement with a strategic partner whereby the Company
retains certain exclusive rights to bill payment processing through
the partner's financial management software over a specific period of
time.
2. ACQUISITIONS AND DISPOSITIONS
On 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 fair values at the date of the acquisition. The values ascribed
to acquired intangible assets and their respective useful lives are as
follows:
INTANGIBLE USEFUL
ASSET LIFE
------- -------
(IN THOUSANDS)
Goodwill ................................... $10,392 15
Customer base .............................. 4,429 15
Tradenames ................................. 3,709 10
Existing product technology ................ 1,864 5
Workforce .................................. 940 5
13-25
<PAGE> 26
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization of intangible assets is on a straight line basis over the
assets' respective useful life. Mobius Group's operations are included in
the 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 SFAS 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.
- 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.
13-26
<PAGE> 27
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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%
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.
13-27
<PAGE> 28
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- 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.
On October 3, 1997, the Company acquired certain assets of Advanced
Mortgage Technologies, Inc. ("AMTI") for cash of $1.0 million. The
acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their fair
values at the date of the acquisition. Of the total purchase price, $0.2
million was allocated to goodwill and $0.1 million to other identifiable
intangible assets. Additionally, $0.7 million was allocated to in-process
research and development, which was charged to operations at the time of
the acquisition.
On January 27, 1997, the Company acquired Intuit Services Corporation
("ISC") for a total of $199.0 million, including 12.6 million shares of
common stock valued at $177.2 million, the present value of cash payments
due to Intuit, Inc. under the Services and License Agreement of $19.6
million and acquisition costs of $2.2 million. The acquisition was treated
as a purchase for accounting purposes, and, accordingly, the assets and
liabilities were recorded based on their fair values at the date of the
acquisition. Of the total purchase price, $28.9 million was allocated to
goodwill. In addition, $140.0 million was allocated to in-process research
and development, which was charged to operations at the time of the
acquisition. $7.9 million was allocated to an exclusivity agreement with
Intuit, Inc. and was amortized on a straight-line basis over the
contractual life of eight months. A further $3.5 million was allocated to
other identifiable intangible assets and $20.3 million allocated to
tangible assets. ISC's operations are included in the consolidated results
of operations from the date of the acquisition.
Consistent with the Company's policy for internally developed software,
the Company determined the amounts to be allocated to in-process research
and development based on whether technological feasibility had been
achieved and whether there was any alternative future use for the
technology. As of the date of the acquisitions, the Company concluded that
the in-process research and development had no alternative future use
after taking into consideration the potential for usage of the software in
different products, resale of the software and internal usage.
The unaudited pro forma results of operations of the Company for the years
ended June 30, 1998 and 1999, assuming the acquisitions occurred at the
beginning of each period are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Total revenues ........................ $ 239,701 $ 255,427
Net income (loss) ..................... $ (3,417) $ 13,462
Basic earnings per share:
Net income (loss) per common share $ (0.06) $ 0.25
=============== ===============
Equivalent number of shares ...... 55,624 52,815
=============== ===============
Diluted earnings per share:
Net income (loss) per common share $ (0.06) $ 0.24
=============== ===============
Equivalent number of shares ...... 55,624 56,900
=============== ===============
</TABLE>
This information is presented to facilitate meaningful comparisons to
on-going operations and to other companies. The unaudited pro forma
amounts above do not include a charge for in-process research and
development of $2.2 million arising from the Mobius acquisition in 1999.
Previous operations of AMTI were insignificant and therefore, require no
pro forma considerations. The unaudited pro forma information is not
necessarily indicative
13-28
<PAGE> 29
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of the actual results of operations had the transactions occurred at the
beginning of the periods presented, nor should it be used to project the
Company's results of operations for any future periods.
On 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. Loss
on the sale amounted to $2.9 million.
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. Net gain on the sale amounted to $6.4 million.
On July 6, 1998 the Company divested itself of certain software related to
its leasing line of business. The Company paid the acquiring party
$639,000 in cash and agreed to five additional quarterly installments of
$60,000 each. Additionally, in conjunction with this transaction, the
Company agreed to pay $3.0 million to a customer to relieve the Company
and acquiring party of further obligations relating to a product related
consulting agreement. The loss of $4.7 million was recorded in the fourth
quarter of the year ended June 30, 1998.
On April 20, 1998, the Company sold certain software and related assets of
its wire transfer and cash management businesses for cash of $18.25
million resulting in a net gain on the sale of $14.7 million.
On March 24, 1998, the Company sold certain software and related assets of
its item processing business for cash of $3.4 million resulting in a net
gain on the sale of $3.2 million.
On August 29, 1997, the Company sold certain software and related assets
of its recovery management business for cash of $33.5 million resulting in
a net gain on the sale of $28.2 million.
On March 26, 1997, the Company sold certain assets and certain contracts
and licensed certain proprietary software for processing automatic
accounts receivable through credit cards or the Automated Clearing House
resulting in a net gain on the sale of $6.3 million.
The gain or loss on sale of assets described above is included in Net Gain
on Dispositions of Assets in the Company's Consolidated Statements of
Operations.
3. INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Held-to-Maturity-State Obligations ................................... $ 1,006 $ --
Held-to-Maturity-U.S. Government Agency Obligations .................. -- 1,875
Trading .............................................................. 24,533 10,266
-------- --------
Total ............................................ $ 25,539 $ 12,141
======== ========
</TABLE>
Held-to-Maturity - The difference between the amortized cost and the
aggregate fair value of held-to-maturity investments at June 30, 1998 and
1999 was insignificant. The held-to-maturity investment at June 30, 1998
was
13-29
<PAGE> 30
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
sold to provide funding for treasury stock purchases. The realized gain on
the sale of this investment was insignificant.
Trading - Trading investments are classified as current assets and are
recorded at fair value.
Contractual maturities of debt securities classified as held-to-maturity at
June 30, 1999 are as follows:
<TABLE>
<S> <C>
Due after one year through five years.................................. $ 1,875
===========
</TABLE>
Expected maturities may differ from contractual maturities because debt
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Trade accounts receivable ............................................ $ 22,739 $ 31,366
Unbilled trade accounts receivable ................................... 10,654 16,334
Other receivables .................................................... 3,037 2,390
-------- --------
Total ............................................. 36,430 50,090
Less allowance for doubtful accounts ................................. 3,470 4,430
-------- --------
Accounts receivable, net ......................... $ 32,960 $ 45,660
======== ========
</TABLE>
5. ASSETS HELD FOR SALE
In April 1998, the Company announced plans to divest several of its
software businesses through the sale of software and related assets.
Assets of the Company's mortgage, leasing, imaging, and safe box
accounting businesses totaling $15.9 million at June 30, 1998, were
comprised of trade, unbilled, and other accounts receivable (net of an
allowance for doubtful accounts), property and equipment dedicated to the
businesses, capitalized software, and other purchased intangible assets.
Sales of all businesses, with the exception of safe box accounting, were
completed during the year ended June 30, 1999. The Company decided not to
divest the safe box accounting business and its assets are therefore
included with the Company's other operating assets at June 30, 1999.
6. NOTE RECEIVABLE
In May 1998, in anticipation of a tax-free exchange of property, the
Company loaned $14.9 million to a third party to purchase a building on
its behalf. Interest of 8% was earned monthly commencing in June 1998. In
June 1999, the Company completed its tax-free exchange and the note was
paid in full. At June 30, 1998, the estimated fair value of the note
receivable approximated the carrying value based on currently available
instruments with similar interests rates and remaining maturities.
13-30
<PAGE> 31
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. In
accordance with SFAS 109, deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Income tax expense (benefit) is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
The Company's income tax benefit consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ............................................... $ -- $ 3,795 $(10,555)
State and local ....................................... 1,084 1,063 (2,308)
-------- -------- --------
Total current ............................... 1,084 4,858 (12,863)
Deferred federal and state ................................. (13,101) (5,499) 854
-------- -------- --------
Total income tax benefit .................... $(12,017) $ (641) $(12,009)
======== ======== ========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 35 percent to income before income
taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit ............................ $(60,844) $ (1,520) $ (543)
Nondeductible in-process research and
development of acquired businesses ...................... 49,000 252 770
Nondeductible intangible amortization ...................... 839 1,189 1,137
State and local taxes, net of federal income tax
benefits ................................................ (553) 21 (1,741)
Loss from medical benefits subsidiary ..................... -- -- (10,665)
Other, net ................................................. (459) (583) (967)
-------- -------- --------
Total income tax benefit .................... $(12,017) $ (641) $(12,009)
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1998 and 1999 are as follows (in thousands):
13-31
<PAGE> 32
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Federal and state net operating loss carryforwards ......... $ 1,155 $ 12,739
Federal and state tax credit carryforwards ................. -- 2,145
Intangible assets .......................................... 1,870 --
Allowance for bad debts and returns ........................ 1,699 1,996
Accrued compensation and related items ..................... 1,731 2,028
Stock warrants ............................................. 12,964 12,964
Reserve accruals ........................................... 3,212 3,410
-------- --------
Total deferred tax assets ........................ 22,631 35,282
Deferred tax liabilities:
Capitalized software ....................................... (1,926) (2,246)
Property and equipment ..................................... (19) (2,327)
Deferred revenue ........................................... -- (128)
Intangible assets .......................................... -- (1,354)
Prepaid expenses............................................ (566) (794)
-------- --------
Total deferred tax liabilities .................. (2,511) (6,849)
-------- --------
Net deferred tax asset .......................... $ 20,120 $ 28,433
======== ========
</TABLE>
At June 30, 1999, the Company has approximately $3,072,000 of state and
$9,667,000 of federal net operating loss carryforwards available, expiring
in 2009 to 2013 and 2009 to 2019, respectively. Additionally, at June 30,
1999, the Company has approximately $306,000 of state and $1,839,000 of
federal tax credit carryforwards available, expiring in 2008 to 2009 and
2009 to 2019, respectively. During the year ended June 30, 1999, the
Company established a subsidiary to administer the Company's employee
medical benefits program. The Company recognized a one-time combined
federal and state tax benefit of $12.2 million arising from the creation
of this subsidiary.
8. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Land and land improvements ................................. $ 3,146 $ 4,341
Building and building improvements ......................... 16,692 31,226
Computer equipment and software licenses ................... 55,526 72,138
Furniture and equipment .................................... 9,002 11,404
-------- --------
Total ....................................... 84,366 119,109
Less accumulated depreciation and amortization ............. 33,446 49,286
-------- --------
Property and equipment, net ................. $ 50,920 $ 69,823
======== ========
</TABLE>
13-32
<PAGE> 33
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. INTANGIBLE ASSETS
The components of intangible assets are as follows (in thousands):
JUNE 30,
----------------------
1998 1999
------- -------
Workforce ..................................... $ 5,179 $ 6,171
Tradenames..................................... 815 4,568
Customer base.................................. 1,231 5,758
Goodwill....................................... 28,927 39,318
-------- --------
Total........................... 36,152 55,815
Less accumulated amortization.................. 5,678 9,940
-------- --------
Intangible assets, net......... $ 30,474 $ 45,875
======== ========
10. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
JUNE 30,
------------------------
1998 1999
--------- ---------
Salaries and related costs.................... $ 9,374 $ 10,307
Liabilities associated with contract and other
losses...................................... 5,655 -
Processing fees............................... 2,335 908
Reserve for returns and chargebacks........... 1,944 1,664
Other......................................... 5,852 14,092
--------- ---------
Total......................... $25,160 $ 26,971
========= =========
The liabilities associated with contract and other losses at June 30, 1998
is comprised of $4.7 million related to an estimated loss from the sale of
the leasing business that occurred on July 7, 1998 (see Note 2,
"Acquisitions and Dispositions") and $1.0 million for accrued contract
losses and related costs which resulted from the decision to exit the Web
Investor business.
11. LINE OF CREDIT
In May, 1997 the Company obtained a working capital line-of-credit, which
enables the Company to borrow up to $20 million, based on the collateral
of eligible accounts receivable. The line expires in October 1999, and
contains certain restrictive covenants, including defined quarterly
operating results, minimum tangible net worth requirements, and the
prohibition of dividend payments. No amounts were outstanding under the
line at June 30, 1998 and 1999.
12. OBLIGATIONS UNDER CAPITAL LEASES
During 1993, the Company entered into a 20-year lease with the Department
of Development of the State of Ohio for land and an office building
located in Columbus, Ohio. The Company had the option to purchase the land
and building for $1 at the termination of the lease and thus, the Company
recorded the transaction as a capital lease. In June, 1999, the Company
completed a tax-free exchange of property involving the land and building
under this capital lease. In order to exercise its purchase option and
complete the transaction, the Company paid $2.5 million of principal
obligations under the lease, and placed an additional $3.6 million in
escrow. The Company and the State of Ohio entered into an escrow agreement
whereby the funds deposited will be used to make scheduled principal and
interest payments through September 1, 2000, and retire the remaining
principal obligation at that date. The net gain resulting from the sale of
the property amounted to $1.1 million and is included in the Net Gain on
Dispositions of Assets in the Company's Consolidated Statement of
Operations. Amounts deposited with the escrow trustee and the related
obligations are included in current and noncurrent assets and liabilities,
based on the respective principal repayment dates, in the Company's June
30, 1999 Consolidated Balance Sheets.
13-33
<PAGE> 34
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company also leases certain computer equipment, furniture and
telephone equipment under capital leases. The Company is required to pay
certain taxes, insurance and other expenses related to the leased
property.
The following is a summary of property under capital leases included in
the accompanying balance sheets (in thousands):
JUNE 30,
------------------------
1998 1999
--------- ---------
Land and land improvements.....................$ 3,146 $ -
Building and building improvements............. 4,526 -
Computer equipment and software licenses....... 2,371 3,654
--------- ---------
Total........................... 10,043 3,654
Less accumulated depreciation and amortization. 2,017 2,266
--------- ---------
Property and equipment, net.....$ 8,026 $ 1,388
========= =========
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows (in thousands):
FISCAL YEAR
ENDING JUNE 30,
-------------------
2000................................................. $944
2001................................................. 3,253
2002................................................. 390
2003................................................. 373
2004................................................. 62
Thereafter........................................... -
-------
Total future minimum lease payments... 5,022
Less amount representing interest.................... 182
-------
Net future minimum lease payments..... $4,840
=======
13. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that
the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the
leases. Total expense under all operating lease
13-34
<PAGE> 35
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
agreements for the years ended June 30, 1997, 1998 and 1999, was
$5,882,000, $5,800,000 and $8,492,000, respectively.
Minimum future rental payments under these leases are as follows (in
thousands):
FISCAL YEAR
ENDING JUNE 30,
-------------------
2000............................................... $11,464
2001............................................... 10,922
2002............................................... 8,966
2003............................................... 5,650
2004............................................... 3,837
Thereafter......................................... 16,271
-------
Net future minimum lease payments........ $57,110
=======
14. EMPLOYEE BENEFIT PLANS
Retirement Plan - The Company has a defined contribution 401(k) retirement
plan covering substantially all of its employees. Under the plan eligible
employees may contribute a portion of their salary until retirement and
the Company, at its discretion, may match a portion of the employee's
contribution. Total expense under the plan amounted to $1,862,000,
$859,000 and $1,218,000, for the years ended June 30, 1997, 1998 and 1999,
respectively.
Deferred Compensation Plan - In January, 1999, the Company established a
deferred compensation plan (the "DCP") covering highly-compensated
employees as defined by the DCP. 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 Company's June 30, 1999 Consolidated Balance Sheet. In addition, the
Company has established 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 Company's June
30, 1999 Consolidated Balance Sheet. Total expense under the DCP for the
period ended June 30, 1999 amounted to $40,000.
Group Medical Plans - The Company has a group medical self-insurance plan
covering certain of its employees. The Company has employed an
administrator to manage this plan. Under terms of this plan, both the
Company and eligible employees are required to make contributions to this
plan. The administrator reviews all claims filed and authorizes the
payment of benefits. The Company has stop-loss insurance coverage on all
individual claims exceeding $100,000. In addition, the Company offers
medical insurance coverage under managed care health plans. Total expense
for medical insurance coverage amounted to $3,458,000, $3,752,000, and
$4,430,000, for the years ended June 30, 1997, 1998 and 1999,
respectively. Under the self-insurance plan, the Company expenses amounts
as claims are incurred and recognizes a liability for incurred but not
reported claims. At June 30, 1998 and 1999, the Company accrued $308,000
and $315,000 respectively, as a liability for costs incurred but not paid
under this plan.
In December, 1998, a subsidiary, CheckFree Management Corporation, was
created to administer the Company's employee medical benefits program. The
Company owns a controlling interest in the subsidiary, and therefore, the
accompanying consolidated financial statements include the subsidiary's
results of operations.
15. COMMON STOCK
During 1995, the company adopted the 1995 Stock Option Plan (the "1995
Plan). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan
(the "1993 Plan"). The options granted under the 1995 and 1993 Plans may
be either incentive stock options or non-statutory stock options. The
terms of the options granted under the 1995
13-35
<PAGE> 36
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and 1993 Plans are at the sole discretion of a committee of members of the
Company's Board of Directors, not to exceed ten years. Generally, options
vest at either 33% or 20% per year from the dated of grant. The 1995 Plan
originally provided that the Company may grant options for not more than
5,000,000 shares of common stock to certain key employees, officers and
directors. In November of 1998, the 1995 Plan was amended by a vote of the
Company's shareholders to extend the maximum option grants to not more
than 8,000,000 shares. Options granted under the 1995 and 1993 Plans are
exercisable according to the terms of each option, however, in the event
of a change in control or merger as defined, the options shall become
immediately exercisable. At June 30, 1999, 2,920,684 additional shares are
available for grant in the aggregate for all Plans.
Previously, the Company had adopted the 1983 Incentive Stock Option Plan
and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983
Plans"), which provided that the Board of Directors may grant options for
shares of common stock to certain employees and directors. Under the terms
of the 1983 Plans, options are exercisable over a period up to ten years
from the grant date. In the event the Company is sold, options outstanding
under the 1983 Plans must be repurchased at a price calculated as if the
options had been fully exercised.
All options granted under the 1983 Plans, the 1993 Plan and the 1995 Plan
were granted at exercise prices not less than the fair market value of the
underlying common stock at the date of grant. In the event that shares
purchased through the exercise of incentive stock options are sold within
one year of exercise, the Company is entitled to a tax deduction. The tax
benefit of the deduction is not reflected in the consolidated statements
of operations but is reflected as an increase in additional paid-in
capital.
The following table summarizes stock option activity from July 1, 1996 to
June 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
-------------------------------------------------------------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning of period.......... 2,908,218 $ 4.58 4,441,461 $ 9.59 4,365,562 $ 15.23
Granted.................................... 2,282,056 14.32 1,377,334 25.60 1,575,057 36.40
Exercised.................................. (636,309) 1.01 (708,661) 3.17 (354,758) 4.56
Cancelled.................................. (112,504) 14.88 (744,572) 12.63 (389,261) 16.12
--------- --------- ---------
Outstanding - End of period................ 4,441,461 $ 9.59 4,365,562 $ 15.23 5,196,600 $ 18.69
========= ======== ========= ======= ========= ========
Options exercisable at end of period....... 1,218,341 $ 1.17 1,352,516 $ 6.81 1,394,269 $ 9.00
========= ======== ========= ======= ========= ========
Weighted average per share fair value of
options granted during the year....... $ 6.68 $ 10.77 $ 17.65
======== ======= ========
</TABLE>
The following table summarizes information about options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
---------------------------- ----------------------
Range of Exercise Price REMAINING EXERCISE EXERCISE
------------------------ NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
--------- ---------------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 0.85 - $10.00............... 764,769 4.4 $ 1.17 672,427 $ 1.03
$10.01 - $20.00............... 3,014,916 8.4 13.30 623,955 15.03
$20.01 - $30.00............... 266,815 8.9 25.55 97,887 25.25
$30.01 - $40.00............... 196,300 9.7 34.85 - -
$40.01 - $50.00............... 953,800 9.8 44.56 - -
--------- ---------
5,196,600 $ 18.69 1,394,269 $ 9.00
========= ======== ========= ========
</TABLE>
13-36
<PAGE> 37
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended June 30, 1997, 1998 and 1999,
respectively: dividend yield of 0% in all periods; expected volatility of 47%,
48% and 49%; risk-free interest rates of 6.41%, 5.21%, and 5.87%; and expected
lives of 3-5 years.
Under the 1997 Associate Stock Purchase Plan, effective for the six-month period
beginning January 1, 1997, the Company is authorized to issue up to 1,000,000
shares of Common Stock to its full-time employees, nearly all of whom are
eligible to participate. Under the terms of the Plan, employees can choose,
every six months, to have up to 15% of their salary withheld to purchase the
Company's Common Stock. The purchase price of the stock is 85% of the lower of
its beginning-of-period or end-of-period market price. Approximately 39% of
eligible employees participated in the Plan in the second half of the year ended
June 30, 1997, approximately 32% in the first half of fiscal 1998, approximately
49% in the second half of fiscal 1998, approximately 30% in the first half of
fiscal 1999 and approximately 31% in the second half of fiscal 1999. Under the
Plan, 53,013 shares were issued in July of 1997, 56,844 in January of 1998,
48,631 in July of 1998, 48,748 in January of 1999 and 46,819 in July of 1999
from employees' salary withholdings from the respective previous six-month
period. Following is a summary of the weighted average fair market value of this
look-back option estimated on the grant date using the Black-Scholes option
pricing model, and the related assumptions used:
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
--------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1997 1997 1998 1998 1999
-------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Fair value of options........ $3.93 $14.10 $ 9.68 $ 7.18 $5.51
Assumptions:
Risk-free interest rate... 5.1% 5.0% 5.0% 4.9% 4.9%
Expected life............. 3 months 3 months 3 months 3 months 3 months
Volatility................ 47.0% 48.0% 48.0% 49.0% 49.0%
Dividend yield............ 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees"
and related Interpretations in accounting for its stock option plans and
employee stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans in accordance with the provisions of
SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
(loss) and net income (loss) per share would have been as follows (in thousands,
except per share data):
YEAR ENDED JUNE 30,
---------------------------------------
1997 1998 1999
----------- --------- ------
Pro forma net income (loss)..............$ (164,089) $ (9,521) $1,032
=========== ========= ======
Pro forma net income (loss) per share;
Basic and Diluted..................$ (3.49) $ (0.17) $ 0.02
=========== ========= ======
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
13-37
<PAGE> 38
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In September 1998, the Company offered an option repricing program to its
employees. Under the terms of the offer, employees had one week to decide
whether to return any outstanding option grant in its entirety and replace
it on a share-for-share basis with an option grant with an exercise price
equal to the fair market value of the Company's Common Stock at the new
grant date. Only those exchanges received within one day of the designated
grant date were accepted and any vested options in such returned grants
were forfeited. The lives of returned historical grants typically ranged
from three to five years with straight line vesting beginning one year
from the original grant date. All newly issued option grants had a life of
five years and vesting occurs at 40% beginning two years from the new
grant date and 20% for each year thereafter. A total of 1,418,403 options
were returned and had the offer taken place at June 30, 1998, the options
exercisable would have decreased by 95,614.
As described below, the Company has issued certain stock warrants to third
parties and has accounted for the issuance of such warrants in accordance
with the provisions of EITF 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
In January 1998 the Company entered into a 10-year processing agreement
with a strategic partner. Under the terms of the agreement, the partner
acquired 10-year warrants exercisable at $20 15/16 for 10 million shares
of the Company's Common Stock. Three million warrants vested upon the
execution of a related processing outsourcing agreement on March 9, 1998
which resulted in the Company recording a non-cash charge of $32.4
million. The charge was based on a Black-Scholes option pricing model
valuation of $10.80 per vested share using the following assumptions:
risk-free rate of 5.7%, expected life of 10 years, and volatility rate of
56.4%. The remaining seven million warrants are to vest upon achievement
of specific performance targets set forth in the agreement. Any shares
acquired by the strategic partner under the terms of this agreement are
subject to certain transfer and other restrictions. In March 1997 the
Company entered into a consulting agreement with a third party. Under the
terms of the agreement the consultant acquired 5-year options exercisable
at $13.00 for up to 50,000 shares of the Company's Common Stock. In June
of 1998, upon the execution of a processing agreement with a key customer,
25,000 of the options vested, which resulted in the Company recording a
non-cash charge of $418,000. The charge was based on a Black-Scholes
option pricing model valuation of $16.73 per vested share using the
following assumptions: risk-free rate of 5.6%, expected life of 4 years,
and volatility rate of 56.4%. The remaining 25,000 options are to vest
upon achievement of specific performance targets by key customers set
forth in the agreement. Any shares acquired by the consultant under the
terms of the agreement are subject to certain transfer restrictions. In
accordance with the terms of a joint marketing agreement, a strategic
partner has warrants to purchase up to 650,000 shares of the Company's
Common Stock should the partner attain certain customer acquisition
targets.
In January 1997 the Board of Directors approved an amendment to the
Company's 401(k) plan which authorized up to 1,000,000 shares of Common
Stock for the Company's matching contribution. The Company issued 78,257
shares in September 1997 and 74,981 shares in August 1998 out of treasury
to fund its 401(k) match that had accrued during the years ended June 30,
1997 and 1998, respectively.
At June 30, 1996 certain stockholders had an option to sell up to 280,565
shares of common stock to the company at $19.00 per share, which expired
on September 30, 1996. Of the eligible shares, 276,469 were sold to the
Company and were recorded as treasury stock.
16. PREFERRED STOCK
In January 1997, the Company's Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights to protect its
stockholders in the event of an unsolicited attempt to acquire the
Company. On February 14, 1997, the Rights were issued to the Company's
stockholders of record, with an expiration date of 10 years. Until a
person or group acquires 15% or more of the Company's Common Stock, the
Rights will automatically trade with the shares of Common Stock. Only when
a person or group has acquired 15% or more of the Company's Common Stock,
will the Rights become exercisable and separate certificates issued. Prior
to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's Common Stock, the Rights are redeemable for $.001
per Right at the option of the Board of Directors.
13-38
<PAGE> 39
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. EARNINGS PER SHARE
The following table reconciles the differences in income and shares
outstanding between basic and dilutive for the periods indicated (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1999
------------------------------------ ------------------------------------ ----------------------------------
LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS............. $ (161,813) 46,988 $ (3.44) $ (3,703) 55,087 $ (0.07) $ 10,457 52,444 $ 0.20
======== ======= ======
Effect of dilutive
securities-options
and warrants....... - - - - - 4,085
----------- ------ ---------- ------ -------- ------
Diluted EPS........... $ (161,813) 46,988 $ (3.44) $ (3,703) 55,087 $ (0.07) $ 10,457 56,529 $ 0.18
=========== ====== ========= ========== ====== ======== ======== ====== ======
</TABLE>
Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss
periods. The number of anti-dilutive equivalent shares excluded from the
per share calculations are 1,218,000 and 1,725,000 for the years ended
June 30, 1997 and 1998, respectively.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
(IN THOUSANDS)
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Interest paid......................................... $ 585 $ 632 $ 618
========= ======== ========
Income taxes paid..................................... $ 1,147 $ 1,434 $ 1,688
========= ======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Capital lease additions and purchase of other
long-term assets............................ $ 1,914 $ 650 $ 3,379
========= ======== ========
Stock funding of 401(k) match.................... $ - $ - $ 963
========= ======== ========
Purchase price of business acquisitions.......... $ 200,997 $ 1,000 $ 19,100
Less: Issuance of common stock and stock
options pursuant to acquisitions........... 177,188 - 18,000
Liabilities assumed........................ 1,619 145 887
Net present value of future payment due.... 9,610 - -
Cash acquired in acquisitions.............. 1,217 - 23
--------- -------- --------
Net cash paid.......................... $ 11,363 $ 855 $ 190
========= ======== ========
</TABLE>
19. BUSINESS SEGMENTS
The Company operates in three business segments - Electronic Commerce,
Software, and Investment Services. These reportable segments are strategic
business units that offer different products and services. A further
description of each business segment along with the Corporate services
area follows:
- Electronic Commerce - Electronic commerce includes electronic home
banking, electronic billing, electronic bill payment and business
payments. These services are primarily directed to financial
institutions and businesses and their customers.
- Software - Software services includes end-to-end software products for
ACH processing, account reconciliation, wire transfer, mortgage loan
origination and servicing, lease accounting and debt recovery. These
products and services are primarily directed to financial institutions
and large corporations.
13-39
<PAGE> 40
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- Investment Services - Investment services includes investment portfolio
management services and investment trading and reporting services. These
products and services are primarily directed to institutional investment
managers.
- Corporate - Corporate services include human resources, legal, accounting
and various other of the Company's unallocated overhead charges.
The accounting policies of the segments are the same as those described in Note
1 "Summary of Significant Accounting Policies". The Company evaluates
performance based on revenues and operating income (loss) of the respective
segments. No single customer accounted for 10% or more of consolidated revenues
for the years ended June 30, 1997, 1998 and 1999. Foreign sales for the periods
presented are insignificant. There are no intersegment sales.
The following sets forth certain financial information attributable to the
Company's business segments for the years ended June 30, 1997, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Electronic Commerce.................................... $ 85,926 $ 137,972 $ 169,443
Software............................................... 68,113 66,143 41,384
Investment Services.................................... 22,406 29,749 39,304
--------- --------- ---------
Total........................................ $ 176,445 $ 233,864 $ 250,131
========= ========= =========
Operating income (loss):
Electronic Commerce- including charge for acquired
in-process research and development of $140,000
in 1997.............................................. $(160,195) $ (39,423) $ (5,490)
Software- including charge for acquired in-process
research and development of $719 in 1998.............. 4,324 48,854 18,083
Investment Services- including charge for acquired
in-process research and development of $2,201 in 1999 2,171 5,040 5,892
Corporate............................................... (21,449) (21,647) (22,218)
--------- --------- ---------
Total........................................ $(175,149) $ (7,176) $ (3,733)
========= ========= =========
Identifiable assets:
Electronic Commerce.................................... $ 59,265 $ 70,192 $ 80,223
Software............................................... 61,701 39,346 34,194
Investment Services.................................... 23,187 21,187 49,098
Corporate.............................................. 79,683 119,387 89,246
--------- --------- ---------
Total........................................ $ 223,836 $ 250,112 $ 252,761
========= ========= =========
Capital expenditures:
Electronic Commerce.................................... $ 3,182 $ 19,532 $ 9,258
Software............................................... 1,171 2,197 1,189
Investment Services.................................... 1,973 895 4,764
Corporate.............................................. 2,788 5,315 25,233
--------- --------- ---------
Total........................................ $ 9,114 $ 27,939 $ 40,444
========= ========= =========
Depreciation and amortization:
Electronic Commerce.................................... $ 2,094 $ 9,964 $ 14,214
Software............................................... 10,501 6,051 2,069
Investment Services.................................... 4,379 4,558 5,336
Corporate.............................................. 7,945 4,426 3,011
--------- --------- ---------
Total........................................ $ 24,919 $ 24,999 $ 24,630
========= ========= =========
</TABLE>
13-40
<PAGE> 41
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended June 30,
1998 and 1999 includes all adjustments necessary for a fair presentation
of quarterly results of operations: (In thousands except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- ---------
<S> <C> <C> <C> <C>
FISCAL 1998
Total revenue.............................. $ 52,087 $ 56,515 $ 61,750 $ 63,512
Income (loss) from operations.............. 17,187 (2,771) (29,223) 7,731
Net income (loss).......................... 9,771 (1,692) (17,540) 5,758
Basic earnings per share:
Net income (loss) per common share.... $ 0.17 $ (0.03) $ (0.32) $ 0.10
============ =========== ======== =========
Equivalent number of shares........... 56,703 55,028 55,281 55,376
============ =========== ======== =========
Diluted earnings per share:
Net income (loss) per common share.... $ 0.17 $ (0.03) $ (0.32) $ 0.10
============ =========== ======== =========
Equivalent number of shares........... 56,920 55,028 55,281 55,735
============ =========== ======== =========
FISCAL 1999
Total revenue.............................. $ 56,814 $ 59,605 $ 62,960 $ 70,752
Income (loss) from operations.............. (3,462) (1,408) 349 788
Net income (loss).......................... (1,468) 11,375 (308) 858
Basic earnings per share:
Net income (loss) per common share.... $ (0.03) $ 0.22 $ (0.01) $ 0.02
============ =========== ======== =========
Equivalent number of shares........... 55,510 51,326 51,218 51,695
============ =========== ======== =========
Diluted earnings per share:
Net income (loss) per common share.... $ (0.03) $ 0.22 $ (0.01) $ 0.02
============ =========== ======== =========
Equivalent number of shares........... 55,510 52,553 51,218 56,839
============ =========== ======== =========
</TABLE>
The sum of the quarterly income (loss) per share does not equal the
year-to-date income (loss) per share for the respective fiscal periods,
due to changes in the number of shares outstanding at each quarter-end.
Significant Fourth Quarter Transactions - During the week of April 26,
1999, the Company experienced a system error that led users of its
electronic billing and payment services to experience intermittent
problems accessing and using the system. As a result of this situation,
the Company incurred charges of $2,681,000, of which $800,000 is reflected
as a reduction in processing and servicing revenue and $1,881,000 as sales
and marketing expense in the Company's Consolidated Statements of
Operations for the year ended June 30, 1999.
During the fourth quarter of 1999, the Company incurred $890,000 of costs
associated with a recalled secondary offering of stock. The costs are
reflected in general and administrative expense in the Consolidated
Statements of Operations for the year ended June 30, 1999.
13-41
<PAGE> 42
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In the fourth quarter of 1998 the Company recorded adjustments to reduce
its 401(k) match accrual by $2.4 million and its management incentive
bonus accrual by $1.7 million. Both incentive amounts had been provided
for ratably over the year in anticipation of achievement of financial
results that would have resulted in distribution of the amounts accrued in
accordance with related plan provisions.
21. COMMITMENTS
In June 1999, the Company entered into a five-year agreement for software
to be used in conjunction with its electronic commerce business. The
software is to be licensed in incremental units over the term of the
agreement to coincide with the growth of the Company's business. Total
commitments under the agreement amount to $10 million over the five-year
term.
13-42
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
- ------------------------------
CheckFree Corporation, a Delaware corporation
CheckFree Investment Corporation, a Delaware corporation
CheckFree Investment Services, Inc., a Delaware corporation
CheckFree Management Corporation, a Wisconsin corporation
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-98440, 33-98444, 33-98442, 33-98446, 333-21799, 333-21795 and
333-70599) on Form S-8 and the Registration Statements (No. 333-20479 and
333-79695) on Form S-3 of CheckFree Holdings Corporation of our reports dated
August 9, 1999, appearing in and incorporated by reference in the Annual Report
on Form 10-K of CheckFree Holdings Corporation for the year ended June 30, 1999.
/s/Deloitte & Touche LLP
Atlanta, Georgia
September 24, 1999
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
Each director and/or officer of CheckFree Holdings Corporation (the
"Corporation") whose signature appears below hereby appoints Peter J. Kight,
Mark A. Johnson, and Curtis A. Loveland as the undersigned's attorneys or any of
them individually as the undersigned's attorney, to sign, in the undersigned's
name and behalf and in any and all capacities stated below, and to cause to be
filed with the Securities and Exchange Commission (the "Commission"), the
Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year
ended June 30, 1999, and likewise to sign and file with the Commission any and
all amendments to the Form 10-K, and the Corporation hereby also appoints such
persons as its attorneys-in-fact and each of them as its attorney-in-fact with
like authority to sign and file the Form 10-K and any amendments thereto
granting to each such attorney-in-fact full power of substitution and
revocation, and hereby ratifying all that any such attorney-in-fact or the
undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 20th day of
September, 1999.
Signature Title
/s/Peter J. Kight Chairman of the Board of Directors
------------------------- and Chief Executive Officer
Peter J. Kight
/s/Mark A. Johnson Vice Chairman
-------------------------
Mark A. Johnson
/s/Allen L. Shulman Executive Vice President, Chief
------------------------- Financial Officer and General
Allen L. Shulman Counsel
/s/Gary A. Luoma, Jr. Vice President, Chief Accounting
------------------------- Officer and Assistant Secretary
Gary A. Luoma, Jr.
/s/William P. Boardman Director
-------------------------
William P. Boardman
/s/George R. Manser Director
-------------------------
George R. Manser
/s/Eugene F. Quinn Director
-------------------------
Eugene F. Quinn
/s/Jeffrey M. Wilkins Director
-------------------------
Jeffrey M. Wilkins
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,446
<SECURITIES> 10,266
<RECEIVABLES> 50,090
<ALLOWANCES> 4,430
<INVENTORY> 0
<CURRENT-ASSETS> 82,685
<PP&E> 119,109
<DEPRECIATION> 49,286
<TOTAL-ASSETS> 252,761
<CURRENT-LIABILITIES> 58,440
<BONDS> 3,882
0
0
<COMMON> 518
<OTHER-SE> 186,385
<TOTAL-LIABILITY-AND-EQUITY> 252,761
<SALES> 0
<TOTAL-REVENUES> 250,131
<CGS> 0
<TOTAL-COSTS> 258,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 618
<INCOME-PRETAX> (1,522)
<INCOME-TAX> (12,009)
<INCOME-CONTINUING> 10,457
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,457
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
<PAGE> 1
Exhibit 99
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of CheckFree Holdings Corporation
and Subsidiaries:
We have audited the consolidated financial statements of CheckFree Holdings
Corporation and Subsidiaries as of June 30, 1998 and 1999, and for the years
ended June 30, 1997, 1998 and 1999, and have issued our report thereon dated
August 9, 1999; such financial statements and report are included in your 1999
Annual Report to Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedule of CheckFree Holdings
Corporation and Subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Atlanta, Georgia
August 9, 1999
<PAGE> 2
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1998 and 1999
<TABLE>
<CAPTION>
BALANCE AS AMOUNT CHARGES
OF ASSUMED IN TO COSTS CHARGES TO
BEGINNING BUSINESS AND OTHER BALANCE AS OF
OF PERIOD COMBINATION EXPENSES DEDUCTIONS DEDUCTIONS END OF PERIOD
---------- ------------ --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
1997..................... $2,279 1,000 9,196 -- 8,258 4,217
1998..................... 4,217 -- 3,441 -- 4,188 3,470
1999..................... 3,470 309 1,246 -- 595 4,430
Reserve for Returns and Chargebacks
1997..................... 543 -- 1,920 -- 1,237 1,226
1998..................... 1,226 -- 2,080 -- 1,362 1,944
1999..................... 1,944 -- 1,932 -- 2,212 1,664
</TABLE>
