<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- ---------------------
Commission file number: 0-26802
CHECKFREE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA
30092 (Address of principal executive offices, including zip code)
(770) 441-3387
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 51,079,710 shares
of Common Stock, $.01 par value, were outstanding at February 8, 1999.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of 3
December 31, 1998 and June 30, 1998
Condensed Consolidated Statements of 4
Operations For the Three and Six Months Ended
December 31, 1998 and 1997
Condensed Consolidated Statements of 5
Cash Flows For the Six Months Ended
December 31, 1998 and 1997
Notes to Interim Condensed Consolidated Unaudited 6-8
Financial Statements For the Six Months
Ended December 31, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
-------------------- ---------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,403 $ 36,535
Investments 6,924 24,533
Accounts receivable, net 35,118 32,960
Assets held for sale -- 15,881
Notes receivable 15,382 14,882
Prepaid expenses and other 7,524 4,678
Deferred income taxes 5,997 7,231
-------------------- ---------------------
Total current assets 85,348 136,700
Property and equipment, net 56,942 50,920
Capitalized software, net 14,404 11,387
Intangible assets, net 28,779 30,474
Investments -- 1,006
Deferred income taxes 26,161 12,889
Other noncurrent assets 6,471 6,736
-------------------- ---------------------
Total $ 218,105 $ 250,112
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,081 $ 8,536
Accrued liabilities and other 25,313 30,365
Current portion of long-term obligations 1,071 1,180
Deferred revenue 13,598 19,710
-------------------- ---------------------
Total current liabilities 46,063 59,791
Long-term obligations - less current portion 6,816 6,467
-------------------- ---------------------
Total Liabilities 52,879 66,258
Stockholders' Equity
Preferred stock - 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding -- --
Common stock - 150,000,000 authorized shares, $.01 par value;
issued 56,545,962 shares, 56,364,839 shares;
outstanding 52,000,938 shares, 56,364,839 shares 520 564
Additional paid-in capital 465,296 492,109
Treasury stock - at cost, 1,000,000 shares, 963,295 shares (6,040) (4,362)
Accumulated deficit (294,550) (304,457)
-------------------- ---------------------
Total Stockholders' Equity 165,226 183,854
-------------------- ---------------------
Total $ 218,105 $ 250,112
==================== =====================
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements.
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<PAGE> 4
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing $ 48,521 $ 38,436 $ 93,575 $ 72,946
License 3,441 7,491 6,412 13,295
Maintenance 4,238 6,419 9,202 13,260
Other 3,405 4,169 7,230 9,102
--------------- --------------- --------------- ---------------
Total revenues 59,605 56,515 116,419 108,603
Expenses:
Cost of processing, servicing and support 34,368 30,788 71,457 60,119
Research and development 5,579 8,729 12,157 16,797
Sales and marketing 7,408 7,883 15,232 15,310
General and administrative 7,625 5,093 14,358 10,532
Depreciation and amortization 6,033 6,074 11,999 13,116
In process research and development -- 719 -- 719
Exclusivity amortization -- -- -- 2,963
--------------- --------------- --------------- ---------------
Total expenses 61,013 59,286 125,203 119,556
Net gain on dispositions of assets -- -- 3,914 25,369
--------------- --------------- --------------- ---------------
Income (loss) from operations (1,408) (2,771) (4,870) 14,416
Interest, net 426 756 1,219 1,113
--------------- --------------- --------------- ---------------
Income (loss) before income taxes (982) (2,015) (3,651) 15,529
Income tax expense (benefit) (12,357) (323) (13,558) 7,450
--------------- --------------- --------------- ---------------
Net income (loss) $ 11,375 $ (1,692) $ 9,907 $ 8,079
=============== =============== =============== ===============
Basic earnings per share:
Net income (loss) per common share $ 0.22 $ (0.03) $ 0.19 $ 0.15
=============== =============== =============== ===============
Equivalent number of shares 51,326 55,028 53,419 54,846
=============== =============== =============== ===============
Diluted earnings per share:
Net income (loss) per common share $ 0.22 $ (0.03) $ 0.18 $ 0.14
=============== =============== =============== ===============
Equivalent number of shares 52,553 55,028 54,664 57,135
=============== =============== =============== ===============
</TABLE>
See Notes to Interim Condensed Consolidated Unaudited Financial Statements
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 9,907 $ 8,079
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 11,999 13,116
Exclusivity amortization -- 2,963
Deferred income taxes (11,554) 6,943
Net gain on dispositions of assets (3,914) (25,369)
Write-off of in process research and development -- 719
Loss on disposal of property and equipment -- 498
Proceeds from maturities and sales of investments, net-trading 17,609 --
Changes in operating assets and liabilities:
Accounts receivable, net 2,916 733
Prepaid expenses and other 207 (1,394)
Accounts payable (2,422) (1,483)
Accrued liabilities and customer deposits (2,515) 1,071
Deferred revenues (2,549) (5,241)
Income taxes payable (4,541) 17
------------ ------------
Net cash provided by operating activities 15,143 652
Cash Flows From Investing Activities:
Purchase of property and software (16,750) (8,717)
Capitalization of software development costs (2,776) --
Proceeds from the sale of property and equipment -- 340
Purchase of business, net of cash acquired -- (11,000)
Proceeds from purchase price adjustment -- 8,889
Proceeds from the sale of assets 11,421 33,500
Purchase of investments -- (7,941)
Proceeds from maturities and sales of investments, net 1,006 2,898
------------ ------------
Net cash provided by (used in) investing activities (7,099) 17,969
Cash Flows From Financing Activities:
Repayment of stockholder and other notes payable -- (44)
Principal payments under capital lease obligations (621) (415)
Purchase of treasury stock (31,161) --
Proceeds from exercise of stock options including related tax benefits 536 807
Proceeds from employee stock purchase plan 1,070 754
------------ ------------
Net cash provided by (used in) financing activities (30,176) 1,102
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (22,132) 19,723
Cash and Cash Equivalents at Beginning of Period 36,535 32,086
------------ ------------
Cash and Cash Equivalents at End of Period $ 14,403 $ 51,809
============ ============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 349 $ 268
============ ============
Income taxes paid $ 2,353 $ 1,121
============ ============
Capital lease additions $ 1,583 $ --
============ ============
Treasury share funding of 401(k) match $ 963 $ 1,692
============ ============
</TABLE>
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1. The accompanying condensed consolidated financial statements and
notes thereto have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the six months
ended December 31, 1998 and 1997 are not necessarily indicative of the results
for the full year.
These financial statements should be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Company's Annual Report filed with the Securities and Exchange
Commission on Form 10-K. In the opinion of management, the accompanying
condensed consolidated unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. Basic earnings (loss) per common share amounts were computed by
dividing income (loss) available to shareholders by the weighted average number
of shares outstanding. Diluted per-common-share amounts assume the issuance of
common stock for all potentially dilutive equivalent shares outstanding except
in loss periods when such an adjustment would be anti-dilutive. The following
table reconciles differences in income and shares outstanding between basic and
dilutive for the periods indicated.
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
---------------------------------------------- -----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss)
available to common
shareholders $9,907 53,419 $0.19 $8,079 54,846 $0.15
===== =====
Effect of Dilutive
Securities
Stock options 0 1,245 0 2,289
------ ----- ------ -----
Diluted EPS
Income (loss)
available to
stockholders and
assumed conversions $9,907 54,664 $0.18 $8,079 57,135 $0.14
====== ====== ===== ====== ====== =====
</TABLE>
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<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
----------------------------------------------- -----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss)
available to common
shareholders $11,375 51,326 $0.22 ($1,692) 55,028 ($0.03)
===== =======
Effect of Dilutive
Securities
Stock options 0 1,227 0 0
------- ------ ------- ------
Diluted EPS
Income (loss)
available to
stockholders and
assumed conversions $11,375 52,553 $0.22 ($1,692) 55,028 ($0.03)
======= ====== ===== ======= ====== =======
</TABLE>
Options to purchase shares of common stock at various prices
outstanding at December 31, 1998 and 1997, that were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares during the period
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------- -----------
<S> <C> <C>
Six Month Period Ended 4,197,997 72,779
Three Month Period Ended 3,750,988 61,348
</TABLE>
3. In the quarter ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement requires disclosure of total non-shareowner changes in
equity in interim periods and additional disclosures of the components of
non-shareowner changes in equity on an annual basis. Total non-shareowner
changes in equity includes all changes in equity during a period except those
resulting from investments by and distributions to shareowners. The specific
components of comprehensive income applicable to the Company would include net
income and unrealized gains or losses on the Company's available-for-sale
securities. There were no available-for-sale securities held during the six
month period ended December 31, 1998 and the carrying value of
available-for-sale securities held during the six month period ended December
31, 1997 approximated market value. As a result there were no reported
unrealized gains or losses reported on available-for-sale securities in either
period.
4. In the quarter ended September 30, 1998, the Company adopted
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The
Statement provides guidance for recognizing revenue on software transactions and
supersedes SOP 91-1, "Software Revenue Recognition." The adoption of the
Statement did not result in a material impact on reported results.
5. In the quarter ended September 30, 1998, the Company issued 74,981
shares of common stock out of treasury to fund its 401(k) match, the cost of
which was accrued during the year ended June 30, 1998. Additionally, during the
quarter ended September 30, 1998, the Company issued 48,631 shares of common
stock out of treasury in
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conjunction with the employee stock purchase plan which was funded through
employee payroll deductions accumulated in the immediately preceding six-month
period.
6. During the quarter ended September 30, 1998, the Company purchased
575,000 shares of its common stock and recorded them as treasury shares. During
the quarter ended December 31, 1998, the Company purchased an additional
4,130,341 shares of its common stock and recorded them as treasury shares. At
December 31, 1998, the Company had retired all except 1,000,000 shares of its
treasury stock and anticipates retiring the remaining shares during the next
quarter.
7. On September 11, 1998, the Company sold certain software and other
assets related to its mortgage line of business for $19.1 million, net of a
working capital adjustment. As part of the sales agreement, the Company retained
responsibility for certain customer obligations and agreed to subcontract with
the acquiring company to perform consulting services at retail hourly rates for
these retained obligations. The Company received cash of $15.0 million, net of
$4.0 million of prepaid subcontract services due the acquiring company. The net
gain on the sale of $6.4 million is included in the Net Gain on Dispositions of
Assets in the Company's Statement of Operations.
8. On October 1, 1998, the Company sold certain software and other
assets related to its imaging line of business for $0.8 million consisting of a
note receivable of $0.5 million and future services of $0.3 million. The
loss on the sale of $2.4 million was recorded in the quarter ended September 30,
1998 and is included in the Net Gain on Dispositions of Assets in the Company's
Statement of Operations.
9. In the quarter ended December 31, 1998, a special purpose subsidiary
was created to administer the Company's employee medical benefits program. The
Company owns a controlling interest in the subsidiary, therefore, the
accompanying condensed consolidated financial statements include the
subsidiary's results of operations.
10. In the quarter ended December 31, 1998, the Company reported a
one-time tax benefit of approximately $12.2 million arising out of the creation
of the special purpose subsidiary described above. In addition, the Company's
annual effective tax rate, exclusive of the impact of the one-time tax benefit,
decreased from approximately 45% in the first quarter to approximately 38% on a
year to date basis, primarily due to state job tax credits and increased
tax-exempt interest.
11. Certain amounts in the June 30, 1998 balance sheet have been
reclassified to conform with the December 31, 1998 presentation. In addition,
certain amounts in the condensed consolidated statements of operations for the
six months ended December 31, 1997 have been reclassified to conform with the
December 31, 1998 presentation.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The business was founded in 1981, and following a number of
acquisitions and divestitures reorganized its corporate structure on December
22, 1997. CheckFree Holdings Corporation (the "Company") is the parent
corporation of CheckFree Corporation, the principal operating company of the
business.
The Company is the leading provider of electronic commerce services,
software and related products for over 2.6 million consumers, 1,000 businesses
and 850 financial institutions. The Company designs, develops and markets
services that enable its customers to make electronic payments and collections,
automate paper-based recurring financial transactions and conduct secure
transactions on the Internet. As a result of significant acquisitions in 1996
and 1997, the Company operates in three business segments: Electronic Commerce,
Software, and Investment Services. The Company's electronic transaction
processing services, software, and related products are primarily targeted to
financial institutions, institutional investment portfolio managers, and their
customers.
The Company remains focused on quality enhancement combined with
efficiency improvement in anticipation of overall market growth. The Company is
driving to improve the profitability of the business through efforts to
facilitate revenue growth in all business segments and improve cost efficiency
primarily in remittance, customer care and data processing. From a revenue
perspective the Company is taking several steps to promote growth. In the
Electronic Commerce segment, the Company is currently reliant upon its financial
institution customers to promote its electronic bill payment, banking and bill
presentment product offerings. The Company supports financial institutions'
efforts to convert from a personal computer based software front-end offering to
a more efficient web-based offering. As financial institutions complete their
web-based offerings and revitalize marketing efforts toward electronic bill
payment and electronic banking, the Company believes this will result in
enhanced subscriber growth. An important variable in the anticipated subscriber
growth is the timing of the rollout of these web-based offerings. Also, on
January 26, 1999 the Company announced the execution of a material Internet
distribution contract designed to make electronic billing and universal
electronic payment an integral part of the average Internet user's experience.
Additionally, Company efforts to rapidly enroll significant national merchants
in electronic bill presentment programs, which will be integrated with financial
institutions' electronic bill payment and banking offerings, will allow
consumers complete electronic "round trip" payment capabilities. The growth in
bill presentment is expected to drive growth in bill payment revenue through a
more complete electronic offering, more so than providing a new stand alone
revenue stream. Efforts are also underway to provide enhanced product offerings
in both the Software and Investment Services business segments, which are
expected to further enhance revenue growth opportunities in these segments as
well. As a result of integration of the various acquisitions, the completion of
the data center consolidation in Norcross, Georgia and the continued rollout of
project Genesis (which is designed to provide a single, state of the art
processing platform and to promote customer care efficiency), economies of scale
and leverage are inherent in the Company's business model. Improvements in
remittance and customer care cost efficiency and quality will primarily be
driven by an increased percentage of electronic versus paper transaction
processing and the design and implementation of electronic customer self help
offerings. Improvements in data processing costs and quality are addressed by
the Genesis project, which will also contribute to an increased percentage of
electronic versus paper transactions.
The Company expects that these efforts will allow it to defend and
extend its leading position in the rapidly growing electronic commerce market.
Barring any unforeseen circumstances, this trend is expected to continue in the
foreseeable future. There can be no assurances, however, that the Company will
be able to successfully compete against current or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results, and financial condition.
RESULTS OF OPERATIONS
The following table sets forth as percentage of total operating
revenues, certain consolidated statements of operations' data:
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<PAGE> 10
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
------------------------------ ----------------------------
1998 1997 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenues: 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 57.7% 54.5% 61.4% 55.4%
Research and development 9.4% 15.4% 10.4% 15.5%
Sales and marketing 12.4% 13.9% 13.1% 14.1%
General and administrative 12.8% 9.0% 12.3% 9.7%
Depreciation and amortization 10.1% 10.7% 10.3% 12.1%
In process research and development 0.0% 1.3% 0.0% 0.7%
Exclusivity amortization 0.0% 0.0% 0.0% 2.7%
------------ ------------ ------------ ------------
Total expenses 102.4% 104.9% 107.5% 110.1%
Net gain on dispositions of assets 0.0% 0.0% 3.4% 23.4%
------------ ------------ ------------ ------------
Income (loss) from operations -2.4% -4.9% -4.2% 13.3%
Interest, net 0.7% 1.3% 1.0% 1.0%
------------ ------------ ------------ ------------
Income (loss) before income taxes -1.6% -3.6% -3.1% 14.3%
Income tax expense (benefit) -20.7% -0.6% -11.6% 6.9%
------------ ------------ ------------ ------------
Net income (loss) 19.1% -3.0% 8.5% 7.4%
============ ============ ============ ============
</TABLE>
Reported revenue increased 5%, from $56.5 million to $59.6 million, for
the three months ended December 31, 1997 and 1998, respectively, and by 7%, from
$108.6 million to $116.4 million on a year over year basis. The increases in
quarter to quarter and year over year revenue are due primarily to internal
growth in the Electronic Commerce and Investment Services segments, offset by a
reduction in the Software segment. Decreased Software segment revenue is
primarily the result of divestitures of the Company's recovery management
business in August 1997, its item processing business in March 1998, its wire
and electronic banking business in April 1998, its leasing business in July
1998, its mortgage business in September 1998 and its imaging business in
October 1998. On a pro forma basis, excluding the impact of the divested
software businesses and the discontinuance of the Web Investor business in the
Electronic Commerce segment in June 1998, revenue increased 23%, from $48.6
million to $59.6 million, for the three months ended December 31, 1997 and 1998,
respectively, and by 24%, from $93.6 million to $116.4 million on a year over
year basis. The quarter to quarter pro forma increase of 23% was driven by
increases of 27% in the Electronic Commerce segment, 19% in the Investment
Services segment and 8% in the Software segment. The year over year pro forma
revenue increase of 24% was driven by increases of 27% in Electronic Commerce,
24% in Investment Services and 16% in Software. Growth in Electronic Commerce
revenue is driven primarily by a 30% increase in subscribers from approximately
2.0 million at December 31, 1997 to over 2.6 million at December 31, 1998. In
the Software Segment, the current year revenue of $19.7 million includes $1.7
million of revenue from businesses divested during the current year. Therefore,
comparative revenue grew by 5% on a year over year basis. Although dampened by
customers' focus on completing Year 2000 projects, the Software segment has seen
growth, primarily in implementations of its ACH product line. Growth in
Investment Services revenue is driven primarily by an increase in portfolios
managed from over 400,000 at December 31, 1997 to over 573,000 at December 31,
1998.
Processing and servicing revenue increased by 26% from $38.4 million to
$48.5 million for the three months ended December 31, 1997 and 1998,
respectively, and by 28% from $72.9 million to $93.6 million on a year over year
basis. Quarter to quarter and year over year growth is primarily the result of
the previously mentioned increase in subscribers in the Electronic Commerce
segment and portfolios managed in the Investment Services segment. In January
1999, the Company announced a material Internet distribution agreement. Although
there are no guarantees in the timing or extent of its success, this agreement
has the potential to provide significant increases in subscribers over the next
year and beyond. Initial pricing has not been announced.
Reported license revenue declined by $4.1 million from $7.5 million to
$3.4 million for the quarters ended December 31, 1997 and 1998, respectively,
and by $6.9 million from $13.3 million to $6.4 million on a year over year
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<PAGE> 11
basis. This decline is due primarily to the previously mentioned software
business divestitures. On a pro forma basis, license revenue decreased by $1.1
million from $4.5 million to $3.4 million for the quarters ended December 31,
1997 and 1998, respectively and decreased by $2.0 million from $8.4 million to
$6.4 million on a year over year basis. The pro forma decline is due primarily
to softness in software sales resulting from purchasing moratoriums imposed by
potential customers preparing for Year 2000.
Reported maintenance revenue declined by $2.2 million from $6.4 million
to $4.2 million for the quarters ended December 31, 1997 and 1998, respectively,
and by $4.1 million from $13.3 million to $9.2 million on a year over year
basis. This decline is due primarily to the previously mentioned software
divestitures. On a pro forma basis, maintenance revenue increased by $0.5
million from $3.7 million to $4.2 million for the quarters ended December 31,
1997 and 1998, respectively, and increased by $1.7 million from $7.5 million to
$9.2 million on a year over year basis. Increases in maintenance are due
primarily to first year maintenance revenue related to new software sales
generated in the second half of fiscal 1998 combined with high retention rates
and moderate price increases related to renewal maintenance streams.
Reported other revenue, consisting mainly of consulting fees, declined
by $0.8 million from $4.2 million to $3.4 million for the quarters ended
December 31, 1997 and 1998, respectively, and by $1.9 million from $9.1 million
to $7.2 million on a year over year basis. This decline is due primarily to the
previously mentioned software divestitures. On a pro forma basis, other revenue
increased by $1.2 million from $2.2 million to $3.4 million for the quarters
ended December 31, 1997 and 1998, respectively, and by $1.8 million from $5.4
million to $7.2 million on a year over year basis. The increase is due to
implementations related to new software sales in the second half of fiscal 1998
and implementations related to new business in the Investment Services segment.
The cost of processing, servicing and support was $30.8 million and
$34.4 million or 54.5% and 57.7% of total revenue for the quarters ended
December 31, 1997 and 1998, respectively. These same costs were $60.1 million
and $71.5 million or 55.4% and 61.4% of total revenue for the six months ended
December 31, 1997 and 1998, respectively. Cost of processing as a percentage of
servicing only revenue (all revenue except license) was 62.8% and 61.2% for the
three months ended December 31, 1997 and 1998, respectively, and 63.1% and 64.9%
for the six months ended December 31, 1997 and 1998, respectively. Revenue
growth in Electronic Commerce has slowed as financial institutions convert from
a personal computer software-based front-end to a web-based offering for their
customers. During this period, the Company is continuing to invest in customer
care resources in anticipation of expected revenue growth when these web-based
conversions are completed and the financial institutions reinstate related
marketing efforts toward subscriber growth. Additionally, the Company is
incurring the costs of electronic bill presentment or E-Bill implementations
with inadequate current revenue to offset the cost. A strong three months of
software implementation revenue in the quarter ended December 31, 1998 offset a
portion of these added costs resulting in an apparent improvement in efficiency,
but this should not be considered as recurring at this time. The previously
mentioned Internet distribution agreement will result in increases in operating
expenses estimated at approximately $4.0 million and an estimated $2.0 million
of additional capital spending over the next six months to prepare the Company
for possible subscriber growth from the rollout of this new program. The added
costs from a processing and servicing perspective will consist of:
1. The development of a professional services staff and programs
that can support the timely and effective deployment of electronic
billing and payment offerings by billers;
2. Investments in the hardware, software and technical support
staff we will need to deliver dial-tone quality to up to 1.0
million additional subscribers; and
3. Customer care staff additions and training.
There is no guarantee that the launch of this program will in fact result in the
subscriber growth mentioned, but the Company feels it is prudent to prepare for
this level of growth based on its potential.
Research and development costs were $8.7 million and $5.6 million or
15.4% and 9.4% of total revenue for the quarters ended December 31, 1997 and
1998, respectively. Research and development expenditures were $16.8 million and
$12.2 million or 15.5% and 10.4% of total revenue for the six months ended
December 31, 1997 and 1998,
-11-
<PAGE> 12
respectively. The reduction in absolute dollars on a quarter to quarter and a
year over year basis is due primarily to two factors. As a result of the
previously mentioned software divestitures, there was approximately $2.0 million
of development resources included in the three months ended December 31, 1997
and approximately $4.5 million of development resources in the six months ended
December 31, 1997, that were not present on a comparable basis in the same
respective periods in 1998. Additionally, as software development efforts have
shifted from Year 2000 activities, which may not be capitalized under generally
accepted accounting principles, and as Electronic Commerce efforts have been
geared toward projects with added functionality, the Company capitalized
approximately $1.6 million in the three months ended December 31, 1998 and
approximately $2.8 million in the six months ended December 31, 1998. Net of the
two items listed above, spending on research and development as a percentage of
revenue is relatively equivalent on a year over year basis as the Company
continues to focus significant resources on research and development activities
in anticipation and support of revenue growth, quality improvement and
efficiency enhancement opportunities. The Company could capitalize from $8 to
$10 million of development costs in this fiscal year.
Sales and marketing costs were $7.9 million and $7.4 million or 13.9%
and 12.4% of total revenue for the quarters ended December 31, 1997 and 1998,
respectively. These same costs were $15.3 million and $15.2 million or 14.1% and
13.1% of total revenue for the six months ended December 31, 1997 and 1998,
respectively. On an absolute dollar basis, sales and marketing expenses have
remained fairly consistent year over year. Reductions in sales and marketing
expenses resulting from the divested software businesses have been replaced by
increased sales expenses related to activities in the Company's bill presentment
area, as well as funding for the creation and launch of a new trade group, the
Electronic Banking Association, which is intended to increase the general
population's awareness and interest in the electronic banking industry.
Marketing expenses are expected to increase in the second half of 1999 due to
the announced agreement between the Company and a significant internet
distribution company in support of efforts to launch a new combined product
offering in the Electronic Commerce segment.
General and administrative expenses were $5.1 million and $7.6 million
or 9.0% and 12.8% of total revenue for the quarters ended December 31, 1997 and
1998, respectively. General and administrative expenses were $10.5 million and
$14.4 million or 9.7% and 12.3% of total revenue for the six months ended
December 31, 1997 and 1998, respectively. In the three and six month periods
ended December 31, 1998, the Company incurred one-time general and
administrative expenses of approximately $0.6 million in real estate expenses
related to the move of the Company's main Investment Services office to a
facility better suited for its needs and another $0.6 million in the
establishment of a benefits company intended to better manage future benefit
expenses in anticipation of growth of Company headcount. Historical growth in
infrastructure expenses has remained below the rate of revenue growth, as the
Company has been able to leverage its existing infrastructure. The divestiture
of the various software businesses has not resulted in a corresponding reduction
in existing infrastructure as business specific systems and administrative
functions must remain in place to support retained software businesses, as well
as the growing Electronic Commerce and Investment Services segments. As
anticipated revenue growth materializes, management expects general and
administrative expenses to decline as a percentage of revenue from its current
levels to be more in line with historical experience.
Depreciation and amortization expenses have remained consistent at $6.0
million for the three months ended December 31, 1997 and 1998. On a year over
year basis depreciation has declined from $13.1 million to $12.0 million for the
six months ended December 31, 1997 and 1998, respectively. Reductions in
depreciation and amortization from the elimination of tangible and intangible
assets resulting from the divested software businesses have been replaced by
depreciation resulting from significant capital expenditures throughout fiscal
1998 primarily in support of the data center migration to Norcross, Georgia and
the development of project Genesis.
The $0.7 million charge for in process research and development in the
three month and six month periods ended December 31, 1997 resulted from the
purchase of AMTI in October 1997.
Exclusivity amortization of $2.9 million in the six-month period ended
December 31, 1997 was the final amortization expense related to the exclusivity
arrangement the Company entered into with Intuit in conjunction with the
purchase of ISC in January 1997.
The net gain on dispositions of assets is the result of various
transactions in the six month periods ended December 31, 1997 and 1998. The gain
of $3.9 million in the six months ended December 31, 1998 is the net result of
the gain on the sale of the mortgage business of approximately $6.4 million and
the loss on the sale of the imaging
-12-
<PAGE> 13
business of approximately $2.5 million. The gain of $25.4 million in the six
month period ended December 31, 1997 is the net result of the gain on the sale
of the recovery management business of $28.4 million less charges of $3.0
million related to certain equipment to be disposed of and capitalized costs
where management determined the book value of the related assets exceeded their
net realizable value.
Net interest income decreased from $0.8 million to $0.4 million for the
quarter ended December 31, 1997 and 1998, respectively. Net interest income
increased from $1.1 million to $1.2 million for the six-month periods ended
December 31, 1997 and 1998, respectively. In the quarter to quarter comparison,
net interest income was lower in 1998 primarily due to the share repurchase that
cost approximately $31.2 million at the opening of the quarter. On a year over
year basis, the cash utilized for the share repurchase was offset by cash
proceeds from divested software businesses in the six months ended December 31,
1998. Average invested assets net of average outstanding obligations were
relatively consistent, as were net yields, therefore the net investment income
was stable year to year.
The Company recorded an income tax benefit of $0.3 million in the
three-month period ended December 31, 1997 versus an income tax benefit of $12.4
million in the three-month period ended December 31, 1998. In the quarter ended
December 31, 1998 the Company recorded a one-time tax benefit of approximately
$12.2 million arising out of the medical benefits management subsidiary. The
remaining tax benefit in the quarter was the amount necessary to bring the year
to date effective tax rate down to 38% from the previously recorded effective
rate of 45%. This reduction in the 1998 effective rate was due primarily to
state jobs credits and an expected increase in annual returns from tax-exempt
securities. On a year over year basis, the effective rate (net of the previously
mentioned one-time benefit of $12.2 million in 1998) was 48% for the six-month
period ended December 31, 1997 and 38% for the same period in 1998. The reported
rates differ from the blended statutory rate of 40% due to goodwill amortization
and other non-deductible expenses in both periods and the previously mentioned
jobs credits and tax-exempt interest income in the 1998 period.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by industry segment for the periods noted (in thousands):
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Operating Revenue:
Electronic Commerce $ 41,298 $ 32,660 $ 79,385 $ 62,966
Software 9,535 16,508 19,730 31,656
Investment Services 8,772 7,347 17,304 13,981
---------------- ---------------- ---------------- ----------------
Total Operating Revenue $ 59,605 $ 56,515 $ 116,419 $ 108,603
================ ================ ================ ================
Operating Income (Loss):
Electronic Commerce $ (778) $ (210) $ (5,388) $ (1,102)
Software 3,720 1,841 4,935 1,043
Investment Services 895 1,376 2,690 2,448
Corporate (5,245) (5,059) (11,021) (10,660)
Exclusivity Amortization -- -- -- (2,963)
In Process Research and Development -- (719) -- (719)
Net Gain on Disposition of Assets -- -- 3, 914 25,369
---------------- ---------------- ---------------- ----------------
Total Operating Loss $ (1,408) $ (2,771) $ (4,870) $ 14,416
================ ================ ================ ================
</TABLE>
Revenue in the Electronic Commerce business unit increased by $8.6
million or 26% from $32.7 million to $41.3 million for the three months ended
December 31, 1997 and 1998, respectively, and by $16.4 million or 26% from $63.0
million to $79.4 million for the six months ended December 31, 1997 and 1998,
respectively. On a pro forma basis, excluding the Web Investor business which
was discontinued in fiscal 1998, revenue increased $8.8 million or 27% for the
quarter to quarter period and by $16.8 million or 27% on a year over year basis.
This increase in revenue
-13-
<PAGE> 14
is due primarily to an increase in subscribers of 30% from approximately 2.0
million at December 31, 1997 to over 2.6 million at December 31, 1998. Operating
losses in the Electronic Commerce business unit increased from $0.2 million to
$0.8 million for the three months ended December 31, 1997 and 1998,
respectively, and from $1.1 million to $5.4 million for the six months ended
December 31, 1997 and 1998, respectively. On a pro forma basis, the operating
loss increased from $23,000 to $778,000 for the quarter to quarter period and
from $712,000 to $5.4 million for the year over year period. As previously
mentioned, revenue growth has slowed temporarily as financial institutions
convert their personal computer software-based front-end interfaces to the
company's electronic bill payment and banking processes to more efficient
web-based front-end interfaces. During this time the Company has continued to
commit resources geared toward quality and efficiency improvement in
anticipation of the revenue growth when financial institutions complete their
technology conversions and refocus marketing efforts toward subscriber growth.
These investments include additional customer care resources geared toward
improved quality and significant E-Bill implementation costs, which are not
offset by significant related revenue in the near term. While the Company
expects revenue to grow at an increasing rate, starting with the third quarter
of this fiscal year, such growth is dependent upon financial institutions
completing their technology conversions and implementing planned marketing
programs in a timely fashion. Finally, in January 1999, the Company announced a
material Internet distribution agreement designed to promote online bill
payment, bill presentment and banking opportunities to general users of the
Internet. Additional up front investments (both operating and capital) resulting
from this agreement will place near term downward pressure on margins, however
these costs will prepare the Company for up to one million additional
subscribers. In the next two quarters alone, the Company plans to spend an
estimated $4.0 in incremental costs related to this agreement for the
establishment of a professional services staff to support the timely and
effective deployment of electronic billing and payment offerings by billers,
additional customer care staff and related training activities and sales,
marketing and communications program expansion.
Reported Software segment revenue declined from $16.5 million to $9.5
million for the three months ended December 31, 1997 and 1998, respectively, and
from $31.7 million to $19.7 million for the six months ended December 31, 1997
and 1998, respectively. On a pro forma basis, net of the impact of divested
software businesses in fiscal 1998, revenue increased by $0.7 million or 8% from
$8.8 million to $9.5 million for the three months ended December 31, 1997 and
1998, respectively, and by $2.6 million or 15% from $17.1 million to $19.7
million on a year over year basis. The three months ended September 30, 1998
included $1.8 million in revenue from divested businesses, therefore, the
comparison of retained businesses is revenue growth of $0.8 million in revenue
growth from $17.1 million to $17.9 million for the six months ended December 31,
1997 and 1998, respectively. License sales have been lower than anticipated in
the current fiscal year due primarily to purchasing moratoriums imposed by
potential customers who are preparing internally for the Year 2000. The slowdown
in license sales has been offset by consulting revenues earned on
implementations of software licenses sold in the second half of fiscal 1998.
This slowdown in license sales could continue until customers complete their
Year 2000 initiatives. Reported operating income increased from $1.8 million to
$3.7 million for the three months ended December 31, 1997 and 1998,
respectively, and from $2.0 million to $4.9 million for the six months ended
December 31, 1997 and 1998, respectively. On a pro forma basis, operating income
has increased from $2.7 million to $3.7 million for the three months ended
December 31, 1997 and 1998, respectively, and from $4.3 million to $4.9 million
for the six months ended December 31, 1997 and 1998, respectively. Retained
businesses, net of $1.6 million of operating losses in divested businesses in
the three months ended September 30, 1998, achieved operating profit growth from
$2.9 million to $6.5 million for the six months ended December 31, 1998. The
increase in retained business profit is a reporting anomaly related to allocated
corporate fixed costs in the 1997 periods. The prior year pro forma results are
carrying the full burden of fixed overhead from the Software segment to avoid
unreasonably impacting other segments on a restated pro forma basis. When the
effect of allocations is ignored, underlying operating profit margins in the
Software segment are fairly consistent from year to year.
Revenue in the Investment Services segment has increased by $1.4
million or 19% from $7.3 million to $8.8 million for the three months ended
December 31, 1997 and 1998, respectively, and by $3.3 million from $14.0 million
to $17.3 million for the six months ended December 31, 1997 and 1998,
respectively. Increases in revenue are due primarily to an increase in
portfolios managed from approximately 400,000 at December 31, 1997 to over
573,000 at December 31, 1998. Additionally, some of the focus of this division
has been directed toward managing retail portfolios on behalf of several large
brokerage firms. Offerings to these customers provide more narrow functionality
and therefore a commensurately lower price. Operating income decreased from $1.4
million to $0.9 million for the three months ended December 31, 1997 and 1998,
respectively, and increased from $2.4 million to $2.7 million for the six months
ended December 31, 1997 and 1998, respectively. In the quarter ended December
31, 1998, the division
-14-
<PAGE> 15
absorbed approximately $644,000 of one-time occupancy charges. Net of the
one-time charges, operating income from quarter to quarter increased by $0.2
million and from year to year increased by $0.9 million. On an adjusted basis,
the year over year increase in margin is the result of leveraging the
infrastructure of this business in light of increased portfolio growth.
The Corporate segment represents charges for the human resources,
legal, accounting and various other of the Company's unallocated overhead
charges. Corporate incurred operating costs of $5.2 million in the quarter ended
December 31, 1998 versus $5.1 million in the same period in 1997 and costs of
$11.0 million for the six months ended December 31, 1998 versus $10.7 million in
the same period of 1997. One-time charges of approximately $0.6 million were
incurred in the formation of a special purpose subsidiary created to administer
the Company's employee medical benefits program. Net of these one-time charges,
unallocated Corporate charges were $4.7 million and $10.5 for the three and six
months ended December 31,1998. The relative stability of these unallocated costs
are due to successful efforts to leverage these resources as the dynamics of the
other operating segments have changed over the past year.
The $0.7 million charge for in process research and development in the
three month and six month periods ended December 31, 1997 resulted from the
purchase of AMTI in October 1997.
Exclusivity amortization of $2.9 million in the six-month period ended
December 31, 1997 was the final amortization expense related to the exclusivity
arrangement the Company entered into with Intuit in conjunction with the
purchase of ISC in January 1997.
The net gain on dispositions of assets is the result of various
transactions in the six month periods ended December 31, 1997 and 1998. The gain
of $3.9 million in the six months ended December 31, 1998 is the net result of
the gain on the sale of the mortgage business of approximately $6.4 million and
the loss on the sale of the imaging business of approximately $2.5 million. The
gain of $25.4 million in the six month period ended December 31, 1997 is the net
result of the gain on the sale of the recovery management business of $28.4
million less charges of $3.0 million related to certain equipment to be disposed
of and capitalized costs where management determined the book value of the
related assets exceeded their net realizable value.
The following table represents pro forma segment revenue and operating
profit information, by quarter for fiscal year 1998, net of divested businesses.
This information may be used to better understand underlying trends in the
businesses represented.
<TABLE>
<CAPTION>
PRO FORMA FISCAL 1998 RESULTS:
Three Months Ended
--------------------------------------------------------------------------------------------
(in thousands) September 30, 1997 December 31, 1997 March 31, 1998 June 30, 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Electronic Commerce $ 30,088 $ 32,452 $ 35,949 $ 38,773
Software 8,254 8,824 9,030 11,324
Investment Services 6,617 7,366 7,588 8,179
-------------------- -------------------- -------------------- --------------------
Total Segment Operating Revenue $ 44,959 $ 48,642 $ 52,567 $ 58,276
==================== ==================== ==================== ====================
Operating Income (Loss):
Electronic Commerce (689) (23) 795 (535)
Software 1,599 2,699 2,322 4,095
Investment Services 1,050 1,397 1,703 2,076
Corporate (5,685) (5,023) (4,654) (4,760)
-------------------- -------------------- -------------------- --------------------
Total Operating Income (Loss)* $ (3,725) $ (950) $ 166 $ 876
==================== ==================== ==================== ====================
</TABLE>
* Exclusivity amortization, Net gain on disposition of assets, in-process
research and development and charge for stock warrants have been omitted to
facilitate understanding of the underlying business segments.
-15-
<PAGE> 16
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 note) enacted on October 19, 1998.
The goal of the Company is to ensure that all systems and products will
be ready for any date-based processing related to the millennium. The following
readiness disclosure is presented for each of the Company's business segments;
Electronic Commerce, Software and Investment Services.
State of Readiness. The Company is moving all of its Electronic
Commerce Division processing to Year 2000-ready environments and is making
satisfactory progress to ensure that all of its systems will be ready for any
date-based functions related to the millennium. An inventory of all information
technology and non-information technology systems is maintained and periodically
updated. Those functions that are likely to have a material effect on Company
business have been identified and assessed. Validation is based on third party
representations and/or internal testing. Based on a review of third-party
representations, the Company is not currently aware of any third-party issue
applicable to the Year 2000 that is likely to have a material impact on the
conduct of business, the results of operations or the financial condition of the
Company. The Company has not performed its own tests on many of these
third-party systems and no assurance can be given at this time that these
systems are Year 2000 ready.
Previous implementation phases included building a Year 2000-ready data
center and the physical move of the processing systems to that center. The final
implementation phase will include the planned migration of customers from the
Chicago and Columbus systems to the Year 2000-ready environment followed by
applicable testing on that system to be completed by the middle of 1999. In
anticipation of limited customer migration from the Austin system to Genesis
before January 1, 2000, the Austin system has been made Year 2000 ready and
testing with financial institutions is substantially complete. Any of the
existing systems or facilities that will be retained were made Year 2000-ready
by the end of calendar 1998. During the first half of calendar 1999, the Company
will address any remaining Year 2000 functions that are not considered mission
critical and will support the certification efforts of its financial institution
partners.
Costs to Address the Company's Year 2000 Issues. Although the
development of Genesis has taken into account relevant Year 2000 issues, the
planned conversion was not accelerated due to Year 2000 issues and Year 2000
costs are not included in development for the Norcross system. The following
chart reflects the Company's Year 2000 specific costs. The fiscal year 1998
costs were attributed to remediation of legacy systems and applications. The
cost to complete includes remediation, testing and verification, but is
primarily budgeted to remedy any Year 2000 related situations that management
has not heretofore anticipated. The Company believes that associated costs are
adequately budgeted for in its fiscal 1999 business plans.
(In Thousands)
================================================================================
<TABLE>
<CAPTION>
YEAR TO
COST TO DATE FISCAL FISCAL FISCAL
BUSINESS SEGMENT COMPLETE 1999 1998 1997 TOTAL
- -------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Electronic Commerce $ 849 $ 551 $ 100 $ -- $ 1,500
Software 200 400 500 -- 1,000
Investment Services 154 653 375 -- 1,182
Corporate 212 98 -- -- 310
------------ ------------ ------------ ------------ ------------
Total $ 1,415 $ 1,702 $ 975 $ -- $ 4,092
============ ============ ============ ============ ============
</TABLE>
Risks of the Company's Year 2000 Issues. In order to accurately process
transactions, the Company must rely on technology supported by its customers and
suppliers. Transaction processing relies on transmissions of data from consumer
personal computers, through financial institution and merchant web servers and
the internet, over third party data and voice communication lines, and through
the Federal Funds System. Failure by the Company, its customers or suppliers to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to process transactions and can have a direct impact on its
ability to generate revenue per agreements with financial
-16-
<PAGE> 17
institution, portfolio management, merchant and direct customers. This in turn
could have a material impact on the conduct of the business, the results of
operations and the financial condition of the Company. Accordingly, the Company
plans to address all Year 2000 issues before problems materialize. However,
should efforts on the part of the Company, its customers and suppliers fail to
adequately address their relevant Year 2000 issues, the most likely worst case
scenario would be a total loss of revenue to the Company.
The Company's Contingency Plans. The Company is internally reviewing
and testing all mission critical systems and major system components for Year
2000 readiness. Additionally, Year 2000 considerations have been and will
continue to be incorporated into the Company's business contingency plans.
The Company cannot guarantee that its efforts will prevent all
consequences and there may be undetermined future costs due to business
disruption that may be caused by customers, suppliers or unforeseen
circumstances.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended December 31, 1998, the Company expended
approximately $30 million to repurchase shares of its own common stock. In spite
of this expenditure, the Company has retained in excess of $21 million in cash,
cash equivalents and short-term investments. Additionally, the December 31, 1998
balance sheet reflects a strong current ratio of 1.85. Over the remainder of the
fiscal year the Company expects to generate positive cash flow from operations.
Additionally, in conjunction with the purchase of a new building in Dublin,
Ohio, the Company expects to increase cash in the next several months by up to
$15.0 million through available financing alternatives. The Company believes
that existing cash, cash equivalents and investments combined with projected
positive operating cash flow and the financing of the building mentioned above,
will be more than sufficient to meet presently anticipated requirements for the
foreseeable future. To the extent that additional capital resources may be
needed, the Company has access to an untapped line of credit totaling $20
million.
INFLATION
The Company believes the effects of inflation have not had a
significant impact on the Company's results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include certain forward looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including the Annual Report on Form 10-K for
the year ended June 30, 1998 and the Company's Proxy Statement for the Annual
Meeting of Stockholders held on November 9, 1998. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Form 10-Q
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a presentation by the Company or any other
person that the objectives and plans of the Company will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company will not undertake, and specifically declines, any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of anticipated or
anticipated events.
-17-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on Monday,
November 9, 1998 for the following purposes:
(1) To elect two Class III Directors of the Company to serve for a
three-year term expiring at the 2001 Annual Meeting of
Stockholders.
(2) To approve and adopt an amendment to the Company's 1995 Stock
Option Plan.
Each of management's proposals as presented in the proxy statement were
approved with the following vote:
Proposal 1: The election of two Class III Directors of the
Company, to serve until the 2001 Annual Meeting
of Stockholders or until his successor is elected
and qualified:
<TABLE>
<CAPTION>
Number of Shares Voted
---------------------------------------------
WITHHOLD
FOR AUTHORITY TOTAL
-------------- -------------- -------------
<S> <C> <C> <C>
Peter J. Kight 42,569,285 199,956 42,769,241
Jeffrey M. Wilkins 42,566,513 202,728 42,769,241
</TABLE>
Proposal 2: The approval of the Company's Amended and Restated 1995
Stock Option Plan:
<TABLE>
<CAPTION>
Number of Shares Voted
------------------------------------------------------------------------
WITHHOLD
FOR AUTHORITY ABSTAIN TOTAL
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
33,258,692 1,499,970 55,127 34,813,789
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit Number Exhibit Description
-------------- -------------------
27 * Financial Data Schedule.
* Filed with this report.
-18-
<PAGE> 19
(b) REPORTS ON FORM 8-K.
The Registrant filed the following Current Reports on Form 8-K
with the Securities and Exchange Commission:
(i) A current report on Form 8-K, dated October 9, 1998,
was filed with the Securities and Exchange Commission
on October 13, 1998 (Items 5 and 7).
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: February 12, 1999 By: /s/ Allen L. Shulman
-------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer, and General
Counsel*
(Principal Financial Officer)
Date: February 12, 1999 By: /s/ Gary A. Luoma, Jr.
---------------------------
Gary A. Luoma, Jr., Vice President, Chief
Accounting Officer, and Assistant Secretary
(Principal Accounting Officer)
* In his capacity as Executive Vice President, Finance and Chief
Financial Officer, Mr. Shulman is duly authorized to sign this report
on behalf of the Registrant.
-20-
<PAGE> 21
CHECKFREE HOLDINGS
CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1998
EXHIBIT INDEX
<PAGE> 22
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 * Financial Data Schedule.
* Filed with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 BALANCE SHEET AND INCOME STATEMENT SUBMITTED IN FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 14,403
<SECURITIES> 6,924
<RECEIVABLES> 38,675
<ALLOWANCES> (3,557)
<INVENTORY> 0
<CURRENT-ASSETS> 85,348
<PP&E> 98,241
<DEPRECIATION> (41,299)
<TOTAL-ASSETS> 218,105
<CURRENT-LIABILITIES> 46,063
<BONDS> 0
0
0
<COMMON> 520
<OTHER-SE> 164,706
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<TOTAL-COSTS> 125,203
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<INCOME-PRETAX> (3,651)
<INCOME-TAX> (13,558)
<INCOME-CONTINUING> 9,907
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<NET-INCOME> 9,907
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
