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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A No. 1
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) 375-3000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No
--- ---
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 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 30
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and Management 73
Item 13. Certain Relationships and Related Transactions 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 74
Signatures 88
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PART I
ITEM 1. BUSINESS.
All references to "we," "us," "our," or "CheckFree" in this Annual
Report on Form 10-K/A No. 1 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.
We operate our business through three independent but inter-related divisions:
- Electronic Commerce;
- Investment Services; and
- Software.
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 electronic billing and payment services for
approximately 3 million consumers. Our services are available through over 350
sources, including:
- 23 of the 25 largest banks in the United States;
- 8 of the top 10 brokerage firms in the United States;
- Internet portals;
- Internet-based banks;
- Internet financial sites like Quicken.com; and
- personal financial management software like Quicken and Microsoft
Money.
We have developed contracts 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 December 31, 1999, we processed an average
of nearly 14 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. As of December 31, 1999, we
had signed contracts for E-Bill services with 89 of the country's largest
billers. In December 1999, we presented more than 38,000 electronic bills, which
is nearly double the number of bills presented through E-Bill services in
September 1999. Additionally, over 100 CheckFree distribution points are live
with Internet billing and payment.
For example, when a customer instructs us to pay a bill, we have the
ability to process the payment either by electronic funds transfer, by paper
check or by draft drawn on the customer's account. Our patented bill payment
processing system in Norcross, Georgia determines the preferred method of
payment based on a credit analysis of the customer, assessing the customer's
payment history, the amount of the bill to be paid and other relevant factors.
If the results of the credit analysis are favorable, we will assume the
risk of collection of the funds from the customer's accounts, and if we have an
electronic connection to the merchant, the remittance will be sent
electronically. Otherwise, the remittance will be sent to the merchant by a
paper check or draft drawn directly on the customer's checking account. In an
electronic remittance, the funds are transmitted electronically to the merchant
with the customer's account number included as an addenda record. For a paper
draft, the customer's name, address, and account number is printed on the face
of the check. In addition, our processing system provides the ability to
aggregate multiple electronic and paper remittances due to merchants. Thus, if
multiple payments are going to the same merchant on the same day, we may send
one check for the sum of these payments and include a remittance statement that
provides the customers' names, addresses, account numbers, and payment amounts.
Our strategy is to drive operational efficiency and improve profitability by
increasing the percentage of transactions we process electronically.
We are also a leading provider of institutional portfolio management
and information services and financial application software. Our Investment
Services business offers portfolio accounting and performance measurement
services to investment advisors, brokerage firms, banks and insurance companies
and financial planning application software to financial planners.
Our portfolio management system solution includes:
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- data conversion;
- personnel training;
- trading system;
- graphical client reporting;
- performance measurement;
- technical network support and interface setup; and
- Depository Trust Corporation processing.
Our financial planning software applications include:
- retirement and estate planning modules;
- cash flow, tax and education planning modules;
- asset allocation module; and
- investment manager performance database system.
Our fee-based money manager clients are typically sponsors or managers
of wrap money management products or traditional money managers, managing
investments of institutions and high net worth individuals.
Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support the following software applications, among
others:
- Electronic Funds Transfer.
Through our Paperless Entry Processing System Plus software,
we offer an online, real-time system providing an operational
interface for originating and receiving payments through the
automated clearinghouse. The automated clearinghouse is a nationwide
electronic clearing and settlement system that processes
electronically originated credit and debit transfers among
participating depository institutions. These electronic transactions
are substitutes for paper checks and are typically used for recurring
payments like direct deposit payroll payments and corporate payments
to contractors and vendors, debit transfers that consumers make to
pay insurance premiums, mortgages, loans and other bills, and
business to business payments. You may obtain additional information
on the automated clearinghouse at the Federal Reserve Commission's
website at http://www.federalreserve.gov. We do not maintain a direct
connection with the automated clearinghouse, but rather, clear our
electronic transactions through KeyBank, N.A., under the terms of an
automated clearinghouse agreement.
- Reconciliation.
Through our ReconPlus software, we provide United States
banks, international banks and corporate treasury operations with
automated check and non-check reconciliations in high volume,
multi-location environments. Some of the services provided by
ReconPlus are automated deposit verification, consolidated bank
account reconciliation and cash mobilization, immediate and accurate
funds availability data and improved cash control.
- Other.
We also provide software solutions like regulatory compliance
solutions for Form 1099 processing, safe box accounting and other
applications.
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 majority of today's consumer bill payments are completed using
traditional paper-based methods. According to the Gartner Group, of the
estimated 17 billion consumer bills produced each year, 81% are paid by paper
check, 12% are paid by electronic means and 7% by other means. 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.
Persistence of Traditional Financial Transaction Processes
Many traditional methods of completing financial transactions still
persist, including:
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- Paper Checks.
It is estimated that 65 billion checks were written in the
United States in 1998. 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 17 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 United States 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 Personal Computer Ownership.
Declining prices for personal computers and rapid growth in
the number of computer-literate consumers are driving increased
penetration of personal computers in United States homes.
- 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 estimates that there were 52 million
Internet users in the United States 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. International Data Corporation estimates that
the total value of goods and services purchased over the Internet in
the United States 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
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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, compared with
conventional paper-based transactions, electronic transactions cost much less to
complete, give rise to far fewer errors and generate far fewer subscriber
inquires. We believe that an electronic solution 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
- 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 an internally
developed data processing system created by our in-house engineers to
process electronic billings and payments. The Genesis platform was
designed to be scaled to handle more than 30 million consumers. We
have made significant investments in processes and technologies
supporting our Genesis platform to ensure that transactions are
executed with the highest level of security, reliability and
efficiency.
- Connectivity to Billers.
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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
provide a significant number of bills to most consumers at their
access point of choice. We have contracts with 89 billers, which
represent the opportunity to deliver over 500 million bills per
month, representing over 68% of the telecom bills, 24% of the utility
bills, 35% of the mortgage bills and 30% of the credit card bills in
the United States. 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 approximately 825 trained, experienced customer care
and merchant services staff that 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 contracts with over 350 sources, we are able to distribute
our services to whichever access and aggregation site the consumer prefers.
Significant among these contracts are our agreements with:
- 23 of the 25 largest banks in the United States;
- 8 of the top 10 brokerage firms in the United States;
- Internet portals;
- Internet-based banks;
- Internet financial sites like Quicken.com; and
- personal financial management software like Quicken and Microsoft
Money.
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, Internet portals, 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. Our strategy to drive adoption of our
electronic services will focus on the following initiatives.
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 and Internet portal 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 working 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.
We are proposing new pricing structures to our financial
institution customers to facilitate their offering electronic
billing and payment to a broad spectrum of consumers. Our
traditional financial institution pricing
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structure was based on subscriber fees, with an average cost to the
financial institution of approximately $4 per subscriber per month.
Under the old pricing structure, the costs to our financial
institution customers grew roughly proportionally to the number of
subscribers added, regardless of activity. Our new pricing programs
include a monthly fixed fee to the financial institution to cover
our infrastructure costs which helps our financial institution
customers more accurately predict the costs, a small monthly per
subscriber fee and a new fee based on the number of transactions
processed. We believe the new pricing structure should allow our
financial institution customers to justify promoting the service
through free trials and other offers.
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 personal
financial management 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
established a third operational center in Phoenix, Arizona 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. We recently began an internal program
called the "sigma challenge" which ties employee performance
evaluations and compensation to the achievement of process and
system improvements. Sigma is a measure of quality typically used by
manufacturing firms to minimize defects. The sigma challenge applies
sigma measurements as a barometer of our performance on our key
metrics of system availability and payment timeliness. Small changes
in our performance drive significant sigma movements, focusing our
attention on critical tasks and peak performance. The sigma
challenge is designed to take our quality performance from 99.0%, or
3.8 sigma, where we began our fiscal year 2000, to 99.9%, or 4.6
sigma, by the end of fiscal 2000. A 4.6 sigma is the quality
standard set by the telecommunications industry for delivering their
services to businesses and consumers or "dial-tone" quality.
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 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,
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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 sources through which
electronic payment services are provided to their customers. The following
financial institutions are some of our largest customers of our electronic
commerce services, as determined by the number of subscribers:
- Bank of America; - Merrill Lynch & Co.;
- Bank One; - NationsBank;
- Charles Schwab & Co.; - U.S. Bancorp; and
- Chase Manhattan Bank; - Wells Fargo;
- First Union;
- KeyCorp;
This list of our customers is not exhaustive and may not fully represent our
customer base.
Bill Payment and Banking. Our bill payment services enable financial
institution and Internet portal customers, as well as direct consumer
subscribers to pay bills electronically using a variety of devices like personal
computers 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 make any payment electronically from any checking account at any
financial institution in the United States. Recurring bills like mortgages can
be paid automatically and scheduled in advance, as specified by the consumer. As
of December 31, 1999, we had approximately 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 personal computer and web-based account registers, matching
cleared items with previously entered transactions.
Revenues are generated through contracts with individual financial
institutions. We historically negotiated 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. We recently announced the adoption of new
pricing programs that include a monthly fixed fee to the financial institution
to cover our infrastructure costs which helps our financial institution
customers more accurately predict the costs, a small monthly per subscriber fee
and a new fee based on the number of transactions processed. 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 these 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.
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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.
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 that 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 automated
clearinghouse 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 automated clearinghouse 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.
Automated Clearinghouse. The automated clearinghouse 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 automated
clearinghouse network acts as the clearing facility for routing electronic funds
transfer entries between financial institutions. All automated clearinghouse
transfers are handled in a standard format established through the National
Automated Clearing House Association. More than 15,000 financial institutions
participate in the automated clearinghouse system. There are 31 automated
clearing houses, 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. With 46 of the
top 50 originators utilizing the product to process approximately 74% of all
automated clearinghouse transactions nationally, it is the most widely used,
comprehensive automated clearinghouse processing system in the United States.
Paperless Entry Processing System Plus is an on-line, real-time system providing
an operational interface for originating and receiving electronic payments
through the automated clearinghouse.
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Reconciliation. Our reconciliation products allow users to verify and
compare their financial records, data and accounts against related information
derived from third party sources. RECON-PLUS provides United States 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;
- 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, automated teller machine transactions, automated clearinghouse transfers
and securities transactions.
Our account reconciliation package is one of the most widely used
account reconciliation systems in the United States banking industry. The
account reconciliation package/service management system which was developed in
1995 to replace and augment the existing 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. The account reconciliation package/service management
system 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.
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<PAGE> 12
COMPETITION
Electronic Commerce
Portions of the electronic commerce market are becoming increasingly
competitive. We face significant competition in all of our customer markets.
First, we need to switch billers and consumers from paper bills sent by mail and
paid by check to electronic bill presentment and payment. Second, 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. To the best of our knowledge Spectrum has done
limited electronic presentment of bills, and is developing a "pay anyone"
capability. In addition, recently Mastercard International announced that it
would begin offer online bill presentment to enable people to receive and pay
bills over the Internet by September 2000. A number of relatively small
companies, like 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 entered into its own agreements with financial
institutions to offer on-line home banking and electronic billing and payment to
consumers. As previously announced, we have entered into an agreement to acquire
TransPoint and its operations. We also compete for business bill payment
customers with ACI and Deluxe Data, which provide automated clearinghouse
processing. We also face increased competition from new competitors offering
billing and payment services utilizing scan and pay technology. These "scan and
pay" companies offer a service whereby a consumer's bill is received by the
company, scanned to create an electronic image of the bill, and electronically
delivered to the consumer who can elect to pay that bill either by writing a
paper check or through an electronic transfer of funds. We believe that our
competitors, however, will need to make substantial progress to 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 this 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 like SunGard Portfolio Solutions and FMC Service
Bureau.
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 that 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)."
BlueGill is expanding into international markets where we may discover
new local competitors that have the advantages of existing relationships with
customers, local technical support staff, and local language support.
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.
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<PAGE> 13
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 like 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 working 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, like
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
alliances 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 alliances with companies 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 alliance 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.
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 approximately 825 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
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<PAGE> 14
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 established a third operational center in
Phoenix, Arizona to house customer care, check printing and distribution
functions. This center, 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 automated clearinghouse 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. These 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 Risks (Our business could become subject to
increased government regulation, which could make our business more expensive to
operate)."
Automated Clearinghouse. The automated clearinghouse 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 automated
clearinghouse to execute some of our customers' payment instructions. Like other
users of the automated clearinghouse, 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 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 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 like
automated teller machine 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 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 these risks, which
reserve was $1.2 million at December 31, 1999, and we have not incurred losses
in excess of 0.93% 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 Risks (We may be unable to protect our
proprietary technology, permitting competitors to duplicate our products and
services)."
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<PAGE> 15
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 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, various
types of networks or the Internet to our computing complex in Norcross, Georgia.
Within this complex, there is a wide variety of application servers that capture
transactions and route them to our back-end banking, billing and payment
applications for processing. The back-end applications are run on 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 automated clearinghouse and paper transactions to financial
institutions. We have also developed a merchant information file consisting of
over 1 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
these 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.
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)."
Sigma Challenge. We recently began an internal program called the
"sigma challenge" which ties employee performance evaluations and compensation
to the achievement of process and system improvements. Sigma is a measure of
quality typically used by manufacturing firms to minimize defects. The sigma
challenge applies sigma
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<PAGE> 16
measurements as a barometer of our performance on our key metrics of system
availability and payment timeliness. Small changes in our performance drive
significant sigma movements, focusing our attention on critical tasks and peak
performance. The sigma challenge is designed to take our quality performance
from 99.0%, or 3.8 sigma, where we began our fiscal year 2000, to 99.9%, or 4.6
sigma, by the end of fiscal 2000. A 4.6 sigma is the quality standard set by the
telecommunications industry for delivering their services to businesses and
consumers or "dial-tone" quality.
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 personal computers 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 December 31, 1999, our
research and development group consisted of approximately 246 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, 8.4% of revenues
during the fiscal year ended June 30, 1999 and 10.6% of revenues during the six
months ended December 31, 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, $7.4 million in the fiscal year ended June 30, 1999 and
$3.2 million for the six months ended December 31, 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 Office of the
Comptroller of the Currency, the Federal Reserve Board, or other federal or
state agencies that regulate or monitor banks or other types of providers of
electronic commerce services. The Office of the Comptroller of the Currency,
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 this 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 these systems from banks. Further, the Federal Reserve rules provide
that we can only access the Federal Reserve's automated clearinghouse through a
bank. If the Federal Reserve rules were to
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<PAGE> 17
change to further restrict our access to the automated clearinghouse or limit
our ability to provide automated clearinghouse 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, like 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 the 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. These
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,
these 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. See "Business - Business Risks (Our business could become
subject to increased government regulation, which could make our business more
expensive to operate)."
Proprietary Rights
We own the following federally registered trademarks and service marks:
<TABLE>
<S> <C>
- CHECKFREE(R); - MOBILEPAY(R);
- CHECKFREE and Design(R); - MOBIUS GROUP and Design(R);
- CHECKFREE (Stylized Letters)(R); - MOE(R);
- CHECKFREE EASY(R); - MPREPS(R);
- CHECKFREE EXTRA(R); - M-SEARCH(R);
- CHECKFREE MANAGER(R); - MSEARCH(R);
- CHECKFREE WALLET(R); - OMNI(R);
- CHECKFREE-BILL and Design(R); - ORBS(R);
- CHECKFREE FREES YOU FROM CHECKS(R); - PAWWS(R);
- CLAS(R); - PAWTRACKS(R);
- CLRS(R); - PEP+(R);
- CLUB HOOCH(R); - PEP PAPERLESS ENTRY PROCESSING(R);
- CPIM(R); - PODIUM(R);
- CSSII(R); - PTT(R);
- DASH(R); - QUICKILL(R);
- DECISION MANAGER(R); - SBA(R);
- DISC and Design(R); - SERVANTIS SYSTEMS(R);
- DISC CHECKBOOK-PLUS(R); - SERVANTIS WORLD$NET(R);
- DISC WORLD$NET(R); - SUPRRB(R);
- ECP(R); - TCM THE CONTROL MACHINE(R);
- EPOCH(R); - THE SECONDARY MARKETER(R);
- FASTOCK PC(R); - THE WAY MONEY MOVES and Design(R);
- FMS(R); - TRS(R);
- INTEGRATED DECISION MANAGER(R); - TST(R); and
- MAX(R); - VAULT(R).
- M-WATCH(R);
- MWATCH(R);
</TABLE>
Additionally, we have applied to federally register the following service
marks:
<TABLE>
<S> <C>
- CEC CENTER FOR ELECTRONIC - CHECKFREE YES/PC(TM);
COMMERCE and Design(SM); - DEFAULT NAVIGATOR(TM);
- CHECKFREE CHARITY NET(TM); - ECX(SM);
- CHECKFREE(SM); - M-PLAN(TM);
- CHECKFREE CONNECT(SM); - MPLAN(SM);
- CHECKFREE E-BILL(SM); - M-PREPS(TM);
- CHECKFREE ELECTRIC MONEY(SM); - M-VEST(TM);
- CHECKFREE RECON SELECT(TM); - MY-BILLS.COM(SM);
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C>
- RCM 2001...THE NEXT - SSI(TM);
GENERATION(TM); - SSI and Design(TM); and
- RECOVERY MANAGEMENT - STYLE ANALYIS PLUS(TM).
SYSTEM(TM);
</TABLE>
We are awaiting further information to file applications for the following
marks:
<TABLE>
<S> <C>
- 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);
</TABLE>
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<PAGE> 19
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 like
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 some of our programs and software documentation and
trademark some 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 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 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 December 31, 1999, we employed approximately 2,162 full-time
employees, including approximately 534 in systems and development, including
software development, approximately 825 in customer care, and approximately 803
in sales and marketing, 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.
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<PAGE> 20
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.
RISKS RELATED TO CHECKFREE
THE MARKET FOR OUR ELECTRONIC COMMERCE SERVICES IS EVOLVING AND MAY NOT CONTINUE
TO DEVELOP OR GROW RAPIDLY ENOUGH FOR US TO BECOME CONSISTENTLY PROFITABLE.
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. 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.
WE HAVE NOT OPERATED PROFITABLY IN THE PAST AND EXPECT TO EXPERIENCE NET LOSSES
IN THE FUTURE.
We have not consistently operated profitably to date. Since our
inception, our accumulated losses have totalled approximately $301,905,000. 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;
- a loss from operations of $3.7 million and net income of $10.5 million
for the fiscal year ended June 30, 1999; and
- a loss from operations of $12.6 million and a net loss of $7.9 million
for the six months ended December 31, 1999.
In addition, we recently announced the acquisitions of BlueGill Technologies,
Inc. and the TransPoint entities, owned by Microsoft Corporation, First Data
Corporation and Citicorp, N.A. BlueGill has incurred significant losses to date,
including a net loss of $7.1 million for the fiscal year ended December 31,
1999. The TransPoint business also has incurred significant losses to date,
including a net loss of $16.0 during the six month period ended December 31,
1999 and $42.7 during the fiscal year ended June 30, 1999.
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. For the six months ended December 31, 1999, we
invested over $15.1 million in research and development and over $18 million in
sales and marketing. We intend to continue to make significant investments in
research and development and sales and marketing. If the investment of our
capital is not successful to grow our business, it will have a material adverse
effect on our business and financial condition, as well as negatively impact
your investment in our business and limit our ability to pay dividends in the
future to our stockholders.
OUR FUTURE PROFITABILITY DEPENDS ON OUR ABILITY TO IMPLEMENT OUR STRATEGY
SUCCESSFULLY TO INCREASE ADOPTION OF ELECTRONIC BILLING AND PAYMENT METHODS.
Our future profitability will depend, in part, on our ability to
implement our strategy successfully to increase adoption of electronic billing
and payment methods. Our strategy includes investment of time and approximately
$40 million during fiscal 2000 in programs designed to:
- drive consumer awareness of electronic billing and payment;
- encourage consumers to sign up for and use our electronic billing and
payment services offered by 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.
If we do not successfully implement our strategy, revenue growth will be
minimal, and expenditures for these programs will not be justified.
Our investment in these programs will have a negative impact on our
short-term profitability. Additionally, our failure to implement these programs
successfully or to increase substantially 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.
COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
Electronic commerce is new and evolving rapidly, resulting in a dynamic
competitive environment. We face significant competition in our each of our
business units, Electronic Commerce, Investment Services and Software. Increased
competition or other competitive pressures may result in price reductions,
reduced margins or loss of business, any of which could have a material adverse
effect on our business, financial condition and results of operations. Further,
we expect competition to persist, increase and intensify in the future. First,
we need to switch billers and consumers from paper bills sent by mail and paid
by check to electronic bill presentment and payment. Second, a number of
financial institutions have developed, and others in the future may develop,
in-house home banking services similar to ours. For example, in June 1999, Chase
Manhattan Corporation, First Union Corporation and Wells Fargo & Co. announced
the formation of a new venture called Spectrum that will allow individuals and
businesses to receive and pay bills
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electronically. To the best of our knowledge, Spectrum has done limited
electronic presentment of bills, and is developing a "pay anyone" capability. In
addition, recently MasterCard International announced that it would begin
offering online bill presentment to enable people to receive and pay bills over
the Internet by September 2000. Additionally, TransPoint has entered into its
own agreements with financial institutions to offer on-line home banking and
electronic billing and payment services to consumers. As previously disclosed,
we have entered into an agreement to acquire TransPoint and its operations. In
the event that the TransPoint Acquisition is not completed, TransPoint will
continue to be a competitor. We also face increased competition from billers
directly presenting bills to their customers electronically and from new
competitors offering billing and payment services utilizing scan and pay
technology. These "scan and pay" companies offer a service whereby a consumer's
bill is received by the company, scanned to create an electronic image of the
bill, and electronically delivered to the consumer who can elect to pay that
bill either by writing a paper check or through an electronic transfer of funds.
We cannot assure you that we will be able to compete effectively against
financial institutions, Spectrum, TransPoint, MasterCard, billers directly
delivering bills to their customers, scan and pay companies or other current and
future electronic commerce competitors.
In addition, we cannot assure you that we will be able to compete
effectively against current and future competitors in the investment services
and software products markets. The markets for our investment services and
software products are also highly competitive. In investment services, our
competition comes primarily from 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.
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 a significant market share, it
could have a material adverse effect on our business, financial condition and
results of operations.
SOME OF OUR CUSTOMERS MAY COMPETE AGAINST US WHICH MAY RESULT IN A LOSS OF
REVENUE.
From time to time, some of our customers may compete against us which
may have a material adverse effect on our revenues and results of operations.
For the formation of Spectrum that will allow individuals and businesses to
receive and pay bills electronically. Collectively, Chase Manhattan, First Union
and Wells Fargo accounted for 13.3% of our total revenues for the year ended
June 30, 1999. Other of our significant customers may in the future decide to
compete against us and such competition may have a material adverse effect on
our business and financial results.
SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS MAY DAMAGE CUSTOMER
RELATIONS AND INHIBIT OUR GROWTH.
Any failures in our security and privacy measures could have a material
adverse effect on our business, financial condition and results of operations.
We electronically transfer large sums of money and personal information about
consumers, including bank account and credit card information, social security
numbers, and merchant account numbers. If we are unable to protect, or consumers
perceive that we are unable to protect, the security and privacy of our
electronic transactions, our growth and the growth of the electronic commerce 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.
WE RELY ON THIRD PARTIES TO DISTRIBUTE OUR ELECTRONIC COMMERCE SERVICES, WHICH
MAY NOT RESULT IN WIDESPREAD ADOPTION.
We rely on our contracts 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. None of these third parties accounted for more than 10% of our
total revenue for the year ended June 30, 1999 or for the six months ended
December 31, 1999. These contracts are an important source of the growth in
demand for our electronic commerce services. If any of these third parties
abandon, curtail or insufficiently increase its marketing efforts, it could have
a material adverse effect on our business, financial condition and results of
operations.
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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 adversely to 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;
- business opportunities, if combined financial institutions were to
determine 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 combined financial institutions were able to negotiate a
greater volume discount for, or to discontinue 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 contracts with three key financial institutions for a
substantial portion of our subscriber base and the volume of electronic
transactions that we process. As of December 31, 1999, these three financial
institutions accounted for approximately 1.4 million subscribers, or
approximately 47% of our total subscriber base. No single customer, however,
accounts for more than 10% of our revenues. The loss of the contract 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. If 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.
OUR FUTURE PROFITABILITY DEPENDS ON AN INCREASE IN THE PROPORTION OF
TRANSACTIONS WE PROCESS ELECTRONICALLY.
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.
We processed electronically 45% of our transactions for the year ended June 30,
1999 and 52% of the transactions for the six months ended December 31, 1999. 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.
THE TRANSACTIONS WE PROCESS EXPOSE US TO CREDIT RISKS.
Any losses resulting from returned transactions, merchant fraud or
erroneous transmissions could result in liability to financial institutions,
merchants or subscribers, which could have a material adverse effect on our
business, financial condition and results of operations. The electronic and
conventional paper-based transactions we process expose us to credit risks.
These include risks arising from returned transactions caused by:
- insufficient funds; - payment disputes;
- unauthorized use; - closed accounts;
- stop payment orders; - theft;
- frozen accounts; and - fraud.
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We are also exposed to credit risk from merchant fraud and erroneous
transmissions.
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. For example,
our system may be subject to disruption of service interruptions caused by
hostile third parties similar to those experienced by many companies operating
Internet websites during February 2000 or other instances of deliberate system
sabotage. Other events that could cause system interruptions include:
- fire; - telecommunications failure;
- natural disaster; - unauthorized entry; and
- power loss; - computer viruses.
For the fiscal year ended June 30, 1999, we incurred a charge of $2.7
million due to problems accessing and using our system. Without the charge, our
loss from operations in our electronic commerce segment would have been $2.8
million compared to the actual $5.5 million we lost. These problems stemmed from
system errors we experienced in April 1999 due to system degradation issues in
connection with the migration of subscribers to our Genesis platform, which
resulted in consumers inability to connect with and transmit data to our
processing system. This system failure did not result in the loss of any
consumer data.
Although we completed the initial migration of some of our subscribers
from our pre-existing data processing platforms to a new system that we call the
Genesis platform, we will continue to migrate subscribers from non-Genesis
platforms to the Genesis platform at the request of our other customers. 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 our data logs
hourly and our overall system daily, as well as 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. We constantly review our usage and
capacity constraints. We have engineered our systems to ensure that we never
exceed 80% utilization of capacity at peak processing times. That means that, in
general, we average processing at 40%-50% of capacity, with no peak time
consuming more than 80% of the system's resources. 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 OUR 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 that 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, we cannot assure you that these measures
will be successful in limiting our liability.
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WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING
RESULTS TO FLUCTUATE.
We have historically experienced seasonal fluctuations in our net sales,
and we expect to experience similar fluctuations in the future. 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 like 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.
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.
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.
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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. 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.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, PERMITTING COMPETITORS
TO DUPLICATE OUR PRODUCTS AND SERVICES.
Our success and ability to compete is dependent, in part, upon our
proprietary technology, which includes our patent for our electronic billing and
payment processing system, our source code information for our software
products, and our operating 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, reverse engineer 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 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, 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
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laws and regulations could amend these 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, including taxation of electronic commerce activities. The adoption of
any of these laws or regulations may decrease the growth of the Internet, which
could in turn decrease 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.
RISKS RELATED TO OUR COMMON STOCK
THE MARKET PRICE FOR OUR COMMON STOCK OF HAS BEEN VOLATILE.
Our common stock is quoted on the Nasdaq National Market and we have
experienced substantial volatility in our market price. During the period from
December 15, 1999 to the date of this Form 10-K/A No. 1, the market price our
common stock has been as high as $125.63 per share and as low as $28.50 per
share.
These historical fluctuations of the market price of our common have
been and in the future may be the result of various factors, many of which are
sometimes beyond our control. These factors may include, but are not limited to,
the following:
- actual or anticipated fluctuations in our operating results;
- actual or anticipated fluctuations in our subscriber growth;
- announcements by us, our competitors or our customers;
- 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.
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In addition, the stock markets in general have experienced extreme price
and volume fluctuations in the past that have affected the market price for our
common stock, as well as the common stock of many technology companies. These
price fluctuations are sometimes unrelated to the operating performance of the
specific companies whose stock is affected by the fluctuations.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has occurred against the
issuing company. If we are subject to this type of litigation in the future, it
could incur substantial costs and a diversion of management's attention and
resources, potentially leading to a material adverse effect on the economic
condition of these companies.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR 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 conversion of the notes or otherwise
could adversely affect the market price for our common stock. As of January 31,
2000, we had outstanding 52,635,730 shares of our common stock, of which
34,532,321 shares of our issued and outstanding common stock were held by
nonaffiliates. The holders of the remaining 18,103,409 shares were entitled
to resell them only pursuant to a registration statement under the Securities
Act of 1933 or an applicable exemption from registration. As of January 31,
2000, we had an additional 21,087,430 shares of our common stock available for
future sale, including:
- outstanding options to purchase 5,826,583 shares of our common stock,
of which options for 1,428,287 shares were fully vested and
exercisable at an average weighted exercise price of approximately
$9.21 per share;
- issued warrants to purchase 11,400,000 shares of our common stock, of
which warrants for 2,725,000 shares were fully vested and exercisable
at a weighted exercise price of approximately $20.86 per share;
- up to 704,347 shares available for issuance under our Associate Stock
Purchase Plan;
- up to 799,943 shares available for issuance under our 401(k) Plan; and
- up to 2,356,557 shares of our common stock issuable upon conversion of
the 6 1/2% convertible subordinated notes.
As of March 31, 2000, the following entities hold shares or warrants to
purchase shares of our common stock in the following amounts:
- Intuit, Inc., which holds 10,175,00 shares;
- Integration Financial Network, L.L.C., which with current and former
members, collectively holds warrants to purchase up to 9,700,000
shares, 2,700,000 of which are fully vested and exercisable; and
- Bank One, which holds warrants to purchase 1,000,000 shares and may
be entitled to receive warrants to purchase up to 2,000,000 additional
shares, none of which are vested or exercisable.
Each of Intuit, Integrion and Bank One may be entitled to registration
rights. If Intuit, Integration or Bank One, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, these sales may have an adverse effect on the market price of our common
stock.
If we complete the TransPoint acquisition, CheckFree Corporation will
issue 17,000,000 shares of common stock as follows:
- 8,567,250 shares to Microsoft;
- 6,567,250 shares to First Data; and
- 2,015,500 shares to Citibank.
We have agreed with Microsoft, First Data and Citibank to file a shelf
registration statement that would allow continuous resales of the shares that
First Data will be limited in their ability to transfer their shares of common
stock during the next three years pursuant to stockholder agreements with us,
they will be able to transfer significant portions of their common stock in the
future in both registered and unregistered sales. One year after the acquisition
is completed, Microsoft and Citibank may be able to sell up to the greater of
one percent of CheckFree Corporation's average weekly trading volume or one
percent of CheckFree Corporation's outstanding common stock in reliance on
registration exemptions. In addition, Microsoft and First Data will be permitted
to a limited extent to engage in hedging transactions with respect to our common
stock. Sales of substantial amounts of our common stock by either Microsoft or
First Data, or the perception that these sales could occur, may adversely affect
prevailing market prices for our common stock.
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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 also have 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.
In addition, both the commercial alliance agreement with Microsoft and
the marketing agreement with First Data, each of which we will execute in
connection with the closing of the TransPoint acquisition, both allow the
termination of the agreement by Microsoft or First Data, as the case may be,
under specific change of control circumstances. If either Microsoft or First
Data terminates under these circumstances, we will lose a portion of the future
revenue guarantees under the applicable agreement. This potential termination
event could discourage third parties from acquiring us.
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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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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....................................................................... $44.25 $23.13
Second Quarter...................................................................... $107.50 $34.00
Third Quarter ...................................................................... $125.63 $55.77
Fourth Quarter(through April 24, 2000).............................................. $70.75 $28.50
</TABLE>
On April 24, 2000, the last reported bid price for our common stock on
the Nasdaq National Market was $30.63 per share. As of April 24, 2000, there
were approximately 556 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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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We operate our business through three independent but inter-related
divisions:
- Electronic Commerce;
- Investment Services; and
- Software.
During the fiscal year ended June 30, 1999, Electronic Commerce
accounted for 68% of our revenues and Investment Services and Software each
accounted for 16% of our revenues.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997 and Mobius Group, Inc. in March 1999. On
December 21, 1999 we announced the planned acquisition of BlueGill Technologies,
Inc. and expect this transaction to close in the quarter ended June 30, 2000.
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During fiscal 2000, we announced a new pricing structure to our
financial institution customers. The new pricing program includes a fee based on
the number of transactions processed, a small per subscriber fee and a fixed
monthly fee to cover our infrastructure costs. Our traditional financial
institution pricing structure was based primarily on subscriber fees, which grew
roughly proportionally to the number of subscribers added, regardless of
activity. Both programs provide for monthly minimum fees. Until we see
significant increases in the number of electronic billing and payment customers
enrolling through financial institutions, we do not anticipate that this pricing
change will have a significant impact on our revenues. Once the subscriber
growth rates begin to accelerate and financial institutions adopt the new
pricing program, revenue growth will become more dependent upon consumer usage
of our services. As of December 31, 1999, only one financial institution had
adopted the new pricing program. From an efficiency perspective, electronic
payment of bills is significantly less expensive than traditional paper based
payments. Since June 1998 we have increased our electronic payments ratio from
32% of total payments processed to over 52% by December 1999. Improvement in
this important metric drives down our variable costs and results in increased
gross profits in our electronic payment business.
In March 1997, we introduced electronic billing -- "E-bill" -- which
enables merchants to deliver billing information as well as marketing materials
to their customers electronically over the Internet. Through December 1999 we
have placed 62 billers into production and are now delivering in excess of
38,000 electronic bills monthly through E-Bill. We derive revenue from our
billers on a per bill presented basis.
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.
The following table sets forth percentages of revenue represented by
consolidated statements of operations data:
YEAR ENDED JUNE 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
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%
========= ========== ==========
RESULTS OF OPERATIONS
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 some 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
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<PAGE> 33
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 automated clearinghouse
product line.
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 Internet 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 our divestitures of some 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
some 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.
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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, which has depressed
the denominator in the ratio of cost of processing, servicing and support to
processing only revenue. On the cost side, or the numerator in this ratio, we
continue to focus attention on increasing the percentage of electronic versus
paper based payments. On a per transaction basis, electronic payments are
significantly less expensive than paper based payments. Our electronic payment
percentage has increased from approximately 31% at June 30, 1998 to
approximately 45% at June 30, 1999. 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 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% 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
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<PAGE> 35
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.
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 like 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 in this Form 10-K/A No. 1 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 Integrion 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 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 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
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$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.
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
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<PAGE> 37
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.
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 years 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 revenue for the years ended June 30, 1997 and $28.8 million or
12.3% of total revenue 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 electronic banking businesses in April 1998, reductions in
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<PAGE> 38
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 Integrion. 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
strategic targets and each incremental vesting of warrants will result in a
future non-cash charge based on the fair market value of 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 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.
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, 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 above:
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<PAGE> 39
YEAR ENDED JUNE 30,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
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)
========= ========= =========
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 personal computer-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.
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.
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<PAGE> 40
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 years 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 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 years ended June 30, 1998. On a pro forma basis, assuming twelve
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<PAGE> 41
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 years 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
in 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 years 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.
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
We had a staff of approximately 100 technical associates on site to
review and test our internal and third party systems through the evening of
December 31, 1999 and into January 1, 2000. We had no significant internal
systems issues arise as a result of crossing into the Year 2000, and interfaces
with customers and suppliers have caused no adverse impact. While we continue to
monitor our systems for any related issues that may arise, additional costs in
this regard are anticipated only to the extent necessary to complete final
documentation of the testing activities that we performed and for activities
necessary to wind down our project team assigned to Year 2000.
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<PAGE> 42
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 related costs in the development of the Genesis platform are
therefore not included in our costs below. The following chart reflects our Year
2000 specific costs. The fiscal year 1999 and prior costs were attributed to
remediation of legacy systems and applications. The year to date fiscal year
2000 costs include minor remediation and testing and verification activities.
The cost to complete include the direct costs of the 100 associates that were on
site on January 1, 2000 and through the weekend to perform final testing as we
crossed into the Year 2000, as well as anticipated remaining project
documentation and wind down costs.
<TABLE>
<CAPTION>
YTD
FISCAL FISCAL FISCAL FISCAL COST TO
BUSINESS SEGMENT 1997 1998 1999 2000 COMPLETE TOTAL
---------------------- -------- ----------- ----------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Electronic commerce $ 0 $ 100 $1,360 $ 800 $ 20 $2,280
Software -- 500 525 171 10 1,206
Investment services -- 375 937 110 25 1,447
Corporate -- -- 270 81 -- 351
------ ------ ------ ------ ------ ------
Total $ 0 $ 975 $3,092 $1,162 $ 55 $5,284
====== ====== ====== ====== ====== ======
</TABLE>
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.
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.
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<PAGE> 43
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
million 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.
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 our 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 our first quarter of fiscal 2001.
We are in the process of evaluating the effects of this new statement.
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<PAGE> 44
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/A No. 1 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/A No.1 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. Accordingly, there can be no assurance that the
forward-looking statements included in this Annual Report on Form 10-K/A No. 1
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/A No. 1 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 below.
Our Financial Statement Schedule and Independent Auditors' Report on
Financial Statement Schedule are included in response to Item 14 below.
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<PAGE> 45
CHECKFREE HOLDINGS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Consolidated Financial Statements
Independent Auditors' Report.............................. 46
Consolidated Balance Sheets............................... 47
Consolidated Statements of Operations..................... 48
Consolidated Statements of Stockholders' Equity........... 49
Consolidated Statements of Cash Flows..................... 50
Notes to Consolidated Financial Statements................ 51
</TABLE>
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<PAGE> 46
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.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
Deloitte & Touche LLP
Atlanta, Georgia
August 9, 1999
(except for Note 22 as to which
the date is May 5, 2000)
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<PAGE> 47
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
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
Goodwill, net............................................. 25,138 32,280
Other intangible assets, net.............................. 5,336 13,595
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.
-47-
<PAGE> 48
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.
-48-
<PAGE> 49
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL NUMBER OF TREASURY TOTAL
SHARES OF STOCK PAID-IN SHARES OF STOCK ACCUMULATED STOCKHOLDERS'
COMMON STOCK AT PAR CAPITAL TREASURY STOCK AT COST DEFICIT EQUITY
------------ ------ ---------- -------------- -------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- June 30, 1996..... 42,274,800 $423 $276,822 (757,536) $ (629) $(138,941) $ 137,675
Net loss................... -- -- -- -- -- (161,813) (161,813)
Stock options exercised.... 636,309 6 591 -- -- -- 597
Tax benefit associated with
exercise of stock
options.................. -- -- 887 -- -- -- 887
Issuance of common stock
and stock options
pursuant to
acquisitions............. 12,635,212 126 176,550 -- -- -- 176,676
Treasury stock acquired.... -- -- -- (284,016) (5,378) -- (5,378)
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1997..... 55,546,321 555 454,850 (1,041,552) (6,007) (300,754) 148,644
Net loss................... -- -- -- -- -- (3,703) (3,703)
Stock options exercised.... 708,661 8 2,204 -- (47) -- 2,165
Employee stock purchases... 109,857 1 1,572 -- -- -- 1,573
401(k) match............... -- -- -- 78,257 1,692 -- 1,692
Warrants issued............ -- -- 32,827 -- -- -- 32,827
Tax benefit associated with
exercise of stock
options.................. -- -- 656 -- -- -- 656
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1998..... 56,364,839 564 492,109 (963,295) (4,362) (304,457) 183,854
Net income................. -- -- -- -- -- 10,457 10,457
Stock options exercised.... 354,758 3 1,605 -- -- -- 1,608
Employee stock purchases... 48,748 1 968 48,631 1,070 -- 2,039
401(k) match............... -- -- -- 74,981 963 -- 963
Treasury stock acquired.... -- -- -- (4,709,698) (31,336) -- (31,336)
Treasury stock retired..... (5,549,381) (55) (33,610) 5,549,381 33,665 -- --
Issuance of common stock
pursuant to
acquisition.............. 537,314 5 17,995 -- -- -- 18,000
Tax benefit associated with
exercise of stock
options.................. -- -- 1,318 -- -- -- 1,318
---------- ---- -------- ---------- -------- --------- ---------
Balance -- June 30, 1999..... 51,756,278 $518 $480,385 -- $ -- $(294,000) $ 186,903
========== ==== ======== ========== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
-49-
<PAGE> 50
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.
-50-
<PAGE> 51
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.
-51-
<PAGE> 52
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. The
company periodically reviews goodwill to evaluate whether changes have occurred
that would suggest that goodwill may be impaired based on the estimated
undiscounted cash flows of the assets to which goodwill relates over the
remaining amortization period. If this review indicates that the remaining
useful life of goodwill requires revision or that the goodwill is not
recoverable, the carrying amount of the goodwill is reduced by the estimated
shortfall of cash flows on a discounted basis. Other intangible assets are also
evaluated periodically for impairment using undiscounted cash flows over the
remaining useful life of the respective asset. If this review indicates that the
remaining useful life of the respective intangible asset requires revision, the
carrying amount of the asset is reduced by the estimated shortfall of cash flows
on a discounted basis.
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 stockholders 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. If such assets are
considered to be impaired, the carrying amount is reduced by the estimated
shortfall of cash flows on a discounted basis. 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
-52-
<PAGE> 53
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
-53-
<PAGE> 54
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
Estimated losses, if any, on contracts are provided for when probable.
Estimated loss provisions are based on excess costs over the revenues earned
from the contract. Credit losses, if any, are contemplated in the establishment
of our allowance for doubtful accounts.
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
Automated Clearinghouse 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,
-54-
<PAGE> 55
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
---------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill................................................... $10,392 15
Customer base.............................................. 4,429 15
Tradenames................................................. 3,709 10
Existing product technology................................ 1,864 5
Workforce.................................................. 940 5
</TABLE>
Amortization of intangible assets is on a straight line basis over the
assets' respective useful life. Mobius Group's operations are included in the
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
-55-
<PAGE> 56
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
composites. In-process development is designed to allow the user to customize
reports based on selection criteria, which the current version does not offer.
This effort requires a rewrite of a significant portion of the source code.
Based on software engineers' estimates of the percentage of reuse of developed
technology within particular components of the product, 25% of its value is
attributable to core technology.
M-Vest Revision -- M-Vest is Mobius Group's 16-bit asset allocation system
that is under development to port the entire program over to 32-bit. This
development effort requires significant changes to the user interface, a
revision of most of the reports and changes to core algorithms. Management
estimates that it would have taken six man months to recreate the code from the
beginning and the entire porting would take 12 man months and as a result, 30%
of its value is attributable to core technology.
The following table presents information regarding the status of various
in-process research and development projects acquired in connection with the
Mobius Group acquisition:
<TABLE>
<CAPTION>
ESTIMATED STAGE EXPECTED EXPECTED COST
OF COMPLETION RELEASE TO COMPLETE VALUATION
--------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
M-Plan:
Retirement and Estate Planning
Module..................... 92% May 1999 $ 49 $ 693
Cash Flow, Tax and Education
Module..................... 64% December 1999 208 183
M-Search Revision............... 56% September 1999 176 1,218
M-Vest Revision................. 20% September 1999 220 107
---- ------
Total................. $653 $2,201
==== ======
</TABLE>
The method used to allocate the purchase consideration to IPR&D was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPR&D projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
- Analysis of the stage of completion of each project;
- Exclusion of value related to research and development yet-to-be
completed as part of the on-going IPR&D projects; and
- The contribution of existing products/technologies.
The projected revenues used in the income approach are based upon the
incremental revenues associated with a portion of the project related to Mobius
Group's technology likely to be generated upon completion of the project and the
beginning of commercial sales, as estimated by the Company's management. The
projections assume that the product will be successful and the products'
development and commercialization are as set forth by management. The discount
rate used in this analysis is an after-tax rate of 20%.
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.
-56-
<PAGE> 57
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The cash flow module reports have not been developed. As the reports are
the only output seen by the end user, this represents a major development
effort.
- The Company has not yet determined how it will integrate tax tables into
its tax calculation in the tax module. Significant work remains to
complete reports and database fields.
- For the education module, significant data gathering had not occurred
and, therefore, the code had not yet been written for the calculations,
the database fields, and the reports.
- Significant risks still exist related to the completion and reintegration
of the M-Plan Modules (Retirement and Estate Planning and Cash Flow, Tax,
and Education Modules). For example, a user who borrows for education
purposes from his retirement fund should see his retirement decrease (in
the Retirement Module) and education investment increase (in the
Education Module).
- The M-Plan Modules are based entirely on new technology, since they are
written in C++ for a windows platform and utilize no existing technology.
- M-Vest is Mobius Group's current asset allocation system. There is an
on-going development program to migrate this program to run on 32-bit
hardware. This effort requires significant changes to interfaces, to
reports and some core algorithms.
- Each of the acquired IPR&D projects have not demonstrated their
technological or commercial feasibility as of the valuation date.
Significant risks exist because of uncertainties the Company may face in
the form of time and costs necessary to produce technologically feasible
products.
- If the proposed products fail to become viable, there is uncertainty that
the Company would be able to realize any value from the sale of the
technology to another party.
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.
-57-
<PAGE> 58
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
-58-
<PAGE> 59
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
Trade accounts receivable represents amounts billed to customers. Unbilled
trade accounts receivable result from extended payment terms on software license
agreements or services agreements and are recorded at the time of contract
execution. Revenue is recognized and customers are billed under service
agreements as the services are performed. For software contracts, revenue is
recognized under the provisions of SOP 97-2 as described in Note 1, and unbilled
amounts under those software contracts are billed on specific dates according to
contractual terms. Other receivables are comprised primarily of amounts due from
employees for travel and other advances. The allowance for doubtful accounts
represents management's estimate of uncollectible accounts receivable.
-59-
<PAGE> 60
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
-60-
<PAGE> 61
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<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.
-61-
<PAGE> 62
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
9. OTHER INTANGIBLE ASSETS
The components of other intangible assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Workforce................................................... $ 5,179 $ 6,171
Tradenames.................................................. 815 4,568
Customer base............................................... 1,231 5,758
------- -------
Total............................................. 7,225 16,497
Less accumulated amortization............................... 1,889 2,902
------- -------
Other intangible assets, net...................... $ 5,336 $13,595
======= =======
</TABLE>
10. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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.
-62-
<PAGE> 63
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company also leases certain computer equipment, furniture and telephone
equipment under capital leases. The Company is required to pay certain taxes,
insurance and other expenses related to the leased property.
The following is a summary of property under capital leases included in the
accompanying balance sheets (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1998 1999
------- ------
<S> <C> <C>
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
======= ======
</TABLE>
-63-
<PAGE> 64
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
---------------
<S> <C>
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
======
</TABLE>
13. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that the
Company shall pay for insurance, taxes and maintenance. In addition, certain
leases include rent escalations throughout the terms of the leases. Total
expense under all operating lease agreements for the years ended June 30, 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):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
---------------
<S> <C>
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
=======
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Retirement Plan -- The Company has a defined contribution 401(k) retirement
plan covering substantially all of its employees. Under the plan eligible
employees may contribute a portion of their salary until retirement and the
Company, at its discretion, may match a portion of the employee's contribution.
Total expense under the plan amounted to $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
-64-
<PAGE> 65
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
-65-
<PAGE> 66
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES 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
--------------------------- --------------------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE 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>
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 to 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 1997, 56,844 in January 1998, 48,631 in
July 1998, 48,748 in January 1999 and 46,819 in July 1999 from employees' salary
withholdings from the respective previous six-month period. Following is a
summary of the weighted average fair market value of
-66-
<PAGE> 67
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1998 1999
--------- ------- ------
<S> <C> <C> <C>
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
========= ======= ======
</TABLE>
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
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
-67-
<PAGE> 68
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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
--------------------------------------- ---------------------------------------
LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS............ $(161,813) 46,988 $(3.44) $(3,703) 55,087 $(0.07)
====== ======
Effect of dilutive
securities-options
and warrants....... -- -- -- --
--------- ------ ------- ------
Diluted EPS.......... $(161,813) 46,988 $(3.44) $(3,703) 55,087 $(0.07)
========= ====== ====== ======= ====== ======
<CAPTION>
YEAR ENDED JUNE 30, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS............ $10,457 52,444 $0.20
=====
Effect of dilutive
securities-options
and warrants....... -- 4,085
------- ------
Diluted EPS.......... $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.
-68-
<PAGE> 69
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Automated Clearinghouse processing, account reconciliation, wire
transfer, mortgage loan origination and servicing, lease accounting and
debt recovery. These products and services are primarily directed to
financial institutions and large corporations.
- Investment Services -- Investment services includes investment portfolio
management services and investment trading and reporting services. These
products and services are primarily directed to institutional investment
managers.
- 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.
-69-
<PAGE> 70
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
-70-
<PAGE> 71
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.
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.
-71-
<PAGE> 72
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
22. GUARANTOR FINANCIAL INFORMATION
CheckFree Management Corporation is a guarantor of the Company's
$172,500,000 convertible subordinated notes that were issued November 29,
1999. CheckFree Management Corporation was formed as a medical claims
management subsidiary in order to appropriately minimize, control, and
manage the medical claims liabilities of the Company and its subsidiaries.
As of June 30, 1999, the Company and its subsidiaries own approximately
63% of CheckFree Management Corporation. Separate financial statements of
the other guarantor subsidiaries have not been separately presented
because (1) CheckFree Holdings Corporation, the parent Company, has no
operations or assets other than its investment in its subsidiaries, (2)
all of the subsidiaries have guaranteed the securities on a full,
unconditional, and joint and several basis and (3) all of the subsidiaries
other than CheckFree Management Corporation are wholly owned by the
Company. The following table sets forth condensed consolidating financial
information of the Company, CheckFree Management Corporation, and other
wholly owned guarantor subsidiaries as of and for the year ended June 30,
1999:
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET INFORMATION
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 120 $ 291 $ 12,035 $ -- $ 12,446
Investments -- -- 10,266 -- 10,266
Accounts receivable, net -- 1,970 45,660 (1,970)(1) 45,660
Prepaid expenses and other
assets -- -- 7,800 -- 7,800
Deferred income taxes -- -- 6,513 -- 6,513
-------------- -------------- -------------- -------------- --------------
Total current assets 120 2,261 82,274 (1,970) 82,685
Property and equipment, net -- -- 69,823 -- 69,823
Capitalized software, net -- -- 20,059 -- 20,059
Intangible assets, net -- -- 45,875 -- 45,875
Investment in subsidiaries 186,922 -- -- (186,922)(3) --
Other investments -- -- 1,875 -- 1,875
Deferred income taxes -- -- 21,920 -- 21,920
-- -- -- (27,798)(1) --
-- -- -- (29,400)(2) --
Other noncurrent assets -- 27,798 40,158 (234)(4) 10,524
-------------- -------------- -------------- -------------- --------------
$ 187,042 $ 30,059 $ 281,984 $ (246,324) $ 252,761
============== ============== ============== ============== ==============
Current Liabilities:
Accounts payable $ -- $ 318 $ 9,634 $ (318)(4) $ 9,634
-- -- -- (1,970)(1) --
-- -- -- 126 (3) --
Accrued liabilities 139 -- 28,840 (164)(4) 26,971
Current portion of long-term
obligations -- 1,970 1,640 (1,970)(2) 1,640
Deferred revenue -- -- 20,195 -- 20,195
-------------- -------------- -------------- -------------- --------------
Total current liabilities 139 2,288 60,309 (4,296) 58,440
-- -- -- (27,798)(1) --
-- -- -- (27,430)(2) --
Accrued rent and other -- 27,430 31,086 248 (4) 3,536
Obligations under capital leases -
Less current portion -- -- 3,882 -- 3,882
Redeemable Preferred Stock -- 114 -- (114)(3) --
Stockholders' equity 186,903 227 186,707 (186,934)(3) 186,903
-------------- -------------- -------------- --------------- --------------
$ 187,042 $ 30,059 $ 281,984 $ (246,324) $ 252,761
============== ============== ============== ============== ==============
</TABLE>
1. Elimination of note receivable between CheckFree Corporation, a wholly owned
subsidiary of CheckFree Holdings, and CheckFree Management Corporation.
2. Elimination of claims liability deposit between CheckFree Corporation, a
wholly owned subsidiary of CheckFree Holdings, and CheckFree Management
Corporation.
3. Elimination of CheckFree Holdings investment in subsidiaries, and
reclassification of the minority interest in CheckFree Management
Corporation.
4. Elimination of other intercompany balances.
-72-
<PAGE> 73
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CheckFree
Combined
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Processing and servicing $ -- $ -- $ 201,059 $ -- $ 201,059
License Fees -- -- 15,975 -- 15,975
Maintenance fees -- -- 17,746 -- 17,746
Other 117 -- 15,351 (117)(1) 15,351
-------------- -------------- -------------- -------------- --------------
Total revenues 117 -- 250,131 (117) 250,131
Expenses:
Cost of processing, servicing
and support -- -- 146,704 -- 146,704
Research and development -- -- 21,085 -- 21,085
Sales and marketing -- -- 32,354 -- 32,354
-- -- -- (117)(1) --
General and administrative -- 117 31,450 16 (2) 31,466
Depreciation and amortization -- -- 24,630 -- 24,630
In-process research and
development -- -- 2,201 -- 2,201
-------------- -------------- -------------- -------------- --------------
Total expenses -- 117 258,424 (101) 258,440
Net gain on disposition of assets -- -- 4,576 -- 4,576
-------------- -------------- -------------- -------------- --------------
Income (loss) from operations 117 (117) (3,717) (16) (3,733)
Interest income -- 1,344 3,940 (1,300)(3) 2,799
-- -- -- (1,185)(4) --
Interest expense -- (1,185) (1,918) 1,300 (3) (618)
-- -- -- 1,185 (4) --
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes 117 42 (1,695) (16) (1,552)
Income tax benefit -- -- (12,009) -- (12,009)
Income before equity in earnings of
-------------- -------------- -------------- -------------- --------------
subsidiaries 117 42 10,314 (16) 10,457
Equity in earnings of subsidiaries 10,340 -- -- (10,340)(2) --
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 10,457 $ 42 $ 10,314 $ (10,356) $ 10,457
============== ============== ============== ============== ==============
</TABLE>
1. Elimination of administrative fee between CheckFree Holdings Corporation
and CheckFree Management Corporation.
2. Elimination of CheckFree Holdings investment in subsidiaries, including the
minority interest of CheckFree Management Corporation.
3. Elimination of the interest income / expense from the note receivable
between CheckFree Corporation, a wholly owned subsidiary of CheckFree
Holdings, and CheckFree Management Corporation.
4. Elimination of the interest income/ expense from the claims liability
deposit between CheckFree Corporation, a wholly owned subsidiary of
CheckFree Holdings, and CheckFree Management Corporation.
-73-
<PAGE> 74
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CheckFree
Combined
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 10,457 $ 42 $ 10,314 $(10,356)(1) $ 10,457
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in earnings of subsidiaries (10,340) -- -- 10,340 (1) --
Net inter-subsidiary cash transfers (2,733) -- 2,733 -- --
Write-off of in-process research
and development -- -- 2,201 -- 2,201
Depreciation and amortization -- -- 24,630 -- 24,630
Deferred income tax provision -- -- 854 -- 854
Net gain on disposition of assets -- -- (4,576) -- (4,576)
Purchases of investments-Trading -- -- (10,416) -- (10,416)
Proceeds from sales and
maturities of investments-Trading -- -- 24,683 -- 24,683
Change in certain assets and
liabilities (net of acquisitions and
dispositions):
Accounts receivable -- -- (6,976) -- (6,976)
Prepaid expenses and other -- -- 1,434 -- 1,434
Accounts payable -- -- 988 -- 988
Accrued liabilities -- -- (2,320) 126 (1) (2,194)
Deferred revenues -- -- 1,739 -- 1,739
Income tax accounts -- -- (17,253) -- (17,253)
--------- -------- --------- -------- ----------
Net cash provided by (used in) operating
Activities (2,616) 42 28,035 110 25,571
Investing activities:
Purchase of property and software -- -- (40,444) -- (40,444)
Proceeds from sale of assets -- -- 18,435 -- 18,435
Proceeds from repayment of note
receivable -- -- 14,882 -- 14,882
Capitalization of software development
costs -- -- (8,031) -- (8,031)
Purchase of business, net of cash acquired (190) -- -- -- (190)
Purchase of investments- held to maturity. -- -- (1,875) -- (1,875)
Proceeds from maturities and sales of
investments- held to maturity -- -- 1,006 -- 1,006
Loan to/from related party -- (30,512) 30,512 -- --
Proceeds (principal payments) on related
party loan -- 743 (743) -- --
--------- -------- --------- -------- ----------
Net cash provided by (used in) investing
activities (190) (29,769) 13,742 -- (16,217)
Financing Activities:
Principal payments on capital lease
obligations -- -- (3,327) -- (3,327)
Escrow deposit associated with capital
lease obligation -- -- (3,637) -- (3,637)
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C> <C> <C> <C> <C>
Proceeds from stock options exercised,
including related tax benefits 2,926 -- -- -- 2,926
Proceeds from employee stock purchase
plan -- -- 1,931 -- 1,931
Inter-subsidiary cash transfer for purchase
of treasury stock 31,336 -- (31,336) -- --
Purchase of treasury stock (31,336) -- -- -- (31,336)
Issuance of stock -- 300 (190) (110)(1) --
Proceeds from (funding of) assumption of
health plan liabilities -- 30,473 (30,473) --
Proceeds from (funding of) assumption of
health plan claims -- (755) 755 -- --
--------- --------- --------- ---------- ---------
Net cash provided by (used in) financing
Activities 2,926 30,018 (66,277) (110) (33,443)
--------- --------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents 120 291 (24,500) -- (24,089)
Cash and cash equivalents:
Beginning of period -- -- 36,535 -- 36,535
--------- --------- --------- ---------- ---------
End of period $ 120 $ 291 $ 12,035 $ -- $ 12,446
========= ========= ========= ========== =========
</TABLE>
(1) Elimination of CheckFree Holdings investment in subsidiaries, and
reclassification of the minority interest in CheckFree Management Corporation.
-75-
<PAGE> 76
The following table represents the equity structure of CheckFree Management
Corporation as of June 30, 1999.
<TABLE>
<S> <C>
REDEEMABLE PREFERRED STOCK:
Class C, 350 authorized shares, $100 par value;
350 shares issued and outstanding $ 36,400
Class D, 750 authorized shares, $100 par value;
750 shares issued and outstanding
78,000
--------
Total redeemable preferred stock $114,400
========
STOCKHOLDERS' EQUITY:
Preferred stock- Class B, 600 authorized shares, $100 par value;
600 shares issued, no amounts outstanding
Common stock- Class A, 1,900 authorized shares, $100 par value;
1,900 shares issued and outstanding $190,000
Retained earnings 37,048
--------
Total stockholders' equity $227,048
========
</TABLE>
Redeemable Preferred Stock - The holders are entitled to receive
dividends before any dividend is declared or paid on shares of Class A
Common Stock. Such dividends are cumulative and are payable at times
determined by the CheckFree Management Corporation's Board of
Directors. The holders are entitled to one vote per share and each
class has certain rights with respect to election of the Company's
Board of Directors. On or after January 1, 2004, the Company may, at
its option, redeem the shares of Class C and Class D preferred stock
for cash, the amount of which is determined by the "Formula Value",
plus any accrued but unpaid dividends. The "Formula Value" provides for
the price to be par value plus a percentage of the increase in the
Company valuation from the inception date, not to exceed a per share
price of $500. On or after January 1, 2005, the holders of Class C and
Class D preferred stock may require the Company to redeem their shares
for cash, the amount of which is determined by the Formula Value
defined above, plus any accrued but unpaid dividends. At June 30, 1999
the redemption value of the preferred stock is approximately equal to
its carrying value. In the event of liquidation, dissolution or winding
up of the Company, holders of Class C and Class D preferred stock are
entitled to receive, prior to and in preference to any distributions to
the holders of Class B preferred stock or Class A common stock, an
amount determined by the Formula Value, plus any accrued but unpaid
dividends.
Capital Stock - Holders of class A Common Stock are entitled to one
vote per share and have certain rights with respect to election of the
Company's Board of Directors. The holders of Class B, Preferred Stock
have certain additional rights, privileges and preferences. The holders
are entitled to one vote per share and each class has certain rights
with respect to election of the Company's Board of Directors. The
holders are entitled to receive dividends before any dividend is
declared or paid on shares of Class A Common Stock. Such dividends are
cumulative and are payable at times determined by the Board of
Directors. In the event of liquidation, dissolution or winding up of
the Company, subject to the redeemable preferred stock preferences,
holders of Class B preferred stock are entitled to receive an amount
equal to the par value plus any accrued but unpaid dividends.
In December 1998, the Company entered into a Stockholders' Agreement
with each holder of common and preferred stock. The agreement restricts
the sale or transfer of any shares of stock without express written
consent of all stockholders. In addition, the agreement provides that
the holder of the Class A Common Stock, CheckFree Holdings, is subject
to capital calls when and if the Board of Directors determines that the
Company will have a cash shortfall for any quarter. Through June 30,
1999, no additional capital contributions were required.
-76-
<PAGE> 77
23. UNAUDITED SUBSEQUENT EVENTS
On November 29, 1999, the Company issued $172.5 million of 6 1/2% convertible
subordinated notes in demoninations of $1,000 that are due on December 1, 2006.
The Company will pay interest on the notes on June 1 and December 1 of each
year, commencing June 1, 2000. The notes may be converted, at the holder's
option, into 13.6612 shares of common stock per note and the Company may redeem
the notes at any time on or after December 1, 2002.
On December 20, 1999, the Company entered into a definitive agreement to
purchase BlueGill Technologies, Inc. in exchange for 5 million shares of the
Company's common stock. The acquisition, which closed on April 28, 2000, will be
accounted for under the purchase method of accounting and will include a charge
for in-process research and development which is currently estimated at
approximately $6.9 million. BlueGill provides software that facilitates Web
based electronic billing and bill payment.
On February 15, 2000 the Company entered into a definitive agreement to purchase
MSFDC L.L.C (TransPoint) in exchange for 17 million shares of the Company's
common stock. TransPoint is a joint venture between Microsoft, First Data
Corporation and Citibank. The acquisition will be accounted for under the
purchase method of accounting and is expected to include a charge for in process
research and development. As part of the agreement, the selling parties will
fund the joint venture with $100 million of cash immediately prior to closing.
Additionally, a related commercial agreement with Microsoft provides for a
revenue guarantee of $120 million over the next five years and a related
marketing agreement with First Data Corporation provides for a revenue and/or
expense savings guarantee of $60 million over the next five years. TransPoint
provides electronic billing and payment processing services.
On April 27, 2000 the Company announced a 10-year strategic agreement with Bank
of America ("BofA"), whereby the Company will acquire the electronic billing and
payment assets of BofA and will provide electronic billing and payment services
to BofA's customer base in exchange for 10 million shares of the Company's
common stock. The agreement provides for a revenue guarantee of $500 million to
the Company over the next 10 years. BofA has the ability to earn warrants on up
to 10 million additional shares, eight million of which vest incrementally upon
achievement of specific levels of subscriber adoption of electronic billing and
payment services and separately, and the other two million of which vest upon
achievement of specific levels of electronic bills presented to those
subscribers. Upon vesting of the warrants, the Company will record a charge for
the fair value of the warrants, based on a Black-Scholes valuation which will
take into consideration the market value of our stock, the $32.50 strike price
of the warrants, the volatility of our stock and the applicable risk-free
interest rate at that time. Additionally, the agreement requires the Company to
invest $25 million into a joint marketing development fund designed to
accelerate adoption of electronic billing and payment services through BofA's
customer base.
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<PAGE> 78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 in this Form
10-K/A No. 1 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 in this Form 10-K/A No. 1 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 in this Form 10-K/A No. 1 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
in this Form 10-K/A No. 1 by reference.
-78-
<PAGE> 79
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 are included in this
Annual Report on Form 10-K/A No. 1:
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.
Independent Auditors' Report regarding financial statements of
CheckFree Management Corporation.
Balance Sheet of CheckFree Management Corporation as of
June 30, 1999.
Statement of Operations of CheckFree Management Corporation as
of June 30, 1999.
Statement of Stockholder's Equity of CheckFree Management
Corporation as of June 30, 1999.
Statement of Cash Flows of CheckFree Management Corporation as
of June 30, 1999.
Notes to the Financial Statements of CheckFree Management
Corporation.
(2) The following financial statement schedule is included in
this Annual Report on Form 10-K/A No. 1 and should be read in conjunction with
the Consolidated Financial Statements contained in this form 10-K/A No. 1.
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).
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<PAGE> 80
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.)**
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<PAGE> 81
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.)**
-81-
<PAGE> 82
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.
*** Previously filed with the Annual Report on Form 10-K for the year ended
June 30, 1999
(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).
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<PAGE> 83
(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.
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<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
CheckFree Management Corporation:
We have audited the accompanying balance sheet of CheckFree Management
Corporation (the "Company") as of June 30, 1999, and the related statements of
operations, stockholders' equity and cash flows for the period from December 8,
1998 (date of inception) to June 30, 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1999, and the
results of its operations and its cash flows for the period from December 8,
1998 (date of inception) to June 30, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
----------------------------
Deloitte & Touche LLP
Atlanta, Georgia
May 5, 2000
-84-
<PAGE> 85
CHECKFREE MANAGEMENT CORPORATION
BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash ...................................................................... $ 290,563
Related party note receivable, current portion ............................ 1,970,154
-----------
Total current assets ....................................... 2,260,717
RELATED PARTY NOTE RECEIVABLE, less current portion ............................ 27,798,114
-----------
$30,058,831
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Claims payable ............................................................ $ 317,190
Deposit for future claims liability ....................................... 1,970,154
-----------
Total current liabilities................................... 2,287,344
DEPOSIT FOR FUTURE CLAIMS LIABILITY- Less current portion ...................... 27,430,039
REDEEMABLE PREFERRED STOCK:
Class C, 350 authorized shares, $100 par value;
350 shares issued and outstanding ...................................... 36,400
Class D, 750 authorized shares, $100 par value;
750 shares issued and outstanding ...................................... 78,000
-----------
Total redeemable preferred stock ........................... 114,400
STOCKHOLDERS' EQUITY:
Preferred stock- Class B, 600 authorized shares, $100 par value;
600 shares issued, no amounts outstanding .............................. --
Common stock- Class A, 1,900 authorized shares, $100 par value;
1,900 shares issued and outstanding .................................... 190,000
Retained earnings ......................................................... 37,048
-----------
Total stockholders' equity ................................. 227,048
-----------
$30,058,831
===========
</TABLE>
See notes to financial statements
-85-
<PAGE> 86
CHECKFREE MANAGEMENT CORPORATION
STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 8, 1998 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<S> <C>
REVENUES:
Interest income from related party ........................ $1,300,220
Other interest income ..................................... 43,450
----------
Total revenues ............................. 1,343,670
EXPENSES:
Interest expense on deposit for future claims liability ... 1,185,022
General and administrative ................................ 117,200
----------
Total expenses ............................. 1,302,222
----------
INCOME BEFORE INCOME TAXES ..................................... 41,448
INCOME TAX EXPENSE ............................................. --
----------
NET INCOME ..................................................... 41,448
DIVIDENDS ON REDEEMABLE PREFERRED STOCK ........................ 4,400
----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS ................... $ 37,048
==========
</TABLE>
See notes to financial statements
-86-
<PAGE> 87
CHECKFREE MANAGEMENT CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 8, 1998 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
NUMBER OF PREFERRED NUMBER OF COMMON TOTAL
SHARES OF STOCK AT SHARES OF STOCK AT RETAINED STOCKHOLDERS'
PREFERRED STOCK PAR COMMON STOCK PAR EARNINGS EQUITY
--------------- --------- ------------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 8, 1998 .................... -- $ -- -- $ -- $ -- $ --
Issuance of preferred stock for cash ...... 600 60,000 -- -- -- 60,000
Exchange of preferred stock for
redeemable preferred stock .......... (600) (60,000) -- -- -- (60,000)
Dividends accrued on redeemable
preferred stock ..................... -- -- -- -- (4,400) (4,400)
Issuance of common stock for cash ......... -- -- 1,900 190,000 -- 190,000
Net income ................................ -- -- -- -- 41,448 41,448
------ -------- ----- -------- ------- --------
BALANCE- JUNE 30, 1999 ......................... -- $ -- 1,900 $190,000 $37,048 $227,048
====== ======== ===== ======== ======= ========
</TABLE>
See notes to financial statements
-87-
<PAGE> 88
CHECKFREE MANAGEMENT CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 8, 1998 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income .............................................. $ 41,448
------------
Net cash provided by operating activities..... 41,448
INVESTING ACTIVITIES:
Loan to related party ................................... (30,511,872)
Principal payments received on related party note ....... 743,603
------------
Net cash used in investing activities .... (29,768,269)
FINANCING ACTIVITIES:
Proceeds from assumption of health plan liabilities ..... 30,472,860
Payments made on health plan liabilities ................ (755,476)
Proceeds from issuance of common stock .................. 190,000
Proceeds from issuance of preferred stock ............... 110,000
------------
Net cash provided by financing activities..... 30,017,384
------------
NET INCREASE IN CASH ......................................... 290,563
CASH:
Beginning of period ..................................... --
------------
End of period ........................................... $ 290,563
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................... $ 1,185,022
============
Dividends accrued on redeemable preferred stock ......... $ 4,400
============
</TABLE>
See notes to financial statements
-88-
<PAGE> 89
CHECKFREE MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND FOR THE PERIOD FROM DECEMBER 8, 1998
(DATE OF INCEPTION) TO JUNE 30, 1999
1. DESCRIPTION OF THE BUSINESS
CheckFree Management Corporation (the "Company") was formed from a plan of
recapitalization of RCM Systems, Inc., a wholly owned subsidiary of
CheckFree Holdings Corporation ("CheckFree Holdings"), on December 8,
1998. The Company was formed as a medical claims management subsidiary in
order to appropriately minimize, control, and manage the medical claims
liabilities of CheckFree Holdings and its subsidiaries. As of June 30,
1999, CheckFree Holdings and its subsidiaries own approximately 63% of the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements include the
results of operations of the Company since its inception date, December 8,
1998, and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("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.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents. The Company held no cash equivalents at June 30, 1999.
Deposit for Future Claims Liability- The Company accounts for the deposit
for future claims liability under deposit accounting as set forth in
Statement of Position ("SOP") 98-7, "Deposit Accounting & Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk"
issued by the Accounting Standards Executive Committee. Under deposit
accounting, the Company recorded the cash received from CheckFree
Corporation as a deposit liability. As the Company makes payments of
medical claims, they record a reduction in the accrued deposit for future
claims liability. The deposit liability account is also adjusted by
calculating the effective yield on the deposit to reflect the actual
medical claim payments to date and expected future medical claims, with a
corresponding credit or charge to interest income or expense.
Comprehensive Income - The Company reports Comprehensive Income in
accordance with the provisions of 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
include all changes in equity during a period except those resulting from
investments by and distributions to shareowners. There were no components
of other comprehensive income applicable to the Company for the period
ended June 30, 1999.
Recent Accounting Pronouncements - 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 No. 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.
3. RELATED PARTY NOTE RECEIVABLE
On December 30, 1998, the Company loaned $30,511,871 to CheckFree
Corporation and received a promissory note calling for principal and
interest payments to be made monthly commencing February 1, 1999. The note
matures on March 1, 2005 and bears interest at 8.51% per annum. CheckFree
Corporation is a stockholder in the Company and is a wholly owned
subsidiary of CheckFree Holdings. Interest income on the note amounted to
$1,300,220 for the period ended June 30, 1999.
-89-
<PAGE> 90
CHECKFREE MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
Principal payments due on the note are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
---------------
<S> <C>
2000.......................................... $ 1,970,154
2001 ......................................... 3,581,060
2002 ......................................... 4,697,237
2003 ......................................... 5,985,173
2004 ......................................... 7,425,415
Thereafter ................................... 6,109,229
-----------
Total ......................... $29,768,268
===========
</TABLE>
At June 30, 1999, the estimated fair value of the note receivable
approximates the carrying value based on currently available instruments
with similar interest rates and remaining maturities.
4. DEPOSIT FOR FUTURE CLAIMS LIABILITY
On December 21, 1998, the Company and CheckFree Corporation entered into
an exchange agreement whereby CheckFree Corporation contributed cash of
$30,507,860 in exchange for 350 shares of Class C Redeemable Preferred
Stock and the Company agreed to unconditionally assume and undertake to
pay certain health plan liabilities of CheckFree. The health plan
liabilities recorded by the Company were based on the present value (at an
assumed discount rate of 8.51%) of claims estimated to be incurred over a
five-year period commencing January 1, 1999. Estimated annual claim
liability reduction is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JUNE 30,
---------------
<S> <C>
2000 ................................................ $ 1,970,154
2001 ................................................ 3,581,060
2002 ................................................ 4,697,237
2003 ................................................ 5,985,173
2004 ................................................ 7,425,418
Thereafter .......................................... 5,741,151
-----------
Total ................................ $29,400,193
===========
</TABLE>
5. REDEEMABLE PREFERRED STOCK
The holders of Class C, and Class D Redeemable Preferred Stock have
certain rights, privileges and preferences, which include the following:
Dividends- The holders are entitled to receive dividends before
any dividend is declared or paid on shares of Class A Common Stock. Such
dividends are cumulative and are payable at times determined by the Board
of Directors.
Voting Rights-The holders are entitled to one vote per share and
each class has certain rights with respect to election of the Company's
Board of Directors.
Redemption - On or after January 1, 2004, the Company may, at its
option, redeem the shares of Class C and Class D preferred stock for cash,
the amount of which is determined by the "Formula Value", plus any accrued
but
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<PAGE> 91
CHECKFREE MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
unpaid dividends. The "Formula Value" provides for the price to be par
value plus a percentage of the increase in the Company valuation from the
inception date, not to exceed a per share price of $500.
On or after January 1, 2005, the holders of Class C and Class D preferred
stock may require the Company to redeem their shares for cash, the amount
of which is determined by the Formula Value defined above, plus any
accrued but unpaid dividends. At June 30, 1999 the redemption value of the
preferred stock is approximately equal to its carrying value.
Liquidation Preference - In the event of liquidation, dissolution
or winding up of the Company, holders of Class C and Class D preferred
stock are entitled to receive, prior to and in preference to any
distributions to the holders of Class B preferred stock or Class A common
stock, an amount determined by the Formula Value, plus any accrued but
unpaid dividends.
A summary of redeemable preferred stock activity for the period ended June
30, 1999 is as follows:
<TABLE>
<CAPTION>
CLASS C CLASS D TOTAL
------- ------- --------
<S> <C> <C> <C>
Issuance of redeemable preferred stock ................... $35,000 $75,000 $110,000
Dividends accrued ........................................ 1,400 3,000 4,400
------- ------- --------
Redeemable preferred stock at June 30, 1999....... $36,400 $78,000 $114,400
======= ======= ========
</TABLE>
6. CAPITAL STOCK
The Company's capital stock consists of the following:
Class A Common Stock- Holders of the stock are entitled to one vote per
share and have certain rights with respect to election of the Company's
Board of Directors.
Class B Preferred Stock- The holders of Class B, Preferred Stock have
certain rights, privileges and preferences, which include the following:
Dividends- The holders are entitled to receive dividends before
any dividend is declared or paid on shares of Class A Common Stock. Such
dividends are cumulative and are payable at times determined by the Board
of Directors.
Voting Rights-The holders are entitled to one vote per share and
each class has certain rights with respect to election of the Company's
Board of Directors.
Liquidation Preference - In the event of liquidation, dissolution
or winding up of the Company, subject to the redeemable preferred stock
preferences, holders of Class B preferred stock are entitled to receive an
amount equal to the par value plus any accrued but unpaid dividends.
In December 1998, the Company entered into a Stockholders' Agreement with
each holder of common and preferred stock. The agreement restricts the
sale or transfer of any shares of stock without express written consent of
all stockholders. In addition, the agreement provides that the holder of
the Class A Common Stock, CheckFree Holdings, is subject to capital calls
when and if the Board of Directors determines that the Company will have a
cash shortfall for any quarter. Through June 30, 1999, no additional
capital contributions were required.
-91-
<PAGE> 92
CHECKFREE MANAGEMENT CORPORATION
NOTES TO 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
basis 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 files separate federal and state tax returns. Accordingly, the
income tax provisions included in the Statement of Operations have been
determined as if the Company was a separate taxpayer.
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 34 percent to income before income
taxes as a result of the following:
<TABLE>
<S> <C>
Federal tax at statutory rates .......................... $ 14,092
Deductible medical claims ............................... (256,861)
Change in valuation allowance ........................... 242,769
---------
Total .................................... $ --
=========
</TABLE>
At June 30, 1999, the Company's deferred tax assets were as follows:
<TABLE>
<S> <C>
Deferred tax assets- net operating loss carryforwards ........ (242,769)
Valuation allowance .......................................... 242,769
---------
Total ......................................... $ --
=========
</TABLE>
At June 30, 1999, the Company's has approximately $42,842 of state and
$755,475 of federal net operating loss carryforwards that expire in 2019.
A valuation allowance has been recorded due to the uncertainty of the
realizability of the net operating loss carryforwards.
8. OTHER RELATED PARTY TRANSACTIONS
On December 21, 1998, the Company entered into an Administrative Services
Agreement (the "Agreement") with CheckFree Holdings. Under the terms of
the Agreement, CheckFree Holdings receives a monthly administrative fee
for services provided to the Company. The Agreement calls for annual fee
increases of 4% and carries a two-year initial term, with an automatic
renewal clause. Total amounts paid under the agreement for the period
ended June 30, 1999 amounted to $115,200.
9. SUBSEQUENT EVENTS
On November 19, 1999, CheckFree Corporation purchased all outstanding
shares of Class D Preferred Stock. Subsequent to this purchase, CheckFree
Holdings and its subsidiaries own 89% of the Company.
-92-
<PAGE> 93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: July 7, 2000 By: /s/David Mangum
-------------------------------------------
David Mangum, Executive Vice President, and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended report has been signed below by the following persons on our behalf
and in the capacities indicated on the 7th day of July, 2000.
<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
*David Mangum Executive Vice President and Chief Financial Officer
------------------------------------------ (Principal Financial Officer)
David Mangum
*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>
-93-
