<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number: 0-26802
CHECKFREE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA 30092
(Address of principal executive offices, including zip code)
(678) 375-3000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 57,863,363 shares of
Common Stock, $.01 par value, were outstanding at May 11, 2000.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
March 31, 2000 and June 30, 1999
Condensed Consolidated Statements of 4
Operations For the Three and Nine Months Ended
March 31, 2000 and 1999
Condensed Consolidated Statements of 5
Cash Flows For the Three and Nine Months Ended
March 31, 2000 and 1999
Notes to Interim Condensed Consolidated Unaudited 6-8
Financial Statements For the Three and Nine Months
Ended March 31, 2000 and 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures. 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 2000
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 12,446 $ 125,043
Investments ........................................................... 10,266 26,292
Accounts receivable, net .............................................. 45,660 53,343
Prepaid expenses and other assets ..................................... 7,800 11,716
Deferred income taxes ................................................. 6,513 9,444
--------- ---------
Total current assets .............................................. 82,685 225,838
Property and equipment, net ................................................ 69,823 84,461
Capitalized software, net .................................................. 20,059 23,006
Intangible assets, net ..................................................... 45,875 41,763
Investments ................................................................ 1,875 52,869
Deferred income taxes ...................................................... 21,920 34,436
Other noncurrent assets .................................................... 10,524 13,760
--------- ---------
Total ........................................................ $ 252,761 $ 476,133
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 9,634 $ 6,573
Accrued liabilities ................................................... 26,971 41,032
Current portion of long-term obligations .............................. 1,640 6,533
Deferred revenue ...................................................... 20,195 29,638
--------- ---------
Total current liabilities ......................................... 58,440 83,776
Accrued rent and other ..................................................... 3,536 6,653
Convertible subordinated notes ............................................. -- 172,500
Obligations under capital leases - less current portion .................... 3,882 820
Commitments and contingencies ..............................................
Stockholders' equity:
Preferred stock- 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding .................................. -- --
Common stock- 150,000,000 authorized shares, $.01 par value;
issued 57,305,659 and 58,661,612 shares, respectively;
outstanding 51,756,278 and 53,112,231 shares, respectively......... 518 531
Additional paid-in-capital ............................................ 480,385 517,912
Other ................................................................. -- (281)
Accumulated deficit ................................................... (294,000) (305,778)
--------- ---------
Total stockholders' equity ........................................ 186,903 212,384
--------- ---------
Total ........................................................ $ 252,761 $ 476,133
========= =========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
3
<PAGE> 4
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
1999 2000 1999 2000
-------- -------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ................ $ 51,893 $ 68,499 $ 145,468 $ 189,430
License fees ............................ 3,593 4,098 10,005 10,295
Maintenance fees ........................ 4,112 4,615 13,314 13,571
Other ................................... 3,362 2,494 10,592 8,399
-------- -------- --------- ---------
Total revenues ........... 62,960 79,706 179,379 221,695
Expenses:
Cost of processing, servicing
and support............................ 36,115 46,785 107,572 133,684
Research and development ................ 4,382 9,166 16,539 24,276
Sales and marketing ..................... 6,713 10,945 21,945 29,522
General and administrative .............. 7,198 9,550 21,556 28,837
Depreciation and amortization ........... 6,002 9,033 18,001 23,789
In-process research and development ..... 2,201 -- 2,201 --
-------- -------- --------- ---------
Total expenses ........... 62,611 85,479 187,814 240,108
Net gain on dispositions of assets ...... -- -- 3,914 --
-------- -------- --------- ---------
Loss from operations ......................... 349 (5,773) (4,521) (18,413)
Net interest income (expense) ................ 479 (226) 1,698 (83)
-------- -------- --------- ---------
Loss before income taxes ..................... 828 (5,999) (2,823) (18,496)
Income tax benefit ........................... 1,136 (2,126) (12,422) (6,718)
-------- -------- --------- ---------
Net income (loss) ............................ $ (308) $ (3,873) $ 9,599 $ (11,778)
======== ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ...... $ (0.01) $ (0.07) $ 0.18 $ (0.23)
======== ======== ========= =========
Equivalent number of shares ............. 51,218 52,716 52,696 52,246
======== ======== ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ...... $ (0.01) $ (0.07) $ 0.17 $ (0.23)
======== ======== ========= =========
Equivalent number of shares ............. 51,218 52,716 56,117 52,246
======== ======== ========= =========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
4
<PAGE> 5
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------------
1999 2000
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 9,599 $ (11,778)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ..................................... 18,001 23,789
Deferred income tax provision ..................................... (10,418) (6,718)
Net gain on dispositions of assets ................................ (3,914) --
Write-off of in-process research and development .................. 2,201 --
Loss on disposal of property and equipment ........................ 202 --
Purchases of investments - Trading ................................ (3,061) (15,202)
Proceeds from maturities and sales of investments, net - Trading .. 18,169 18,929
Change in certain assets and liabilities
(net of acquisitions and dispositions):
Accounts receivable ........................................... (6,401) (7,683)
Prepaid expenses and other .................................... 1,570 (605)
Other noncurrent assets ....................................... -- (278)
Accounts payable .............................................. (943) (3,459)
Accrued liabilities ........................................... (1,012) 15,168
Deferred revenue .............................................. 5,257 9,443
Income tax accounts ........................................... (4,541) (2)
Accrued rent and other ........................................ -- 943
-------- ---------
Net cash provided by operating activities ................ 24,709 22,547
Cash flows from investing activities:
Purchase of property and software ................................. (21,581) (26,222)
Proceeds from sale of assets ...................................... 11,421 --
Purchase of business, net of cash acquired ........................ (125) (1,157)
Capitalization of software development costs ...................... (5,111) (5,379)
Purchase of investments - held to maturity ........................ -- (70,747)
Proceeds from maturities and sales of investments - held to
maturity ........................................................ 1,006 --
-------- ---------
Net cash used in investing activities .................... (14,390) (103,505)
Cash flows from financing activities:
Repayment of notes payable ........................................ (752) --
Principal payments under capital lease obligations ................ (822) (659)
Proceeds from sale of stock and exercise of warrants .............. -- 16,093
Proceeds from issuance of convertible subordinated notes .......... -- 166,903
Proceeds from stock options exercised, including related tax
benefits ........................................................ 1,184 9,034
Proceeds from employee stock purchase plan ........................ 1,070 2,184
Purchase of treasury stock ........................................ (31,335) --
-------- ---------
Net cash provided by (used in) financing activities ...... (30,655) 193,555
-------- ---------
Net increase (decrease) in cash and cash equivalents ................... (20,336) 112,597
Cash and cash equivalents:
Beginning of period ............................................... 36,535 12,446
-------- ---------
End of period ..................................................... $ 16,199 $ 125,043
======== =========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 491 $ 145
======== =========
Income taxes paid ................................................. $ 2,392 $ 56
======== =========
Capital lease additions and purchase of other long-term assets .... $ 1,583 $ 4,964
======== =========
Stock funding of 401(k) match ..................................... $ 1,932 $ 1,059
======== =========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
5
<PAGE> 6
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000
1. INTRODUCTION.
The accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the nine months
ended March 31, 1999 and 2000 are not necessarily indicative of the results for
the full year.
These financial statements should be read in conjunction with the
financial statements, accounting policies and financial notes thereto included
in the Company's Annual Report filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
2. 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>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------------------------------------
MARCH 31, 1999 MARCH 31, 2000
------------------------------------------- ----------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ................ $9,599 52,696 $0.18 $(11,778) 52,246 $(0.23)
===== ====== ======
Effect of dilutive
securities:
Options and warrants..... -- 3,421 -- --
------ ------ -------- ------
Diluted EPS ............... $9,599 56,117 $0.17 $(11,778) 52,246 $(0.23)
====== ====== ===== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MARCH 31, 1999 MARCH 31, 2000
------------------------------------------- ----------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ................. $(308) 51,218 $(0.01) $(3,873) 52,716 $(0.07)
====== ======
Effect of dilutive
securities:
Options and warrants..... -- -- -- --
----- ------ ------- ------
Diluted EPS ............... $(308) 51,218 $(0.01) $(3,873) 52,716 $(0.07)
===== ====== ====== ======= ====== ======
</TABLE>
Basic earnings (loss) per common share amounts were computed by
dividing income (loss) available to shareholders by the weighted average number
of shares outstanding. Diluted per-common-share amounts assume the issuance of
common stock for all potentially dilutive equivalent shares outstanding except
in loss periods when such an adjustment would be anti-dilutive. During the
quarter ended December 31, 1999, the Company issued convertible subordinated
notes. Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", requires that interest charges applicable to the convertible debt be
added back to income in computing diluted earnings per share, except in loss
periods when such an adjustment would be anti-dilutive. The number of
anti-dilutive interest charges and equivalent shares excluded from the per share
calculations were as follows (in thousands):
6
<PAGE> 7
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 2000
------------------------------------- ---------------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
---------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Nine Month Period Ended $-- 4,652 $1,499 6,251
=== ===== ====== =====
Three Month Period Ended $-- 3,421 $1,100 8,034
=== ===== ====== =====
</TABLE>
3. ACQUISITIONS AND DIVESTITURES.
On December 20, 1999, the Company entered into a definitive agreement
to purchase BlueGill Technologies, Inc. in exchange for 5.0 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. The final
allocation of the purchase price, which is not yet completed, is expected to
include a charge for in-process research and development, currently estimated at
approximately $11.9 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, which is expected to close
within four to six months, 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.
In March 1999, the Company acquired Mobius Group and accounted for the
acquisition under the purchase method of accounting. In accounting for the
acquisition, management identified estimated useful lives for the intangible
assets acquired. In conjunction with a periodic review of the reasonableness of
assigned useful lives, management has decided to reduce the remaining lives on
several of the intangible assets, and for accounting purposes has treated this
as a change in accounting estimate. This change in estimate, which was effective
January 1, 2000, had an immaterial impact on earnings for the quarter.
4. STRATEGIC AGREEMENTS.
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 billling 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, the other two million
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.
5. COMMON STOCK AND WARRANTS.
The Company has issued stock for various employee benefit programs
during the current fiscal year. In the quarter ended September 30, 1999, the
Company issued 36,226 shares of common stock to fund its 401(k) match, the cost
of which was accrued during the year ended June 30, 1999. In the quarter ended
September 30, 1999, the Company issued 46,819 shares of common stock and, in the
quarter ended March 31, 2000, the Company issued 52,191 shares of common stock
in conjunction with the employee stock purchase plan, which was funded through
employee payroll deductions accumulated in the immediately preceding six-month
period. In the quarter ended September 30, 1999, the Company issued 13,000
shares of restricted stock to certain key employees. Shares issued were recorded
at their fair market value on the date of the grant with a corresponding charge
to stockholders' equity.
7
<PAGE> 8
The unearned portion is being amortized as compensation expense on a
straight-line basis over the related vesting periods. Sale of these shares is
restricted prior to the date of vesting.
In October 1999, the Company announced an agreement with one of its
customers. Under the terms of the agreement, the customer has purchased 250,000
shares of the Company's stock, has been issued warrants on one million shares,
and has the ability to earn warrants on up to two million additional shares. All
warrants are exercisable on September 15, 2002 contingent upon achievement of
various annual revenue targets and maintaining the continued existence of the
agreement through that date. 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
$39.25 strike price of the warrants, the volatility of our stock and the
applicable risk-free interest rate at that time.
During the quarter ended December 31, 1999, the Company received
notification of and payment for the exercise of warrants for 300,000 shares of
the Company's common stock at an exercise price of $20.9375. Although cash was
received for the exercise of all 300,000 shares, 150,000 shares were not issued
until January 2000. As a result, $3.1 million of cash received was recorded as
an accrued liability in the Company's December 31, 1999 Condensed Consolidated
Balance Sheets and subsequently reclassified to equity upon issuance of the
shares.
6. CONVERTIBLE SUBORDINATED NOTES.
On November 29, 1999, the Company issued $172.5 million of 6 1/2%
convertible subordinated notes 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 January 14, 2000, the Company
filed a shelf registration statement to register the underlying shares. The
Company was unable to cause the shelf registration statement to be declared
effective by March 28, 2000 and as a result, will incur penalty interest of an
additional 1/2% until which time the registration statement is declared
effective.
7. CREDIT FACILITY.
On October 25, 1999, the Company executed an amendment to its working
capital line-of-credit agreement. The amendment extended the term of the line
through December 31, 1999, and changed certain financial covenants contained in
the agreement. In January 2000, the Company completed a new line-of-credit
agreement, which matures on December 30, 2002. The new agreement, which carries
an interest rate of LIBOR plus 200 basis points or Prime, enables the Company to
borrow up to $30 million and contains certain financial and operating covenants.
As of March 31, 2000, no amounts are outstanding.
8. RECENT ACCOUNTING PRONOUNCEMENTS.
In the quarter ended September 30, 1999, the Company adopted Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Statement distinguishes accounting
for costs of computer software developed or obtained for internal use from
guidance under SFAS No 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed." The adoption of SOP 98-1 did not result in
a material impact on reported results.
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's current investment policy
does not allow for the use of hedging instruments. In anticipation of the
adoption of SFAS 133, the Company is currently reviewing all outstanding
contracts for evidence of embedded derivatives. Based on the procedures
undertaken through this point, management does not believe that adoption of SFAS
133 will have a material impact on its results of operations.
9. 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 March 31, 2000,
the Company and its subsidiaries own approximately 89% 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 nine months ended March 31, 2000:
<TABLE>
<CAPTION>
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
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...... $ 62 $ 1 $ 124,980 $ - $ 125,043
Investments.................... - - 26,292 - 26,292
Accounts receivable, net....... - 3,060 53,343 (3,060) (1) 53,343
Prepaid expenses and other
assets..................... - - 14,776 (3,060) (2) 11,716
Deferred income taxes.......... - - 9,444 - 9,444
------------- ---------------- ---------------- --------------- -------------------
Total current assets....... 62 3,061 228,835 (6,120) 225,838
Property and equipment, net....... - - 84,461 - 84,461
Capitalized software, net......... - - 23,006 - 23,006
Intangible assets, net............ - - 41,763 - 41,763
Investment in subsidiaries........ 392,303 - - (392,303) (3) -
Other investments................. - - 52,869 - 52,869
Deferred income taxes............. - - 34,436 - 34,436
(25,200) (1)
(24,181) (2)
Other noncurrent assets........... 5,348 25,200 33,272 (679) (4) 13,760
------------- ---------------- ---------------- --------------- -------------------
$ 397,713 $ 28,261 $ 498,642 $ (448,483) $ 476,133
============= ================ ================ =============== ===================
Current Liabilities:
Accounts payable............... $ - $ 379 $ 6,573 $ (379) (4) $ 6,573
138 (3)
Accrued liabilities............ 12,829 290 28,074 (299) (4) 41,032
Current portion of long-term (3,060) (1)
obligations................ - 3,060 9,593 (3,060) (2) 6,533
Deferred revenue............... - - 29,638 - 29,638
------------- ---------------- ---------------- --------------- -------------------
Total current liabilities... 12,829 3,729 73,878 (6,660) 83,776
(25,200) (1)
(24,181) (2)
Accrued rent and other............ - 24,181 31,854 (1) (4) 6,653
Convertible subordinated notes.... 172,500 - - - 172,500
Obligations under capital leases -
less current portion.......... - - 820 - 820
Redeemable Preferred Stock........ - 112 - (112) (3) -
Stockholders' equity.............. 212,384 239 392,090 (392,329) (3) 212,384
------------- ---------------- ---------------- --------------- -------------------
$ 397,713 $ 28,261 $ 498,642 $ (448,483) $ 476,133
============= ================ ================ =============== ===================
</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, including the
minority interest of CheckFree Management Corporation.
4. Elimination of other intercompany balances
<TABLE>
<CAPTION>
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
------------- ---------------- ---------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Processing and servicing....... $ - $ - $ 189,430 $ - $ 189,430
License Fees................... - - 10,295 - 10,295
Maintenance fees............... - - 13,571 - 13,571
Other.......................... 174 - 8,399 (174) (1) 8,399
------------- ---------------- ---------------- --------------- -----------------------
Total revenues............. 174 - 221,695 (174) 221,695
Expenses:
Cost of processing, servicing
and support................ - - 133,684 - 133,684
Research and development....... - - 24,276 - 24,276
Sales and marketing............ - - 29,522 - 29,522
(174) (1)
General and administrative..... - 174 28,835 2 (2) 28,837
Depreciation and amortization.. - - 23,789 - 23,789
------------- ---------------- ---------------- --------------- -----------------------
Total expenses............. - 174 240,106 (172) 240,108
------------- ---------------- ---------------- --------------- -----------------------
Income (loss) from operations..... 174 (174) (18,411) (2) (18,413)
(1,875) (3)
Interest income................... - 1,875 6,179 (1,689) (4) 4,490
1,875 (3)
Interest expense.................. (4,133) (1,689) (2,315) 1,689 (4) (4,573)
------------- ---------------- ---------------- --------------- -----------------------
Income (loss) before income taxes. (3,959) 12 (14,547) (2) (18,496)
Income tax benefit................ (1,409) - (5,309) - (6,718)
Income (loss) before equity in
earnings of subsidiaries...... ------------- ---------------- ---------------- --------------- -----------------------
(2,550) 12 (9,238) (2) (11,778)
Equity in earnings of
subsidiaries.................. (9,228) - - 9,228 (2) -
------------- ---------------- ---------------- --------------- -----------------------
Net income (loss)................. $ (11,778) $ 12 $ (9,238) $ 9,226 $ (11,778)
============= ================ ================ =============== =======================
</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.
<TABLE>
<CAPTION>
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
-------------- --------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income............................. $ (11,778) $ 12 $ (9,238) $ 9,226 (1) $ (11,778)
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Equity in earnings of
subsidiaries...................... 9,228 - - (9,228) (1) -
Net inter-subsidiary cash (22,213) 22,213 - -
Depreciation and amortization...... - - 23,789 - 23,789
Deferred income tax provision...... (1,409) - (5,309) - (6,718)
Purchases of investments-Trading... - - (15,202) - (15,202)
Proceeds from sales and
maturities of investments-
Trading......................... - - 18,929 - 18,929
Change in certain assets and
liabilities (net of acquisitions
and dispositions):
Accounts receivable.......... - - (7,683) - (7,683)
Prepaid expenses and other... - - (605) - (605)
Other noncurrent assets...... (278) (278)
Accounts payable............. - - (3,459) - (3,459)
Accrued liabilities.......... - - 15,166 2 15,168
Deferred revenues............ - - 9,443 - 9,443
Income tax accounts.......... 1,409 - (1,411) - (2)
Accrued rent and other....... - - 943 943
Net cash provided by (used in) operating -------------- --------------- ----------------- -------------- ---------------
Activities........................... (24,763) 12 47,298 - 22,547
Investing activities:
Purchase of property and software..... - - (26,222) - (26,222)
Capitalization of software development
costs.............................. - - (5,379) - (5,379)
Purchase of business, net of cash (1,157) (1,157)
Proceeds (principal payments on related
party loan......................... - 1,507 (1,507) - -
Purchase of investments- Held to Maturity (70,747) (70,747)
Net cash provided by (used in) investing -------------- --------------- ----------------- -------------- ---------------
activities............................ - 1,507 (105,012) - (103,505)
Financing Activities:
Principal payments on capital lease
obligations........................ - - (659) - (659)
Proceeds from sale of stock and exercise
of warrants........................ 16,093 - - - 16,093
Proceeds from issuance of convertible
subordinated notes................. 166,903 - - - 166,903
Proceeds from stock options exercised,
including related tax benefits..... 9,034 - - - 9,034
Proceeds from employee stock purchase
plan............................... - - 2,184 - 2,184
Proceeds from (funding of) assumption of
health plan claims.................. (1,899) 1,899 - -
Capital contribution to subsidiary..... (167,325) 167,325 - -
Loan from related party............... 90 (90) - -
Net cash provided by (used in) financing -------------- --------------- ----------------- -------------- ---------------
activities............................ 24,705 (1,809) 170,659 - 193,555
Net increase (decrease) in cash and cash -------------- --------------- ----------------- -------------- ---------------
equivalents........................... (58) (290) 112,945 - 112,597
Cash and cash equivalents:
Beginning of period................... 120 291 12,035 - 12,446
-------------- --------------- ----------------- -------------- ---------------
End of period......................... $ 62 $ 1 $ 124,980 $ - $ 125,043
============== =============== ================= ============== ===============
</TABLE>
(1) Elimination of CheckFree Holdings investment in subsidiaries, including the
minority interest of CheckFree Management Corporation.
The following table represents the equity structure of CheckFree Management
Corporation as of March 31, 2000:
<TABLE>
<S> <C> <C>
REDEEMABLE PREFERRED STOCK:
Class C, 350 authorized shares, $100 par value;
350 shares issued and outstanding.................................... $ 35,700
Class D, 750 authorized shares, $100 par value; 750 shares issued
and outstanding...................................................... 76,500
----------
Total redeemable preferred stock $ 112,200
==========
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....................................................... 49,480
----------
Total stockholders' equity............................... $ 239,480
==========
</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 March 31, 2000 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 December 31,1999, no additional capital contributions were
required.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are the leading provider of electronic billing and payment services.
We operate our business through three independent but inter-related divisions:
o Electronic Commerce;
o Investment Services; and
o Software.
Our Electronic Commerce business provides services that allow consumers
to:
o receive electronic bills through the Internet;
o pay any bill - electronic or paper - to anyone; and
o perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliation's.
We currently provide electronic billing and payment services for
approximately 3.3 million consumers. Our services are available through over 350
sources, including:
o 23 of the 25 largest banks in the United States;
o 8 of the top 10 brokerage firms in the Unites States;
o Internet portals;
o Internet-based banks;
o Internet financial sites such as Quicken.com; and
o Personal financial management software such as Quicken and
Microsoft Money.
We have developed contracts with over 1,100 merchants nationwide that
enable us to remit in excess of 50% of all of our bill payments electronically.
During the three-month period ended March 31, 2000, we processed an average of
nearly 15 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 information as well as marketing materials
to their customers electronically over the Internet. Through March 2000, we have
placed 76 billers into production and are now delivering in excess of 62,000
electronic bills monthly through E-Bill. We derive revenue from our billers on a
per bill presented basis.
Currently, 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 account, 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 a 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. Since June
1998, we have increased our electronic payments ratio from 32% of total payments
processed to 56% by March 2000.
9
<PAGE> 10
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. During fiscal 2000, we announced a
new pricing structure available to our largest financial institution customers.
The new pricing program includes a fee per transaction processed, a small per
subscriber fee and a fixed monthly fee to cover our infrastructure costs. 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 customer usage of our services. As of
March 31, 2000, only two financial institutions had adopted the new pricing
program.
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 systems solution includes:
o data conversion;
o personnel training;
o trading system;
o graphical client reporting;
o performance measurement;
o technical network support and interface setup; and
o Depository Trust Corporation processing.
Our financial planning software applications include:
o retirement and estate planning modules;
o cash flow, tax and education planning modules;
o an asset allocation module; and
o an investment manager performance database system.
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:
o 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
transactions 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 transactions through
KeyBank, N.A., under the terms of an automated clearinghouse
agreement.
o Reconciliation
Through our RECON-PLUS 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
10
<PAGE> 11
verification, consolidated bank account reconciliation and
cash mobilization, immediate and accurate funds availability
data and improved cash control.
o Other
We also provide software solutions such as regulatory
compliance software 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 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, Mobius Group, Inc. in March 1999, and
BlueGill Technologies, Inc. in April 2000. On February 15, 2000 we announced the
planned acquisition of MSFDC, L.L.C (TransPoint), and expect this transaction to
close in the quarter ended September 30, 2000.
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 receiver offers for them from time to time.
RESULTS OF OPERATIONS
The following table sets forth percentages of revenue represented by
consolidated statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Total Revenues: ............................ 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 57.4 58.7 60.0 60.3
Research and development ................ 7.0 11.5 9.2 11.0
Sales and marketing ..................... 10.7 13.7 12.2 13.3
General and administrative .............. 11.4 12.0 12.0 13.0
Depreciation and amortization ........... 9.5 11.3 10.0 10.7
In process research and development ..... 3.5 -- 1.2 --
----- ----- ----- -----
Total expenses ................... 99.5 107.2 104.7 108.3
Net gain on dispositions of assets ......... -- -- 2.2 --
----- ----- ----- -----
Income (loss) from operations .............. 0.5 (7.2) (2.5) (8.3)
Interest:
Income .................................. 1.0 3.8 1.2 2.0
Expense ................................. (0.2) (4.1) (0.3) (2.0)
----- ----- ----- -----
Loss before income taxes ................... 1.3 (7.5) (1.6) (8.3)
Income tax benefit ......................... 1.8 (2.7) (6.9) (3.0)
----- ----- ----- -----
Net income (loss) .......................... (0.5)% (4.8)% 5.3% (5.3)%
===== ===== ===== =====
</TABLE>
Revenues. Reported revenue increased 27%, from $63.0 million for the
three months ended March 31, 1999 to $79.7 million for the three months ended
March 31, 2000, and 24%, from $179.4 million for the nine months ended March 31,
1999 to $221.7 million for the nine months ended March 31, 2000. On a pro forma
basis,
11
<PAGE> 12
net of the divestitures of our mortgage business in September 1998 and
our imaging business in October 1998 and adjusting for the acquisition of Mobius
Group in March 1999, revenue increased 24%, from $64.2 million for the three
months ended March 31, 1999 to $79.7 million for the three months ended March
31, 2000, and 22% from $182.1 million for the nine months ended March 31, 1999
to $221.7 million for the nine months ended March 31, 2000. The increase in
quarterly pro forma revenue of 24% was driven by increases of 28% in our
Electronic Commerce segment, 29% in our Investment Services segment and 2% in
our Software segment. The increase in year to date pro forma revenue of 22% was
driven by increases of 25% in our Electronic Commerce segment, 25% in our
Investment Services segment and 1% in our Software segment. Quarterly and year
to date growth in Electronic Commerce revenue is driven primarily by an increase
in subscribers from approximately 2.8 million at March 31, 1999 to approximately
3.3 million at March 31, 2000. As mentioned in previous reports, the 3.3 million
figure is net of approximately 0.4 million subscribers utilizing old legacy or
non Year 2000 compliant front ends that were purged by financial institutions
during the six months ended December 31, 2000. Pro forma quarterly and year to
date growth in Investment Services revenue is driven primarily by an increase in
portfolios managed from approximately 630,000 at March 31, 1999 to approximately
900,000 at March 31, 2000. In spite of dampened demand caused by customer focus
on Year 2000 projects early in the fiscal year, the Software segment has
achieved growth, both quarterly and year to date, on a pro forma basis.
Reported processing and servicing revenue increased by 32%, from $51.9
million for the three months ended March 31, 1999 to $68.5 million for the three
months ended March 31, 2000, and 30%, from $145.5 million for the nine months
ended March 31, 1999 to $189.4 million for the nine months ended March 31, 2000.
On a pro forma basis, adjusting for the acquisition of Mobius Group in March
1999, processing and servicing revenue increased by 29%, from $53.1 million for
the three months ended March 31, 1999 to $68.5 million for the three months
ended March 31, 2000, and 26%, from $149.8 million for the nine months ended
March 31, 1999 to $189.4 million for the nine months ended March 31, 2000.
Quarter over quarter and year over year pro forma growth in processing and
servicing revenue is primarily the result of the previously mentioned growth in
subscribers in our Electronic Commerce segment and portfolios managed in our
Investment Services segment. Our processing agreements with Internet portals
such as Yahoo!, allow for a free three month trial period for subscribers who
enroll through the portal. Because these subscribers are not generating revenue
during this free period, we do not count them in our active subscriber base.
Additionally, we now have 76 billers in production that presented approximately
62,000 electronic bills in the month ended March 31, 2000. The number of bills
we presented electronically has increased by 63% since the month ended December
31, 1999 and is up from 10,000 at March 31, 1999. We expect growth in this area
to continue as we bring additional billers into live production. When combined
with a recently announced transaction based pricing model available for our
largest customers, it will become more difficult to correlate revenue solely to
the number of our subscribers, with transactions processed becoming an
additional indicator. We exited the quarter ended March 31, 2000 processing more
than 15 million transactions on a monthly basis, compared to approximately 12
million as of June 30, 1999 and 11 million as of March 31, 1999.
Reported license fee revenue increased by 14%, from $3.6 million for
the three months ended March 31, 1999 to $4.1 million for the three months ended
March 31, 2000, and 3%, from $10.0 million for the nine months ended March 31,
1999 to $10.3 million for the nine months ended March 31, 2000. On a pro forma
basis, adjusting for the impact of divested software businesses, license revenue
increased by 14%, from $3.6 million for the three months ended March 31, 1999 to
$4.1 million for the three months ended March 31, 2000, and 6%, from $9.7
million for the nine months ended March 31, 1999 to $10.3 million for the nine
months ended March 31, 2000. Pro forma increases in license revenue on a quarter
over quarter and year over year basis are an early indication that customers
have completed their internal Year 2000 related projects and are beginning to
invest in additional software packages again. Increases in license fees have
come primarily through growth in sales in our automated clearinghouse processing
software.
Reported maintenance fee revenue increased by 12%, from $4.1 million
for the three months ended March 31, 1999 to $4.6 million for the three months
ended March 31, 2000, and 2%, from $13.3 million for the nine months ended March
31, 1999 to $13.6 million for the nine months ended March 31, 2000. On a pro
forma basis, adjusting for the impact of divested software businesses,
maintenance revenue increased by 12%, from $4.1 million for the three months
ended March 31, 1999 to $4.6 million for the three months ended March 31, 2000,
and 10%, from $12.4 million for the nine months ended March 31, 1999 to $13.6
million for the nine months ended March 31, 2000. This increase is due to new
maintenance paying customers added late in fiscal 1999 and early in fiscal 2000
as well as moderate price increases year over year, which is offset by
maintenance retention rates in the upper 80% range for the core maintenance base
in the Software segment.
12
<PAGE> 13
Reported other revenue, consisting mostly of consulting fees, decreased
by 26%, from $3.4 million for the three months ended March 31, 1999 to $2.5
million for the three months ended March 31, 2000 and by 21%, from $10.6 million
for the nine months ended March 31, 1999 to $8.4 million for the nine months
ended March 31, 2000. On a pro forma basis, adjusting for the impact of divested
software businesses and the acquisition of Mobius Group, other revenue decreased
by 26%, from $3.4 million for the three months ended March 31, 1999 to $2.5
million for the three months ended March 31, 2000, and 17%, from $10.1 million
for the nine months ended March 31, 1999 to $8.4 million for the nine months
ended March 31, 2000. The decrease in pro forma other revenue is due primarily
to the decline in software implementations and other software consulting
engagements resulting from customer software implementation freezes earlier in
the year in preparation for and follow up from the Year 2000.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $36.1 million or 57.4% of total revenue for the three
months ended March 31, 1999 and $46.8 million or 58.7% of total revenue for the
three months ended March 31, 2000. Cost of processing, servicing and support was
$107.6 million or 60.0% of total revenue for the nine months ended March 31,
1999 and $133.7 million or 60.3% of total revenue for the nine months ended
March 31, 2000. Cost of processing, servicing and support as a percentage of
servicing only revenue (all revenue except license) was 60.8% for the three
months ended March 31, 1999 and 61.9% for the three months ended March 31, 2000
and was 63.5% for the nine months ended March 31, 1999 and 63.2% for the nine
months ended March 31, 2000. We have seen deterioration in this ratio on a
comparative basis, both quarter over quarter and year over year. From an
efficiency perspective, our ratio of electronic payments to total payments has
improved from approximately 45% at March 31, 1999 to approximately 56% at March
31, 2000. Electronic payments carry a significantly lower variable cost per unit
than paper based payments. Additionally, we have seen improvements from the
leverage inherent in converting two-thirds of our subscribers from two legacy
systems to our Genesis processing system. These improvement, however, continue
to be offset by E-Bill implementation costs as we continue to move an increasing
number of billers into live production and by transaction costs generated by
portal subscribers operating within their free trial period. Additionally, we
have invested in quality improvement and infrastructure improvement initiatives
to prepare for future growth during this fiscal year.
Research and Development. Our research and development costs were $4.4
million or 7.0% of total revenue for the three months ended March 31, 1999 and
$9.2 million or 11.5% of total revenue for the three months ended March 31,
2000. Research and development costs were $16.5 million or 9.2% of total revenue
for the nine months ended March 31, 1999 and $24.3 million or 11.0% of total
revenue for the nine months ended March 31, 2000. Adjusted for capitalized
development costs of $2.3 million for the three months ended March 31, 1999,
$2.0 million for the three months ended March 31, 2000, $5.1 million for the
nine months ended March 31, 1999 and $5.3 million for the nine months ended
March 31, 2000, our gross research and development costs were $6.7 million or
10.6% of total revenue for the three months ended March 31, 1999 and $11.2
million or 14.0% of total revenue for the three months ended March 31, 2000 and
were $21.6 million or 12.0% of total revenue for the nine months ended March 31,
1999 and $29.6 million or 13.4% of total revenue for the nine months ended March
31, 2000. We continue to invest a significant portion of our revenue into
research and development activities in all business segments in anticipation and
support of revenue growth, quality enhancement and efficiency improvement
opportunities.
Sales and Marketing. Sales and marketing costs were $6.7 million or
10.7% of total revenue for the three months ended March 31, 1999 and $10.9
million or 13.7% of total revenue for the three months ended March 31, 2000.
Sales and marketing costs were $21.9 million or 12.2% of total revenue for the
nine months ended March 31, 1999 and $29.5 million or 13.3% of total revenue for
the nine months ended March 31, 2000. We have increased our sales staff to sign
additional billers in support of our electronic billing product offerings and
have increased program management staff in support of new non-subscriber based
products designed to leverage our existing electronic payment infrastructure. We
expect to incur increased promotional expenses in support of electronic billing
and payment offerings through financial institutions and Internet portals in an
effort to accelerate the growth of subscribers in our Electronic Commerce
segment.
General and Administrative. General and administrative expenses were
$7.2 million or 11.4% of total revenue for the three months ended March 31, 1999
and $9.6 million or 12.0% of total revenue for the three months ended March 31,
2000. General and administrative expenses were $21.6 million or 12.0% of total
revenue for the nine months ended March 31, 1999 and $28.8 million or 13.0% of
total revenue for the nine months ended March 31, 2000. The increase in general
and administrative expenses is due principally to an increase in facilities
costs
13
<PAGE> 14
resulting from upgraded facilities in Dublin, Ohio and Jersey City, New Jersey
and a new facility in Phoenix, Arizona; administrative staff required to manage
growth in all areas of the company; and our allowance for estimated doubtful
accounts consistent with realized revenue growth.
Depreciation and Amortization. Depreciation and amortization costs
increased from $6.0 million for the three months ended March 31, 1999 to $9.0
million for the three months ended March 31, 2000 and from $18.0 million for the
nine months ended March 31, 1999 to $23.8 million for the nine months ended
March 31, 2000. The increase in depreciation and amortization is due primarily
to amortization of intangible assets resulting from the acquisition of Mobius
Group in March of 1999 and increased depreciation resulting from capital
spending in support of growth and quality improvement initiatives. With the
acquisition of BlueGill Technologies, Inc. in April 2000 and the expected
acquisition of TransPoint L.L.C in the summer of 2000, we expect significant
increases in depreciation and amortization from the resulting increase in
intangible assets from these acquisitions.
Net Gain on Dispositions of Assets. The net gain on dispositions of
assets of $3.9 million in the nine months ended March 31, 1999 is the net result
of the gain on the sale of our mortgage business of approximately $6.3 million
offset by the loss on the sale of our imaging business of approximately $2.4
million.
Interest. Interest income has increased from $0.6 million for the three
months ended March 31, 1999 to $3.1 million for the three months ended March 31,
2000 and from $2.2 million from the nine months ended March 31, 1999 to $4.5
million for the three months ended March 31, 2000. On a quarter over quarter
basis, our average invested assets have increased from $38.9 million at March
31, 1999 to $202.8 million at March 31, 2000 and on a year over year basis, our
average invested assets have increased from $59.0 million at March 31, 1999 to
$114.4 million at March 31, 2000. The increase in both periods is primarily the
result of the receipt of $167.3 million in net proceeds from the issuance of our
6 1/2% convertible subordinated notes in November 1999. Interest expense has
increased from $0.1 million for the three months ended March 31, 1999 to $3.3
million for the three months ended March 31, 2000 and from $0.5 million for the
nine months ended March 31, 1999 to $4.6 million for the nine months ended March
31, 2000. On a quarter over quarter basis, our average outstanding debt has
increased from $7.8 million at March 31, 1999 to $179.2 million at March 31,
2000 and on a year over year basis, our average outstanding debt has increased
from $7.7 million at March 31, 1999 to $92.7 million at March 31, 2000. The
increase in both periods is primarily the result of a significant increase in
long term debt resulting from the issuance of $172.5 million of 6 1/2%
convertible subordinated debt in November 1999. Please refer to the Liquidity
and Capital Resources section of Management's Discussion and Analysis of Results
of Operations and Financial Condition and the Notes to Interim Condensed
Consolidated Unaudited Financial Statements included elsewhere in this Form 10-Q
for further discussion of the convertible debt.
Income Taxes. We recorded an income tax expense of $1.1 million at an
effective rate of 137% for the three months ended March 31, 1999 as compared to
an income tax benefit of $2.1 million at an effective rate of 35% for the three
months ended March 31, 2000. We recorded an income tax benefit of $12.4 million
(effective rate not meaningful) for the nine months ended March 31, 1999 as
compared to an income tax benefit of $6.7 million at an effective rate of 36%
for the nine months ended March 31, 2000. In the quarter ended December 31, 1999
we recorded a one-time tax benefit of approximately $12.2 million arising out of
our medical benefits management subsidiary. Net of this one-time benefit, the
reported effective rates differ from the blended statutory rate of 40% in all
periods due to goodwill and other non-deductible expenses, jobs credits and tax
exempt interest income.
SEGMENT INFORMATION
The following table sets forth our operating revenue and operating
income by industry segment for the periods noted. Charges identified as in
process research and development and net gain on dispositions of assets were
separated from the operating results of the segment for a better understanding
of the underlying performance of each segment. Explanations of these charges are
located above. The following numbers are in thousands:
14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ------------------------------
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenue:
Electronic Commerce ................ $ 43,530 $ 55,723 $ 122,915 $ 154,207
Software ........................... 9,768 9,933 29,498 27,993
Investment Services ................ 9,662 14,050 26,966 39,495
-------- -------- --------- ---------
Total operating revenue ........ $ 62,960 $ 79,706 $ 179,379 $ 221,695
======== ======== ========= =========
Operating income (loss):
Electronic Commerce ................ $ 1,484 $ (4,380) $ (3,904) $ (15,190)
Software ........................... 3,778 2,987 8,713 7,753
Investment Services ................ 2,452 2,481 5,142 7,928
Corporate .......................... (5,164) (6,861) (16,185) (18,904)
In process research and development (2,201) -- (2,201) --
Net gain on disposition of assets .. -- -- 3,914 --
-------- -------- --------- ---------
Total operating income (loss) .. $ 349 $ (5,773) $ (4,521) $ (18,413)
======== ======== ========= =========
</TABLE>
Revenue in our Electronic Commerce segment increased by 28%, from $43.5
million for the three months ended March 31, 1999 to $55.7 million for the three
months ended March 31, 2000 and increased by 25%, from $122.9 million for the
nine months ended March 31, 1999 to $154.2 million for the nine months ended
March 31, 2000. The increase in revenue is due primarily to an increase in
subscribers from approximately 2.8 million at March 31, 1999 to approximately
3.3 million at March 31, 2000. During the quarter ended September 30, 1999, a
few of our financial institution customers removed approximately 200,000
subscribers from our system that were either utilizing our low fee remittance
only processing services through proprietary PC-based front ends or that no
longer promoted certain legacy financial manager software. Additionally, in the
quarter ended December 31, 1999, we assisted our financial institution customers
in removing another 200,000 subscribers who were utilizing personal financial
management software that was not Year 2000 compliant. The majority of these
combined reductions were on older contracts with lower than average associated
monthly fees.
Our processing agreement with Yahoo! allows for a free three month
trial period for subscribers who enroll through Yahoo! During this free period,
we do not count them in our active subscriber base. Early in the Yahoo! program
we provided bill payment services only, but in December 1999, we added
electronic billing capability that now allows for a fully electronic round trip
billing experience through the Yahoo! offering. Upon completion of the service,
Yahoo! increased the nature and extent of advertising promotions though various
Yahoo! properties such as Yahoo.com, Yahoo! Calendar and Yahoo! Wallet in an
effort to increase consumer awareness and interest in the program.
To date, we have signed 121 billers to our E-Bill electronic billing
product offering and we now have 76 billers in production that presented over
62,000 electronic bills in the month ended March 31, 2000. The number of bills
we presented electronically has increased by 63% since December 1999 and has
more than tripled since September 1999. There are currently 23 billers actively
engaged in the implementation process and another 22 in the evaluation or
discovery stage in the process. We expect this growth in electronic bills
presented to continue for the foreseeable future. Our acquisition of BlueGill
Technologies, which closed on April 28, 2000, will facilitate our efforts to
provide quality billing content, and by simplifying and accelerating the process
of taking bills from paper to electronic, these relationships will help us speed
adoption of electronic billing services available today. When combined with our
new transaction based pricing model available to our largest customers, it will
become more difficult to correlate revenue solely to the number of active
subscribers, with transactions processed becoming an additional key indicator.
We exited the quarter ended March 31, 2000 processing approximately 15 million
transactions per month, an increase of 1 million per month over that which we
processed in December 1999.
15
<PAGE> 16
Our Electronic Commerce segment experienced operating income of $1.5
million for the three months ended March 31, 1999 compared to an operating loss
of $4.4 million for the three months ended March 31, 2000 and operating losses
increased from $3.9 million for the nine months ended March 31, 1999 to $15.2
million for the nine months ended March 31. 2000. As we have explained in
previous quarters, we are currently investing heavily in the following four
areas:
o Marketing and price incentives to spur industry growth;
o Compressing the time from E-bill contract execution to live billing;
o Improved infrastructure and programs that improve quality and
performance; and
o Extension of payment offerings through leverage of our existing
infrastructure.
Additionally, as subscribers sign up for electronic billing and payment
offerings through portals and other sponsors that offer free trial periods, we
will incur the variable costs associated with processing transactions from these
customers with no revenue to offset the costs. These combined factors will
continue to place downward pressure on operating margins in this segment for the
remainder of the fiscal year.
We have recently made several strategic announcements that will further
enhance the opportunity to facilitate accelerated market adoption of our
electronic billing and payment services. On February 15, 2000, we announced
plans to acquire TransPoint, a joint venture with Microsoft, First Data
Corporation, and Citibank, NA, and we expect this transaction to close in the
summer of 2000. With this acquisition we become the preferred provider of
electronic billing and payment services to customers of Microsoft offered
through their MSN and Money Central offerings and it comes with guaranteed
revenue of $120 million over the next five years. Additionally, we received $60
million of guaranteed revenue and/or costs savings opportunities through First
Data Corporation in the transaction. On April 5, 2000, we announced a strategic
agreement with the U.S. Postal Service whereby we will become the provider of
electronic billing and payment services through its Internet portal
www.usps.com. Finally, on April 27, 2000, we announced a strategic agreement
with Bank of America, the largest bank in the U.S., to offer electronic billing
and payment services to its 30 million customer base. This 10 year agreement
provides annual revenue guarantees of $50 million and the parties have mutually
agreed to invest $45 million in combined marketing and promotional funds geared
toward accelerating the adoption of our services by Bank of America's customers.
While there are no guarantees as to the timing or extent of accelerated adoption
of electronic billing and payment services, we believe that upon completion of
the aforementioned transactions, we will be better positioned to maintain our
market leadership throughout the accelerated growth cycle when it occurs.
Reported revenue in our Software segment increased by 1%, from $9.8
million for the three months ended March 31, 1999 to $9.9 million for the three
months ended March 31, 2000 and declined by 5%, from $29.5 million for the nine
months ended March 31, 1999 to $28.0 million for the nine months ended March 31,
2000. On a pro forma basis, net of divestitures of our mortgage and imaging
businesses in the prior year, revenue increased by 1%, from $9.8 million for the
three months ended March 31, 1999 to $9.9 million in the three months ended
March 31, 2000 and by 1%, from $27.7 million for the nine months ended March 31,
1999 to $28.0 million for the nine months ended March 31, 2000. The revenue
results were expected given purchasing moratoriums by customers concerned with
year 2000 issues through calendar year 1999 and into calendar year 2000. It is
our belief that as customers begin investing in third party software again we
will experience incremental growth in overall software revenue.
Reported operating income in our Software segment decreased from $3.8
million for the three months ended March 31, 1999 to $3.0 million for the three
months ended March 31, 2000 and decreased from $8.7 million for the nine months
ended March 31, 1999 to $7.8 million for the nine months ended March 31, 2000.
On a pro forma basis, net of divestitures, operating income decreased from $3.8
million for the three months ended March 31, 1999 to $3.0 million for the three
months ended March 31, 2000 and decreased from $10.3 million for the nine months
ended March 31, 1999 to $7.8 million for the nine months ended March 31, 2000.
The decrease in operating margins reflects investments in new initiatives such
as the recent launch of missingmoney.com, a state-sponsored Internet site we
developed with the National Association of Unclaimed Property designed to enable
individuals to find and claim money owed to them from non-refunded deposits,
unclaimed securities, and other accounts held by states. Also, additional
resources have been assigned to our new automated clearinghouse alliance
services program that carries a profit margin that is inherently lower than that
of our traditional product offerings in this area.
Reported revenue in our Investment Services segment increased by 45%,
from $9.7 million for the three months ended March 31, 1999 to $14.1 million for
the three months ended March 31, 2000 and by 46%, from $27.0
16
<PAGE> 17
million for the nine months ended March 31, 1999 to $39.5 million for the nine
months ended March 31, 2000. On a pro forma basis, adjusting for the acquisition
of Mobius Group in March 1999, revenue increased by 29%, from $10.9 million for
the three months ended March 31, 1999 to $14.1 million for the three months
ended March 31, 2000 and by 25%, from $31.5 million for the nine months ended
March 31, 1999 to $39.5 million for the nine months ended March 31, 2000. Growth
in pro forma revenue is primarily the result of an increase in portfolios
managed from approximately 630,000 at March 31, 1999 to approximately 900,000 at
March 31, 2000. A significant portion of portfolio growth over the past year has
occurred in retail versus institutional accounts that carry a lower unit price.
In October 1999, we launched our new M-Plan product from Mobius. Consultants,
plan sponsors, investment managers and financial planners use M-Plan for
integrating retirement, capital needs, tax, education and real estate planning
needs for their customers. Additionally, in the during the quarter ended March
31, 2000, we released revisions to our M-Search product from Mobius that allows
Internet based data collection capabilities to the product which will make data
collection on money manager returns and asset allocations more timely.
Reported operating income in our Investment Services segment remained
flat at $2.5 million for the three months ended March 31, 1999 and 2000 and
increased from $5.1 million for the nine months ended March 31, 1999 to $7.9
million for the nine months ended March 31, 2000. On a pro forma basis,
adjusting for the Mobius acquisition, operating income decreased slightly from
$2.7 million for the three months ended March 31, 1999 to $2.5 million for the
three months ended March 31, 2000 and increased from $5.6 million for the nine
months ended March 31, 1999 to $7.9 million for the nine months ended March 31,
2000. During the quarter ended March 31, 2000, we decided to reduce the useful
lives on three of the intangible assets resulting from the Mobius Group
acquisition. The change was effective January 1, 2000 and the pre-tax impact on
the operations was approximately $0.2 million and this was the reason for the
drop in operating income on a quarter over quarter basis. For both the quarter
over quarter and year over year results, as indicated earlier, a significant
portion of portfolio growth over the past year has occurred in retail versus
institutional accounts that carry a lower unit price which places downward
pressure on margins as the costs to process the business are not proportionally
lower.
The Corporate segment represents charges for legal, human resources,
accounting and finance and various other of our unallocated overhead charges.
Our Corporate segment incurred an operating loss of $5.2 million, or 8.2% of
revenue for the three months ended March 31, 1999 and $6.9 million or 8.6% of
total revenue for the three months ended March 31, 2000. Our Corporate segment
incurred an operating loss of $16.2 million or 9.0% of total revenue for the
nine months ended March 31, 1999 and $18.9 million or 8.5% of total revenue for
the nine months ended March 31, 2000. The unallocated portions of our expenses
have remained fairly consistent as a percentage of revenue. As subscriber price
promotions allowing for free trial periods begin to expire and related customers
begin paying for various related electronic billing and payment services, we
believe our corporate costs will begin to decline as a percentage of revenue as
we regain the leverage inherent in our normalized business model.
The in process research and development charge of $2.2 million in the
three month and nine month periods ended March 31, 19999 represents the charge
taken upon completion of the acquisition of Mobius Group in March 1999.
The net gain on dispositions of assets of $3.9 million in the nine
months ended March 31, 1999 is the net result of the gain on the sale of our
mortgage business of approximately $6.3 million, offset by the loss on the sale
of our imaging business of approximately $2.4 million.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had cash, cash equivalents, short-term and
long-term investments on hand totaling $204.2 million. Our balance sheet
reflects working capital of $142.1 million and our current ratio stands at 2.7.
The following table sets for a summary of quarterly cash flow activity
for the current fiscal year and should be referred to in conjunction with
statements regarding our liquidity and capital resources:
17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- -----------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
1999 1999 2000 2000
------------- ------------ --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities ................... $ 2,651 $ 10,647 $ 9,249 $ 22,547
Investing activities ................... (10,528) (51,571) (41,406) (103,505)
Financing activities ................... 1,870 187,264 4,421 193,555
-------- --------- -------- ---------
Net increase (decrease) in cash and
cash equivalents ............... $ (6,007) $ 146,340 $(27,736) $ 112,597
======== ========= ======== =========
</TABLE>
As a result of several specific transactions and positive cash flow
from operations, we have seen a net increase of $112.6 million in cash and cash
equivalents through the nine months ended March 31, 2000.
We have generated $22.5 million in cash from operating activities for
the nine months ended March 31, 2000. Operating cash flow has been positive in
each of the three quarters this year. For accounting purposes, we are required
to reflect the cash flows related to purchases of and proceeds from the sale of
trading securities within the operating cash flow category. Net of activities
related to trading securities our cash flow provided by operating activities was
$1.3 million for the three months ended September 30, 1999, $8.9 million for the
three months ended December 31, 1999, $8.6 million for the three months ended
March 31, 2000 and $18.8 million for the nine months ended March 31, 2000. The
primary factor impacting operating cash flow is the adjustment for depreciation
totaling $23.8 million year to date, which is a non cash expense resulting from
intangible assets obtained in acquisitions and capital assets purchased in
support of the expected growth of the business.
The most significant cash activity has taken place in financing
activities. On November 29, 1999 we issued $172.5 million of 6 1/2% convertible
subordinated notes that provided $166.9 million of proceeds, net of underwriting
and other direct issuance costs. During the same quarter, we received $19.2
million from the direct sale of 250,000 shares of stock to Bank One and from the
exercise of 300,000 warrants from Integrion member banks. This $19.2 million
included an overpayment of $3.2 million due to a duplicate submission of cash on
the last business day of the quarter ended December 31, 1999 that was returned
on the first day of the subsequent quarter. Additionally, we received cash from
the exercise of employee stock options and the purchase of company stock from
the employee stock purchase plan in the amounts of $1.9 million in the quarter
ended September 30, 1999, $1.4 million in the quarter ended September 30, 1999
and $7.9 million in the quarter ended March 31, 2000 for a total of $11.2
million on a year to date basis.
As a result of the cash receipts indicated above, we have seen
significant investing activity throughout the year. We invested $39.5 million in
the quarter ended December 31, 1999 and another $31.2 million in the quarter
ended March 31, 2000 in held to maturity investments, for a total of $70.7
million for the year. We have also invested $26.2 million in the purchase of
property, equipment and software in preparation for and in response to the
growth of the company and have capitalized $5.4 million in software costs
related primarily to the development of new product offerings ratably throughout
the year. Finally, we have paid approximately $1.2 million in costs related to
the acquisitions of BlueGill Technologies, Inc. and TransPoint during the
quarter ended March 31, 2000.
Convertible Subordinated Notes. On November 29, 1999, we issued $172.5
million of 6 1/2% convertible subordinated notes that are due on December 1,
2006. We will pay interest on the notes on June 1 and December 1 of each year,
commencing on June 1, 2000. The notes may be converted, at the holder's option,
into 13.6612 shares of common stock per note and we may redeem the notes at any
time on or after December 1, 2002. Upon a change in control, as defined, the
holders of the notes may require us to repurchase some or all of the notes at
par value plus any accrued and unpaid interest. On January 14, 2000, we filed a
shelf registration statement with the Securities and Exchange Commission to
register the underlying shares. Under the terms of the offering, should we fail
to obtain a declaration of effectiveness of the shelf registration by the
Securities and Exchange Commission by March 28, 2000, we will incur penalty
interest in the amount of 1/2% until the declaration of effectiveness is
received.
Because of the interrelationships between the various regulatory
filings we have had pending for the convertible notes, the BlueGill acquisition
and the TransPoint acquisition, by May 14, 2000, we had not yet received
18
<PAGE> 19
a declaration of effectiveness on the convertible notes and, therefore, we are
incurring the penalty interest. We are taking appropriate action as necessary to
have this regulatory review process completed as quickly as possible. We expect
to use the net proceeds from this offering for working capital and general
corporate purposes, including expansion of our services to a broader market and
potential acquisitions.
Credit Facility. On October 31, 1999, our $20 million working capital
line of credit with Key Bank was set to expire. We extended the line until
December 31, 1999 while we negotiated a new agreement. In December 1999, we
entered into a three-year, $30 million working capital line of credit with
KeyBank that carries an interest rate of LIBOR plus 200 basis points or Prime,
at our discretion. These are the same terms that were in place on the original
line. As of May 1, 2000, the LIBOR rates were 6.29125% for one month, 6.5025%
for three months, 6.73125% for six months and 7.10125% for one year and the
Prime rate was 9.0%. In this instance, it would be more beneficial to choose the
LIBOR option for any capital needs for less than one year and the Prime rate
option for needs exceeding one year. As of March 31, 2000, there was no balance
outstanding on this line and we had no plans or expectations to draw from it
through June 30, 2000. Although we have significant working capital in place at
March 31, 2000, we feel it prudent to have access to a credit facility given our
plans for growth.
Because of successful efforts in completing the convertible
subordinated note offering and in executing the new working capital line of
credit, we discontinued negotiations with various vendors in establishing an
additional lease line of credit.
The net result of activities in the three-month and nine-month periods
ended March 31, 2000 is a significant improvement in our liquidity and capital
resources. We believe that existing cash, cash equivalents, investments and
available financing alternatives will be sufficient to meet our presently
anticipated working capital and capital investment requirements through June 30,
2000. In the longer term, our working capital and capital investment
requirements will be somewhat dependent upon the timing of significant consumer
adoption of our electronic billing and payment services and the related
acquisitions, and, therefore, we are not in a position to make longer-term
predictions at this time.
INFLATION
We believe the effects of inflation have not had a significant impact
on our results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our Form 10-Q include certain forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding our and management's intent, belief and
expectations, such as statements concerning our future profitability, our
operating and growth strategy, and Year 2000 issues. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, the factors set forth under the caption "Business - Business
Risks" in the Annual Report on Form 10-K for the year ended June 30, 1999 and
other factors detailed from time to time in our filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect, our businesses and financial results in the future and
could cause actual results to differ materially from plans and projections.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included in Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved. All forward-looking statements made in this Form 10-Q are based on
information presently available to our management. We assume no obligation to
update any forward-looking statements.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
27* Financial Data Schedule.
99 CheckFree Management Corporation
Interim Unaudited Condensed
Financial Statements and Notes.
----------------
* Previously filed with this report.
(B) REPORTS ON FORM 8-K.
We filed the following Current Reports on Form 8-K with the Securities
and Exchange Commission during the quarter ended March 31, 2000:
(i) A current report on Form 8-K, dated January 11, 2000, was
filed with the Securities and Exchange Commission on January 11, 2000
(Item 5 and 7).
(ii) A current report on Form 8-K, dated March 16, 2000, was
filed with the Securities and Exchange Commission on March 22, 2000 and amended
on April 27, 2000 (Items 5 and 7).
(iii) A current report on Form 8-K, dated March 28, 2000, was
filed with the Securities and Exchange Commission on March 28, 2000
(Items 5 and 7).
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: July 7, 2000 By: /s/ David Mangum
--------------------------------------------
David Mangum, Executive Vice President and
Chief Financial Officer*
(Principal Financial Officer)
Date: July 7, 2000 By: /s/ Gary A. Luoma, Jr.
-------------------------------------------
Gary A. Luoma, Jr., Vice President, Chief
Accounting Officer, and Assistant Secretary
(Principal Accounting Officer)
* In his capacity as Executive Vice President and Chief Financial
Officer, Mr. Mangum is duly authorized to sign this report on behalf of
the Registrant.
21
<PAGE> 22
CHECKFREE HOLDINGS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2000
EXHIBIT INDEX
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27* Financial Data Schedule.
99 CheckFree Management Corporation
Interim Unaudited Condensed Financial
Statements and Notes.
----------------
* Previously filed with this report.
