<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-26802
CHECKFREE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD, NORCROSS, GEORGIA 30092
(Address of principal executive offices, including zip code)
(678) 375-3387
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 52,486,670 shares of
Common Stock, $.01 par value, were outstanding at February 7, 2000.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
<TABLE>
TABLE OF CONTENTS
-----------------
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
December 31, 1999 and June 30, 1999
Condensed Consolidated Statements of 4
Operations For the Three and Six Months Ended
December 31, 1999 and 1998
Condensed Consolidated Statements of 5
Cash Flows For the Three and Six Months Ended
December 31, 1999 and 1998
Notes to Interim Condensed Consolidated Unaudited 6-7
Financial Statements For the Three and Six Months
Ended December 31, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-16
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. 17
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 17-18
Signatures. 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
--------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 12,446 $ 152,779
Investments .................................................. 10,266 17,015
Accounts receivable, net ..................................... 45,660 46,780
Prepaid expenses and other assets ............................ 7,800 11,863
Deferred income taxes ........................................ 6,513 8,324
--------- ---------
Total current assets ..................................... 82,685 236,761
Property and equipment, net ....................................... 69,823 80,416
Capitalized software, net ......................................... 20,059 21,584
Intangible assets, net ............................................ 45,875 43,354
Investments ....................................................... 1,875 31,663
Deferred income taxes ............................................. 21,920 31,095
Other noncurrent assets ........................................... 10,524 12,855
--------- ---------
Total ............................................... $ 252,761 $ 457,728
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 9,634 $ 8,679
Accrued liabilities .......................................... 26,971 37,494
Current portion of long-term obligations ..................... 1,640 5,069
Deferred revenue ............................................. 20,195 25,840
--------- ---------
Total current liabilities ................................ 58,440 77,082
Accrued rent and other ............................................ 3,536 4,862
Convertible subordinated notes .................................... -- 172,500
Obligations under capital leases - less current portion ........... 3,882 906
Commitments and contingencies......................................
Stockholders' equity:
Preferred stock- 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding ......................... -- --
Common stock- 150,000,000 authorized shares, $.01 par value;
issued 57,305,659 and 57,971,003 shares, respectively;
outstanding 51,756,278 and 52,420,649 shares,
respectively.............................................. 518 524
Additional paid-in-capital ................................... 480,385 504,058
Other ........................................................ -- (299)
Accumulated deficit .......................................... (294,000) (301,905)
--------- ---------
Total stockholders' equity ............................... 186,903 202,378
--------- ---------
Total ............................................... $ 252,761 $ 457,728
========= =========
</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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- -----------------------
1998 1999 1998 1999
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Processing and servicing ................. $ 48,521 $62,627 $ 93,575 $120,931
License fees ............................. 3,441 3,201 6,412 6,197
Maintenance fees ......................... 4,238 4,518 9,202 8,956
Other .................................... 3,405 2,623 7,230 5,905
-------- ------- -------- --------
Total revenues ............ 59,605 72,969 116,419 141,989
Expenses:
Cost of processing, servicing and
support.................................. 34,368 43,906 71,457 86,899
Research and development ................. 5,579 8,286 12,157 15,110
Sales and marketing ...................... 7,408 9,909 15,232 18,577
General and administrative ............... 7,625 9,363 14,358 19,287
Depreciation and amortization ............ 6,033 7,780 11,999 14,756
-------- ------- -------- --------
Total expenses ............ 61,013 79,244 125,203 154,629
Net gain on dispositions of assets ....... -- -- 3,914 --
-------- ------- -------- --------
Loss from operations .......................... (1,408) (6,275) (4,870) (12,640)
Interest, net ................................. 426 (102) 1,219 143
-------- ------- -------- --------
Loss before income taxes ...................... (982) (6,377) (3,651) (12,497)
Income tax benefit ............................ (12,357) (2,408) (13,558) (4,592)
-------- ------- -------- --------
Net income (loss) ............................. $ 11,375 $(3,969) $ 9,907 $ (7,905)
======== ======= ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ....... $ 0.22 $ (0.08) $ 0.19 $ (0.15)
======== ======= ======== ========
Equivalent number of shares .............. 51,326 52,200 53,419 52,023
======== ======= ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ....... $ 0.22 $ (0.08) $ 0.18 $ (0.15)
======== ======= ======== ========
Equivalent number of shares .............. 52,553 52,200 54,664 52,023
======== ======= ======== ========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
4
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CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 30,
-----------------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ 9,907 $ (7,905)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 11,999 14,756
Deferred income tax provision ..................................... (11,554) (4,592)
Net gain on dispositions of assets ................................ (3,914) --
Purchases of investments - Trading ................................ -- (10,563)
Proceeds from maturities and sales of investments, net - Trading .. 17,609 13,594
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable ........................................... 2,916 (1,120)
Prepaid expenses and other .................................... 207 (831)
Other noncurrent assets ....................................... -- (298)
Accounts payable .............................................. (2,422) (955)
Accrued liabilities ........................................... (2,321) 5,027
Deferred revenue .............................................. (2,549) 5,645
Income tax accounts ........................................... (4,541) 2
Accrued rent and other ........................................ (194) 538
-------- --------
Net cash provided by operating activities ................ 15,143 13,298
Cash flows from investing activities:
Purchase of property and software ................................. (16,750) (19,336)
Proceeds from sale of assets ...................................... 11,421 --
Capitalization of software development costs ...................... (2,776) (3,195)
Purchase of investments - held to maturity ........................ -- (39,568)
Proceeds from maturities and sales of investments - held to
maturity ........................................................ 1,006 --
-------- --------
Net cash used in investing activities .................... (7,099) (62,099)
Cash flows from financing activities:
Principal payments under capital lease obligations ................ (621) (312)
Proceeds from sale of stock and exercise of warrants .............. -- 19,233
Proceeds from issuance of convertible subordinated notes .......... -- 166,921
Proceeds from stock options exercised, including related tax
benefits ........................................................ 536 1,976
Proceeds from employee stock purchase plan ........................ 1,070 1,316
Purchase of treasury stock ........................................ (31,161) --
-------- --------
Net cash provided by (used in) financing activities ...... (30,176) 189,134
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (22,132) 140,333
Cash and cash equivalents:
Beginning of period ............................................... 36,535 12,446
-------- --------
End of period ..................................................... $ 14,403 $152,779
======== ========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 349 $ 58
======== ========
Income taxes paid ................................................. $ 2,353 $ 209
======== ========
Capital lease additions and purchase of other long-term assets .... $ 1,583 $ 1,753
======== ========
Stock funding of 401(k) match ..................................... $ 963 $ 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 SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
1. The accompanying condensed consolidated financial statements and
notes thereto have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the six months
ended December 31, 1998 and 1999 are not necessarily indicative of the results
for the full year.
These financial statements should be read in conjunction with the
financial statements, accounting policies and financial notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. 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 SIX MONTHS ENDED
-------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------------------ -----------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ........ $9,907 53,419 $0.19 $(7,905) 52,023 $(0.15)
===== ======
Effect of dilutive
securities:
Options and
warrants ......... -- 1,245 -- --
------ ------ ------- ------
Diluted EPS ...... $9,907 54,664 $0.18 $(7,905) 52,023 $(0.15)
====== ====== ===== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------------------- -------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ........ $11,375 51,326 $0.22 $(3,969) 52,200 $(0.08)
===== ======
Effect of dilutive
securities:
Options and
warrants ......... -- 1,227 -- --
------- ------ ------- -----
Diluted EPS ...... $11,375 52,553 $0.22 $(3,969) 52,200 $(0.08)
======= ====== ===== ======= ====== ======
</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 impact of
anti-dilutive interest charges and equivalent shares excluded from the per share
calculations were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- --------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Six Month Period Ended $-- 4,198 $687 5,108
==== ===== ==== =====
Three Month Period Ended $-- 3,751 $687 6,381
==== ===== ==== =====
</TABLE>
3. In the quarter ended September 30, 1999, the Company adopted
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Statement distinguishes
accounting for costs of computer software developed or obtained for internal use
from guidance under
6
<PAGE> 7
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.
4. In the quarter ended September 30, 1999, the Company issued 36,226
shares of common stock to fund its 401(k) match, the cost of which was accrued
during the year ended June 30, 1999.
5. In the quarter ended September 30, 1999, the Company issued 46,819
shares of common stock in conjunction with the employee stock purchase plan,
which was funded through employee payroll deductions accumulated in the
immediately preceding six-month period.
6. In the quarter ended September 30, 1999, the Company issued 13,000
shares of restricted stock to certain key employees. Shares issued were recorded
at their fair market value on the date of the grant with a corresponding charge
to stockholders' equity. The unearned portion is being amortized as compensation
expense on a straight-line basis over the related vesting periods. Sale of these
shares is restricted prior to the date of vesting.
7. In October 1999, the Company announced a new agreement with one of
its customers. Under the terms of the agreement, the customer purchased 250,000
shares of the Company's stock, was issued warrants on 1 million shares, and has
the ability to earn warrants on up to 2 million additional shares upon
achievement of specific performance targets. None of the warrants can vest and
become exercisable prior to September 2002. Shares of stock acquired by the
customer under the terms of this agreement are subject to certain transfer and
other restrictions.
8. On October 25, 1999, the Company executed an amendment to its
working capital line-of-credit agreement. The amendment 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
enables the Company to borrow up to $30 million and contains certain financial
and operating covenants.
9. On November 29, 1999, the Company issued $172.5 million of 6.5%
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 is using its reasonable best efforts to cause the shelf registration
statement to be declared effective by March 28, 2000.
10. On December 20, 1999, the Company entered into a definitive
agreement to purchase BlueGill Technologies, Inc. in exchange for approximately
3.5 million shares of the Company's common stock. The acquisition, which is
expected to close during the quarter ending March 31, 2000, will be accounted
for under the purchase method of accounting and is expected to include a charge
for in-process research and development which is currently estimated at
approximately $7.6 million. BlueGill provides software that facilitates Web
based electronic billing and bill payment.
11. During the quarter ended December 31, 1999, the Company received
notification and payment for the exercise of warrants for 300,000 shares of the
Company's common stock at an exercise price of $20.9375. Of the 300,000 total
shares, 150,000 shares were not issued until February 2000, therefore, the
amount received is included in accrued liabilities in the Company's December 31,
1999 Condensed Consolidated Balance Sheets. The exercise of these warrants
resulted in an increase in deferred tax benefit and additional paid-in capital
as a result of the differences in the book versus tax accounting treatment of
these transactions.
12. In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which will
require that all derivative financial instruments be recognized as either assets
or liabilities in the balance sheet. SFAS 133 will be effective for the
Company's first quarter of fiscal 2001. The Company is in the process of
evaluating the effects of this new statement.
13. Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are the leading provider of electronic billing and payment services.
Our Electronic Commerce business provides services that allow customers to:
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
reconciliations.
We currently provide electronic billing and payment services for
approximately 3 million consumers. Our services are available through over 350
sources, including:
o 23 of the 25 largest U.S. banks;
o 8 of the top 10 U.S. brokerage firms;
o The Internet portal Yahoo!;
o WingspanBank.com, a leading Internet-based full-service bank;
o Internet financial sites such as Quicken.com; and
o Personal financial management software such as Quicken and
Microsoft Money.
We have developed relationships with over 1,100 merchants nationwide
that enable us to remit in excess of 50% of all of our bill payments
electronically. We exited the quarter ended December 31, 1999, processing 14
million transactions per month, and for the twelve months ended June 30, 1999 we
processed more than 125 million transactions.
In March 1997, we introduced electronic billing - "E-Bill" - which
enables merchants to deliver billing as well as marketing materials
interactively to their customers over the Internet. As of December 31, 1999, we
have signed contracts for E-Bill services with 89 of the country's largest
billers. During the month of December 1999, we presented more than 38,000
electronic bills, which is nearly double the number of bills presented through
E-bill Services in September of 1999. Additionally, over 100 CheckFree
distribution points are live with Internet billing and payment.
We are also a leading provider of portfolio management and information
services and financial applications software. Our Investment Services business
offers portfolio management and information services for fee-based money
managers and financial planners within investment advisory firms, brokerage
firms, banks and insurance companies. Our fee-based money manager clients are
typically sponsors or managers of wrap money management products or traditional
money managers, managing investments of institutions and high net worth
individuals. Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support software products for automated
clearinghouse, or ACH, processing, reconciliation and regulatory compliance.
During the fiscal year ended June 30, 1999, Electronic Commerce
accounted for 68% of our revenues and Investment Services and Software each
accounted for 16% of our revenues.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997 and Mobius Group, Inc. in March 1999. On
December 21, 1999 we announced the planned acquisition of BlueGill Technologies,
Inc. and expect this transaction to close in the quarter ended March 31, 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
8
<PAGE> 9
October 1998. While we have no pending agreements to dispose of our remaining
software businesses, we do receive offers for them from time to time.
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating
revenues, certain consolidated statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Total Revenues: 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support 57.7% 60.2% 61.4% 61.2%
Research and development 9.4% 11.3% 10.4% 10.6%
Sales and marketing 12.4% 13.6% 13.1% 13.1%
General and administrative 12.8% 12.8% 12.3% 13.6%
Depreciation and amortization 10.1% 10.7% 10.4% 10.4%
----- ----- ----- -----
Total expenses 102.4% 108.6% 107.6% 108.9%
Net gain on dispositions of assets 0.0% 0.0% 3.4% 0.0%
----- ----- ----- -----
Loss from operations -2.4% -8.6% -4.2% -8.9%
Interest, net 0.7% -0.1% 1.0% 0.1%
----- ----- ----- -----
Loss before income taxes -1.6% -8.7% -3.1% -8.8%
Income tax benefit -20.7% -3.3% -11.6% -3.2%
----- ----- ----- -----
Net income (loss) 19.1% -5.4% 8.5% -5.6%
===== ===== ===== =====
</TABLE>
Reported revenue increased 22%, from $59.6 million for the three months
ended December 31, 1998 to $73.0 million for the three months ended December 31,
1999 and by 22%, from $116.4 million for the six months ended December 31, 1998
to $142.0 million for the six months ended December 31, 1999. On a pro forma
basis, 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 19% from $61.3 million for the three
months ended December 31, 1998 to $73.0 million for the three months ended
December 31, 1999 and by 20%, from $118.0 million for the six months ended
December 31, 1998 to $142.0 million for the six months ended December 31, 1999.
The increase in quarterly pro forma revenue of 19% was driven by increases of
23% in our Electronic Commerce segment and 26% in our Investment Services
segment, offset slightly by a decline of 5% in our Software segment. The
increase in year to date pro forma revenue of 20% was driven by increases of 24%
in our Electronic Commerce segment, 23% in our Investment Services segment and
less than 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 2.6 million at December 31, 1998 to approximately 3.0 million
at December 31, 1999. Pro forma quarterly and year to date growth in Investment
Services revenue is driven primarily by an increase in portfolios managed from
approximately 573,000 at December 31, 1998 to approximately 820,000 at December
31, 1999. In the Software segment, the decline in pro forma quarterly revenue
and the minimal growth in pro forma year to date revenue were due primarily to
anticipated purchasing moratoriums by customers due to Year 2000 concerns.
Reported processing and servicing revenue increased by 29%, from $48.5
million for the three months ended December 31, 1998 to $62.6 million for the
three months ended December 31, 1999, and by 29%, from $93.6 million for the six
months ended December 31, 1998 to $120.9 million for the six months ended
December 31, 1999.
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<PAGE> 10
On a pro forma basis, adjusting for the acquisition of Mobius Group in March
1999, processing and servicing revenue increased by 25%, from $50.1 million for
the three months ended December 31, 1998 to $62.6 million for the three months
ended December 31, 1999, and by 25%, from $96.7 million for the six months ended
December 31, 1998 to $120.9 million for the six months ended December 31, 1999.
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 agreement with Yahoo! allows for a
free three month trial period for subscribers who enroll through Yahoo! 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 62 billers
in production that presented approximately 38,000 electronic bills in the month
ended December 31, 1999. The number of bills we presented electronically has
nearly doubled since the month ended September 30, 1999 and we expect growth in
this area to continue. When combined with a recently announced transaction based
pricing model for our largest customers, it will become more difficult to
correlate revenue solely to the number of subscribers, with transactions
processed becoming an additional indicator.
Reported license fee revenue decreased by 6%, from $3.4 million for the
three months ended December 31, 1998 to $3.2 million for the three months ended
December 31, 1999 and by 3% from $6.4 million for the six months ended December
31, 1998 to $6.2 million for the six months ended December 31, 1999. On a pro
forma basis, adjusting for the impact of divested software businesses, license
revenue decreased by 6%, from $3.4 million for the three months ended December
31, 1998 to $3.2 million for the three months ended December 31, 1999 and
increased by 2% from $6.1 million for the six months ended December 31, 1998 to
$6.2 million for the six months ended December 31, 1999. The pro forma decline
in license revenue on a quarter over quarter basis and the relatively flat pro
forma performance on a year over year basis was due primarily to expected
purchasing moratoriums from customers with Year 2000 concerns.
Reported maintenance fee revenue increased by 7%, from $4.2 million for
the three months ended December 31, 1998 to $4.5 million for the three months
ended December 31, 1999 and decreased by 2% from $9.2 million for the six months
ended December 31, 1998 to $9.0 million for the six months ended December 31,
1999. On a pro forma basis, adjusting for the impact of divested software
businesses, maintenance revenue increased by 7%, from $4.2 million for the three
months ended December 31, 1998 to $4.5 million for the three months ended
December 31, 1999 and by 8%, from $8.3 million for the six months ended December
31, 1998 to $9.0 million for the six months ended December 31, 1999. This
increase is due to new maintenance paying customers added during fiscal 1999 and
moderate price increases, offset slightly by retention rates in the upper 80%
range for the core maintenance base in the Software business.
Reported other revenue, consisting mostly of consulting fees, decreased
by 23%, from $3.4 million for the three months ended December 31, 1998 to $2.6
million for the three months ended December 31, 1999 and by 18%, from $7.2
million for the six months ended December 31, 1998 to $5.9 million for the six
months ended December 31, 1999. On a pro forma basis, adjusting for the impact
of divested software businesses and the acquisition of Mobius Group, other
revenue decreased by 23%, from $3.4 million for the three months ended December
31, 1998 to $2.6 million for the three months ended December 31, 1999 and by
13%, from $6.8 million for the six months ended December 31, 1998 to $5.9
million for the six months ended December 31, 1999. The decrease in pro forma
other revenue is due primarily to the decline in software implementations due to
customer's software implementation freezes in the quarter in preparation for
Year 2000.
Our cost of processing, servicing and support was $34.3 million or
57.7% of total revenue for the three months ended December 31, 1998 and $43.9
million or 60.2% of total revenue for the three months ended December 31, 1999.
Cost of processing, servicing and support was $71.5 million or 61.4% of total
revenue for the six months ended December 31, 1998 and $86.9 million or 61.2% of
total revenue for the six months ended December 31, 1999. Cost of processing,
servicing and support as a percentage of servicing only revenue (all revenue
except license) was 61.2% for the three months ended December 31, 1998 and 62.9%
for the three months ended December 31, 1999 and was 64.9% for the six months
ended December 31, 1998 and 64.0% for the six months ended December 31, 1999.
Improvements in this area, resulting from further increases in our percentage of
electronic versus paper payments and inherent leverage resulting from the
conversion of over two thirds of our subscribers from legacy processing systems
to our new Genesis processing system, are 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 subscribers enrolled by Yahoo! currently
within their free three-month trial period.
10
<PAGE> 11
Our research and development costs were $5.6 million or 9.4% of total
revenue for the three months ended December 31, 1998 and $8.3 million or 11.3%
of total revenue for the three months ended December 31, 1999. Research and
development costs were $12.2 million or 10.4% of total revenue for the six
months ended December 31, 1998 and $15.1 million or 10.6% of total revenue for
the six months ended December 31, 1999. Adjusted for capitalized development
costs of $1.6 million for the three months ended December 31, 1998, of $1.3
million for the three months ended December 31, 1999, of $2.8 million for the
six months ended December 31, 1998 and of $3.2 million for the six months ended
December 31, 1999, our gross research and development costs were $7.2 million or
12.1% of total revenue for the three months ended December 31, 1998 and $9.6
million or 13.2% of total revenue for the three months ended December 31, 1999
and were $15.0 million or 12.9% of total revenue for the six months ended
December 31, 1998 and $18.3 million or 12.8% of total revenue for the six months
ended December 31, 1999. We continue to invest a significant portion of our
revenue into research and development activities in all business segments in
anticipation and support of revenue growth, quality improvement and efficiency
enhancement opportunities.
Sales and marketing costs were $7.4 million or 12.4% of total revenue
for the three months ended December 31, 1998 and $9.9 million or 13.6% of total
revenue for the three months ended December 31, 1998. Sales, marketing and
royalty costs were $15.2 million or 13.1% of total revenue for the six months
ended December 31, 1998 and $18.6 million or 13.1% of total revenue for the six
months ended December 31, 1999. We have increased our sales staff to sign
additional billers in support of our electronic billing product offerings and
have increased program management staff in support of new non-subscriber based
products designed to leverage our existing electronic payment infrastructure. We
expect to incur increased promotional expenses in support of electronic billing
and payment offerings through financial institutions and Internet portals such
as Yahoo! and other partners such as WingspanBank.com in an effort to accelerate
the growth of subscribers in our Electronic Commerce segment.
General and administrative expenses were $7.6 million or 12.8% of total
revenue for the three months ended December 31, 1998 and $9.4 million or 12.8%
of total revenue for the three months ended December 31, 1999. General and
administrative expenses were $14.4 million or 12.3% of total revenue for the six
months ended December 31, 1998 and $19.3 million or 13.6% of total revenue for
the six months ended December 31, 1999. The increase in general and
administrative expenses is due principally to an increase in facilities costs
resulting from new facilities in Dublin, Ohio, Jersey City, New Jersey and
Phoenix, Arizona; an increase in administrative staff required to manage growth
in all areas of the company; and an increase in our reserve for estimated
doubtful accounts consistent with realized revenue growth.
Depreciation and amortization costs increased from $6.0 million for the
three months ended December 31, 1998 to $7.8 million for the three months ended
December 31, 1999 and from $12.0 million for the six months ended December 31,
1998 to $14.8 million for the six months ended December 31, 1999. Reductions in
depreciation and amortization expense resulting from the divestiture of
previously mentioned software businesses have been offset by amortization of
intangible assets resulting from the acquisition of Mobius Group and increased
depreciation expense resulting from capital spending in support of growth and
quality improvement initiatives.
The net gain on dispositions of assets of $3.9 million in the six
months ended December 31, 1998 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 the imaging business of approximately $2.4 million.
Net interest declined from net interest income of $0.4 million for the
three months ended December 31, 1998 to net interest expense of $0.1 million for
the three months ended December 31, 1999. Net interest declined from net
interest income of $1.2 million for the six months ended December 31, 1998 to
net interest income of $0.1 million for the six months ended December 31, 1999.
The varied net interest amounts are the net result of the timing of significant
transactions in each of the periods identified. At September 30, 1998, we had
approximately $56.2 million of cash, cash equivalents and investments on hand,
primarily resulting from proceeds from the divestitures of various software
businesses. We spent approximately $31.0 million in cash from September 1998
through October 1998 to buy back approximately 4.7 million of common shares when
the market price of our stock was relatively low. Investment yields on our
average cash, cash equivalents and invested assets exceeded interest expense on
outstanding capital lease obligations, resulting in net interest income of $0.4
million for the three months ended December 31, 1998 and $1.2 million for the
six months ended December 31, 1998. On November 29, 1999, we received net
proceeds of approximately $166.9 million from the issuance of $172.5 million of
6.5% subordinated
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<PAGE> 12
convertible notes. Additionally, in October 1999 we received approximately $9.8
million from the direct purchase of 250,000 shares of our common stock, at
market value, by a strategic partner and in December 1999 we received
approximately $6.2 million from the exercise of outstanding common stock
warrants. Direct interest expense and amortization of issuance costs resulting
from the convertible debt combined with interest expense from capital leases
exceeded the interest income earned on cash, cash equivalents and invested
assets for the quarter resulting in net interest expense of $0.1 million for the
three months ended December 31, 1999. For the six months ended December 31, 1999
our interest income exceeded interest expense by $0.1 million.
We recorded an income tax benefit of $12.4 million for the three months
ended December 31, 1998 (effective rate not meaningful) and an income tax
benefit of $2.4 million or an effective tax rate of 37.8% for the three months
ended December 31, 1999. We recorded an income tax benefit of $13.6 million for
the six months ended December 31, 1998 (effective rate not meaningful) and an
income tax benefit of $4.6 million or an effective tax rate of 36.8% for the six
months ended December 31, 1999. In the quarter ended December 31, 1998 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 operating revenue and operating income
by industry segment for the periods noted (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenue:
Electronic Commerce $41,298 $50,703 $ 79,385 $ 98,484
Software 9,535 9,076 19,730 18,060
Investment Services 8,772 13,190 17,304 25,445
------- ------- -------- --------
Total Operating Revenue $59,605 $72,969 $116,419 $141,989
======= ======= ======== ========
Operating Income (Loss):
Electronic Commerce $ (778) $(5,060) $ (5,388) $(10,810)
Software 3,720 2,283 4,935 4,766
Investment Services 895 3,080 2,690 5,445
Corporate (5,245) (6,578) (11,021) (12,041)
Net Gain on Disposition of Assets -- -- 3,914 --
------- ------- -------- --------
Total Operating Income (Loss) $(1,408) $(6,275) $ (4,870) $(12,640)
======= ======= ======== ========
</TABLE>
Revenue in our Electronic Commerce business unit increased by 23%, from
$41.3 million for the three months ended December 31, 1998 to $50.7 million for
the three months ended December 31, 1999 and increased by 24%, from $79.4
million for the six months ended December 31, 1998 to $98.5 million for the six
months ended December 31, 1999. The increase in revenue is due primarily to an
increase in subscribers from approximately 2.6 million at December 31, 1998 to
approximately 3.0 million at December 31, 1999. While underlying growth in total
subscribers approximated 7% and, within that figure underlying Internet based
subscribes grew in excess of 20%, the total subscriber based remained consistent
from last quarter at approximately 3.0 million. As expected in our discussion
last quarter, we had approximately 200,000 subscribers deleted during the
quarter ended December 31, 1999 as our financial institution partners removed
subscribers using personal financial management software that was not Year 2000
compliant. We have assisted our partners in actively soliciting these
subscribers to upgrade to Year 2000 compliant software and to remove
non-compliant subscribers from our systems through December 1999. We do not
expect these deletions to have a material impact on our expected earnings for
the remainder of the year.
12
<PAGE> 13
Our processing agreement with Yahoo! allows for a free three month
trial period for subscribers who enroll through Yahoo! Because these subscribers
are not generating revenue during this free period, we do not count them in our
active subscriber base. Early on in the program with Yahoo! we provided bill
payment services only and in December 1999, we added electronic billing
capability that now allows for a fully electronic round trip billing and payment
experience through the Yahoo! offering. Now that the services are complete, we
expect an increase in the nature and extent of advertising promotions through
the various Yahoo! properties such as Yahoo.com, Yahoo! Calendar and Yahoo!
Wallet.
Additionally, we now have 62 billers in production that presented
approximately 38,000 electronic bills in the month ended December 31, 1999. The
number of bills we presented electronically has nearly doubled since the month
of September 1999 and we expect growth in this area to continue. Our recently
announced acquisition of BlueGill Technologies, expected to close in the quarter
ended March 31, 2000, will facilitate our efforts to provide quality billing
content and by simplifying and accelerating the process of taking bills from
paper to electronic, BlueGill will help us speed adoption of electronic billing
services available today. When combined with a recently announced transaction
based pricing model for our largest customers, it will become more difficult to
correlate revenue solely to the number of subscribers, with transactions
processed becoming an additional indicator. We exited the quarter ended December
31, 1999 processing approximately 14 million transactions per month, an increase
of one million per month over that which we processed in September 1999.
Operating losses in our Electronic Commerce segment increased from $0.8
million for the three months ended December 31, 1998 to $5.1 million for the
three months ended December 31, 1999 and from $5.4 million for the six months
ended December 31, 1998 to $10.8 million for the six months ended December 31,
1999. As we have explained in previous quarters, we are 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.
Reported revenue in our Software segment declined by 4%, from $9.5
million for the three months ended December 31, 1998 to $9.1 million for the
three months ended December 31, 1999 and by 8% from $19.7 million for the six
months ended December 31, 1998 to $18.1 million for the six months ended
December 31, 1999. The decline in the periods mentioned is partially due to the
divestiture of our mortgage and imaging businesses in the prior year. On a pro
forma basis, net of the divestitures, revenue declined by 4%, from $9.5 million
for the three months ended December 31, 1998 to $9.1 million for the three
months ended December 31, 1999 and increased by 1% from $17.9 million for the
six months ended December 31, 1998 to $18.1 million for the six months ended
December 31, 1999. The revenue results were as expected due to purchasing
moratoriums by customers concerned with Year 2000 issues.
Reported operating income in our Software segment decreased from $3.7
million for the three months ended December 31, 19998 to $2.3 million for the
three months ended December 31, 1999 and decreased slightly from $4.9 million
for the six months ended December 31, 1998 to $4.8 million for the six months
ended December 31, 1999. On a pro forma basis, net of divestitures, operating
income decreased from $3.7 million for the three months ended December 31, 1998
to $2.3 million for the three months ended December 31, 1999 and decreased from
$6.6 million for the six months ended December 31, 1998 to $4.8 million for the
six months ended December 31, 1999. 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 to enable customers to find and claim money owed to them from
non-refunded deposits, unclaimed securities, and other accounts held by states.
Additional resources have also been assigned to our new ACH alliance
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<PAGE> 14
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 50%,
from $8.8 million for the three months ended December 31, 1998 to $13.2 million
for the three months ended December 31, 1999 and by 47%, from $17.3 million for
the six months ended December 31, 1998 to $25.4 million for the six months ended
December 31, 1999. This increase is partially due to our acquisition of Mobius
Group in March of 1999. On a pro forma basis, adjusting for the impact of the
Mobius Group acquisition, revenue increased 27% from $10.4 million for the three
months ended December 31, 1998 to $13.2 million for the three months ended
December 31, 1999 and by 23%, from $20.7 million for the six months ended
December 31, 1998 to $25.4 million for the six months ended December 31, 1999.
Growth in pro forma revenue is driven primarily by an increase in portfolios
managed from approximately 573,000 at December 31, 1998 to approximately 820,000
at December 31, 1999. A major 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 Mobius M-Plan for
integrating retirement, capital needs, tax, education and real estate planning
needs for their customers.
Operating income in our Investment Services segment increased from $0.9
million for the three months ended December 31, 1998 to $3.1 million for the
three months ended December 31, 1999 and from $2.7 million for the six months
ended December 31, 1998 to $5.4 million for the six months ended December 31,
1999. On a pro forma basis, adjusting for the acquisition of Mobius Group,
operating income increased from $0.9 million for the three months ended December
31, 1998 to $3.1 million for the three months ended December 31, 1999 and from
$2.9 million for the six months ended December 31, 1998 to $5.4 million for the
six months ended December 31, 1999. In the quarter ended December 31, 1998 we
incurred one time charges of $0.6 million related to real estate transactions in
this business unit. Additionally, increases in operating income are due to the
marginal profit inherent in the increase in portfolios managed and synergies
realized in the integration of Mobius Group into the operations of the business
segment.
The Corporate segment represents charges for 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 9% of total
revenue for the three months ended December 31, 1998 versus an operating loss of
$6.6 million, or 9% of total revenue for the three months ended December 31,
1999. Our Corporate segment incurred an operating loss of $11.0 million, or 9%
of total revenue for the six months ended December 31, 1998 versus an operating
loss of $12.0 million, or 8% for the six months ended December 31, 1999. 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 bill 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 net gain on dispositions of assets of $3.9 million in the six
months ended December 31, 1998 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.
YEAR 2000 UPDATE
We had a staff of approximately 100 technical associates on sight to
review and test our internal and third party systems through the evening of
December 31, 1999 and into January 1, 2000. We had no significant internal
systems issues arise as a result of crossing into the Year 2000, and interfaces
with customers and suppliers have caused no adverse impact. While we continue to
monitor our systems for any related issues that may arise, additional costs in
this regard are anticipated only to the extent necessary to complete final
documentation of the testing activities that we performed and for activities
necessary to wind down the project team assigned to Year 2000 at CheckFree.
Costs to Address Our Year 2000 Issues. Although the development of
Genesis has taken into account relevant Year 2000 issues, the planned conversion
was not accelerated due to year 2000 issues and Year 2000 related costs in the
development of the Genesis Platform are therefore not included in our costs
below. The following chart reflects our Year 2000 specific costs. The fiscal
year 1999 and prior costs were attributed to
14
<PAGE> 15
remediation of legacy systems and applications. The year to date fiscal year
2000 costs include minor remediation and testing and verification activities.
The cost to complete include the direct costs of the 100 associates that were on
sight on January 1, 2000 and through the weekend to perform final testing as we
crossed into the Year 2000, as well as anticipated remaining project
documentation and wind down costs.
<TABLE>
<CAPTION>
YTD
FISCAL FISCAL FISCAL FISCAL COST TO
BUSINESS SEGMENT 1997 1998 1999 2000 COMPLETE TOTAL
---------------- ----- ------ ------ ------ -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Electronic Commerce ... $0 $100 $1,360 $ 800 $20 $2,280
Software .............. - 500 525 171 10 1,206
Investment Services ... - 375 937 110 25 1,447
Corporate ............. - -- 270 81 -- 351
-- ---- ------ ------ --- ------
Total .............. $0 $975 $3,092 $1,162 $55 $5,284
== ==== ====== ====== === ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash, cash equivalents and investments
(short and long term) on hand totaling $201.5 million. Our balance sheet
reflects working capital of $159.7 million and our current ratio stands at 3.1.
There have been a number of significant transactions that have taken
place during the quarter ended December 31, 1999 to improve our liquidity and
capital resources. The following chart, which summarized our Consolidated
Statement of Cash Flows for the six months ended December 31, 1999, highlights
these changes.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1999 1999
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities ............. $ 2,651 $ 10,647 $ 13,298
Investing activities ............. (10,528) (51,571) (62,099)
Financing activities ............. 1,870 187,264 189,134
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................ $ (6,007) $146,340 $140,333
======== ======== ========
</TABLE>
Net cash provided by financing activities reflects the most significant
positive impact on cash flow in the quarter ended December 31, 1999. On November
29, 1999, we issued $172.5 million of 6.5% convertible subordinated notes that
provided $166.9 million of proceeds, net of underwriting and other direct
issuance costs. During the quarter, we also received $19.2 million from the
direct sale of 250,000 shares of stock to a strategic partner and the issuance
of 300,000 shares upon exercise of vested warrants from other partners. This
amount of $19.2 million included an overpayment of $3.2 million due to a
duplicate submission of cash proceeds by one of the partners on the last day of
the quarter which was returned on the first day of the subsequent quarter.
Additionally, we received $1.3 million from the exercise of employee stock
options and from our employee stock purchase plan and we spent $0.2 million on
principal payments for capital leases.
We invested approximately $39.6 million of the proceeds above in the
purchase of investments designated as held to maturity, $10.7 in capital
expenditures and $1.3 million in the capitalization of software development
costs, resulting in net cash used in investing activities of $51.6 million.
Net cash provided by operation of $10.6 million reflects a significant
improvement over the $2.7 million provided by operations in the previous
quarter. This improvement is driven by an improvement of $11.1 million in
accounts receivable, which was primarily the result of timing of payments by our
customers from quarter to quarter.
15
<PAGE> 16
We had previously extended our $20 million working capital line of
credit through December 30, 1999 as we negotiated an expansion of this facility.
The original line has expired and we have negotiated a new $30 million working
capital line of credit. Additionally, we had been negotiating a significant
lease line of credit, but we have suspended negotiations in this regard.
The net result of the activities in the quarter ended December 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 capital
requirements for the foreseeable future.
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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 29, 1999, we issued $172.5 million of 6.5% convertible
subordinated notes due on December 1, 2006 in a private placement to Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and
Hambrecht & Quist LLC (as the initial purchasers) and were subsequently sold by
the initial purchasers in private transactions exempt from the registration
requirements of the Securities Act to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act). We 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 our common
stock per note and we may redeem the notes at any time on or after December 1,
2002. On January 14, 2000, we filed a shelf registration statement to register
the underlying shares, which we subsequently amended on January 26, 2000. We are
using our reasonable best efforts to cause the shelf registration statement to
be declared effective by March 28, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on Thursday,
November 4, 1999 for the following purposes:
(1) To elect two Class I Directors of the Company to serve for a
three-year term expiring at the 2002 Annual Meeting of
Stockholders.
Management's proposal as presented in the proxy statement was approved
with the following vote:
Proposal 1: The election of two Class I Directors of the Company,
to serve until the 2002 Annual Meeting of
Stockholders or until his successor is elected and
qualified:
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
------------------------------------------------------------
WITHHOLD
FOR AUTHORITY TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
William P. Boardman 43,023,146 3,076,626 49,099,772
George R. Manser 43,018,854 3,080,918 49,099,772
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
4(a) Form of Guarantee (Reference is made to Exhibit 4(c)
to the Registration Statement on Form S-3, as amended
(Registration No. 333-94757), and incorporated herein
by reference.)
4(b) Indenture, by and between the Company and Fifth Third
Bank as Trustee, for the 6.5% Convertible
Subordinated Notes due 2006, dated as of November 29,
1999, including the form of the 6.5% Note (Reference
is made to Exhibit 4(d) to the Registration Statement
on Form S-3, as amended (Registration No. 333-94757),
and incorporated herein by reference.)
4(c) First Supplemental Indenture by and between the
Company and Fifth Third Bank as Trustee, for the 6.5%
Convertible Subordinated Notes due 2006, dated as of
November 29, 1999 (Reference is made to Exhibit 4(f)
to the Registration Statement on Form S-3, as amended
(Registration No. 333-94757), and incorporated herein
by reference.)
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<PAGE> 18
4(e) Form of the Global Note (Reference is made to Exhibit
4(g) to the Registration Statement on Form S-3, as
amended (Registration No. 333-94757), and
incorporated herein by reference.)
4(f) Registration Rights Agreement, dated as of November
29, 1999, among the Company, CheckFree Corporation,
CheckFree Investment Corporation, CheckFree
Management Corporation, CheckFree Investment
Services, Inc., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Deutsche Bank
Securities Inc., and Hambrecht & Quist LLC (Reference
is made to Exhibit 4(h) to the Registration Statement
on Form S-3, as amended (Registration No. 333-94757),
and incorporated herein by reference.)
27* Financial Data Schedule.
- ----------
* 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 December 31, 1999:
(i) A current report on Form 8-K, dated November 29, 1999, was
filed with the Securities and Exchange Commission on December 2, 1999
(Item 5).
(ii) A current report on Form 8-K, dated December 20, 1999,
was filed with the Securities and Exchange Commission on December 23,
1999 (Items 5 and 7).
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: February 10, 2000 By: /s/ Allen L. Shulman
-------------------------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer, and General
Counsel*
(Principal Financial Officer)
Date: February 10, 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 Chief Financial Officer and
General Counsel, Mr. Shulman is duly authorized to sign this report on
behalf of the Registrant.
19
<PAGE> 20
CHECKFREE HOLDINGS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1999
EXHIBIT INDEX
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4(a) Form of Guarantee (Reference is made to Exhibit 4(c) to the
Registration Statement on Form S-3, as amended (Registration
No. 333-94757), and incorporated herein by reference.)
4(b) Indenture, by and between the Company and Fifth Third Bank as
Trustee, for the 6.5% Convertible Subordinated Notes due 2006,
dated as of November 29, 1999, including the form of the 6.5%
Note (Reference is made to Exhibit 4(d) to the Registration
Statement on Form S-3, as amended (Registration No.
333-94757), and incorporated herein by reference.)
4(c) First Supplemental Indenture by and between the Company and
Fifth Third Bank as Trustee, for the 6.5% Convertible
Subordinated Notes due 2006, dated as of November 29, 1999
(Reference is made to Exhibit 4(f) to the Registration
Statement on Form S-3, as amended (Registration No.
333-94757), and incorporated herein by reference.)
4(e) Form of the Global Note (Reference is made to Exhibit 4(g) to
the Registration Statement on Form S-3, as amended
(Registration No. 333-94757), and incorporated herein by
reference.)
4(f) Registration Rights Agreement, dated as of November 29, 1999,
among the Company, CheckFree Corporation, CheckFree Investment
Corporation, CheckFree Management Corporation, CheckFree
Investment Services, Inc., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities
Inc., and Hambrecht & Quist LLC (Reference is made to Exhibit
4(h) to the Registration Statement on Form S-3, as amended
(Registration No. 333-94757), and incorporated herein by
reference.)
27* Financial Data Schedule.
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* Filed with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 152,779
<SECURITIES> 17,015
<RECEIVABLES> 51,609
<ALLOWANCES> (4,829)
<INVENTORY> 0
<CURRENT-ASSETS> 236,761
<PP&E> 139,917
<DEPRECIATION> (59,501)
<TOTAL-ASSETS> 457,728
<CURRENT-LIABILITIES> 77,082
<BONDS> 173,406
0
0
<COMMON> 524
<OTHER-SE> 201,854
<TOTAL-LIABILITY-AND-EQUITY> 457,728
<SALES> 0
<TOTAL-REVENUES> 141,989
<CGS> 0
<TOTAL-COSTS> 154,629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,293
<INCOME-PRETAX> (12,497)
<INCOME-TAX> (4,592)
<INCOME-CONTINUING> (7,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,905)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
