<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 September 30, 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) 375-3000
(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: 52,211,714 shares
of Common Stock, $.01 par value, were outstanding at November 10, 1999.
<PAGE> 2
FORM 10-Q
CHECKFREE HOLDINGS CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
September 30, 1999 and June 30, 1999
Condensed Consolidated Statements of 4
Operations For the Three Months Ended
September 30, 1999 and 1998
Condensed Consolidated Statements of 5
Cash Flows For the Three Months Ended
September 30, 1999 and 1998
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three Months
Ended September 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-10
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. 11
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. 11
Signatures. 12
</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, SEPTEMBER 30,
1999 1999
--------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 12,446 $ 6,439
Investments........................................................... 10,266 8,956
Accounts receivable, net.............................................. 45,660 51,758
Prepaid expenses and other assets..................................... 7,800 7,624
Deferred income taxes................................................. 6,513 5,997
--------- ---------
Total current assets.............................................. 82,685 80,774
Property and equipment, net................................................ 69,823 73,400
Capitalized software, net.................................................. 20,059 21,287
Intangible assets, net..................................................... 45,875 44,691
Investments................................................................ 1,875 1,875
Deferred income taxes...................................................... 21,920 24,831
Other noncurrent assets.................................................... 10,524 9,924
--------- ---------
Total........................................................ $ 252,761 $ 256,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 9,634 $ 10,184
Accrued liabilities................................................... 26,971 26,643
Current portion of long-term obligations.............................. 1,640 1,640
Deferred revenue...................................................... 20,195 24,750
--------- ---------
Total current liabilities......................................... 58,440 63,217
Accrued rent and other..................................................... 3,536 3,596
Obligations under capital leases - less current portion.................... 3,882 3,814
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 57,508,759 shares, respectively;
outstanding 51,756,278 and 51,958,405 shares, respectively........ 518 520
Additional paid-in-capital............................................ 480,385 483,890
Other................................................................. -- (319)
Accumulated deficit................................................... (294,000) (297,936)
--------- ---------
Total stockholders' equity........................................ 186,903 186,155
--------- ---------
Total........................................................ $ 252,761 $ 256,782
========= =========
</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
SEPTEMBER 30,
--------------------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Revenues:
Processing and servicing..................... $ 45,054 $ 58,304
License Fees................................. 2,971 2,996
Maintenance Fees............................. 4,964 4,438
Other........................................ 3,825 3,282
-------- --------
Total revenues........................... 56,814 69,020
Expenses:
Cost of processing, servicing and support.... 37,089 42,993
Research and development..................... 6,578 6,824
Sales and marketing.......................... 7,824 8,668
General and administrative................... 6,733 9,924
Depreciation and amortization................ 5,966 6,976
-------- --------
Total expenses........................... 64,190 75,385
Net gain on dispositions of assets................ 3,914 --
-------- --------
Loss from operations.............................. (3,462) (6,365)
Interest, net..................................... 793 245
-------- --------
Loss before income taxes.......................... (2,669) (6,120)
Income tax benefit................................ (1,201) (2,184)
-------- --------
Net loss.......................................... $ (1,468) $ (3,936)
======== ========
Basic earnings (loss) per share:
Net income (loss) per common share........... $ (0.03) $ (0.08)
======== ========
Equivalent number of shares.................. 55,510 51,848
======== ========
Diluted earnings (loss) per share:
Net income (loss) per common share........... $ (0.03) $ (0.08)
======== ========
Equivalent number of shares.................. 55,510 51,848
======== ========
</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>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (1,468) $ (3,936)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 5,966 6,976
Deferred income tax provision........................................... (1,201) (2,184)
Net gain on dispositions of assets...................................... (3,914) --
Purchases of investments- Trading....................................... -- (8,037)
Proceeds from maturities and sales of investments, net- Trading......... -- 9,347
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable................................................. 937 (6,098)
Prepaid expenses and other.......................................... 675 176
Other noncurrent assets............................................. -- 600
Accounts payable.................................................... (3,768) 550
Accrued liabilities................................................. 1,654 853
Deferred revenue.................................................... (2,325) 4,555
Income tax accounts................................................. (1,430) (211)
Accrued rent and other.............................................. -- 60
-------- --------
Net cash provided by (used in) operating activities............ (4,874) 2,651
Cash flows from investing activities:
Purchase of property and software....................................... (10,444) (8,631)
Proceeds from sale of assets............................................ 11,421 --
Capitalization of software development costs............................ (1,241) (1,897)
-------- --------
Net cash provided by (used in) investing activities............ (264) (10,528)
Cash flows from financing activities:
Principal payments under capital lease obligations...................... (175) (68)
Proceeds from stock options exercised, including related tax
benefits.............................................................. 388 1,153
Proceeds from employee stock purchase plan.............................. 1,070 785
Purchase of treasury stock.............................................. (2,066) --
-------- --------
Net cash provided by (used in) financing activities............ (783) 1,870
-------- --------
Net decrease in cash and cash equivalents.................................... (5,921) (6,007)
Cash and cash equivalents:
Beginning of period..................................................... 36,535 12,446
-------- --------
End of period........................................................... $ 30,614 $ 6,439
======== ========
Supplemental disclosure of cash flow information:
Interest paid........................................................... $ 128 $ 27
======== ========
Income taxes paid....................................................... $ 1,624 $ 188
======== ========
Capital lease additions................................................. $ 1,583 $ --
======== ========
Unsettled portion of treasury share purchase............................ $ 3,757 $ --
======== ========
Stock funding of 401(k) match........................................... $ 963 $ 1,059
======== ========
</TABLE>
5
<PAGE> 6
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 three months
ended September 30, 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 filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
2. Basic earnings (loss) per common share amounts were computed by
dividing income (loss) available to shareholders by the weighted average number
of shares outstanding. Diluted per-common-share amounts assume the issuance of
common stock for all potentially dilutive equivalent shares outstanding except
in loss periods when such an adjustment would be anti-dilutive. For the periods
reported herein, there were no differences between basic and diluted earnings
per share. The number of anti-dilutive equivalent shares excluded from the per
share calculations are 5,765,718 and 5,502,093 for the three months ended
September 30, 1998 and 1999, respectively.
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 Statement of Financial Accounting Standards ("SFAS") 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. 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 September 30,
1999, the Company and its subsidiaries own approximately 63% of CheckFree
Management Corporation. Separate financial statements of the other guarantor
subsidiaries have not been separately presented because (1) CheckFree Holdings
Corporation, the parent Company, has no operations or assets other than its
investment in its subsidiaries, (2) all of the subsidiaries have guaranteed the
securities on a full, unconditional, and joint and several basis and (3) all of
the subsidiaries other than CheckFree Management Corporation are wholly owned by
the Company. The following table sets forth condensed consolidating financial
information of the Company, CheckFree Management Corporation, and other wholly
owned guarantor subsidiaries as of and for the three months ended September 30,
1999:
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
------------- ---------------- ---------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents ..... $ 63 $ (3) $ 6,379 $ -- $ 6,439
Investments ................... -- -- 8,956 -- 8,956
Accounts receivable, net ...... -- 2,319 51,758 (2,319)(1) 51,758
Prepaid expenses and other
assets .................... -- -- 9,943 (2,319)(2) 7,624
Deferred income taxes ......... -- -- 5,997 -- 5,997
--------- --------- --------- --------- ---------
Total current assets ...... 63 2,316 83,033 (4,638) 80,774
Property and equipment, net ...... -- -- 73,400 -- 73,400
Capitalized software, net ........ -- -- 21,287 -- 21,287
Intangible assets, net ........... -- -- 44,691 -- 44,691
Investment in subsidiaries ....... 186,277 -- -- (186,277)(3) --
Other investments ................ -- -- 1,875 -- 1,875
Deferred income taxes ............ -- -- 24,831 -- 24,831
(27,021)(1)
Other noncurrent assets .......... -- 27,021 36,236 (26,312)(2) 9,924
--------- --------- --------- --------- ---------
$ 186,340 $ 29,337 $ 285,353 $(244,248) $ 256,782
========= ========= ========= ========= =========
Current Liabilities:
Accounts payable .............. $ -- $ 226 $ 10,184 (226)(4) $ 10,184
(2,319)(1)
134 (3)
Accrued liabilities ........... 185 132 28,285 226 (4) 26,643
Current portion of long-term
obligations ............... -- 2,319 1,640 (2,319)(2) 1,640
Deferred revenue .............. -- -- 24,750 -- 24,750
--------- --------- --------- --------- ---------
Total current liabilities .. 185 2,677 64,859 (4,504) 63,217
(27,021)(1)
Accrued rent and other ........... -- 26,313 30,616 (26,312)(2) 3,596
Obligations under capital leases -
less current portion ......... -- -- 3,814 -- 3,814
Redeemable Preferred Stock ....... -- 116 -- (116)(3) --
Stockholders' equity ............. 186,155 231 186,064 (186,295)(3) 186,155
--------- --------- --------- --------- ---------
$ 186,340 $ 29,337 $ 285,353 $(244,248) $ 256,782
========= ========= ========= ========= =========
</TABLE>
1. Elimination of note receivable between CheckFree Corporation, a wholly
owned subsidiary of CheckFree Holdings, and CheckFree Management
Corporation.
2. Elimination of claims liability deposit between CheckFree Corporation, a
wholly owned subsidiary of CheckFree Holdings, and CheckFree Management
Corporation.
3. Elimination of CheckFree Holdings investment in subsidiaries, and
reclassification of the minority interest of CheckFree Management
Corporation.
4. Elimination of other intercompany balances
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
------------- ---------------- ---------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Processing and servicing ...... $ -- $ -- $ 58,304 $ -- $ 58,304
License Fees .................. -- -- 2,996 -- 2,996
Maintenance fees .............. -- -- 4,438 -- 4,438
Other ......................... 59 -- 3,282 (59)(1) 3,282
-------- -------- -------- -------- --------
Total revenues ............ 59 -- 69,020 (59) 69,020
Expenses:
Cost of processing, servicing
and support ............... -- -- 42,993 -- 42,993
Research and development ...... -- -- 6,824 -- 6,824
Sales and marketing ........... -- -- 8,668 -- 8,668
General and administrative .... -- 59 9,924 (59)(1) 9,924
Depreciation and amortization . -- -- 6,976 -- 6,976
-------- -------- -------- -------- --------
Total expenses ............ -- 59 75,385 (59) 75,385
-------- -------- -------- -------- --------
Income (loss) from operations .... 59 (59) (6,365) -- (6,365)
(635)(3)
Interest income .................. -- 635 844 (572)(4) 272
635(3)
Interest expense ................. -- (572) (662) 572(4) (27)
-------- -------- -------- -------- --------
Income (loss) before income taxes 59 4 (6,183) -- (6,120)
Income tax benefit ............... -- -- (2,184) -- (2,184)
-------- -------- -------- -------- --------
Income (loss) before equity in
earnings of subsidiaries ..... 59 4 (3,999) -- (3,936)
Equity in earnings of subsidiaries (3,995) -- -- 3,995(2) --
-------- -------- -------- -------- --------
Net income (loss) ................ $ (3,936) $ 4 $ (3,999) $ 3,995 $ (3,936)
======== ======== ======== ======== ========
</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.
CHECKFREE HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Combined CheckFree
CheckFree CheckFree Wholly-owned Holdings
Holdings Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
-------------- --------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income ................................. $ (3,936) $ 4 $ (3,999) 3,995 (1) $ (3,936)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries ..... 3,995 -- -- (3,995)(1) --
Net inter-subsidiary cash transfers..... (1,269) 1,269 -- --
Depreciation and amortization .......... -- -- 6,976 -- 6,976
Deferred income tax provision .......... -- -- (2,184) -- (2,184)
Purchases of investments-Trading ....... -- -- (8,037) -- (8,037)
Proceeds from sales and
maturities of investments-Trading -- -- 9,347 -- 9,347
Change in certain assets and liabilities
(net of acquisitions and
dispositions):
Accounts receivable .............. -- -- (6,098) -- (6,098)
Prepaid expenses and other ....... -- -- 176 -- 176
Other noncurrent assets .......... -- -- 600 -- 600
Accounts payable ................. -- -- 550 -- 550
Accrued liabilities .............. -- -- 853 -- 853
Deferred revenues ................ -- -- 4,555 -- 4,555
Income tax accounts .............. -- -- (211) -- (211)
Accrued rent and other ........... -- -- 60 -- 60
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities ............................... (1,210) 4 3,857 -- 2,651
Investing activities:
Purchase of property and software ......... -- -- (8,631) -- (8,631)
Capitalization of software development
costs .................................. -- -- (1,897) -- (1,897)
Proceeds (principal payments) on
related party loan .................... -- 429 (429) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities ................................ -- 429 (10,957) -- (10,528)
Financing Activities:
Principal payments on capital lease
obligations ............................ -- -- (68) -- (68)
Proceeds from stock options exercised,
including related tax benefits ......... 1,153 -- -- -- 1,153
Proceeds from employee stock purchase
plan ................................... -- -- 785 -- 785
Proceeds from (funding of) assumption
of health plan claims ................... (727) 727 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................ 1,153 (727) 1,444 -- 1,870
-------- -------- -------- -------- --------
Net decrease in cash and cash equivalents .... (57) (294) (5,656) -- (6,007)
Cash and cash equivalents:
Beginning of period ....................... 120 291 12,035 -- 12,446
-------- -------- -------- -------- --------
End of period ............................. $ 63 $ (3) $ 6,379 $ -- $ 6,439
======== ======== ======== ======== ========
</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 September 30, 1999.
<TABLE>
REDEEMABLE PREFERRED STOCK:
<S> <C>
Class C, 350 authorized shares, $100 par value;
350 shares issued and outstanding.................................. $ 37,100
Class D, 750 authorized shares, $100 par value; 750 shares issued
and outstanding..................................................... 79,500
---------------
Total redeemable preferred stock....................... $116,600
===============
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..................................................... 41,026
---------------
Total stockholders' equity..................................... $231,026
===============
</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 September 30, 1999 the
redemption value of the preferred stock is approximately equal to its carrying
value. In the event of liquidation, dissolution or winding up of the Company,
holders of Class C and Class D preferred stock are entitled to receive, prior to
and in preference to any distributions to the holders of Class B preferred stock
or Class A common stock, an amount determined by the Formula Value, plus any
accrued but unpaid dividends.
Capital Stock - Holders of class A Common Stock are entitled to one vote per
share and have certain rights with respect to election of the Company's Board of
Directors. The holders of Class B, Preferred Stock have certain additional
rights, privileges and preferences. The holders are entitled to one vote per
share and each class has certain rights with respect to election of the
Company's Board of Directors. The holders are entitled to receive dividends
before any dividend is declared or paid on shares of Class A Common Stock. Such
dividends are cumulative and are payable at times determined by the Board of
Directors. In the event of liquidation, dissolution or winding up of the
Company, subject to the redeemable preferred stock preferences, holders of Class
B preferred stock are entitled to receive an amount equal to the par value plus
any accrued but unpaid dividends.
In December 1998, the Company entered into a Stockholders' Agreement with each
holder of common and preferred stock. The agreement restricts the sale or
transfer of any shares of stock without express written consent of all
stockholders. In addition, the agreement provides that the holder of the Class A
Common Stock, CheckFree Holdings, is subject to capital calls when and if the
Board of Directors determines that the Company will have a cash shortfall for
any quarter. Through September 30, 1999, no additional capital contributions
were required.
8. 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 to purchase 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.
9. On October 25, 1999, the Company executed an amendment to its
working capital line-of-credit agreement. The amendment extends the term of the
line through December 30, 1999, and changes certain financial covenants
contained in the agreement.
10. 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.
11. Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
6
<PAGE> 7
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:
- Receive electronic bills through the Internet;
- Pay any bill - electronic or paper - to anyone; and
- Perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
We currently provide electronic billing and payment services for
approximately 3 million consumers. Our services are available through over 350
sources, including:
- 23 of the 25 largest U.S. banks;
- 8 of the top 10 U.S. brokerage firms;
- Internet portals;
- Internet-based banks;
- Internet financial sites such as Quicken.com; and
- 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. During the three months ended September 30, 1999, we processed
an average of nearly 13 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 September 30, 1999, we
have signed contracts for E-Bill services with 77 of the country's largest
billers. During the month of September 1999, we presented more than 20,000
electronic bills, which is more than double the number of bills presented
through E-bill Services in March of 1999. Additionally, 53 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.
During fiscal 1998, we made the decision to sell some of our software
businesses that did not directly promote our strategic direction. These
divestitures included the sale of our recovery management business in August
1997, our item processing business in March 1998, our wire and electronic
banking businesses in April 1998, our leasing business in July 1998, our
mortgage business in September 1998 and our imaging business in October 1998.
While we have no pending agreements to dispose of our remaining software
businesses, we do receive offers for them from time to time.
7
<PAGE> 8
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
SEPTEMBER 30,
------------------------------------
1998 1999
------------- --------------
<S> <C> <C>
Total revenues: 100.0% 100.0%
Expenses:
Cost of processing, servicing and support........ 65.3% 62.3%
Research and development......................... 11.6% 9.9%
Sales and marketing.............................. 13.8% 12.6%
General and administrative....................... 11.9% 14.4%
Depreciation and amortization.................... 10.5% 10.1%
------------- --------------
Total expenses............................... 113.0% 109.2%
Net gain on dispositions of assets................... 6.9% -
------------- --------------
Loss from operations................................. (6.1)% (9.2)%
Interest, net........................................ 1.4% 0.4%
------------- --------------
Loss before income taxes............................. (4.7)% (8.9)%
Income tax benefit................................... (2.1)% (3.2)%
------------- --------------
Net loss............................................. (2.6)% (5.7)%
============= ==============
</TABLE>
Reported revenue increased 21%, from $56.8 million for the three months
ended September 30, 1998 to $69.0 million for the three months ended September
30, 1999. The overall increase is due to internal growth in our Electronic
Commerce and Investment Services businesses offset by a decrease in our Software
business. The increase in Investment Services is partially due to the
acquisition of Mobius Group in March 1999. The reduction in our reported
Software revenue was due primarily to divestitures of our mortgage business in
September 1998 and our imaging business in October 1998. On a pro forma basis,
net of the divestiture of the Software businesses previously mentioned and
adjusting for the acquisition of Mobius Group, revenue increased 22%, from $56.7
million for the three months ended September 30, 1998 to $69.0 million for the
three months ended September 30, 1999. In our Electronic Commerce business,
revenue grew by 25%, driven primarily by a 20% increase in subscribers from
approximately 2.5 million at September 30, 1998 to approximately 3.0 million at
September 30, 1999. Pro forma revenue in our Investment Services business grew
by 20%, primarily due to an increase in portfolios managed from 546,000 at
September 30, 1998 to 767,000 at September 30, 1999. Pro forma revenue, net of
divested businesses, in our Software business grew by 7%, in spite of a general
slowdown in the market resulting from Year 2000 purchasing moratoriums.
Reported processing and servicing revenue increased $13.2 million, or
29%, from $45.1 million for the three months ended September 30, 1998 to $58.3
million for the three months ended September 30, 1999. On a pro forma basis,
adjusting for the acquisition of Mobius Group, processing and servicing revenue
increased $11.7 million, or 25%, from $46.6 million for the three months ended
September 30, 1998 to $58.3 million for the three months ended September 30,
1999. Pro forma growth was due primarily to the increase in subscribers in our
Electronic Commerce business and the increase in portfolios managed in our
Investment Services business mentioned previously.
Reported license revenue increased by $0.2 million, or 7%, from $2.8
million for the three months ended September 30, 1998 to $3.0 million for the
three months ended September 30, 1999. On a pro forma basis,
8
<PAGE> 9
excluding the impact of divested software businesses, license revenue increased
$0.3 million, or 11%, from $2.7 million for the three months ended September 30,
1998 to $3.0 million for the three months ended September 30, 1999. The
relatively low license performance in both periods is due to typically low
seasonal license sales in the first fiscal quarter in the Software business.
Reported maintenance revenue declined by $0.6 million, or 12%, from
$5.0 million for the three months ended September 30, 1998 to $4.4 million for
the three months ended September 30, 1999. On a pro forma basis, excluding the
impact of divested software businesses, maintenance revenue increased by $0.3
million, or 7%, from $4.1 million for the three months ended September 30, 1998
to $4.4 million for the three months ended September 30, 1999. This increase is
due to new maintenance paying customers added during fiscal 1999 offset slightly
by retention rates in the upper 80% range for the core maintenance base in our
Software business.
Reported other revenue, consisting mostly of consulting fees, decreased
by $0.5 million, or 13%, from $3.8 million for the three months ended September
30, 1998 to $3.3 million for the three months ended September 30, 1999. On a pro
forma basis, excluding the impact of divested software businesses and the
acquisition of Mobius Group, other revenue remained constant at $3.3 million for
the three months ended September 30, 1998 and 1999. Implementation fees have
remained relatively consistent in all three businesses, Electronic Commerce,
Software and Investment Services.
Our cost of processing, servicing and support was $37.1 million or
65.3% of total revenue for the three months ended September 30, 1998 and $43.0
million or 62.3% of total revenue for the three months ended September 30, 1999.
Cost of processing as a percentage of servicing only revenue (total revenue less
license revenue) was 68.9% for the three months ended September 30, 1998 and
65.1% for the three months ended September 30, 1999. Improvement in this area is
due to a year over year increase in the 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 the new Genesis processing
system throughout the fiscal year ended June 30, 1999 and into fiscal 2000.
Our research and development costs were $6.6 million, or 11.6% of
revenue for the three months ended September 30, 1998 and $6.8 million, or 9.9%
of total revenue for the three months ended September 30, 1999. Adjusted for
capitalized development costs of $1.2 million for the three months ended
September 30, 1998 and $1.9 million for the three months ended September 30,
1999, gross research and development costs were $7.8 million, or 13.7% of total
revenue for the quarter ended September 30, 1998 and $8.7 million, or 12.6% of
total revenue for the quarter ended September 30, 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 $7.8 million, or 13.8% of total revenue
for the three months ended September 30, 1998 and $8.7 million, or 12.6% of
total revenue for the three months ended September 30, 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 the rollout of electronic billing and payment offerings through
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 $6.7 million, or 11.9% of
total revenue for the three months ended September 30, 1998 and $9.9 million, or
14.4% of total revenue for the three months ended September 30, 1999. The
increase in general and administrative expenses is due principally to an
increase in facilities costs resulting from new facilities in Dublin, Ohio and
Jersey City, New Jersey; 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.
Depreciation and amortization costs increased from $6.0 million for the
three months ended September 30, 1998 to $7.0 million for the three months ended
September 30, 1999. Reductions in depreciation and amortization expense
resulting from the divestiture of the previously mentioned software businesses
have been offset by
9
<PAGE> 10
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 this Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a 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.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) On August 5, 1999, we granted Peter F. Sinisgalli, our President
and Chief Operating Officer, 12,000 restricted shares of our common stock. The
grant was made pursuant to a Restricted Stock Agreement entered into between Mr.
Sinisgalli and us. Additionally, on August 5, 1999, we granted John Frech,
CheckFree Corporation's Senior Vice President, Computer Operations, 1,000
restricted shares of our common stock. The grant was made pursuant to a
Restricted Stock Agreement entered into between Mr. Frech and us. Both of the
grants were made under the exemption from registration provided by Section 4(1)
of the Securities Act of 1933.
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 did not file any Current Reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 30, 1999.
11
<PAGE> 12
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.
12
<PAGE> 13
CHECKFREE HOLDINGS
CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
EXHIBIT INDEX
<PAGE> 14
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.
