<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 September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number: 0-26802
CHECKFREE 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: 86,240,935 shares of
Common Stock, $.01 par value, were outstanding at November 9, 2000.
<PAGE> 2
FORM 10-Q
CHECKFREE CORPORATION
<TABLE>
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
<CAPTION>
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
September 30, 2000 and June 30, 2000
Condensed Consolidated Statements of 4
Operations For the Three Months Ended
September 30, 1999 and 2000
Condensed Consolidated Statements of 5
Cash Flows For the Three Months Ended
September 30, 1999 and 2000
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three Months
Ended September 30, 1999 and 2000
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 23
Signatures. 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
CHECKFREE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 2000
--------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 128,074 $ 229,919
Investments ..................................................... 56,548 59,265
Accounts receivable, net ........................................ 58,308 65,628
Prepaid expenses and other assets ............................... 12,813 8,297
Deferred income taxes ........................................... 9,733 8,474
--------- ----------
Total current assets ........................................ 265,476 371,583
Property and equipment, net .......................................... 93,214 93,443
Capitalized software, net ............................................ 37,189 239,660
Intangible assets, net ............................................... 251,280 1,547,229
Investments .......................................................... 23,003 23,923
Deferred income taxes ................................................ 29,248 --
Other noncurrent assets .............................................. 13,704 12,213
--------- ----------
Total .................................................. $ 713,114 $2,288,051
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 10,158 $ 17,645
Accrued liabilities ............................................. 43,958 44,113
Current portion of long-term obligations ........................ 5,955 2,639
Deferred revenue ................................................ 26,644 35,929
--------- ----------
Total current liabilities ................................... 86,715 100,326
Accrued rent and other ............................................... 7,269 6,826
Obligations under capital leases - less current portion .............. 736 682
Deferred income taxes ................................................ -- 252,725
Convertible subordinated notes ....................................... 172,500 172,500
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 63,957,859 and 81,593,685 shares, respectively;
outstanding 58,414,035 and 76,044,304 shares, respectively .. 584 760
Additional paid-in-capital ...................................... 771,892 2,139,153
Other ........................................................... (262) (243)
Accumulated deficit ............................................. (326,320) (384,678)
--------- ----------
Total stockholders' equity .................................. 445,894 1,754,992
--------- ----------
Total .................................................. $ 713,114 $2,288,051
========= ==========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
3
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<TABLE>
CHECKFREE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 2000
------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Revenues:
Processing and servicing ......................... $58,304 $ 76,159
License Fees ..................................... 2,996 5,047
Maintenance Fees ................................. 4,438 4,647
Other ............................................ 3,282 4,904
------- --------
Total revenues ............................... 69,020 90,757
Expenses:
Cost of processing, servicing and support ........ 42,993 53,072
Research and development ......................... 6,824 13,918
Sales and marketing .............................. 8,668 14,304
General and administrative ....................... 9,924 11,492
Depreciation and amortization .................... 6,976 55,734
In-process research and development .............. -- 18,600
------- --------
Total expenses ............................... 75,385 167,120
------- --------
Loss from operations .................................. (6,365) (76,363)
Interest, net ......................................... 245 325
------- --------
Loss before income taxes .............................. (6,120) (76,038)
Income tax benefit .................................... (2,184) (17,680)
------- --------
Net loss .............................................. $(3,936) $(58,358)
======= ========
Basic loss per share:
Net loss per common share ........................ $ (0.08) $ (0.91)
======= ========
Equivalent number of shares ...................... 51,848 64,216
======= ========
Diluted loss per share:
Net loss per common share ........................ $ (0.08) $ (0.91)
======= ========
Equivalent number of shares ...................... 51,848 64,216
======= ========
</TABLE>
See Notes to Interim Unaudited Condensed Consolidated Financial Statements.
4
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<TABLE>
CHECKFREE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 2000
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $ (3,936) $ (58,358)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
In-process research and development .................................. -- 18,600
Depreciation and amortization ........................................ 6,976 55,734
Deferred income tax provision ........................................ (2,184) (17,680)
Purchases of investments - Trading ................................... (8,037) (2,943)
Proceeds from maturities and sales of investments, net - Trading ..... 9,347 2,823
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable .............................................. (6,098) (7,324)
Prepaid expenses and other ....................................... 176 1,616
Other noncurrent assets .......................................... 600 170
Accounts payable ................................................. 550 7,486
Accrued liabilities .............................................. 853 2,381
Deferred revenue ................................................. 4,555 3,785
Income tax accounts .............................................. (211) (227)
Accrued rent and other ........................................... 60 (13)
-------- ----------
Net cash provided by operating activities ................... 2,651 6,050
Cash flows from investing activities:
Purchase of property and software .................................... (8,631) (6,177)
Capitalization of software development costs ......................... (1,897) (1,349)
Cash and cash equivalents from business acquired, net of
acquisition costs .................................................. -- 96,840
Purchase of investments - Held to Maturity ........................... -- (3,909)
Proceeds from sales of investments - Held to Maturity ................ -- 392
-------- ----------
Net cash provided by (used in) investing activities ......... (10,528) 85,797
Cash flows from financing activities:
Principal payments under capital lease obligations ................... (68) (2,006)
Proceeds from stock options exercised, including related
income tax benefits ................................................ 1,153 1,225
Proceeds from employee stock purchase plan ........................... 785 1,358
Proceeds from sale of stock and exercise of warrants ................. -- 9,421
-------- ----------
Net cash provided by investing activities ................... 1,870 9,998
-------- ----------
Net increase (decrease) in cash and cash equivalents ...................... (6,007) 101,845
Cash and cash equivalents:
Beginning of period .................................................. 12,446 128,074
-------- ----------
End of period ........................................................ $ 6,439 $ 229,919
======== ==========
Supplemental disclosure of cash flow information:
Interest paid ........................................................ $ 27 $ 134
======== ==========
Income taxes paid .................................................... $ 188 $ 34
======== ==========
Capital lease additions and purchase of other long term assets ..... $ -- $ 1,110
======== ==========
Stock funding of 401(k) match ...................................... $ 1,059 $ 2,484
======== ==========
Purchase price of business acquisitions ............................ $ -- $1,351,408
Less: Issuance of common stock pursuant to acquisitions ........... -- 1,350,083
Cash acquired in acquisitions .................................... -- 97,200
Prepaid acquisition costs ........................................ -- 965
-------- ----------
Net cash received ......................................... $ -- $ (96,840)
======== ==========
</TABLE>
5
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
1. INTRODUCTION
The accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting principles
for interim financial reporting. The results of operations for the three months
ended September 30, 1999 and 2000 are not necessarily indicative of the results
for the full year.
These financial statements should be read in conjunction with the
financial statements, accounting policies and financial notes thereto included
in the Company's Annual Report filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of management, the accompanying condensed
consolidated unaudited financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
representation of financial results for the interim periods presented.
Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation.
2. EARNINGS PER SHARE
The following table reconciles the differences in income and shares
outstanding between basic and dilutive for the periods indicated (in thousands,
except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
---------------------------------- ----------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ................ $(3,936) 51,848 $(0.08) $(58,358) 64,216 $(0.91)
====== ======
Effect of dilutive
securities:
Options and warrants .. -- -- -- --
------- ------ -------- ------
Diluted EPS .............. $(3,936) 51,848 $(0.08) $(58,358) 64,216 $(0.91)
======= ====== ====== ======== ====== ======
</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. For the periods
reported herein, there were no differences between basic and diluted earnings
per share. The anti-dilutive interest charges and number of equivalent shares
excluded from the per share calculations were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Three Month Period Ended ........ $ -- 5,502 $2,404 6,667
==== ===== ====== =====
</TABLE>
3. ACQUISITIONS AND DIVESTITURES
On September 1, 2000, the Company acquired MSFDC, L.L.C. (TransPoint)
for a total of $1.4 billion, consisting of 17,000,000 shares of common stock
valued at $1.4 billion and $1.4 million of acquisition costs. The acquisition
was treated as a purchase for accounting purposes, and, accordingly, the assets
and liabilities were recorded based on their fair values at the date of the
acquisition. The values ascribed to acquired intangible assets and their
respective useful lives are as follows:
6
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<TABLE>
<CAPTION>
Asset Useful
Intangible Asset Value Life
------------------------- -------------- ------
(In thousands)
<S> <C> <C>
Goodwill................. $784,109 5
Strategic agreements..... 495,000 5
Existing technology...... 209,300 3
Customer list............ 29,000 3
Tradename................ 28,300 1
</TABLE>
Amortization of intangible assets is on a straight- line basis over the
assets' respective useful life. TransPoint's operations are included in the
condensed consolidated statement of operations from the date of acquisition.
At the acquisition date, TransPoint had four technologies under
development that had not demonstrated technological feasibility. These
technologies include Biller Integration System and Communications, Service
Center, Delivery Applications and Payment Systems Interface. The in-process
technologies have no alternative use in the event that the proposed technologies
do not prove to be feasible. These development efforts fall within the
definition of In-Process Research and Development ("IPR&D") contained in
Statement of Financial Accounting Standard ("SFAS") No. 2.
BIS / Communications Technology. The Biller Integration System ("BIS")
is provided to the biller to run on-site and supplies the web-hosting for the
biller. The BIS help implement the templates and develop the look and feel for
marketing components. The BIS also includes automation interfaces, EI
interfaces, and the console. The following features of the BIS / Communications
technology are under development:
o Remote access or the Remote BIS Console, which will allow
Biller operators and administrators to perform selected
gateway operations from remote machines using a Web-based
interface to the BIS.
o International "Fixes", which are fixes to the BIS system to
correct incompatibilities with international currency and date
settings.
o Platform Updates that will support installation of the BIS
gateway on the Windows 2000 Server platform.
Service Center Technology. The Service Center connects the TransPoint
servers to the BIS on the biller site, the automated clearinghouse, other
third-party servers, and the individual consumer. The Service Center includes
the database and operational functions as well. The following features of the
Service Center are under development:
o E-mail notification currently uses an internal Microsoft
server. The system is being modified to incorporate the
industry standard allowing the use of any server environment
to send data over the Internet. In addition, service-generated
e-mail messages will be in HTML format (rather than plain
text) for a richer customer experience.
o SysAdmiral upgrade, in which the installation scripts for the
service center are being upgraded to support the latest
version of SysAdmiral.
Delivery Applications. The Delivery Applications generate the actual
web pages through its user interface. This technology creates not only the
TransPoint consumer site, but also the operations, corporate, and support sites.
The following features of the Delivery Applications are under development:
o Passport Integration / Authorization, in which the security
and authentication systems of the TransPoint service will be
modified to use Microsoft Passport for user authentication. In
addition, the user interface will be modified to allow
migration of existing user accounts to Microsoft Passport.
o User Registration Improvement, in which consumer registration
is being modified significantly, with the goal of retaining
new consumers. Changes include sending consumers to the
Microsoft Passport
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Web site to obtain a Passport account, and condensing the
number of screens in registration. In addition, new consumers
are permitted greater access to the system and features as
they await identity and payment account verification.
o Recurring Payments, whereby consumers will now be able to set
up automatic "pay anyone" payments recurring at set intervals,
and automatic rules-based handling of electronic bills by
payee.
o Batch Enabling, whereby biller operators and administrators
will now be able to enable statement batches directly from the
TransPoint Operations site. A new "Enable Batch" button will
be added to the Preview Statements screen on the TransPoint
Operations site.
o Reporting Upgrades, in which a variety of user-interface
upgrades are underway to improve performance of the reporting
subsystem, improve the reporting content available to billers,
and increase the overall reliability of the TransPoint system.
o Payment Center User Interface Improvements, which includes a
variety of user interface improvements to fix minor UI issues,
enhance accessibility options, and improve overall site
usability.
Payment / Interface. The Payment Interface technology connects the
Service Center to the ACH, Original Depository Financial Institutions,
and other third-party servers as well as processing all payment and
settlement information. The following features of the Payment /
Interface technology are under development:
o Microsoft Money Download, in which this feature is being
rearchitected and reimplemented in its entirety to correct
incompatibilities between the existing Microsoft Money
download feature and the newest version of Microsoft Money.
o Credit Card Payments, which provides code that allows the
TransPoint system to support the use of credit cards for
payment settlement.
There are risks and uncertainties associated with the completion of
these in-process technologies. These risks include:
o Not Technologically Feasible.
The acquired IPRD had not demonstrated technological or commercial
feasibility as of the transaction date for TransPoint. Significant
risks exist because TransPoint is unsure of the obstacles it will
encounter in the form of market acceptance, time and cost necessary to
produce a technologically feasible product. SFAS No. 2 does not
specifically require an analysis of the development effort expended
relative to an acquisition date. It is reasonable to assume, however,
that an IPRD project would require a significant amount of time and
cost in order to modify for CheckFree Corporation's use in the
marketplace. Should the proposed technology fail to become viable, it
is unlikely that CheckFree Corporation would realize any value from the
sale of the technology to another party.
o No Alternative Future Use.
The acquired IPRD consists of TransPoint's work to date on its
products. The products are very specific to the tasks and markets for
which it is intended. As is typically the case with software, there are
no alternative use for the in-process work in the event that the
product does not become feasible for CheckFree Corporation. The
development effort for the acquired IPRD does not possess an
alternative future use for CheckFree Corporation under the terms of
SFAS No. 2.
If the TransPoint project underway fails, there will be very limited
life to the existing product because the continuing pace of
technological developments in the marketplace will have rendered them
non-competitive. In the event of a failure, the technology acquired, as
embodied in either current or in-process products, will have no
alternative use and would be written off as a loss by CheckFree
Corporation.
8
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The following table represents information regarding the status of the
various in-process research and development projects acquired:
<TABLE>
<CAPTION>
Estimated Expected
Stage of Estimated Cost to
Completion Completion Date Complete Valuation
---------- --------------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
BIS / Communications ....... 80% October, 2000 $100 $ 1,200
Service Center ............. 80% October, 2000 121 5,900
Delivery Applications ...... 80% October, 2000 396 9,500
Payment / Interface ........ 80% October, 2000 100 2,000
---- -------
Total ................ $717 $18,600
==== =======
</TABLE>
The method used to allocate the purchase consideration to IPRD was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPRD projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
o analysis of the stage of completion of each project;
o exclusion of value related to research and development
yet-to-be completed as part of the on-going IPRD projects; and
o the contribution of existing technologies and applications.
The projected revenues used in the income approach are based upon the
incremental revenues associated with a portion of the project related to
TransPoint's technology likely to be generated upon completion of the project
and the beginning of commercial sales, as estimated by management. The
projections assume that the projects will be successful and the projects'
development and commercialization are as set forth by management. The discount
rate used in this analysis is an after tax rate of 24%.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on July 1, 1999,
and excludes the write-off of purchased research and development of $18.6
million (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1999 September 30, 2000
------------------ ------------------
<S> <C> <C>
Revenues ............................ $ 69,020 $ 90,766
Net Income .......................... $(82,657) $(105,242)
Basic earnings per share:
Net loss per common share ........ $ (1.20) $ (1.30)
Equivalent number of shares ...... 68,848 81,216
Diluted earnings per share:
Net loss per common share ........ $ (1.20) $ (1.30)
Equivalent number of shares ...... 68,848 81,216
</TABLE>
4. STRATEGIC AGREEMENT
Effective October 1, 2000, the Company completed the previously
announced 10-year strategic agreement with Bank of America ("BofA"), whereby the
Company acquired the electronic billing and payment assets of BofA and will
provide electronic billing and payment services to BofA's customer base in
exchange for 10 million shares of the Company's common stock valued at
approximately $404 million and $35 million of cash. The agreement provides for a
revenue guarantee of $500 million to the Company over the next 10 years. BofA
has the ability to earn warrants on up to 10 million additional shares, eight
million of which vest incrementally upon achievement of specific levels of
subscriber adoption of electronic billing and payment services and separately,
and the other two million upon achievement of specific levels of electronic
bills presented to those subscribers. Upon vesting of the warrants, the Company
will record a charge for the fair value of the warrants, based on a
Black-Scholes valuation
9
<PAGE> 10
which will take into consideration the market value of our stock, the $32.50
strike price of the warrants, the volatility of our stock and the applicable
risk-free interest rate at that time. Of the cash portion of the purchase price,
$25 million is to be invested into a joint marketing development fund designed
to accelerate adoption of electronic billing and payment services through BofA's
customer base, and the Company expects to take a charge for the full amount in
the quarter ended December 31, 2000.
5. COMMON STOCK AND WARRANTS
The Company has issued stock for various employee benefit programs
during the current fiscal year. In the quarter ended September 30, 2000, the
Company issued 51,750 shares to fund its 401(k) match, the cost of which was
accrued in the year ended June 30, 2000. In the quarter ended September 30,
2000, the Company issued 34,880 shares of common stock in conjunction with the
employee stock purchase plan, which was funded through employee payroll
deductions in the immediately preceding six-month period.
On September 1, 2000, the Company completed the previously announced
agreement to purchase MSFDC, L.L.C. ("TransPoint") in exchange for 17 million
shares of the Company's common stock. Please refer to Note 3 for additional
information regarding this acquisition.
During the quarter ended September 30, 2000, the Company received
notification of and payment for the exercise of warrants for 450,000 shares of
the Company's common stock at an exercise price of $20.9375.
Effective October 1, 2000, the Company completed the previously
announced agreement to acquire various electronic billing and payment assets
from BofA in exchange for 10 million shares of the Company's common stock. BofA
has the ability to earn warrants on up to 10 million additional shares with a
strike price of $32.50, contingent upon achievement of certain growth
objectives. Please refer to note 4 for additional information regarding this
transaction.
On November 1, 2000, the Company's shareholders approved an increase in
the number of authorized shares of the Company from 165,000,000 to 550,000,000,
consisting of 500,000,000 shares of common stock, $.01 pare value, 48,500,000
shares of preferred stock, $.01 par value, and 1,500,000 shares of Series A
Junior Participating Cumulative Preferred Stock, $.01 par value. Additionally,
the Company's shareholders approved an increase in the number of shares of the
Company's common stock issuable upon exercise of stock options under the 1995
Stock Option Plan from 8,000,000 shares to 12,000,000 shares.
6. GUARANTOR FINANCIAL INFORMATION
CheckFree Management Corporation is a guarantor of the Company's $172.5
million convertible subordinated notes that were issued in November 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,
2000, the Company and its subsidiaries own approximately 89% of CheckFree
Management Corporation. In previous quarters, due to the relative value of the
total assets of CheckFree Management Corporation to the total consolidated
assets of the Company, we were required to provide separate financial statements
for and disclose certain financial information about CheckFree Management
Corporation. As of September 30, 2000, the assets of CheckFree Management
Corporation represent less than 2% of the total consolidated assets of the
Company, and therefore, separate financial statements and financial disclosures
are no longer required.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended September 30, 2000, the Company adopted SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS 133" and by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as
amended, requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
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<PAGE> 11
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of the derivative's change in
fair value is immediately recognized in earnings.
The Company's Investment Policy currently prohibits the use of
derivatives for trading or hedging purposes. Additionally, the Company completed
a review of its contracts and determined that they contained no "imbedded
derivatives" that require separate reporting and disclosure under SFAS 133, as
amended. As such, the adoption of SFAS 133, did not have a material impact on
the Company's results of operations or other comprehensive income.
In 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." The SAB provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Although SAB No. 101 does not change any of the existing
standards on revenue recognition, it draws upon existing guidance and explains
how the SEC staff applies these rules, by analogy, to other transactions that
existing rules do not specifically address. SAB No. 101, as amended by SAB No.
101B, becomes effective for the fourth quarter of our fiscal year 2001. The
Company is in the process of assessing the impact of SAB No. 101 on its
financial statements; however, the adoption of SAB No. 101 is not expected to
have a material impact on results of operations or financial position.
11
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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.
We operate our business through three independent but inter-related divisions:
o Electronic Commerce;
o Investment Services; and
o Software.
Our Electronic Commerce business provides services that allow consumers
to:
o receive electronic bills through the Internet;
o pay any bill--electronic or paper--to anyone; and
o perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
We provide electronic billing and payment services for over 3.8 million
consumers as of September 30, 2000. Our services reach hundreds of sources,
either directly or through reseller relationships, including:
o 9 of the 10 largest U.S. banks;
o 8 of the 10 largest U.S. brokerage firms;
o Internet portals;
o Internet-based banks;
o Internet financial sites like Quicken.com; and
o personal financial management software like Quicken and
Microsoft Money.
We have developed contracts with over 1,100 merchants nationwide that
allows us to remit 58% of all of our bill payments electronically. We processed
an all time high of nearly 17 million monthly transactions during the quarter
ended September 30, 2000 and, for the year ended June 30, 2000, we processed
nearly 170 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. Through September 30, 2000,
we have 137 billers in production and are now delivering over 140,000 electronic
bills monthly.
When a customer instructs us to pay a bill, we have the ability to
process the payment either by electronic funds transfer, by paper check, or by
draft drawn on the customer's account. Our patented bill payment processing
system in Norcross, Georgia determines the preferred method of payment based on
a credit analysis of the customer, assessing the customer's payment history, the
amount of the bill to be paid and other relevant factors. If the results of the
credit analysis are favorable, we will assume the risk of collection of the
funds from the customer's account, and if we have an electronic connection to
the merchant, the remittance will be sent electronically. Otherwise, the
remittance will be sent to the merchant by a paper check or draft drawn directly
on the customer's checking account. In an electronic remittance, the funds are
transmitted electronically to the merchant with the customer's account number
included as an addenda record. For a paper draft, the customer's name, address,
and account number is printed on the face of the check. In addition, our
processing system provides the ability to aggregate multiple electronic and
paper remittances due to merchants. Thus, if multiple payments are going to the
same merchant on the same day, we may send one check for the sum of these
payments and include a remittance statement that provides the customers' names,
addresses, account numbers, and payment amounts. Our strategy is to drive
operational efficiency and improve profitability by increasing the percentage of
transactions we process electronically. Since June 1998, we have increased our
electronic payments ratio from 32% of total payments processed electronically to
58% by September 2000.
We are also a leading provider of institutional portfolio management
and information services and financial application software. Our Investment
Services business offers portfolio accounting and performance measurement
12
<PAGE> 13
services to investment advisors, brokerage firms, banks and insurance companies
and financial planning application software to financial planners. Our portfolio
management system solution includes:
o data conversion;
o personnel training;
o trading system;
o graphical client reporting;
o performance measurement;
o technical network support and interface setup; and
o Depository Trust Corporation interfacing.
Our financial planning software applications include:
o retirement and estate planning modules;
o cash flow, tax and education planning modules;
o an asset allocation module; and
o investment manager performance database system.
Our fee-based money manager clients are typically sponsors or managers of wrap
money management products or traditional money managers, managing investments of
institutions and high net worth individuals. Our portfolios under management
have grown to over one million.
Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support the following software applications, among
others:
o i-Solutions.
The i-Solutions product line, which is a set of
electronic billing software products developed for various
industry segments, was added through the acquisition of
BlueGill Technologies, Inc. in April 2000. These products
allow billers to install and launch an electronic billing
product, send e-mail notifications and present electronic
bills through the Internet, and connect to a variety of bill
aggregators and payment methods. Each product includes an
electronic billing web site template that is unique to a
specific industry segment. Using the template as a sample
design of their Internet billing site, our customers spend
less time developing and designing the look and feel of their
Internet billing sites, which accelerates the product
implementation process.
o Electronic Funds Transfer.
Through our Paperless Entry Processing System Plus
software, we offer an online, real-time system providing an
operational interface for originating and receiving payments
through the automated clearinghouse. The automated
clearinghouse is a nationwide electronic clearing and
settlement system that processes electronically originated
credit and debit transfers among participating depository
institutions. These electronic transactions are substitutes
for paper checks and are typically used for recurring payments
like direct deposit payroll payments and corporate payments to
contractors and vendors, debit transfers that consumers make
to pay insurance premiums, mortgages, loans and other bills,
and business to business payments. You may obtain additional
information on the automated clearinghouse at the Federal
Reserve Commission's website at http://www.federalreserve.gov.
We do not maintain a direct connection with the automated
clearinghouse, but rather, clear our electronic transactions
through KeyBank, N.A., under the terms of an automated
clearinghouse agreement.
o Reconciliation.
Through our ReconPlus software, we provide United
States banks, international banks and corporate treasury
operations with automated check and non-check reconciliations
in high volume,
13
<PAGE> 14
multi-location environments. Some of the services provided by
ReconPlus are automated deposit verification, consolidated
bank account reconciliation and cash mobilization, immediate
and accurate funds availability data and improved cash
control.
o Other.
We also provide software solutions like regulatory
compliance solutions for Form 1099 processing, safe box
accounting and other applications.
During the fiscal year June 30, 2000, Electronic Commerce accounted for
69% of our revenues, Investment Services accounted for 18% of our revenues, and
Software accounted for 13% of our revenues.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997, Mobius Group, Inc. in March 1999, BlueGill
Technologies, Inc. in April 2000, and MSFDC, L.L.C (TransPoint) in September
2000.
Effective October 1, 2000, we completed the strategic agreement we
entered into with Bank of America on April 27, 2000, which was accompanied by
CheckFree acquiring certain of B of A's electronic billing and payment assets.
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,
------------------
1999 2000
------ ------
<S> <C> <C>
Total revenues: ................................ 100.0% 100.0%
Expenses:
Cost of processing, servicing and support .. 62.3% 58.5%
Research and development ................... 9.9% 15.3%
Sales and marketing ........................ 12.5% 15.8%
General and administrative ................. 14.4% 12.6%
Depreciation and amortization ............. 10.1% 61.4%
In-process research and development ........ -- 20.5%
----- -----
Total expenses ......................... 109.2% 184.1%
----- -----
Loss from operations ........................... (9.2)% (84.1)%
Interest, net .................................. 0.4% 0.3%
----- -----
Loss before income taxes ....................... (8.9)% (83.8)%
Income tax benefit ............................. (3.2)% (19.5)%
----- -----
Net loss ....................................... (5.7)% (64.3)%
===== =====
</TABLE>
Revenues. Reported revenue increased by $21.7 million or 31%, from
$69.0 million for the three months ended September 30, 1999 to $90.7 million for
the three months ended September 30, 2000. After adjusting for the combined new
revenue attributable to the acquisitions of BlueGill in April 2000 and
TransPoint in September 2000,
14
<PAGE> 15
underlying revenue increased by approximately 26%. The growth in underlying
revenue was driven by increases of 31% in our Electronic Commerce business and
28% in our Investment Services business, offset by a modest decline in our
Software business. Growth in Electronic Commerce revenue is primarily the result
of an increase in subscribers from approximately 3.0 million at September 30,
1999 to approximately 3.8 million at September 30, 2000. Growth in Investment
Services revenue is driven primarily by an increase in portfolios managed from
approximately 767,000 at September 30, 1999 to over 1.0 million at September 30,
2000. The decline in underlying Software business revenue is due to a
significant license agreement signed in the quarter ended September 30, 1999
that was not recurring in the quarter ended September 30, 2000. Other revenue
lines in the underlying Software business remained relatively consistent on a
year over year basis.
Reported processing and servicing revenue increased by 31%, from $58.3
million for the three months ended September 30, 1999 to $76.2 million for the
three months ended September 30, 2000. The increase in processing and servicing
revenue is driven primarily by the previously mentioned growth in subscribers in
our Electronic Commerce business and growth in portfolios managed in our
Investment Services business. Additionally, we now have 137 billers in
production that presented nearly 140,000 electronic bills in the month ended
September 30, 2000. The number of bills we presented electronically has
increased from approximately 20,000 for the month ended September 30, 1999 and
has increased by nearly 50% from the quarter ended June 30, 2000. When combined
with a transaction based pricing model available 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.
During the quarter ended September 30, 2000, we achieved a new high of
processing nearly 17 million monthly transactions, compared to approximately 13
million in the quarter ended September 30, 1999 and approximately 16 million in
the quarter ended June 30, 2000.
Reported license fee revenue increased by 67%, from $3.0 million for
the three months ended September 30, 1999 to $5.0 million for the three months
ended September 30, 2000. The growth in license fee revenue is primarily
attributable to the acquisition of BlueGill, as license revenue in our other
software businesses declined modestly. As mentioned above, the decrease in
underlying license revenue was due to the signing of a significant license
agreement in the quarter ended September 30, 1999 which did not recur in the
quarter ended September 30, 2000. Our i-Solutions electronic billing software
line, primarily from BlueGill, is expected to drive license revenue growth for
the remainder of the year and our underlying software businesses are expected to
remain fairly consistent with prior year production.
Reported maintenance fee revenue increased by 5%, from $4.4 million for
the three months ended September 30, 1999 to $4.6 million for the three months
ended September 30, 2000. Although we have seen increases in maintenance revenue
as a result of the BlueGill acquisition, underlying maintenance has decreased
slightly. Since last year, we have modified our maintenance revenue recognition
policy. Although maintenance revenue has always been recognized ratably over the
related service period, we now delay the onset of revenue recognition until cash
is actually received, as opposed to our previous practice of estimating
collection rates and adjusting to actual as cash is received. Renewal
maintenance follows the anniversary date of the related license sale, which has
caused a slight timing delay in maintenance revenue recognition in the first
quarter of fiscal 2001. However, we expect full year underlying maintenance
revenue to approximate the prior year as cash collections are expected to
approximate prior year amounts. Reported maintenance is expected to grow as a
result of first year maintenance generated by i-Solutions software sales.
Reported other revenue, consisting mostly of consulting fees, increased
by 48%, from $3.3 million for the three months ended September 30, 1999 to $4.9
million for the three months ended September 30, 2000. The growth in underlying
other revenue is driven primarily by increased consulting fees related to biller
implementations and additional other revenue associated with our acquisition of
BlueGill. In the quarter ended September 30, 2000, we increased the number of
billers in production by 14 (net of 30 new billers added via the TransPoint
acquisition) versus 11 in the quarter ended September 30, 2000.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $43.0 million, or 62.3% of total revenue for the three
months ended September 30, 1999 and $53.1 million, or 58.5% of total revenue for
the three months ended September 30, 2000. Cost of processing, servicing and
support as a percentage of servicing only revenue (all revenue except license)
was 65.1% for the three months ended September 30, 1999 and 61.9% for the three
months ended September 30, 2000. This favorable result is driven primarily by
efficiency and quality improvements. From an efficiency perspective, our ratio
of electronic payments to total
15
<PAGE> 16
payments has improved from approximately 52% at September 30, 1999 to over 58%
at September 30, 2000. Electronic payments carry a significantly lower variable
cost per unit than paper based transactions. From a quality perspective, we
invested significantly in fiscal 2000 on a program designed to improve our
quality levels to 4.6 Sigma or 99.9% availability to our subscribers. However,
we expect near term downward pressure on our direct margin as we integrate
TransPoint and Bank of America into our operations.
Research and Development. Our research and development costs were $6.8
million or 9.9% of total revenue for the three months ended September 30, 1999
and $13.9 million or 15.3% of total revenue for the three months ended September
30, 2000. Adjusted for capitalized development costs of $1.9 million for the
three months ended September 30, 1999 and $1.3 million for the three months
ended September 30, 2000, gross research and development costs were $8.7 million
or 12.6% of total revenue for the three months ended September 30, 1999 and
$15.2 million or 16.8% of total revenue for the three months ended September 30,
2000. In addition to continued improvement of our Genesis processing platform in
our Electronic Commerce business, we are investing in an integrated person to
person payments solution that will run on the Genesis platform. We are investing
significantly in the build out of our i-Solutions electronic billing product
line. We continue to invest a significant portion of our revenue into research
and development activities in all business segments in anticipation and support
of revenue growth, quality enhancement and efficiency improvement opportunities.
Sales and Marketing. Sales and marketing costs were $8.7 million or
12.5% of total revenue for the three months ended September 30, 1999 and $14.3
million or 15.8% of total revenue for the three months ended September 30, 2000.
Since last year we have increased our sales and marketing staff resulting from
both BlueGill and TransPoint acquisitions. In the current year we have incurred
costs necessary to launch our i-Solutions product line. Additionally, we
invested further in our marketing and corporate communications areas in support
of the continued growth of the business. We expect to incur a one-time charge of
$25 million in the quarter ended December 31, 2000 in conjunction with a
national marketing campaign by Bank of America, per the terms of a strategic
agreement that became effective on October 1, 2000.
General and Administrative. General and administrative expenses were
$9.9 million or 14.4% of total revenue for the three months ended September 30,
1999 and $11.5 million, or 12.6% of total revenue for the three months ended
September 30, 2000. Although we have incurred additional general and
administrative expenses as a result of the acquisitions of TransPoint and
BlueGill related to incremental facility and administrative staff expenses
necessary to support the business, our underlying costs have increased by
approximately 6% due to investments in staff in support of the growth of the
business. Our general and administrative expenses as a percentage of underlying
revenue are declining due to the inherent leverage in our existing business
model.
Depreciation and Amortization. Depreciation and amortization costs
increased from $7.0 million for the three months ended September 30, 1999 to
$55.7 million for the three months ended September 30, 2000. The increase was
driven primarily by amortization of intangible assets resulting from the
acquisition of TransPoint on September 1, 2000 in the amount of $30.3 million
and from the acquisition of BlueGill in April 2000 in the amount of $15.4
million. We expect reported depreciation and amortization to increase
significantly in the quarter ended December 31, 2000 as we will incur three
months of TransPoint related purchase accounting amortization versus one in the
quarter ended September 30, 2000 and we expect an estimated $10 million in
incremental intangible amortization resulting from the strategic agreement with
Bank of America which became effective October 1, 2000.
In-Process Research and Development. In the quarter ended September 30,
2000, we incurred $18.6 million of in-process research and development costs.
These costs were incurred as a result of the TransPoint acquisition on September
1, 2000. Please refer to the footnote 3, Acquisitions and Divestitures, included
in the Notes to Interim Condensed Consolidated Unaudited Financial Statements
attached for a complete description of the in-process research and development
charge.
Interest. Net interest has increased from $0.2 million for the three
months ended September 30, 1999 to $0.3 million for the three months ended
September 30, 2000. Net interest is composed of interest income, offset by
interest expense. Interest income has increased from $0.3 for the three months
ended September 30, 1999 to $3.7 million for the three months ended September
30, 2000. Although investment yields have improved slightly, our average
invested assets have increased from $20.9 million for the quarter ended
September 30, 1999 to $260.4 million for the three months ended September 30,
2000. While there have been several increases and decreases in invested assets
since September of 1999, the increase in the September 30, 2000 balance is due
primarily to the
16
<PAGE> 17
receipt of $97.2 million in cash resulting from the TransPoint acquisition in
September 2000 and carryover impact of the receipt of $167.3 million in net
proceeds from the issuance of our 6 1/2% convertible subordinated notes in
November 1999. Interest expense has increased from $0.1 million for the three
months ended September 30, 1999 to $3.4 million for the three months ended
September 30, 2000. The increase in interest expense is due primarily to accrued
interest on the $172.5 million of 6 1/2% convertible subordinated notes that
were issued in November 1999 and, therefore, not a factor in the quarter ended
September 30, 1999.
Income Taxes. We recorded an income tax benefit of $2.2 million at an
effective rate of 36% for the three months ended September 30, 1999 and an
income tax benefit of $17.7 million at an effective rate of 23% for the three
months ended September 30, 2000. The reported effective rates differ from the
blended statutory rate of 40% in both periods due to certain non-deductible
goodwill, in-process research and development and other non-deductible expenses
as well as 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. Charges for purchase accounting
amortization and in-process research and development were separated from the
operating results of the segments for a better understanding of the underlying
segment performance. The following numbers are in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Operating Revenue:
Electronic Commerce .................. $ 47,781 $ 62,958
Software ............................. 8,984 12,144
Investment Services .................. 12,255 15,655
-------- --------
Total Operating Revenue .......... $ 69,020 $ 90,757
======== ========
Operating Income (Loss):
Electronic Commerce .................. $ (5,154) $ (4,786)
Software ............................. 2,734 (815)
Investment Services .................. 3,491 3,999
Corporate ............................ (5,463) (8,260)
Purchase accounting amortization ..... (1,973) (47,901)
In-process research and development .. -- (18,600)
-------- --------
Total Operating Loss ............. $ (6,365) $(76,363)
======== ========
</TABLE>
Revenue in our Electronic Commerce segment increased by 32%, from $47.8
million for the three months ended September 30, 1999 to $63.0 million for the
three months ended September 30, 2000. The increase in underlying revenue is due
primarily to an increase in subscribers from approximately 3.0 million at
September 30, 1999 to over 3.8 million at September 30, 2000.
To date, we have signed 180 billers to our E-Bill electronic billing
product offering. Combined with the 30 net new billers we assumed with the
acquisition of TransPoint, this brings our biller total to 210. We now have 137
billers in production that delivered over 140,000 electronic bills in the month
ended September 30, 2000. There are currently 33 billers actively engaged in the
implementation process and another 40 in the evaluation or discovery stage of
the process. Our acquisition of BlueGill is expected to facilitate our efforts
to provide quality billing content, and by simplifying and accelerating the
process of taking bills from paper to electronic. We believe that a complete,
integrated round trip electronic billing and payment experience for an average
of four to ten bills per month per consumer is an important factor in driving
subscriber growth. As of September 30, 2000, we have to potential to process and
average of five to six bills per month for our existing customer base. When
combined with a new transaction based pricing model available to our largest
customers, it will become increasingly more difficult to correlate revenue
solely to the number of active subscribers, with transactions processed becoming
an additional key indicator. During the quarter ended September 30, 2000, we
achieved a new high of processing nearly 17
17
<PAGE> 18
million monthly transactions, compared to approximately 13 million in the
quarter ended September 30, 1999 and approximately 16 million in the quarter
ended June 30, 2000.
The operating loss in our Electronic Commerce segment, excluding
purchase accounting amortization and in-process research and development, has
improved from $5.2 million for the three months ended September 30, 1999 to $4.8
million for the three months ended September 30, 2000. We have seen improvements
in efficiency through an increase in our ratio of electronic payments to total
payments, which has improved from approximately 52% at September 30, 1999 to
over 58% at September 30, 2000. Electronic payments carry a significantly lower
variable cost per unit than paper based transactions. From a quality
perspective, we invested significantly in fiscal 2000 on a program designed to
improve our quality levels to 4.6 Sigma or 99.9% availability to our
subscribers. The leverage we have obtained through efficiency and quality
improvement has been somewhat offset by operating losses resulting from the
recently acquired TransPoint business. As we integrate the TransPoint business
and the recently acquired electronic billing and payment assets from Bank of
America, we expect near term pressure on our direct margin in this business. For
the remainder of fiscal 2001, we are focusing attention on the following four
areas within the Electronic Commerce segment:
o delivery of an increasing number of bills electronically over
the Internet;
o expansion of the number of sites where consumers can receive
and pay bills;
o co-marketing programs designed to bring billers and channel
partners together to strengthen incentives and value delivered
to consumers; and
o extension of payment the capabilities of our Genesis
infrastructure while continuing to deliver market-leading
quality and cost-efficiency.
We completed our acquisition of TransPoint on September 1, 2000. With
this acquisition we became the preferred provider of electronic billing and
payment services to customers of Microsoft offered through their MSN and Money
Central offerings. The agreement with Microsoft comes with guaranteed revenue of
$120 million over a five year period, expected to commence early in the quarter
ended March 31, 2001. Additionally, as part of the TransPoint transaction, we
received $60 million of guaranteed revenue and/or cost savings opportunities
through First Data Corporation, which began in September 2000. Effective October
1, 2000, we completed a strategic agreement with Bank of America, the largest
bank in the U.S., to offer electronic billing and payment services to its
customer base. This 10 year agreement provides annual revenue guarantees of $50
million and Bank of America has agreed to invest $45 million to promote the
adoption of electronic billing and payment services by Bank of America's
customers. While there are no guarantees as to the timing or extent of
accelerated adoption of electronic billing and payment services, we believe that
the aforementioned transactions, along with other existing strategic alliances,
we are better positioned to maintain our market leadership position throughout
the accelerated growth cycle when it occurs.
Revenue in our Investment Services segment increased by 28%, from $12.3
million for the three months ended September 30, 1999 to $15.7 million for the
three months ended September 30, 2000. Growth in this segment is due primarily
to an increase in the number of portfolios managed from approximately 767,000 at
September 30, 1999 to over 1.0 million at September 30, 2000. Much of the
revenue growth has occurred in retail versus institutional accounts that carry a
lower unit price. During the quarter ended September 30, 2000, the division
released a significantly enhanced version of M-Search, a money manager database
system, and APL-ASP, an innovative and flexible new portfolio management
services offering for start-up and break away money managers. When combined with
the emergence of E-Wrap, or Internet-based Wrap services, which is creating a
highly-visible new distribution channel for money managers and brokers, these
product enhancements and new distribution channel opportunities should fuel
further growth for the Investment Services business.
Operating income in our Investment Services segment, net of purchase
accounting amortization, has increased by 14%, from $3.5 million for the three
months ended September 30, 1999 to $4.0 million for the three months ended
September 30, 2000. While profitability continues to grow, as indicated above,
much of the growth has occurred in retail versus institutional accounts that
carry a lower unit price, which in turn places downward pressure on margins as
the cost to process this business is not proportionally lower.
Reported revenue in our Software segment increased by 35%, from $9.0
million for the three months ended September 30, 1999 to $12.1 million for the
three months ended September 30, 2000. The growth in revenue is primarily
attributable to the acquisition of BlueGill, now operating as CheckFree
i-Solutions, as revenue in our other
18
<PAGE> 19
software businesses has declined modestly. The decline in underlying revenue in
the Software segment was due primarily to a significant license sale in the
quarter ended September 30, 1999, which did not recur in the quarter ended
September 30, 2000. We expect revenue from the i-Solutions line of electronic
billing software and related services to continue to grow incrementally on a
quarter over quarter basis for the remainder of the year.
The $2.7 million of operating income we earned for the three months
ended September 30, 1999 declined to an operating loss of $0.8 million for the
three months ended September 30, 2000. As expected, the operations acquired from
BlueGill provided downward pressure on operating margins in the quarter ended
September 30, 2000 as we continue to invest significantly in this emerging
product line. Operating income of the remainder of the software division
remained fairly consistent. The electronic billing software product line
acquired from BlueGill provides a significant complement to our electronic
billing and payment products in our Electronic Commerce segment. Investments in
this area are expected to facilitate our efforts to provide high quality billing
content, and simplify and accelerate the process of taking bills from paper to
electronic.
The Corporate segment represents charges for legal, human resources,
finance and various other unallocated overhead charges. Our Corporate segment
incurred operating expenses of $5.5 million, or 8.1% of total revenue for the
three months ended September 30, 1999 and expenses of $8.3 million, or 9.1% of
total revenue for the three months ended September 30, 2000. In the corporate
support area, we have added personnel and implemented a new ERP software suite
in support of the continued growth of the Company. With the expansion of the
number of our shares outstanding, the cost of our annual report to shareholders
has increased. We have added a new building on our corporate campus to house
incremental staffing requirements and its incremental cost was $0.5 million.
Finally, our corporate communication costs have increased by $0.7 million year
over year for various programs.
The purchase accounting amortization line represents amortization of
remaining intangible assets resulting from all of our various acquisitions from
1996 forward. We will separate intangible amortization from our segment results
to give investors and interested parties a better understanding of the
underlying operating results of our business segments. The total amount of
purchase accounting amortization has increased from $2.0 million for the three
months ended September 30, 1999 to $47.9 million for the three months ended
September 30, 2000 as a result of intangible assets created by the acquisition
of BlueGill in April 2000 and TransPoint in September 2000. For comparison
purposes, the breakout of purchase accounting amortization by segment is as
follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1999 2000
------ -------
(In thousands)
<S> <C> <C>
Electronic Commerce............................. $ 596 $30,888
Software........................................ 251 15,670
Investment Services............................. 1,126 1,343
------ -------
Total...................................... $1,973 $47,901
====== =======
</TABLE>
In the quarter ended September 30, 2000, we incurred $18.6 million of
in-process research and development costs. These costs were incurred as a result
of the TransPoint acquisition on September 1, 2000. Please refer to the footnote
3, Acquisitions and Divestitures, included in the Notes to Interim Condensed
Consolidated Unaudited Financial Statements attached for a complete description
of the in-process research and development charge.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash, cash equivalents and investments
(short and long term) on hand totaling $313.1 million. Our balance sheet
currently reflects working capital of $271.3 million and our current ratio
stands at 3.7. We believe that existing cash, cash equivalents, and investments
will be more than sufficient to meet our presently anticipated requirements for
the foreseeable future. To the extent that additional capital resources are
required, we have access to an untapped $30.0 million line of credit.
19
<PAGE> 20
The following chart summarizes our Consolidated Statement of Cash Flows
for the three months ended September 30, 2000.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
2000
-------------
(In thousands)
<S> <C>
Net cash provided by:
Operating activities ............................. $ 6,050
Investing activities ............................. 85,797
Financing activities ............................. 9,998
--------
Net increase in cash and cash equivalents ........... $101,845
========
</TABLE>
As a result of specific transactions and positive cash flow from
operations, we have seen a net increase of $101.8 million in cash and cash
equivalents for the three months ended September 30, 2000.
We generated $6.1 million in cash from operations for the three months
ended September 30, 2000. Operating cash flow has been positive in four of the
last five quarters. The primary factors impacting operating cash flow are the
adjustments for depreciation and amortization totaling $55.7 million, for
in-process research and development of $18.6 million and for related deferred
income taxes of $(17.7) million, all of which are non-cash expenses resulting
from intangible assets obtained in acquisitions and capital assets purchased in
support of the expected growth of the business.
The most significant activity has taken place in investing activities.
On September 1, 2000 we completed the acquisition of TransPoint. Per the
purchase agreement, we received $97.2 million of cash upon the closing of the
deal and net $0.4 million of incurred acquisition expenses against the cash
receipt. During the quarter, we purchased $6.2 million of property, equipment
and software in support of business growth and we capitalized $1.3 million of
software development costs related to the development of new product offerings.
Finally we invested a net amount of $3.5 million in held to maturity securities
in the quarter.
We generated $10.0 million in cash from financing activities for the
three months ended September 30, 2000. We received $9.4 million in cash from the
exercise of warrants held by third parties and we received $1.2 million from the
exercise of employee stock options. We also received $1.4 million in cash from
payroll withholdings related to our employee stock purchase plan. Finally, we
spent $2.0 million on principal payments under capital lease obligations.
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 and our
operating and growth strategy. 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, 2000 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
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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.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held a Special Meeting of Stockholders on Friday, September 1, 2000
for the following purpose:
(1) To consider and vote upon a proposal to approve the issuance
of 17,000,000 shares of CheckFree common stock pursuant to a
merger agreement whereby the TransPoint business will be
acquired by CheckFree and, as a result, will become wholly
owned by CheckFree.
Management's proposal as presented in the proxy statement was approved
with the following vote:
Proposal 1: Approval of the issuance of 17,000,000 shares of
CheckFree common stock pursuant to a merger agreement
whereby the TransPoint business will be acquired by
CheckFree and, as a result, will become wholly owned
by CheckFree.:
NUMBER OF SHARES VOTED
-----------------------------------------------------------
FOR AGAINST ABSTAIN TOTAL
---------- ------- ------- ----------
31,350,181 509,765 30,357 31,890,303
Further, we held a Special Meeting of Stockholders on Thursday,
September 28, 2000 for the following purpose:
(1) To consider and vote on a proposal to approve the issuance of
10 million shares of CheckFree common stock, $0.01 par value,
and warrants to purchase up to an additional 10 million shares
of CheckFree common stock, to Banc of America E-Commerce
Holdings, Inc., a Delaware corporation and wholly owned
subsidiary of Bank of America, N.A., a Delaware corporation,
under a strategic agreement with Bank of America through which
CheckFree Services Corporation, our wholly owned subsidiary,
will acquire certain of Banc of America E-Commerce's
electronic billing and payment assets and we will provide
electronic billing and payment services to Bank of America's
customers over the next ten years.
Management's proposal as presented in the proxy statement was approved
with the following vote:
Proposal 1: Approval of the issuance of 10 million shares of
CheckFree common stock, $0.01 par value, and warrants
to purchase up to an additional 10 million shares of
CheckFree common stock, to Banc of America E-Commerce
Holdings, Inc., a Delaware corporation and wholly
owned subsidiary of Bank of America, N.A., a Delaware
corporation, under a strategic agreement with Bank of
America through which CheckFree Services Corporation,
our wholly owned subsidiary, will acquire certain of
Banc of America E-Commerce's electronic billing and
payment assets and we will provide electronic billing
and payment services to Bank of America's customers
over the next ten years:
NUMBER OF SHARES VOTED
-----------------------------------------------------------
FOR AGAINST ABSTAIN TOTAL
---------- ------- ------- ----------
40,225,019 51,410 7,861 40,284,290
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<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
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 September 30, 2000:
(i) A current report on Form 8-K, dated April 28, 2000, was
filed with the Securities and Exchange Commission on May 15, 2000 and amended on
July 10, 2000 (Items 2 and 7).
(ii) A current report on Form 8-K, dated July 12, 2000, was
filed with the Securities and Exchange Commission on July 12, 2000 (Item 5 and
7).
(iii) A current report on Form 8-K, dated August 2, 2000, was
filed with the Securities and Exchange Commission on August 3, 2000 (Items 5 and
7).
(iv) A current report on Form 8-K, dated September 1, 2000,
was filed with the Securities and Exchange Commission on September 15, 2000
(Items 2 and 7).
(v) A current report on Form 8-K, dated September 5, 2000, was
filed with the Securities and Exchange Commission on September 5, 2000 (Items 5
and 7).
(vi) A current report on Form 8-K, dated September 30, 2000,
was filed with the Securities and Exchange Commission on October 3, 2000 (Items
5 and 7).
(vii) A current report on Form 8-K, dated October 1, 2000, was
filed with the Securities and Exchange Commission on October 2, 2000 (Items 5
and 7).
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKFREE CORPORATION
Date: November 13, 2000 By: /s/ David E. Mangum
--------------------------------
David E. Mangum, Executive Vice
President and Chief Financial
Officer* (Principal Financial
Officer)
Date: November 13, 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.
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<PAGE> 25
CHECKFREE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
EXHIBIT INDEX
<PAGE> 26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27* Financial Data Schedule.
-------
* Filed with this report.
